Jun 242016

Conflicting Interpretations of Falsity Preclude Knowledge Under FCA, Tenth Circuit Holds

Kristin Graham Koehler and William Hochul III
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In a victory for government contractors, the U.S. Court of Appeals for the Tenth Circuit held that vendors and their suppliers cannot knowingly submit false claims under the False Claims Act where the knowing falsity is premised on lack of compliance with government regulations that are subject to differing, good-faith interpretations. The case, U.S. ex rel. Smith v. Boeing, No. 14-3247, 2016 WL3244862 (10th Cir. 2016), involved an appeal by relators, three former Boeing employees, of summary judgment for Boeing and Ducommun, Inc.

From 1997–2002, Boeing contracted with Ducommun to supply parts for several aircraft that Boeing sold to the Department of Defense. The parts contract required Ducommun to use automated manufacturing processes as a quality control measure. Ducommun initially complied, but its employees eventually reverted to less precise, manual processes to build the parts. Boeing detected irregularities, so it investigated Ducommun and discovered the nonconforming practices.

Three of Boeing’s employees then filed a $4.8 billion qui tam action against Boeing and Ducommun under the False Claims Act. The relators alleged that Boeing obtained the required regulatory approval for the aircraft from the Federal Aviation Administration (FAA) by certifying that the Ducommun parts were manufactured by automated processes. Because Ducommun produced the parts manually, Boeing’s sales formed the basis of false claims.

After the relators served the complaint, the FAA conducted a two-year investigation into Ducommun’s production processes. Finding no violations, the FAA closed its investigation in 2004 and reported that the parts met FAA regulations. The government decided not to intervene in the case, and the relators voluntarily dismissed their first action.

The relators filed a second complaint in 2005, which they supplemented with two expert opinions challenging the FAA’s conclusion. The experts asserted that the Ducommun parts were non-compliant because they were manufactured by hand tools that were incapable of collecting the process data that Boeing promised to the FAA in its certifications.

The district court granted summary judgment for the defendants because the relators did not establish Boeing’s knowledge of the false certifications. U.S. ex rel. Smith v. The Boeing Company, No. 05-1073-MLB, 2014 WL 5025782 (D. Kan. Oct. 8, 2014). The relators’ “evidence of good-faith differences of opinion” about FAA requirements “will not suffice.” Id. at *22.

The Tenth Circuit agreed: “at best, evidence shows conflicting opinions” as to whether Ducommun’s manual processes failed to meet FAA requirements. U.S. ex rel. Smith, No. 14-3247, at *10. And, even assuming they did not, “there are simply no facts supporting the relators’ contention that Boeing knew about the nonconformities when submitting the claims for payment.” Id. at *9.

The decision is a win for government contractors, requiring more than conflicting evidence of falsity where the claimant cannot otherwise establish knowledge.

The Tenth Circuit’s opinion can be found here.

Kristin Graham Koehler

Washington, D.C.

kkoehler@sidley.com

William Hochul III

whochul@sidley.com

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