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United States ex rel. Danielides v. Northrop Grumman Systems Corp.

United States District Court, N.D. Illinois, Eastern Division

October 23, 2014

UNITED STATES OF AMERICA, ex rel. LEO DANIELIDES, and LEO DANIELIDES, individually, Plaintiffs,
v.
NORTHROP GRUMMAN SYSTEMS CORPORATION, Defendant.

MEMORANDUM OPINION AND ORDER

MANISH S. SHAH, District Judge.

The United States hired Northrop Grumman Systems Corporation to work on a project named "Counter-MANPADS." The project aimed to protect civilian aircraft from missile attacks. Leo Danielides, a former Northrop employee, alleges that Northrop made false representations to obtain payments from the government. Danielides sued Northrop, on behalf of the United States, under the False Claims Act. Northrop moved to dismiss the complaint under Rules 9(b) and 12(b)(6). For the reasons discussed below, that motion is granted in part and denied in part.

I. Legal Standards

A. Rule 12(b)(6)

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, I must construe the complaint in the light most favorable to Danielides, accept as true all well-pleaded facts, and draw reasonable inferences in his favor. Yeftich v. Navistar, Inc., 722 F.3d 911, 915 (7th Cir. 2013). Statements of law, however, need not be accepted as true. Id. Rule 12(b)(6) limits my consideration to "allegations set forth in the complaint itself, documents that are attached to the complaint, documents that are central to the complaint and are referred to in it, and information that is properly subject to judicial notice." Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013).

To survive Northrop's motion, the complaint must "state a claim to relief that is plausible on its face." Yeftich, 722 F.3d at 915 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Yeftich, 722 F.3d at 915 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

B. The False Claims Act

Under the False Claims Act, private individuals (called "relators") may file civil actions on behalf of the United States, to recover money that the government paid as a result of the defendant's fraud. United States ex rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 822 (7th Cir. 2011) (internal citation omitted). "As an incentive to bring suit, a prevailing relator may collect a substantial percentage of any funds recovered for the benefit of the government." Id. (internal citation omitted). To succeed on an FCA claim, "a relator generally must prove (1) that the defendant made a statement in order to receive money from the government; (2) that the statement was false; and (3) that the defendant knew the statement was false." Id.

FCA claims must meet the higher pleading standard set forth in Rule 9(b) of the Federal Rules of Civil Procedure. United States ex rel. Gross v. AIDS Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005). Under Rule 9(b), "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). Rule 9(b) discourages a "sue first, ask questions later" approach by requiring that the complaint describe the who, what, when, where, and how of the fraud. Cincinnati Life Ins. Co. v. Beyrer, 722 F.3d 939, 948 (7th Cir. 2013).

II. Facts[1]

A. Counter-MANPADS Background

In the fall of 2002, the Department of Homeland Security engaged Northrop to work on the Counter-MANPADS project, which aimed to protect civilian aircraft from shoulder-fired missile attacks. FAC ¶¶ 1-2. Northrop had already designed a missile-defense system for the military, and was to adapt that system to serve civilian aircraft. FAC ¶¶ 1, 32. Northrop worked on three phases of the project: in phase one, Northrop performed initial design and development work. FAC ¶ 2. In phase two, Northrop built and tested a prototype system and obtained regulatory certification to install that system on commercial aircraft. FAC ¶ 2. In phase three-which is the subject of Danielides's complaint-Northrop tested the system to identify and correct its failures. FAC ¶¶ 2-3.

Although each phase was separately bid and negotiated (FAC ¶ 28), Northrop's performance on phases one and two was the deciding factor in DHS's decision to award phase three to Northrop (FAC ¶¶ 4, 50). Substantially the same contract structure, language, terms, and conditions were used for phase three as had been used in phases one and two. FAC ¶¶ 4, 37. The phase three contract was a series of modifications to the contracts that governed phases one and two. FAC ¶ 4.

Throughout the relevant periods, relator Danielides was a Program Manager on the project. FAC ¶ 25. The Program Director for phases one and two was John Stanfill. FAC ¶ 8. After phase two, Stanfill was replaced by David Denton. FAC ¶ 8. Danielides alleges that Denton was primarily responsible for the fraud that is the subject of this lawsuit. FAC ¶¶ 8, 51.

B. The "Fixed Price Best Efforts" Contract

The phase three contract referred to itself as a "fixed price best efforts" agreement, and tied the government's payment obligations to Northrop's achievement of certain "milestones." Specifically, the contract stated that "[t]he Agreement is a fixed price best efforts agreement with payments based on milestone payments which will be made only upon the completion of the acceptance criteria outlined in Attachment 3 as ...


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