Apr 22012

Lockheed Martin Corporation Settles False Claims Act Allegations Pertaining to Recklessness

Kristin Graham Koehler and Theodore M. Lis
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On March 23, 2012, DOJ issued a press release, announcing that Lockheed Martin has agreed to pay $15,850,000 to settle allegations under the False Claims Act that the government was overcharged as a result of a seven-year pricing scheme by Tools & Metals Inc. (TMI), a subcontractor that sold perishable tools to Lockheed Martin for use on military aircraft. In the civil claims the government brought against Lockheed, the government alleged that “Lockheed Martin acted recklessly by failing to adequately oversee TMI’s charging practices and by mishandling information revealing these practices.” Because so many FCA claims are fact-driven, we reviewed the government’s complaint for details related to Lockheed Martin’s alleged recklessness.

In its complaint, the government alleged, in part, that Lockheed Martin violated three provisions of the federal False Claims Act, 31 U.S.C. §§3729(a)(1), (a)(2), and (a)(7). (The compliant, which was filed in November 2007, predates 2009 revisions to the statute that correspond to the current 31 U.S.C. §3729(a)(1)(A); 31 U.S.C. §3729(a)(1)(B); and 31 U.S.C. §3729(a)(1)(G), respectively.) All three provisions require that false claims be made “knowingly.” Under the FCA, the terms “knowing” and “knowingly” mean that “a person, with respect to information, (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. §3729(b)(1)(A). For each of the FCA claims, the government alleged generally that “Lockheed acted knowingly in connection with the falsity of its claims for payment, [Forward Pricing Rate Agreement] (FPRA) cost proposals, FPRA’s and certifications of final, year-end manufacturing overhead costs, among other Lockheed omissions and submissions.”

By way of background, the government alleged that Tools & Metals, Inc. (TMI) and Lockheed executed a five year, sole source, integrated supply contract for TMI to supply perishable tools (the Master Agreement). Lockheed allegedly knew that the cost of tools to be purchased by Lockheed would be passed on, in whole or in part, to the United States under Lockheed’s contracts with government agencies. TMI inflated its reported costs, which Lockheed paid. In August 2005, TMI admitted to Lockheed that TMI had intentionally inflated its costs in the total amount of $17.735 million since January 1, 1998. Lockheed’s own subsequent calculations indicated that TMI had unlawfully inflated costs to the tune of $18.9 million.

The crux of the recklessness allegation is the government’s claim that Lockheed Martin could have and should have prevented TMI’s practice of unlawfully inflating its costs but failed to do so. The Master Agreement gave Lockheed’s buyer extensive audit rights to inspect TMI’s books and records. Nonetheless, while the Master Agreement was in effect, according to the government, Lockheed agreed to a severely restricted review of TMI costs. Although Lockheed’s buyer audited TMI twice a year, the audits were allegedly predictable and superficial , with TMI allegedly pre-selecting the small, predetermined number of hard copy vendor invoices that Lockheed’s buyer reviewed. The government also alleged that occasionally TMI provided altered invoices. The government claimed that Lockheed never inspected TMI’s actual books and records or its financial reports until late 2004 – and then only when TMI and Lockheed had learned that a federal prosecutor was investigating TMI’s costs. The government also claimed that Lockheed did not contact any of TMI’ s suppliers to verify the costs that TMI had reported to Lockheed even though Lockheed had purchased perishable tools from many of these suppliers before TMI and Lockheed’s Mater Agreement. Lockheed allegedly never requested audit assistance from DoD’s Defense Contract Audit Agency. Instead, Lockheed allegedly repeatedly used the same auditor, who had a long relationship with TMI. The government also alleged that several of Lockheed’s manufacturing managers had complained about price gouging by TMI.

In sum, the government’s case for recklessness was based on Lockheed’s alleged lack of oversight of TMI, such that Lockheed allegedly knowingly created false records and presented false claims to the United States for payment or approval.

Kristin Graham Koehler

Washington, D.C.

kkoehler@sidley.com

Theodore M. Lis

TheodoreM.Lis@sidley.com

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