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United States ex rel Yannacopoulos v. General Dynamics

July 16, 2009

UNITED STATES OF AMERICA, EX REL. DIMITRI YANNACOPOULOS, RELATOR,
v.
GENERAL DYNAMICS AND LOCKHEED MARTIN CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

In a seven count second amended qui tam complaint,*fn1 Relator Dimitri Yannacopoulos alleges that defendants General Dynamics and Lockheed Martin violated the False Claims Act, 31 U.S.C. § 3729 ("FCA"), by submitting false claims in connection with the sale of F-16 fighter aircraft to Greece. Count I alleges that General Dynamics knowingly submitted false records, statements, and claims to the Defense Security Assistance Agency ("DSAA"), collecting at least $24 million in excess funds in connection with the F-16 airframe. Count II alleges that General Dynamics collected over $52 million of fraudulently obtained funds in connection with debt-level maintenance. Count III alleges that General Dynamics submitted false claims in the excess of $47 million in connection with co-production (the "HDDIC claim"). Count IV and V are brought against both General Dynamics and Lockheed Martin, who purchased General Dynamic's Fort Worth division at the end of February 1993 and assumed the Greek contract.

Count IV alleges that defendants submitted $54 million in false claims for integrated electronic measures counter work, and Count V alleges false statements and claims in excess of $45 million and $6 million in connection with the sale of spare parts (the "Spares Claim"). Count VI alleges that General Dynamics failed to disclose to the United States government that it had deleted a price adjustment schedule between the date of the letter of intent and the final contract. Finally, Count VII alleges that Lockheed Martin modified the contract to avoid paying a refund it owed to the government.

The court has already denied a motion to dismiss, United States ex rel. Dimitri Yannacopoulos v. General Dynamics, 315 F. Supp.2d 939 (N.D. Ill. 2004), and later granted General Dynamics' motion for summary judgment on certain claims raised in the complaint but not set out as separate counts. Specifically, the court granted summary judgment on: (1) all claims attempting to hold defendants liable based on the theory that defendants impliedly certified compliance with all DSAA guidelines not specifically referenced in the actual contract or invoices (the "Implied Certification Claims"); and (2) plaintiff's claim that defendants eliminated an Economic Price Adjustment Clause (the "EPA Clause") from the final contract without informing DSAA, in violation of defendants' express certification that it would inform DSAA of any contract changes "upon effect" (the "Express Certification Claim"). Relator moved to reconsider, which the court granted as to the Express Certification Claim only.

General Dynamics has now renewed its motion for summary judgment on the Express Certification Claim, which the court has treated as a motion to reconsider, and both defendants have filed separate motions for summary judgment on all remaining claims brought against them.

For the reasons set forth below, the motions for summary judgment are granted. The motion to reconsider is granted.

BACKGROUND

This case involves a contract executed in January 1987 between Greece and General Dynamics for the sale of 40 F-16 aircraft ("Contract 5/86"). Defendant Lockheed Martin acquired General Dynamics' Fort Worth division and assumed all of General Dynamics' rights and obligations under Contract 5/86 in March 1993. Contract 5/86 was a direct commercial contract, meaning that Greece contracted directly with General Dynamics, and the United States was not a party. Greece did, however, use foreign military financing ("FMF") loans provided by the United States' government to finance the purchase, which required DSAA to review the contract and approve the use of FMF funds.

In March 1985 General Dynamics and Greece executed a letter of intent ("LOI") setting forth the basic terms of their agreement as of that date. The LOI was effective as of October 1985 and attached to it was a "draft contract" reflecting the status of the negotiations on various contract terms, articles and annexes.

DSAA required General Dynamics to submit a "Contractor Certification and Agreement with the Defense Security Assistance Agent" ("Certification") which set forth General Dynamics' agreement with DSAA as to conditions of payment. General Dynamics submitted its first Certification in February 1986 when it and Greece sent DSAA the LOI that ultimately resulted in Contract 5/86. General Dynamics sent a largely identical Certification in February 1987 when Contract 5/86 was finalized and signed. DSAA drafted the Certifications, each containing thirteen enumerated paragraphs setting forth the terms of the agreement with DSAA. Paragraph ten of the Certification provided that General Dynamics:

Certifies that the entire agreement which effects the contractual relationship between the contractor and the purchasing government relating to this Purchase Agreement consists of: Letter of Intent, dated 6 March 1985, including Annexes and documents listed therein and that there are no other amendments, modifications, side letters, or supplementary agreements relating to this Purchase Agreement. Agrees that any future changes with the terms of the Purchase Agreement will be reported to the DSAA upon effect.

Under the initial contract documents Greece agreed to make a $24 million down payment followed by quarterly milestone payments pursuant to a fixed schedule set forth in Annex A6 to Contract 5/86. The quarterly payments were due on the scheduled date provided defendants had completed the prescribed milestone events associated with each payment. Defendants' right to receive the milestone payments was not limited by their actual cost of performance, nor were defendants required to substantiate their incurred costs, or provide any cost information at all. Instead, they submitted a "Certification of Work-In-Progress" representing that they had completed the necessary milestone events.

Defendants submitted each invoice for payment to the Greek government. On each invoice defendants represented that the invoice was in accordance with Contract 5/86 (or the LOI) and defendants' certification with DSAA. Greek authorities reviewed each invoice to confirm that payment was proper. Greek representatives approved the invoices for payment, signed the Certification of Work-In-Progress and sent the invoices to the U.S. government with requests that they be paid.

The parties performed under the LOI and draft contract while they negotiated the terms of the final contract. The draft contract contained a clause that would require that the final contract price be reduced by the value of the imputed interest General Dynamics obtained by receiving so much of the price up front before incurring costs equal to payments received. That clause (the "EPA Clause") was contained in Article 11 of the draft contract. Negotiations of the final terms of the contract continued for 22 months. Among the many provisions continually discussed were the delivery dates and the EPA Clause. General Dynamics wanted elimination of the EPA Clause as a quid pro quo for an accelerated delivery schedule requested by Greece.

The parties executed the final version of Contract 5/86 on January 12, 1987. Greece submitted the contract and General Dynamics' Certification to DSAA in February 1987. The final version did not contain the EPA Clause, but did include the accelerated delivery schedule.

DISCUSSION

A movant is entitled to summary judgment under Fed. R. Civ. P. 56 when the moving papers and affidavits show that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once a moving party has met its burden, the non-moving party must go beyond the pleadings and set forth specific facts showing that there is a genuine issue for trial. Fed. R. Civ. P. 56(e); Becker v. Tenenbaum-Hill Associates, Inc., 914 F.2d 107, 110 (7th Cir. 1990). The court considers the record as a whole and draws all reasonable inferences in the light most favorable to the party opposing summary judgment. Fisher v. Transco Services-Milwaukee, Inc., 979 F.2d 1239, 1242 (7th Cir. 1992).

A genuine issue of material fact exists when "the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The non-moving party, however, "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "There mere existence of a scintilla of evidence in support of the [non-moving party's] position will be insufficient; there must be evidence on which the jury could reasonable find for [the non-moving party]." Anderson , 477 U.S. at 252.

To help make this task easier, the Northern District of Illinois has adopted Local Rule ("L.R.") 56.1 which requires certain filings in support of and in opposition to motions for summary judgment. Specifically, L.R. 56.1(a)(3) requires the movant to provide a statement of material facts as to which it contends there is no genuine issue. The statement must be in a form of numbered paragraphs with specific references to the parts of the record or other supporting materials relied upon. The non-movant must reply to each paragraph, either admitting that the statement is uncontested or stating that it disagrees, specifically citing to supporting materials showing there is a genuine factual dispute. L.R. 56.1(b)(3)(A), (B). The non-movant may also supply a statement of additional facts that would defeat summary judgment, again in the form of numbered paragraphs with supporting citations. L.R. 56.1(b)(3)(C). The moving party must then reply to the statement of additional facts paragraph by paragraph, admitting the statement or contesting it, with specific citations to supporting materials.

In briefing the two summary judgment motions, the parties submitted more than 300 pages of briefs, (many of them tightly spaced with dense footnotes) and thousands of pages of exhibits to the court over a protracted period of time. The court acknowledges the complexity of this case and the voluminous materials compiled over the long history of the Greek aircraft orders. Nevertheless the court found the briefs to be repetitive and needlessly verbose, reflecting a number of "moving targets " as the parties, especially Relator, constantly changed positions on key arguments.

To make matters worse, Relator filed two separate documents purportedly pursuant to L.R. 56.1 (b)(3)(C), each entitled "Relator's Local Rule 56.1 Statement of Additional Facts." Each such document was supported by an appendix of exhibits consisting of several binders. Neither of the statements of additional facts nor any of the numerous appendices and binders indicate to which defendant's motion they were intended to respond. The separate sets of exhibits used the same numbering system and contained many of the same documents, meaning that many documents had two exhibit numbers. As a result, Relator's filings have unnecessarily complicated an already complicated case.

Lockheed Martin's Motion for Summary Judgment

Relator's claims against Lockheed Martin arise out of invoices submitted for work done pursuant to two contract line items ("CLINs"); one for the Internal Electronic Countermeasures ("IECM") system (CLIN 15) and the other for the sale of spare parts (CLIN 3).

Count IV

In Count IV Relator alleges that Lockheed Martin submitted false invoices in connection with the IECM program. In March 1993 Lockheed Martin and Greece executed Modification 5 to Contract 5/86. Modification 5 added IECM integration to the contract and became CLIN 15. The IECM integration program was a fixed price line item, meaning that the price agreed to between Lockheed Martin and Greece was not subject to any adjustment on the basis of Lockheed Martin's costs with respect to the IECM program specifically or Contract 5/86 in general. As with the overall contract, payments under CLIN 15 were tied to specific milestones.

The IECM integration program involved the integration of the Advanced Self Protection Integrated System ("ASPIS") electronic warfare suite into the 40 Peace Xenia I Block 30 Configuration F-16s that were the subject of Contract 5/86. Sometime in late 1992 Greece had entered into a contract with the United States government for the sale of 40 additional F-16s (the "Peace Xenia II Contract"). The PX II F-16s were Block 50 configuration, meaning that they had slightly different capabilities and functions than the F-16s sold under Contract 5/86. The ASPIS suite was being integrated into both the Block 30 and Block 50 aircraft. Because of the differences between the aircraft, the task of integrating the ASPIS suite on each required different "non-recurring" design and testing work.

Equipment installed on an aircraft is broken down into two general classes. "Group A" provisions are equipment that, on installation, stay on the aircraft (i.e. fixtures). Generally speaking this equipment is expected to last the life of the aircraft or be repairable in place. "Group B" equipment included the more expensive components that are normally removed from the aircraft when the equipment fails. Group B equipment generally consists of system boxes supplied by vendors. The ASPIS suite, manufactured by Litton, was Group B equipment. The Group A equipment, which was provided by Lockheed Martin, was the other changes to the aircraft required to install and connect the Group B (ASPIS suite) to allow it to function properly without interfering with other existing aircraft systems.

Design, testing and manufacture of Group A provisions requires both "recurring" and "non-recurring" tasks. Non-recurring tasks include the definitions of the functional interfaces, partitioning of the interfaces into physical parts, and the design and testing of the Group A provisions. Recurring tasks include manufacturing or procuring equipment and then installation of the Group A provisions on each aircraft. In the IECM integration project (CLIN 15) the non-recurring tasks were the design and development of the ASPIS Group A provisions for the 40 Block 30 configuration aircraft. The recurring tasks consisted of procurement of materials and the manufacturing of the 40 ASPIS Group A provisions, and installation on two aircraft. Installation on the remaining 38 aircraft was done by the Hellenic Air Force after training by Lockheed Martin.

In Count IV Relator raises two theories of recovery for the alleged false claims. In the first, Relator argues that Lockheed Martin charged thousands of hours of Group A design component work to the Peace Xenia II contract instead of the fixed base cost 5/86 Contract. According to Relator, prior to the execution of Modification 5, Lockheed Martin and Greece negotiated and agreed to "ground rules" under Contract 5/86 for determining which contract would be charged for the costs of common Block 30/Block 50 work. In general, most of the common costs, except tooling, were to be charged to Contract 5/86. According to Relator's expert, over 15,000 hours of common Block 30/Block 50 IECM integration work that should have been charged to Contract 5/86 were charged to Peace Xenia II, meaning that Lockheed Martin was paid twice.

Lockheed Martin's argument with respect to this theory is twofold. First, it disagrees with Relator's description of the Peach Xenia II contract as "cost based." In reality, the Peace Xenia II contract, like Contract 5/86, is a fixed cost contract. The Peace Xenia II contract, however, is between Greece and the United States directly. Because it was an FMS (foreign military sales) contract, Lockheed Martin was entitled to progress payments based on costs incurred. Thus, Lockheed Martin's costs were not relevant to the overall cost of the IECM program, but costs determined the timing of payments to Lockheed Martin. Therefore, even if Relator's theory is factually correct, Lockheed Martin would not have received additional funds under the Peace Xenia II contract; it would simply have received those funds earlier.

Next, as Lockheed Martin points out, there is a more basic problem with Relator's theory. It is undisputed that Contract 5/86 was a fixed price contract, and that Lockheed Martin's right to payment under the contract and the IECM integration program was not based on its costs or labor hours expended. Therefore, even if "costs" were shifted from a fixed cost contract to a cost based contract, the invoices and payments under the fixed cost contract would not be false so long as the preconditions for payment under that contract had been met. In the instant case it is undisputed that Lockheed Martin met the milestone requirements for payment under Contract 5/86. As Lockheed Martin correctly argues, it would be the invoices and requests for payments under the Peace Xenia II contract that may support a False Claim Act claim (if it were a cost based contract), but the instant complaint has no such allegation. Accordingly, Relator's claim that Lockheed Martin violated the FCA by shifting costs from Contract 5/86 to Peace Xenia II fails as a matter of law.

Relator's second theory with respect to the IECM program is that Lockheed Martin "billed" under CLIN 15 for work and equipment that had already been paid for and installed on the Block 30 aircraft under CLIN 1. Relator alleges that Lockheed Martin fraudulently provided duplicate and unnecessary Group A provisions for which it was paid twice: once under CLIN 1when the Block 30 aircraft were initially produced, and a second time when Lockheed Martin included duplicate components within its "retrofit kits" that were used under CLIN 15.

This claim relates to Group A provisions needed to install the ASPIS suite onto the Block 30 aircraft. According to Relator, the aircraft were initially produced with full Group A provisions for the initially envisioned radar warning receiver ("ALR-69") and the chaff and flare system ("ALE-40") and partial Group A provisions for the jammer ("ASPJ"). These provisions were charged, paid for and installed under CLIN 1.

When Greece decided to go with the more advanced ASPIS suite on the Block 30 aircraft, the parties executed Modification 5, and Lockheed Martin prepared retrofit kits that contained the Group A provisions to be used for the installation of the ASPIS suite. Lockheed Martin charged $280,000 for each retrofit kit and submitted a list of parts used to both Greece and the United States for approval. Relator's expert examined the parts list and determined that it contained expensive parts that had already been paid for and installed on the aircraft.

Lockheed Martin argues that the allegations amount to nothing more than a complaint that the price it charged for the retrofit kits, which was agreed to by Greece and the United States, was too high. Any such claim is doomed, according to Lockheed Martin, because of the fixed based nature of the contract. It is undisputed that the Contract 5/86 IECM integration program, and the recurring costs associated with provisions of the ASPIS Group A retrofit kit, was not priced on a component by component basis, but rather on an end product or complete kit basis. Therefore, if Lockheed Martin ended up using parts that it did not need because those parts had already been supplied under CLIN 1, Lockheed Martin, not Greece would be eating the cost of those additional parts. Lockheed Martin got the same amount whatever its cost was to produce the retrofit kit. "[T]he mere fact that an activity may be accomplished less expensively in a fixed price contract falls measurably short of fraud under the [FCA]." U.S. ex rel. Wikens v. North American Construction Corp., 173 F. Supp.2d 601, 635 (S.D. Tex. 2001). The court agrees with Lockheed Martin that Relator's claim is a veiled inflated pricing fraud -in-the-inducement allegation that essentially argues that had Lockheed Martin not included the costs of unnecessary parts in the price of the retrofit kit, the price to Greece would have been less. Of course, the price of the IECM integration program was fixed as a whole, not on a component by component basis, and Relator has not pled a fraud in the inducement theory in any event.

Moreover, the underlying facts do not support a fraud claim. Lockheed Martin had provided to Greece everything that Relator's expert Mosely had. Thus, Greece was fully informed as to what had already been installed on the Block 30 aircraft under CLIN 1, and what Lockheed Martin planned to install via retrofit under CLIN 15. Yet, Greece executed Modification 5, which added CLIN 15, with full knowledge and approved every invoice.

Accordingly, for the reasons stated above, Lockheed Martin's motion for summary judgment on Count IV is granted.

Count V - Spares

In Count V, Relator alleges that Lockheed Martin (as well as General Dynamics) submitted false invoices with respect to CLIN 3 under which defendants sold spare parts to Greece. CLIN 3 was one of the original ten CLINs within the "Basic Program" and was included in the contract's initial payment schedule. General Dynamics, and later Lockheed Martin, submitted invoices against the collective value of these basic programs. In his brief in opposition to Lockheed Martin's motion for summary judgment, Relator identifies sixteen invoices in which he claims that Lockheed Martin falsely certified "that no material facts have been omitted."*fn2 Because these invoices covered work performed under the entire Basic Program of the contract, none specifically referenced the spares line item (CLIN 3). It is undisputed that although Lockheed Martin had completed the required milestone event for each payment, submission of the invoices (and thus the payment) were withheld at the time of scheduled payment until such time as Lockheed Martin and Greece had resolved differences as to parts/components that deviated from the approved F-16 configuration baseline by agreeing that Lockheed Martin could invoice for withheld funds pertaining to those parts. That agreement was properly documented pursuant to certain deviation/labor provisions in Annex N (¶ 5.6) of Contract 5/86.

Despite Lockheed Martin and Greece's negotiated settlement of the spares issues before any request by Lockheed Martin of the scheduled milestone payments, Relator claims that the "spares invoices" were nonetheless false because they did not disclose that at the time they were submitted and paid Lockheed Martin's "liability account for Greece advanced payment" contained a "sufficient balance of unearned customer deposits to pay the invoice."

Defendants created and maintained an internal accounting designation known as the 361 Greece Advanced Payment Liability Account (the "361-01 Account"). Upon receipt of payment defendants allocated portions of those payments to incurred cost and profit as the program progressed. According to defendant (and Relator does not dispute) the purpose of the 361-01 Account was to designate a portion of the payments received as unrecognized proceeds from a financial accounting standpoint, until such time as the true costs of the program became known and the amounts could be reallocated as either costs or profit. Because of the ...


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