Amicus Curiae Brief — Hughes Aircraft Co. v. United States Ex Rel. Schumer

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Supreme Court, Us.

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JAN 3 1997

No. 95-1340 CLERK J} :

OCTOBER TERM, 1996

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TABLE OF CONTENTS

Page

ee BI chai tncicteddesttecscticsesastdeccccnssocssezene iii

INTEREST OF THE AMICUS CURIAE ...00........ccccccceeeeeeees l

SUMMARY OF ARGUMENT ...0ccscccscssevseccesccvecsesscorsnssnsseseee 3

cchririitdechcessidiibiiiitliahiormncsitniinenlisianceatntianecsnttintnnccors 5

I. Because Congress Made Accounting Disclo-

sure an Express “Condition of Contracting”

in the 1970 CAS Act, Hughes Injured the

Government by Violating that Condition in

its Claims on the Treasury ...............cccccseseeeceeereeeee 5

Il. Congress’s 1970 Statutory Condition Protects

the Fisc against Accounting Nondislosure like

Hughes’, Apart from Whether The Practices

Themselves Would Be Otherwise Acceptable;

Claims That Fraudulently Violate That Condi-

tion May Be “False Claims.” ..................00cseeeeeeeeee 14

A. The 1970 Condition Protects the Fisc

From the Possibilities for Contractors

Like Hughes in Accounting Nondisclo-

sure, Apart from Whether The Practices

Themselves Would Be Otherwise Ac-

B. The CAS Act’s Disclosure “Condition

of Contracting” Protects Another Fiscal

Interest: Effectiveness of Audits.................... 20

Ill. Hughes Errs that There is No False Claim

from its So-Called “Wholly Technical”

Violation, When the Nineteen-Month Dura-

tion, Seriousness, and Large Scale of

Hughes’ CAS Nondisclosure Show It to be

Particularly InjuriOUs. ...acceeccccccccsosssssseossssseeseeees 24

Hughes’ CAS Noncompsiance Did Not

Prejudice the Judicial False Claims Act Case

Against Hughes by Their Actions on Mere

Administrative Remedies. ...........--:-ssssseeeesseeernes

CONCLUSION ......::-esceseeesessserscsessersenssesssnnsseeansssensnsesnnsnsnnees

APPENDIX .........-0ccceescsessoesseecccessesossnesensssssssenssnsssssssnnesnssnnss

27

TABLE OF AUTHORITIES

Cases: Pages

Bowsher v. Merck & Co,. 460 U.S. 824 (1983) .......cccccccccccoees s

Celotex Corp. v. Catrett, 477 U.S. 317 (1986) ........cccccccccccsees 6

FMC Corp. v. United States, 853 F.2d 882 (Fed. Cir.

1988) 18

General Motors Corp. v. Aspin, 24 F.3d 1376 (Fed.

EE ee 23

Hutchinson v. Proxmire, 443 U.S. 111 (1979) oo..cccccccccceeees 24

Internatio-Rotterdam, Inc. v. River Brand Rice Mills,

Inc., 259 F.2d 137 (2d Cir. 1958), cert. denied, 358

EEE EA CS SO 11

Jacob & Youngs v. Kent, 230 N.Y. 239, 129 N_E. 889

(1921) 12

James Graham Mfg. Co. v. United States, 91 F. Supp.

EE ee 29

Leeds & Northrup Co. v. United States, 101 F. Supp.

rn ceili itiendieridanenaetnesnecczotneene 29

Lichter v. United States, 334 U.S. 742 (1947) .........ccccc00. 7, 20

Radiation Technology, Inc. v. United States, 177 Ct.

Ch, 227, SEB F.26 ICTS (1966) .n2.2.acececcocerecsesccccsosesesececeesees 11

Rex Trailer Co. v. United States, 350 U.S. 148 (1956).......... 12

S & E Contractors, Inc. v. United States, 406 U.S. |

(1972) 29

United States v. Acme Process Equipment Co., 385

EEE 18

United States v. Aerodex, Inc., 469 F.2d 1003 (Sth Cir.

1972) 14,30

United States v. Data Translation, Inc., 984 F.2d 1256

EE 25

iv

Pages

United States ex rel. Marcus v. Hess, 317 U.S. 537

(1943) 20

United States v. National Wholesalers, 236 F.2d 944

(9th Cir. 1956), cert. denied, 353 U.S. 930 (1957)...........- 14

Statutes:

41 U.S.C. § 422 (1996) .2.ocaceeccceecsccscesesscecceccscsccsnscssssnsenossseoned 4

41 U.S.C. § GOS(a)(19B2).....20.00.0020.-cecceccecreeseseeresseresconsoneseoes 29

50 U.S.C. App. § 2168 (1982) .......--..-eseevenenenennnenennnnennnnsned 4,6

50 U.S.C. App. § 2168(g) (1982)..........-..---s-resseensnennenenseneees 6,8

50 U.S.C. App. § 2158(h)(1)(1982) ..........-csvereeereresennennnnennens 16

Pub. L. No. 91-379, § 103, 84 Stat. 796 (1970)...........-..-0c-0- 7

Pub. L. No. 100-679, §5(b), 102 Stat. 4063 (1988)................ 4

Federal Acquisition Reform Act, Division D of Title

VIII of the 1996 Defense Authorization Act, Pub.

L. No. 104-106, section 4205 ............c.ccserecenereneneneeeees 25

Section 719 of the Defense Production Act of 1950

Pub. L. No. 91-379, 84 Stat. 796 (1970)..................ccceeeeeeee 3

Legislative and Regulatory Materials:

Comptroller General of the United States, Report on the

Extension of the Defense Production Act and Uniform

Cost Accounting Standards: Hearings of the Sub-

comm. On Production and Stabilization of the Sen.

Comm. On Banking and Currency, 91st Cong., 2d

UE TTUIIEY cincidheubansnthiniiedidinnastensteesasanrmnenitons 10, 16, 21, 22

House Committee on Banking and Currency, 91"

Cong., 2d Sess., Report on the Feasibility of Ap-

plying Uniform Cost-Accounting Standards to Ne-

gotiated Defense Contracts (Comm. Print 1970))............. 10

S. Rep. No. 890, 91" Cong., 2d. Sess. (1970) ..........ccc000.0-. 8, 23

Valuation of Federal Oil -- Is the U.S. Getting the

Royalties It is Owed?: Hearings Before the Sub-

comm. on Government Management, Information

and Technology of the House Comm. on Govern-

ment Reform and Oversight, 104th Cong., 2d

AEE gE SR Te ee 2

37 Fed. Reg. 4139 (1972) .......ccscccccccccccscsssssssssseeeeeeeeesese 13, 27

37 Fed. Reg. 4142 (1972) ......ccccccsscccccccsssscsveceeeesesesessessesesse 12

aA 27

QB CIP. § 90. DUD-DGaNE 8) cccasaseosceceneeneeee 18

48 C_F.R. § 52.249-B (1996) ....cccccccccccccccsovvsseeoceeserereeseeeseeseees 13

Pages

Miscellaneous:

BOB BERS Baa ricintetncittinetiennnn 19

“Audits: DOD Release to Hughes Aircraft 15.4M in

B2 Radar Funds; Related Qui Tam Suit Filed,”

BNA Fed. Cont. Rep., Jam. 27, 1992..........cccccesseeseereseneeenes 28

American Institute of Certified Public Accountants,

Audits of Federal Government Contractors: Audit

and Accounting Guide (1994 €4.) .........c0.--seseeenesenneeees 25

Lane K. Anderson, Accounting for Government

Contracts: Cost Accounting Standards (1996)..............-»-. 13

Donald P. Arnavas & William J. Ruberry,

Government Contract Guidebook (1994) ..............00»+ 11, 13

Thomas P. Barletta & Barbara A. Pollack,

Civil Litigation of Allegations of Fraud in Connection

with Government Contract Claims, 18 Pub. Cont. LJ.

235 (1988) 29

Gene Perry Bond & Tara Harvey,

The Cost Accounting Standards: Compliance Dis-

putes and Proposed CAS Transfer Legislation, 13

Pub. Cant. 0.3. 385 (GBB nccccccccsessssceesessssszsnssssccssascsssevscese 13

John D. Calamari & Joseph M. Perillo,

The Law of Contracts (3d €d. 1987) ...........--eereeeerseneees 11

John Cibinic, Jr. & Ralph C. Nash, Jr., Cost-Reimbursement

Contracting (20 €d. 1993) .........ccsessssseessesseencenenenes passim

Congressional Quarterly, 1968 Almanac (1969) ..........-..--0-++- 9

Department of Defense CAS Working Group,

Deliberate Noncompliance and Inadvertent

Noncompliance, Working Group Item 77-12

(Mar. 29, 1977), in Cost Accounting Standard

Guide (CCH) para. 5990.12, at 6482 (1992).........cccccccccee 26

Project on Government Oversight, Survey of Defense

Contract Signatories of the “Position Paper: Reform

of the Federal Civil False Claims Act”: A Partial

Listing of the Fines and Settlements Paid for Fraud,

Waste and Abuse in Government Contracting

(1995).24

Charles Tiefer, Congressional Practice and Procedure

(1989) 23

Paul M. Trueger, Accounting Guide for Government

Contracts (9° ed. 1988) ...........cc.cecececcececorececereeeeee 19, 20, 25

Supreme Court Of The United States

OCTOBER TERM, 1996

HUGHES AIRCRAFT COMPANY,

Petitioner,

v.

UNITED STATES EX REL. WILLIAM J. SCHUMER,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

For the Ninth Circuit

BRIEF AMICUS CURIAE

OF THE PROJECT ON GOVERNMENT OVERSIGHT

IN SUPPORT OF RESPONDENT

INTEREST OF THE AMICUS CURIAE

The Project on Government Oversight (“POGO”) is a

non-partisan non-profit organization that for over fifteen years

has addressed -- by investigation, exposure, and formal writ-

ten submissions -- waste and fraud in government spending.

Its goal is to change the way the government works by re-

vealing examples of systemic problems and offering possible

solutions.

Originally named the Project on Military Procurement,

the organization focused on military spending abuses. It

2

made outrageously overpriced spare parts, such as the $7,600

coffee maker and the $1,000 pair of pliers, household words.

The organization also revealed serious inadequacies in weap-

ons, such as the Bradley Fighting Vehicle and the Sgt. York

DIVAD Air Defense Gun. In 1990, the organization changed

its name and broadened its focus to include fraud and abuse in

federal government spending.

In 1994-95, POGO became involved on the defense in-

dustry’s unsuccessful efforts to water down the False Claims

Act, which POGO considers a vital means to protect and re-

ward whistleblowers and to return billions of dollars to the

government. POGO exposed how often the defense contrac-

tors lobbying to weaken the False Claims Act had themselves

paid heavily to resolve charges of fraud and abuse in their

government contracting. POGO produced a survey from pub-

lic records which revealed that from FY 1990 to FY 1993,

over 90% of the lobbying contractors had themselves been

found guilty, pled guilty or settled in civil cases for such con-

alf a billion dollars in fines, penalties and settlements for

such conduct. The appendix to this brief includes a special

updated POGO study following the approach of the 1994-95

survey.

POGO’s methods include formal submissions to the

government forums considering important matters of govern-

ment contracting. For example, earlier this year, it made a

highly regarded submission to the House of Representatives

regarding the Treasury’s enormous losses due to shortfalls in

royalty payments by oil producers. See Valuation of Federal

Oil -- Is the U.S. Getting the Royalties It is Owed?: Hearings

Before the Subcomm. on Government Management, Informa-

tion and Technology of the House Comm. on Government

Reform and Oversight, 104th Cong., 2d Sess. (June 17, 1996)

(publication forthcoming).

3

POGO submits an amicus curiae brief focusing on the

interaction of the False Claims Act with the statute establish-

ing the Cost Accounting Standards disclosure system. The

organization’s above-described efforts frequently produce

visible impact, resulting in savings to taxpayers, in the realm

of measures, like the Cost Accounting Standards disclosure

system, that should protect the Treasury at its points of vul-

nerability to cost-reimbursement contractors.

By letters filed with the Clerk of the Court, the parties

have consented to the filing of this brief.

SUMMARY OF ARGUMENT

The Court of Appeals correctly held that Hughes Aircraft

Company could be found liable under the False Claims Act

for violating the disclosure requirement of the Cost Account-

ing Standards (“CAS”) statute. Hughes attempts to evade its

conceded “noncompliance with accounting disclosure,” Pet.

Br. 38, by arguing that it somehow falls outside the reach of

the False Claims Act (“FCA”). Hughes is wrong for the fol-

lowing reasons:

First, the False Claims Act clearly does not require any

showing of financial or monetary damage to the Government.

(It appears from its recharacterization of the question pre-

sented that Hughes has now conceded this point.)

Second, it is clear that, in any event, CAS disclosure

violations create the potential for financial or monetary injury

to the Government. Under such circumstances, there is no

doubt that a knowing violation of the disclosure requirement

is within the scope of the FCA. While Hughes attempts to

pass the disclosure requirement off as “wholly technical,” the

CAS Act is explicit that timely and accurate disclosure is an

important “condition of contracting.” Section 719 of the De-

fense Production Act of 1950 (“CAS Act”), Pub. L. No. 91-

4

379, 84 Stat. 796 (1970), codified at 50 U.S.C. App. § 2168

(1976).'

Congress imposed disclosure as a “condition of con-

tracting” in order to protect itself from the types of injury that

can result when such disclosure is inaccurate, untimely or ab-

sent. For example, contractors who violate the CAS disclo-

sure requirement can position themselves to “game the

system” by waiting to take advantage of how certain costs and

certain contracts eventually play out. Moreover, contractors

the Government to expend additional audit resources. In this

case Hughes’ failure to submit an accurate disclosure state-

ment added to the government auditors’ burden to determine

whether Hughes had properly allocated its costs in

Finally, there is no doubt that in this case the Govern-

ment has always reserved the issue of CAS noncompliance

and FCA liability, despite releasing withheld funds to Hughes.

Hughes’ violation of the CAS disclosure requirement de-

nied the Government what it bargained for and created both

potential and actual injury to the Government. The FCA prop-

erly applies to Hughes’ claims and the decision of the Court

of Appeals should be affirmed.

From enactment in 1970, through the period of the events in ques-

tion, Section 719 was codified at 50 U.S.C. App. § 2168 (1976). The

statutory revival of the Cost Accounting Standards Board in a new form,

by Pub. L. No. 100-679, §5(b), 102 Stat. 4063 (1988), caused Section 719

to be recodified to the present location at 41 U.S.C. §422 (1994). For

simplicity, reference will be to the codified section during the period in

question, ¢.g., “ § 2168(h).”

5

ARGUMENT

I. BECAUSE CONGRESS MADE ACCOUNTING

DISCLOSURE AN EXPRESS “CONDITION OF

CONTRACTING” IN THE 1970 CAS ACT,

HUGHES INJURED THE GOVERNMENT BY

VIOLATING THAT CONDITION IN ITS CLAIMS

ON THE TREASURY.

Hughes’ CAS disclosure violation warrants summarizing

at the outset. Cost-reimbursed contractors like Hughes bill

their customer (for pertinent purposes, the Government)’ for

their tens of millions of dollars in “direct” labor costs (as dis-

tinct from “indirect” overhead). See John Cibinic, Jr. & Ralph

C. Nash, Jr., Cost-Reimbursement Contracting 660, 668 (2d

ed. 1993)(direct and indirect costs). Hughes 1979 CAS dis-

closure statement spoke, for its Engineering Division, only of

billing those costs to the pertinent contract. Thus, for labor on

the B-2, it would bill only the B-2 contract, not some other

contract, and vice versa.’ Then, without Hughes amending its

CAS disclosure to show a totally different accounting prac-

tice, Hughes’ actual practice from 1982 to 1984 about-faced.

Hughes pooled millions in such costs and billed them by

formula to different contracts, fifty percent to one, and fifty

percent to another. J.A. 19,111; Pet. Br. 56a; Cibinic & Nash,

at 681-84 (cost pools). Meanwhile, according to allegations

that must be accepted as true in the procedural posture of this

* Hughes was a subcontractor on the B-2 and other projects, but the

CAS Act and related obligations apply to a subcontractor the same as to a

prime contractor.

* “Prior to 1984 [Radar Systems Group] had three (3) separate Dis-

closure Statements; Group Office, Non-Manufacturing [i.e., Engineering]

allocation of development costs between contracts in the Non-

Manufacturing Division Disclosure Statement.” J.A. 110-11 (emphasis in

original).

6

case, Hughes instructed its supervisor, the relator Schumer,

not to discuss this, while Hughes kept the prime contractor,

Northrop, in the dark. Hughes’ million-dollar claims on the

Treasury, submitted in fraudulent violation of the CAS disclo-

Sure statute, were false claims.

After nineteen months of CAS nondisclosure, Northrop

awoke, called in the auditors, and, in subsequent years, the

auditors criticized Hughes sharply and repeatedly for CAS

disclosure noncompliance. Schumer, an insider who refused

to participate in Hughes’ wrongdoing, now stands ready to

prove the elements of False Claims Act liability. The unani-

mous panel of the Court of Appeals soundly concluded that

Hughes’ motion for summary judgment failed to demonstrate

the absence of disputed issues of material fact regarding

Schumer’s FCA cause of action for the CAS disclosure viola-

tion. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

Appreciating why Hughes’ claims were false claims re-

quires analyzing the error in Hughes’ insistence that its CAS

disclosure violation cannot possibly be the slightest bit injuri-

ous to the fisc. This requires analyzing the CAS statute re-

quiring disclosure, since, as with any statutory issue, the

proper place to start is the text of the statute itself, and the

meaning the law attaches to that text. In 1970, Congress cre-

ated the CAS system by section 103 of Pub. L. No. 91-379,

codified at 50 U.S.C. App. § 2168 (1982).’ The CAS Act

established the CAS Board and directed it to

cost-accounting standards designed to achieve uniformity and

consistency in the cost-accounting principles followed by de-

fense contractors and subcontractors under federal contracts.”

50 U.S.C. App. § 2168(g)(1982).

* Hughes was “not in compliance with its disclosure statement.” Pet

App. 66a. The government noted Hughes’ “RSG’s noncompliance with

its disclosure statement.” Pet. App. 68a.

* The Government specifies that express condition by contractual

clause as well as by public law.

7

That act’s text brings us into the modern cost-accounting

world, beyond the original 1863 False Claims Act’s stories of

cheating on simple goods like horses and horsefeed. Whereas

the government makes acquisitions of well-defined goods and

services by advertisement for sealed bids, it uses

“negotiation” to make acquisitions too sophisticated fo: such

ver, starting in World War II, and especially in the era of high

technology weaponry epitomized by the aerospace research

and development in this case, the government’s defense con-

tracting has relied heavily on cost-plus contracting. This

method of contracting relieves the contractor of any risk by

paying the contractor’s costs, as reported pursuant to the con-

tractor’s cost-accounting practices, plus profit. Cibinic &

Nash, supra, at 3-7 (historic background). Because the con-

tractor’s own accounting practices determine what gets

claimed as “costs” for the Government to pay, it is critical that

the Government know those practices in advance of contract-

ing — just as the buyer in an international transaction must

know in what currency the seller will require payment. If the

seller could unilaterally switch currencies at a late date, the

buyer would possibly find herself the loser, however legiti-

mate the ultimate choice of currency.

Negotiated cost-reimbursement thus offers contractors a

long-term arrangement with the goose that lays the golden

eggs, namely, a guarantee from the Treasury for their cost

claims. However, absent proper compliance by such con-

tractors with the statutory requirements for, and, above all, the

express conditions upon, those guaranteed cost claims, these

contractors would have their hands on an uncontrolled spigot

out of the Treasury. “Experience has shown ‘cost-plus’ con-

tracts to be worse than worthless in the effort to prevent ex-

cessive costs.” Lichter v. United States, 334 U.S. 742, 762

(1947). “The cost-plus-fixed-fee contract was used where un-

avoidable, but this form has the disadvantage . . . of imposing

a heavy burden of auditing upon the Government... .” Id.

From World War II to the 1960s, Congress tried “renegotia-

tion” as a method to protect the Treasury, see id., without no-

table success; from the inadequacy of “renegotiation” arose

the CAS Act.

The CAS Act does not confine contractor accounting

practices to some uniform pattern. Rather, it lets contractors

largely choose their own practices and still get guaranteed

Treasury payment of costs plus profit -- conditioned upon dis-

closure. The CAS Act simply employs “the authority of Con-

gress to impose, as a condition of doing business with the

Government, a requirement that contractors disclose all of

their cost” accounting practices, Bowsher v. Merck & Co., 460

U.S. 824, 836 n.6 (1983) As the Act states:

The [CAS] Board is authorized to make . . . regula-

tions .... Such regulations shall require defense

contractors and subcontractors as a condition of

contracting to disclose in writing their cost-

§ 2168(g)(1982)(emphasis added). The Congress that enacted

the CAS Act recognized that cost-reimbursed contractors

billing the Government by practices they thought quite ac-

ea’ to Piilicn more than Congres thought thay

Each phrase in the CAS text expresses an important

point. At the outset, the disclosure section of the Act recog-

nizes that contractors will still have “their cost-accounting

principles,” i.¢., individualized practices not prescribed in

standards. In other words, contractors will still have a wide

variety of practices, just as before the Act, many of them ac-

ceptable so long as timely disclosed.’ Congress added the

S. Rep. No. 890, 91" Cong. 2d Sess. (1970\“Senate CAS Report”),

reprinted in 1970 U.S.C.C_AN. 3770, 3772.

' For some contractors, “their” practice may be to bill costs to par-

ticular contracts (the technical term is “benefitting” contracts), and other

9

Statutory direction to “disclose in writing” (what this brief re-

fers to by the precise phrase “CAS disclosure compliance”)

“Disclose in writing” under the CAS act anticipates a

formal system of disclosure, not whatever a contractor like

Hughes might cite after its CAS disclosure noncompliance is

discovered. This Act's text makes strikingly clear that Con-

gress by public law — not by some fine-print procurement

specification — expressly prescribed what Hughes failed to

do: “disclose in writing.” To “disclose in writing” forces

contractors like Hughes to fix, firmly and visibly, at an early

point in time and in a form ideal for use later in auditing,

“their” practices. This disclosure is aimed at precluding an

array of contract-negotiating and cost-reporting accounting

maneuvers thereafter. That is, disclosure constrains these

risk-free, profit-guaranteed Government contractors in their

accounting maneuvers and techniques. Without timely dis-

closure, such contractors can submit (as the GAO warmed in

persuading Congress to enact the CAS disclosure condition)

claims to the Treasury that obtain more than a risk-free,

ernment's thin-spread auditing resources."

contractors can pool and allocate by formula, a percentage to this contract,

and a percentage to that one -- so long as all disclose early. This case ex-

emplifies how Congress let contractors have “their” own cost-accounting

practices on such matters. As far as the CAS Act left it, under Hughes’

1979 CAS disclosure statement, Congress let Hughes’ Engineering Divi-

sion follow its disclosed practice of billing direct labor costs to benefitted

contracts, while, pursuant to that same statement, Hughes’ Manufacturing

Division could follow its practice of pooling the costs and then allocating

by formula.

* In 1968, by Act of Congress, the Comptroller General was directed

to pave the way for what became the 1970 CAS Act. Congressional

Quarterly, /968 Almanac 406 (1969). He did so through his crucial testi-

mony at the hearings underlying the 1970 Act, Extension of the Defense

Production Act and Uniform Cost Accounting Standards: Hearings of the

accounting principles."” Because the CAS Act uses the term

“condition,” this is an “express” condition. Moreover, in

every CAS-covered contract, the contractor, like Hughes,

agrees to that condition by the CAS contract clause echoing

the Act.

Between an Express Condition and a Promise,” John D. Ca-

lamari & Joseph M. Perillo, The Law of Contracts § 11-9, at

445 (3d ed. 1987) (section heading), namely, “if B does not

literally perform (and his performance is not excused), A will

not be obliged to pay.” Jd. at 445. It does not matter whether

by B's (Hughes’) definition, or the definition of someone

other than the Government, A (the Government) should be

deemed well off without compliance with that particular ex-

Hence, the seller’s right to payment is, literally, only condi-

tion of the condition (and its claim for payment despite the

violation) as clearly injurious to the Government. Moreover,

failure to fulfill an express condition invokes “the rule of

ict compliance with an express condition,” Calamari &

Perillo at 448, especially in government contracting, in which

” Even the following of the uniform CAS standards is not a “condition

of contracting,” for Congress reserved that uniquely potent contract law

term, “condition,” with all its meaning about how much importance the

Government places on this point, to the duty to “disclose in writing” their

practices.

" Radiation Technology, Inc. v. United States, 177 Ct. Cl. 227, 366

F.2d 1003 (1966)rule of strict compliance rule in government supply

contracts); Donald P. Arnavas & William J. Ruberry, Government Con-

tract Guidebook at 16-8 (1994) (“the Government is entitled to insist on

strict compliance”); cf Internatio-Rotterdam, Imc. v. River Brand Rice

Mills, Inc., 259 F.2d 137 (24 Cir. 1958\senct compliance with express

conditions in private contracts), cert denied, 358 U.S. 946 (1959). Jacob

& Youngs v. Kent, 230 N.Y. 239, 129 NE. 889 (1921\Cardozo, J.)

(excuse from strict compliance possible for implied but not express con-

37 Fed. Reg. 4139, 4142 (1972).

13

4139, 4142 (1972)(emphasis supplied). The audit manual and

the commentators emphasize that it is a “condition.”"’ Hence, the

commentary warns of liability under the “False Claims Act” for

“[a] contractor that knowingly or wilfully falsifies or conceals a

material fact in the Disclosure Statement.” Lane K. Anderson,

Accounting for Government Contracts: Cost Accounting Stan-

dards, §6.05, at 6-30 (1996).

Hughes’ contention that its fraudulent cost-reimbursement

submissions cannot become “improper request(s} for payment,”

Pet. Br. at 42, by CAS disclosure violation, is nothing new.

Rather, it is merely the version in the cost-reimbursement context

of the meritless argument in other contexts that the Government

has no basis to complain of a false claim. even when the con-

tractor fraudulently deprived the Government of what it condi-

tioned its contract upon, when the contractor gave it a substiuted

product “as good.” Something has to set the standard against

which to measure a false claim: either the contractor's rationali-

zalions uw retrospect, or, beforehand, the public law and the con-

” The Board answered the argument just quoted:

in view of the fact that breach of any of the requirements. of

this clause would be a breach of 2 maternal condition of the

contract, the default clause generally applicable to perform-

ance of the conmract provides adequate coverage

id. (emphasis added). The default clause, 48 C.F.R. 52.249-8 (1996), has

as subsection (a3) that “The Govermment may _. verminate this contract

in whole or in part if the Contractor fails to — (iti) Perform any of the

other provisions of this contract... .”

° | Defense Contract Audit Agency, DCAA Contract Audit Manual

sec. 8-104.), at 805 (1996)“DCAAM" condition”); Cibinic & Nash at

633 (“condition™); Arnavas & Ruberry at 5-20 (“condition”); Lane K.

Anderson, Accounting for Government Contracts: Cost Accounting Stan-

dards, 6-2 (1996) (“condition”); Gene Perry Bond & Tara Harvey, The

Cost Accounting Standards: Compliance Disputes and Proposed CAS

Transfer Legislation, 13 Pub. Cont. LJ. 211, 214 (1983)“condition”).

14

tract conditions. The courts have always chosen the latter."

When a fraudulent contractor faces a false claims suit, the test

of whether the contractor deprived the Government of what it

bargained for, derives from the statute and contract that define

the Government's conditions, not from Hughes’ post-hoc

mitigation notions. This is not broadening the FCA; this is

simply applying the language of the FCA and the courts’ set-

tled FCA precedents to the context of the CAS disclosure

statute.

Il. CONGRESS’S 1970 STATUTORY CONDITION

LATING THAT CONDITION MAKE FALSE

CLAIMS.

A. The 1970 Condition Protects the Fisc From the

Possibilities for Contractors Like Hughes in Ac-

counting Nondisclosure, Apart from Whether

the Practices Themselves Would Be Otherwise

Acceptable.

Hughes admits noncompliant accounting practices can

support FCA liability, but argues that “the court [of appeals]

erred by holding that noncompliance with accounting disclo-

sure” can invoke the same FCA liability as a violation in “the

underlying accounting practices.” Pet. Br. 13. Cost-

reimbursement contractors’ claims can be false claims by

fraudulence in disclosure as much as by fraudulence in prac-

" See, ¢.g., United States v. Aerodex, Inc., 469 F.2d 1003, 1007 (Sth

Cw. 1972); United States v. National Wholesalers, 236 F.2d 944 (9th Cir.

1956), cert. denied, 353 U.S. 930 (1957).

15

loss or exposure to loss upon the Government in various ways

discussed in this section and the next. The words and purpose

of the CAS statutory disclosure condition belie Hughes’ no-

tion that Congress’ goal was only to oppose unacceptable ac-

counting practices such as double billing or misallocation of

pooled costs to the wrong (“unbenefitted”) contracts.

Rather, Congress’ goal concerned timely disclosure of

cll practices, even those that would be otherwise acceptable.

Congress expected the CAS Act to restrain cost-

reimbursement contractors in “the selection of differing but

generally accepted cost accounting methods,” which “can

produce a variance of at least 5 percent in estimating the cost

of a contract . . . [sometimes] much larger.” Senate CAS Re-

port at 3770. CAS disclosure would end the situation that

“Contractors are free to pick and choose the cost accounting

method most advantageous to them.” /d. at 3771. The GAO's

report concluded, under the heading “NEED FOR DISCLO-

SURE” (capitalization and emphasis in original): “Underlying

many of the cost-accounting problems we observed is a need

for a written agreement ('*) of cost-accounting practices to be

followed by the contractor.” GAO CAS Report at 19. Comp-

cost-accounting standards, together with a written disclosure

by the contractor of his cost-accounting practices, could do

much to promote a common understanding as to the methods

* In context, it is plain that what the Comptroller General called an

“agreement” is what statutorily became the CAS condition to “disclose in

writing” and in practice became the CAS disclosure form, prepared by the

contractor but, absent i@vemwonal concealment on areas of dispute, subyect

to resolution of disagreemen: and hence of becoming like an “agreement.”

See GAO CAS Report a 131 (GAO questionnaire about “using advance

agreements on accounting standards”) 268 (response: “This is simply

good business. An agreemnemt 1n aaivance should prevent numerous ques-

tions arising later and showld save time for both the contractor and the

Government.”).

16

of cost determination to be used consistently.” Senate CAS

Hearings at 11.

At this stage, it is taken for purposes of whether the de-

fendant can obtain dismissal that Hughes submitted its non-

compliant CAS disclosure violation knowingly rather than

having it occur inadvertently. Hughes raises only the issue of

what it calls “injury,” not what the record reveals about

Hughes’ motives. The record has prominent indicators that

Hughes saw possibilities to advantage itself by its nondisclo-

sure. After all, in 1982, Hughes did not follow the procedure

in the CAS act available for resolving a legitimate contractor

question about CAS disclosure: “a dispute under the contract

dispute clause.” Sec. § 2158(h)(1)(1982). Hughes could

have, but did not, formally present the position in 1982 that

on some legitimate basis it questioned whether its practice had

to be CAS-disclosed. The company did not follow that proce-

dure in 1982, in 1983, nor in 1984. In 1984, as discovery of

its practice loomed, Hughes made no defense of any supposed

or possible legitimate right not to make a CAS disclosure.

Rather, nineteen months late, it made a CAS disclosure

amendment. The amendment itself, in the circumstances, was

tantamount to an admission of the violation. Additionally,

“in 1983 [William J. Schumer’s] supervisor . . . instructed him

not to inform the contractors,” Pet. App. 4a, of the accounting

practice. Moreover, as the Court of Appeals dissects

precisely, Hughes kept Northrop in the dark; that is why

Northrop called in the auditors. Pet. App. 19a-20a (discussing

Northrop’s 1986 “white paper” that said Hughes’ practice was

“unilaterally implemented with no customer participation”).

The fact that Hughes did not present, as a legitimate dis-

pute, its decision to engage for nineteen months in CAS non-

disclosure, coupled with its concealment instruction to

Schumer and its proceeding without Northrop’s partici ipation,

more than creates the issue of fact on remand about Hughes’

knowing noncompliance. Rather, Hughes’ knowing with-

17

holding of CAS disclosure underscores the possibilities for

advantaging itself.

Hughes’ position has been, until pinned down formally,

that it could freely “elect” whether to charge its costs wholly

to one contract, or to charge part to one, or to charge part to

another," a position consistent with Hughes’ defense of its

accounting practice, but quite at odds with the CAS disclosure

condition. This joins the other record evidence about how

Hughes used the nineteen months it obtained improperly by

CAS nondisclosure to make use of delaying its supposed right

of “election.” At one point “[t}he B-2 program would have

borne all costs,” J.A. 136; at another, “the McDonnell Doug-

las (F-15) subcontract was proposed, evaluated, and negoti-

ated as a stand alone effort,” J.A. 31, meaning the F-15

program would “stand alone” bearing all its costs.

Fraudulent delay about informing of the Government and

prime contractors, particularly about a practice that would let

Hughes “elect” who and what to charge, gives the cost-

reimbursement contractor undue power vis-a-vis the Treasury.

What injures the Government is fraudulently depriving it of

what CAS disclosure establishes, the firm and visible fixing

of the practices. Hughes’ route to enrichment is as simple as

any other game in which a player discloses to others its power

to “elect” the placement of its accounting bets nineteen

months after the last proper moment to do so — even apart

from the propriety of the placement of those bets if timely-

© “Since the dual CPU was required for the B-2, Hughes could have

elected to charge the costs associated with that effort entirely to the B-2

cost reimbursement type subcontract.” Defendant's Fact No. 107, at 185,

in Def. Rep. to Pl. Oppo. to Statement of Uncontroverted Facts and Con-

clusions of Law in Support of Motion for Summary Judgment, March 2,

1992, Docket No. 226. J.A. 9 (emphasis supplied).

made. For example, Hughes obtains an invaluable advantage

in negotiating by fraudulently delaying that disclosure.”

More generally, the Court of Appeals noted that Hughes’

“noncompliance with the CAS may have rendered the costs

unallowable under 48 C.F.R. § 31.202-2(a)(3) which requires

that ‘standards promulgated by the CAS’ be considered in

determining allowability of costs. Jd.” Pet. App. 25a. Bribes

and kickbacks to interfering officeholders might get the job

done faster and might be, in cost-accounting parlance, readily

“allocable” to the particular (“benefitted”) expedited project,

but though the contractor might deliver a product satisfying

contract specifications — and such costs would meet some

criteria of allowability — such costs do not meet all the crite-

ria of allowability and their submission by a contractor like

Hughes would support an FCA case." Hence, auditors look-

ing at one set of noncompliance issues may deem contractors’

accounting to have, on some criteria, “saved the government

money,” App. 4a, without those auditors themselves, let alone

the Court of Appeals or any other court, considering the con-

tractor to have established the claimed costs’ allowability by

the other criteria, such as by what Congress makes an express

| $ A contractor like Hughes can negotiate a high price on a contract

like the F-15 by having an unamended old 1979 CAS disclosure statement

" See, ¢.g., United States v. Acme Process Equipment Co., 385 U.S.

138, 144-48 (1966); FMC Corp. v. United States, 853 F.2d 882, 886 (Fed.

Cir. 1988 (holding legal fees unallowable on one particular CAS alloca-

bility issue, though they may well meet other criteria for allowability and

may even be payable out of another contract).

19

condition, that is, the CAS disclosure condition.” The Gov-

ernment does not endow cost-reimbursed contractors with a

Midas touch to turn anything in their hands into Treasury

payments, while picking and choosing with impunity which

conditions of contracting the contractor will adhere to. In

fact, the Court of Appeals properly cited the law known as the

“Allowable Cost Reform Act,” that expressly links different

tests of allowability and the FCA.” The Court of Appeals

also properly discussed the tie between adequacy of disclosure

to Northrop and the criteria of allowability. Pet. App. 15a n.2

& 19a.

* Hughes seems to imply the CAS system allows contractors to buy

off, or to pay off, the government for a CAS noncompliance by savings or

payments some other way. As could be expected from the strong wording

of the CAS Act, this is anathema. CAS noncompliance adjudication

started with this ringing affirmation, in “(the first decision handed down

by a board of contract appeals involving cost accounting standards,” Paul

M. Trueger, Accounting Guide for Government Contracts 252 (9° ed.

1988): “We emphatically disagree with appellant's assertion that a con-

tractor has a right to refuse to comply with Cost Accounting Standards”

by compensating the Treasury; “[a] motorist acquires no right to park his

automobile on the sidewalk by continuing to pay the fines prescribed for

so doing.” AiResearch Manufacturing Co., ASBCA No. 20998, 76-2

BCAS 12,150 (1976). “Under the Cost Accounting Standards clause, the

contractor undertakes an affirmative obligation, inter alia, to comply with

all Cost Accounting Standards in effect,” id.; accord, Trueger, supra, at

252.

* In that statute, Congress made clear that such FCA liability could

ensue for costs “specified by statute or regulation as being unallowable,”

Pet. App. 15a, apart from whether they pass muster by some other crite-

rion such as the one Hughes trumpets. The Court of Appeals rightly cited

this “Allowable Cost Reform Act.” Trueger, supra, at 506 (“Allowable

Cost Reform Act”); Cibinic & Nash, supra, at 1146. The Allowable Cost

Reform Act is cited just as another indicator of how seriously Congress

takes the FCA as a remedy for allowability criteria, not as applying to

Hughes claims in this case.

*' Hughes concedes its issue about the timing of presentation of issues

to the district court does “not [relate] to [Schumer's} challenge to the ade-

20

B. The CAS Act’s Disclosure “Condition of Con-

tracting” Protects Another Fiscal Interest: Effec-

tiveness of Audits.

As even Hughes admits, the gravamen of a “false claim”

is the Government's exposure to a possible loss of a financial

or fiscal nature. See Pet. Br. at 39 (“financial loss”), 40

(“pecuniary or property loss”), 43 (“injury to the public fisc”).

For exampie, in the classic FCA cases of product substitution

or attempted bilking, the gravamen is the Government's loss

or exposure from the contractor's false claim, including the

Government's effort to prevent or minimize loss. United

States ex rel. Marcus v. Hess, 317 U.S. 537 (1943). The con-

tractor who fraudulently substitutes other types of parts in a

plane than the ones the Government purchased need not have

opportunities to advantage itself to be making a false claim. It

suffices that the Government suffers loss, such as the dissipa-

tion of inspection effort.

The CAS statute protects, and Hughes’ violation im-

paired, a vital Government interest in the struggle against fis-

cal exposure and loss: protecting the Treasury by making

audits effective. This Court said in the cost-reimbursement

context, “The cost-plus-fixed-fee contract was used where

unavoidable, but this form has the disadvantage . . . of im-

posing a heavy burden of auditing upon the Government . . .

.” Lichter v. United States, 334 1).S. 742, 762 (1947). The

authoritative Comptroller General report underlying the CAS

act, previously cited, drew upon the extensive painful failure

of auditing in connection with the Renegotiation Board and

related efforts. Contractors who were not required to make

prior disclosure of their accounting practices dissipated the

government's limited auditing resources. The Comptroller

quacy of Hughes’ disclosure to Northrop, see id. at 19a-22a.” Pet. Br. 45

n.18. Because Hughes appears to have had one unified nondisclosure, the

discussion in this bnef would apply regardless of any such distinction at-

tempted by Hughes.

21

General in his testimony and his report persuasively stated the

way to salvage the government’s fisc-protecting resources

from a “myriad of controversies.”” That is, Congress must

condition contracting upon disclosure in writing by contrac-

tors like Hughes of their accounting practices. Otherwise,

dissipation of government auditing resources could result

even from undisclosed practices said to be acceptable and

even good for the Government. “Contractors should be re-

quired to maintain records of contract performance costs in

conformity with cost-accounting standards and any approved

practices set forth in a disclosure statement ....” Senate CAS

Hearings at 14 (testimony of Comptroller General). Absent

this, “[mJeaningful audits of negotiated contracts by the Gov-

ernment ye and GAO are thus rendered more difficult.”

Id. at 12.” Others explained why contract auditing and ad-

ministration were almost hopeless without the tools, like dis-

closure, in the CAS Act.”

” Distilled from a review of scores of case studies of contract contro-

versies of auditing and litigation, a GAO summary concluded:

[I}t is widely recognized - and past experience indicates - that

the “submerged” portion of the problem is very substantial

and sizable. For each problem that reaches the [Armed Serv-

ices Board of Contract Appeals] or the courts, there are, partly

because of the time and expense involved in resolution by ju-

dicial or quasi-judicial bodies, myriad of controversies which

are settled based on one party persuading the other or through

negotiating. . . . [Hjowever, these settlements lack continuing

commitment.

Senate CAS Hearings at 171-72 (emphasis supplied)reproducing GAO

report segment).

® Mr. Staats endorsed the bill that became the CAS Act because

“Written disclosures would do much toward achieving consistency be-

tween the cost-accounting support for the price proposal and accumulation

of subsequent cost information on contract performance cost.” /d. at 15.

* The legendary Vice Admiral Hyman G. Rickover, architect of the

nuclear submarine program, explained:

22

Hughes’ case fits what the GAO meant by the injurious

controversy-generating nature of undisclosed contractor ac-

counting practices. In 1984, the prime contractor, Northrop,

seeing its costs escalate unexpectedly, “requested a govern-

ment audit of Hughes’ accounting practices,” Pet. App. 3a,

before Hughes ended its nineteen-month fraudulent nondis-

closure period and filed its July 1984 amendment of its CAS

disclosure form. Hughes’ faiiure ic disclose thereafter drew

down substantial government auditing resources. The Air

Force Audit Agency completed the first audit in June 1986;

subsequent Defense Contract Audit Agency (“DCAA”) audits

and related technical reviews from 1986 to 1988 concluded, as

the Court of Appeals noted, that Hughes’ practices “had not

been reflected properly in accounting disclosure statements.

As a result, the government withheld payment to Hughes of

approximately 15.4 million in costs charged to the B-2 pro-

gram.” Pet. App. 3a.” What the DCAA sharply criticized

was one of the prime categories of CAS disclosure noncom-

pliance prominently addressed in the DCAA’s manual and the

commentary.”

As a result, the Air Force requested another DCAA re-

view in September 1990, reminding “that the contractor was

We negotiate every day with the cards stacked against us. De-

fense companies are able to hire large numbers of experi-

enced, highly skilled lawyers and accountants; these are faced

by a very few, relatively inexperienced people in government

who must look after the government’ s interests.

Id. at 498, 500.

* This suspension occurred December 10, 1987. A June 1990 Air

Force letter reaffirmed that Hughes had not made an adequate CAS dis-

closure. (Pl. Sep. Statement of Material Fact, re Fact No. 90, at 155-,

JA8.)

** DCAAM at 8-302.2.2(8), at 815 (“Types of Noncompliance . . . .

(8) Actual practices of accumulating or reporting costs not in compliance

with Disclosure Statement.”)(bold in original); Cibinic & Nash at 1063

(quoting from earlier DCAAM).

23

in conflict with their disclosed accounting practices .

J.A. 110. Sieaeianeemtiehnadiaes letuenehes 1000.

Hughes filed a formal claim for the suspended $15.4 million,

starting the formal dispute clause process under the Contract

Disputes Act. J.A. 174. Hughes could, and presumably

would, have appealed an adverse determination to the Armed

Services Board of Contract Appeals.”

This long sequence of Government audits and claims

controversy is precisely what the CAS Act disclosure

“condition of contracting” intended to prevent. It would fly in

the face of the False Claims Act for Hughes to argue that it

can fiscally injure the Government without FCA liability so

long as Government’s loss occurs without corresponding

gains going into the pocket of Hughes itself. Rather, Hughes

argues that using the False Claims Act to enforce the Cost

Accounting Standards condition is not “[cjonfining the FCA

to its proper realm” of protecting the Treasury but rather is

using the FCA “to enforce the statutory and regulatory rights

of the United States across the board,” such as for “*Nuclear

Waste Policy.”” Pet. Br. at 41 & n.24 (quotation omitted).

Perhaps cost-reimbursement contractors fee] they have such a

vested property interest in their potential claims on the Treas-

ury that audits strike them as a fiscally irrelevant “regulatory

right{] of the United States.” The picture Hughes would

seemingly draw is that Senator Proxmire, the fiercely Treas-

ury-guarding chief sponsor of the CAS bill,” established the

accounting disclosure condition, not in the FCA’s “realm” of

protecting the Treasury from government contracts, but for

some policy goal of the general “statutory and regulatory

rights of the United States” far from where the money is. This

” See generally General Motors Corp. v. Aspin, 24 F.3d 1376, 13769,

1382-83 (Fed. Cir. 1994)

9 For Senator Proxmire’s role, see Senate CAS Report at 2. For the

significance of sponsors, see Charles Tiefer, Congressional Practice and

Procedure 240-42 (1989).

24

Court, well acquainted with Senator Proxmire’s “Golden

Fleece Award” of the CAS Act era (see Hutchinson v. Prox-

mire, 443 U.S. 111 (1979)), need not read his CAS Act as a

fiscally-uninterested, Treasury-unrelated effort at regulation

for general societal betterment.

Ill. HUGHES ERRS THAT THERE IS NO FALSE

CLAIM FROM ITS SO-CALLED “WHOLLY

TECHNICAL” VIOLATION, WHEN THE NINE-

TEEN-MONTH DURATION, SERIOUSNESS, AND

LARGE SCALE OF HUGHES’ CAS NONDISCLO-

SURE SHOW IT TO BE PARTICULARLY INJU-

RIOUS.

As shown by the Project on Government Oversight sur-

vey of public records in this brief’s appendix, contractors like

Hughes and amici have had plenty of reason to seek legisla-

tive watering-down of the False Claims Act, from past experi-

ence with the remedies for fraud and abuse in government

care industry which has paid over a billion dollars since 1994,

million dollars since 1994, in FCA judgments and settlements

and related matters.” Although Congress has made adjust-

ments of the CAS system, these do not include what Hughes

* In January 1995, amicus curiae published a revised update of a 1994

special study. Project on Government Oversight, Survey of Defense Con-

tractor Signatories of the “Position Paper: Reform of the Federal Civil

False Claims Act”: A Partial Listing of the Fines and Settlements Paid for

Fraud, Waste and Abuse in Government Contracting (1995). The study

surveyed 22 defense contractors, including Hughes, who were signatories

of a submission to Congress entitled “Reform of the Federal Civil False

Claims Act Position Paper.” Neither the 103d nor the 104th Congress

made the changes in the False Claims Act sought by those signatories.

The report in the appendix follows the methodology of that 1995 study.

25

and amici seek in this case.” There is little need to dwell on

the centrality for False Claims Act purposes of Hughes’ certi-

fication that its disclosure statement was “complete and accu-

rate,” J.A. 17, or the countless clear warnings that such

certification must be kept current and that when its practices

changed in 1982-84, it must amend.”

Predictably, Hughes downplays the injurious character-

istics of its CAS disclosure noncompliance as “wholly techni-

cal,” and tries analogizing its case to United States v. Data

Translation, Inc., 984 F.2d 1256, 1261 (1st Cir. 1992)(Breyer,

J.in which “no reasonable person . . . could have believed

that the Government really wanted,” id. at 1261, the disclo-

sure alleged in the suit to be required). However, Hughes

committed a violation long in duration, serious in effect, and

large in scale. Addressing duration first, the Court of Appeals

accurately stated of Hughes’ fraud that “for the period from

December 1982 to [the Hughes CAS amendment for the pe-

riod ending in} 1984” -- a CAS amendment filed in July 1984,

J.A. 111 -- “Hughes violated the CAS by failing to state accu-

rately in its disclosure statement its practice ....” Pet. App.

25a.” This was a nineteen month period.”

* In the Federal Acquisition Reform Act (“FARA”), enacted as Divi-

sion D of Title VIII of the 1996 Defense Authorization Act, Pub. L. No.

104-106, section 4205 exempted commercial item contracts from cost ac-

counting standards. The research and development contracts of Hughes in

this case could not be further from commercial items.

” See, e.g., American Institute of Certified Public Accountants, Audits

of Federal Government Contractors : Audit and Accounting Guide 2.40 at

25 (1994 ed.) (“The CAS contract clause . . . . requires amending the dis-

closure statement for any change in practices .. . .”); Trueger at 245-46

(section on “Amending of Disclosure Statements”).

* Hughes definitized its subcontract on October 24, 1982, Pet. App.

42a, an act necessitating a formal avowal upon the DD-633 for the ac-

cepted proposal, J.A. 154, 200. “VI. COST ACCOUNTING STAN-

DARDS BOARD (CASB) DATA (PUBLIC LAW 91 379 AS

26

The Department of Defense CAS Working Group prom-

ulgated a time standard in 1977 with the title that explains

what was to be distinguished: “Deliberate Noncompliance

and Inadvertent Noncompliance.” Department of Defense

CAS Working Group, Working Group Item 77-12 (Mar. 29,

1977)(“Deliberate Noncompliance”), in Cost Accounting

Standards Guide (CCH) para. 5990.12, at 6482 (1992). As a

rough guide, when a contractor's commencement of practice,

and disclosure, respect a sixty day line, the Working Group

considers a problem “inadvertent”; however, worse than sixty

days means “deliberate.”™ Compared to the DOD CAS

Working Group’s sixty days, Hughes’ hiatus of nineteen

months stands far, far out of line.

Moreover, what Hughes did fairly bristles with indicators

cited by the DOD CAS Working Group as signs of deliberate,

not inadvertent, noncompliance.” Nor does Hughes’ CAS

AMENDED): .... HAVE YOU SUBMITTED A CASB DISCLOSURE

STATEMENT (CASB DS 1 OR 2)? YES” J.A. 200.

_" Hughes” noncompliance period consisted of the incredibly long

nineteen months from Hughes’ establishing by internal “agreement” on

December 14, 1982 its accounting practice for the RDP project, Pet. App.

46a, until Hughes’ CAS disclosure by submission on July 3, 1984. J.A.

111. Because the form covered the period to January 1984, that date is

recited and used for many purposes. However, the CAS disclosure oc-

curred when Hughes amended its form in July 1984, just as a :ax form

covers a period until December 31 but is filed March 15.

“Voluntary changes in accounting practices should normally be con-

than 60 days after the time the ACO [i-e., the Administrating Contracting

Officer (ACO)} has received notice as provided in ASPR 3-1214.”

Deliberate Noncompliance at 6483. The emphasis is on formal notice of

the kind that tnggers auditor evaluation of the contractor's proposal,

which Hughes did not give until July 1984.

For example, Hughes does not plead the sign of “inadvertence” that

“the noncompliance resulted from failure {of corporate] employees to

follow company policy and instructions.” Deliberate Noncompliance at

6482 Nor does Hughes plead the sign of inadvertence of a contractor's

27

disclosure violation concern some minor point. Hughes’

practice concerned how to pool its direct costs and allocate

them between contracts of different kinds: cost-

reimbursement like the B-2, and fixed-price like the F-15.

Because late disclosure games of the greatest variety are pos-

sible with such mixed contract types, that is the background

against which a disclosure violation is the most serious.

Moreover, Congress showed its concern with this matter of

pools, as most seriously necessitating disclosure, in the statu-

tory phrase immediately following the CAS disclosure condi-

tion: the condition requires contractors “to disclose in writing

guishing direct costs from indirect costs and the basis used for

allocating indirect costs,” § 2168(g), ¢.g., pools. Accordingly,

the official CAS Disclosure Form, CASB-DS-1, emphasizes,

too, the seriousness of the point upon which Hughes violated

its disclosure duty.”

IV. THE DCAA AUDITORS WHO CRITICIZED

HUGHES’ CAS NONCOMPLIANCE DID NOT

PREJUDICE THE JUDICIAL FALSE CLAIMS

ACT CASE AGAINST HUGHES BY THEIR AC-

TIONS ON MERE ADMINISTRATIVE REME-

DIES.

formally-presented, good faith disagreement for which the penod of non-

compliance is simply the time oecessary for resolution. /d. at 6483.

* That form has as one of its main parts, Part Il, the disclosure of

“Direct Costs” practices, under which “Labor” is, of course, one of the

main categories and “Method” one of the main questions. What Hughes

did not disclose was its resort to one of the non-usual methods for direct

labor costs. For this, the form naturally has a special entry (“Y. Other”)

as distinct from the usual methods. Compare 37 Fed. Reg. 4139, 4151

(Feb. 29, 1972)(original promulgation of form) with J.A. 19 (Hughes’

disclosure form)“Direct labor cost . . . is collected in a holding account

and is allocated to contracts . . . .”).

28

Although the Government did not prejudice the judicial

FCA case against Hughes, Hughes argues that the Govern-

ment did exactly that. Hughes employs two arguments, each

without merit, drawing on the Government’s mere admunis-

trative actions. First, it argues that when the government ad-

ministratively released the suspended interim payments, it

foreclosed a judicial false claims act remedy “[u}nder black-

letter government contracts law.” Pet. Br. 44 n.26 (citing J.

Cibinic & R. Nash, Cost-Reimbursement Contracting 1106

(2d ed. 1993)).

Yet, the Government expressly reserved the issue of

CAS noncompliance and false claims remedies when it ceased

having the money temporarily withheld. J.A. 137.” Moreo-

ver, that passage hardly applies in this case, where the record

shows only the end of a temporary withholding of funds, not a

final settlement. Furthermore, Hughes’ supposedly favorable

“black-letter government contracts law” turns out to be black-

letter government contracts law providing that Hughes re-

mains subject to fraud claims, like this FCA suit, for even fi-

nal settlements do not bar fraud claims.” The administrative

= [T}he Government does not waive rights to a share in any set-

tlement resulting from the parallel qui tam action in the event

the relator’s case is successful. Second, [an] associated issue

of Cost Accounting Standards noncompliance is still open and

shall remain so until resolved to Government satisfaction.

J.A. 137. This careful preservation received widespread publicity. An

article, “Audits: DOD Release to Hughes Aircraft 15.4M in B2 Radar

Funds; Related Qui Tam Suit Filed,” BNA Fed. Cont. Rep., Jan. 27, 1992,

describes the release of funds and the “two caveats: 1) the government

does not waive rights to share in any settlement resulting from a parallel

qui tam action; and 2) An associated cost accounting standards non-

nar seeetiasidaategtil

“" ‘The treatise cited by Hughes begins by saying, “Barring fraud, mis-

take, or lack of authority ... .” Cibinic & Nash, at 1105 (emphasis sup-

plied). That paragraph Hughes quoted as “black-letter” law continues as

to what will bind the government “absent fraud ....” Id. (emphasis sup-

29

action simply handled Hughes’ attempt at having the matter

heard in an administrative non-fraud forum. Hughes at-

tempted this by submitting a claim to the contracting officer.”

The administrative action taken in response to Hughes’ claim

keeps an FCA case perfectly available, even if the contracting

officer made a final settlement, because “[a] contractor's fraud

is of course a wholly different genus,” not resolved by con-

tracting officers, since “Congress . . . has given the federal

courts power to hear and determine such cases.” S & E Con-

tractors, Inc. v. United States, 406 U.S. 1, 16-17 (1972).

Second, Hughes jumbles together different administra-

tive conclusions that the Court of Appeals had carefully sepa-

adhered to, their finding of Hughes CAS disclosure noncom-

pliance, it became their duty to decide whether to trigger an

administrative non-fraud proceeding as distinct from leaving

the matter to a judicial FCA case. They did a cost-impact

study.” Such a study does not use FCA judicial-type ques-

plied)(quoting James Graham Mfg. Co. v. United States, 91 F. Supp. 715,

716 (N.D. Calif. 1950)). What Hughes refers to as its “black-letter”

authority's “citing cases” includes Leeds & Northrup Co. v. United States,

101 F. Supp. 999 (E.D. Pa. 1951)\cited by Cibinic & Nash, at 1106),

which discusses finality “in the absence of fraud.” /d. at 1003.

” “Under the [Contract Disputes Act], the contracting officer's

authority does not extend to ‘a claim or dispute for penalties or forfeitures

prescribed by statute,’ such as the FCA, that are within the jurisdiction of

another agency. [Footnote citing 41 U.S.C. 605(a)(1982).] Moreover, the

‘agency head’ may not pay or settle ‘any claim involving fraud.’

[Footnote citing /d]”" Thomas P. Barletta & Barbara A. Pollack, Civil

Litigation of Allegations of Fraud in Connection with Government Con-

tract Claims, 18 Pub. Cont. L.J. 235, 248 (1988).

“ It is the same type study as when contractors make a timely, proper

disclosure of an intended change in practices or some other timely, proper

CAS disclosure with no element of intentional concealment. Regarding

cost-impact studies, see DCAAM, supra, 8-500; Cibinic & Nash, supra, at

1064-65.

30

tioning of witnesses for establishing the existence and impact

of fraud." That study left unprejudiced the FCA case.

CONCLUSION

Congress wrote the CAS Act, with disclosure as its iron-

clad “condition of contracting,” to protect the great vulner-

ability of the Treasury to undisclosed accounting techniques

of contractors, like Hughes, with their open access to the pub-

lic till. Hughes’ fiscally injurious violation of the express

condition supports a False Claims Act case. The Court of

Appeals should be affirmed.

Respectfully submitted,

CHARLES TIEFER

(Counsel of Record)

Associate Professor

University of Baltimore School of Law

1420 North Charles Street

Baltimore, MD 21201

(301) 229-0112

Counsel for Amicus Curiae

Project on Government Oversight

“" By analogy, a contracting officer might decide to consider the cost-

impact from a fraudulent product substitution not to be of the type for pur-

suing in an administrative remedy. Rather, she might decide to let pro-

ceed, instead, a successful False Claims Act proceeding. See United

States v. Aerodex, Inc., 469 F.2d at 1007.

Project On Government Oversight

#7 REPORTS

Funds Returned to the United States Government

By Defense Contractors and the Health Care Industry

Under the False Claims Act, 1994-1996

2025 Eye Street, NW, Suite 1117, Washington, DC 20006-1903

(202) 466-5539 FAX (202) 466-5596

ee es ee ee ee

2-a

DEFENSE AND HEALTH CARE INDUSTRIES:

RATHER THAN CLEAN UP THEIR ACT,

THEY ATTACK THE ACT

The major trade associations for the defense and health

care industries have risen up in support of the Hughes Aircraft

Company -- the defendant in a pending fraud case before the

Supreme Court. Hughes’ appeal to the Supreme Court chal-

lenges the potency of the False Claims Act. This law, which

was inspired by Civil War profiteering, has successfully

forced those who defraud the government to pay for their ille-

gal activities. It is not surprising that the defense and health

care industries, which account for the overwhelming majority

of False Claims Act settlements, are attacking this law.

In 1994, the Project On Gover.»ment Oversight issued a

report that found of the 22 defense contractors who were lob-

bying the Senate to water down the False Claims Act, 90%

had been involved in fraud and abuse in government con-

tracting practices themselves. At the time, those companies

had paid over $500,000,000 in penalties and settlements to the

government for their alleged fraudulent activities.

Now we see both the defense and the health care indus-

tries jumping on the opportunity to weaken this effective law.

These associations are arguing in amicus curiae briefs to the

Supreme Court that this law is being used to unfairly prose-

cute their members over “regulatory disputes.”

The fact is, however, that just since 1994, the health

care industry has repaid the government over $1 billion’,

and the defense industry over $800,000,000, due to the

False Claims Act.

' As our survey begins in 1994, this figure does not include some

large settlements, such as the $100 million National Health Labs 1992

settlement, nor does it include the approximately $300 million settlement

with Smith Kline Beecham expected to be announced by the end of 1996.

3-a

This survey is by necessity only a partial listing of set-

tlements and judgements. Many False Claims Act settlements

are not made public, and there is no comprehensive database

that compiles information on those that are made public. The

Project On Government Oversight has made every attempt to

avoid duplicate listings of cases. The qui tam provision of the

False Claims Act allows a person with knowledge of fraud to

file a case on behalf of the government. Such cases are noted

in the description of the settlements in this survey.

$1.26 million to settle a gui tam suit alleging that

the company falsified food costs, retained duplicate

payments, misrepresented their intentions to pay the

government and engaged in price fixing and kick-

backs. The company sold commissaries on military

bases in California. Defense Contract Litigation Re-

porter March 24, 1994

Alliant TechSystems Incorporated and Accudyne

Corporation

$12 million to settle a qui tam suit alleging that Ac-

cudyne failed to properly test electronic assemblies

A few of these cases did not involve defense contracts, but were set-

tlements made by defense contractors who are members of either the Aecro-

space Industries Association, the Shipbuilders Council of America,

National Security Industrial Association or the Electronic Industries Asso-

ciation. These associations have all filed amici briefs in Hughes Aircraft

Company v. U.S. ex rel Schumer.

’ Henceforth noted as DCLR.

4-a 5-a

supplied under an Army contract. Federal Contract B.F. Goodrich Company

Report’ July 3, 1995

epo y $552,500 to settle allegations that the _ompany

AT&T Incorporated manufactured defective rafts for the Army. False

$13.9 million to settle allegations that the company Claims Act & Qui Tam Quarterly Review’ October

did not provide accurate and complete pricing in- 1995

formation on air traffic control equipment. FCR Boeing

Dec 26, 1994

mate $75 million to settle allegations that the company

$4 million to settle a gui tam suit alleging that the DCLR May 12, 1994

company inflated contracts for designing govem- Computer Tape Source Incorporated

ment facilities to cover the cost of its employee pen-

sion plan. Department Of Justice’ press release aon ye to settle allegations that the company v4

sented old computer tapes as new. Department

RS Defense Inspector General Semi-Annual Report to

Battelle Memorial Institute Congress’ October 1, 1993 - March 31, 1994

$330,000 to settle a qui tam suit alleging that the Dana Corporation

company used government owned equipment to

service commercial customers. FCR June 10, 1996 1. $19.5 million to partially settle allegations that the

BDM Federal Incorporated company overcharged parts sold to the Army, the

$375,000 to settle allegations that the company im- Air Force and the Navy. FCR October 2 1995

properly transferred funds from an Air Force con- 5) _ ,

tract. Richmond Times-Dispatch March 4, 1996 | a = “ g ty tee ay. oe — -

BEI Sensors and Systems Beaver Precision Products division overcharging

$1 million to settle a gui tam suit alleging that the ee DOJ press release May

company failed to properly test devices used to .

measure the gravitational pull on Air Force planes Deloitte & Touche, LLP

and pilots. DOJ press release December 6, 1995 $396,000 to settle a qui tam suit alleging that the

company submitted false claims in connection with

* Henceforth noted as FCR. * Henceforth noted as QTOR.

’ Henceforth noted as DOJ. ” Henceforth noted as DOD IG SAR.

6-a

consulting contracts with the Bonnerville Power

Administration and the DOJ. QTQR April 1996

DynCorp

$250,000 to settle a gui tam suit alleging that the

company did not perform maintenance and other

services at Fort Belvoir. DOD IG SAR October 1,

1994-March 31, 1995

Equipment And Supply Incorporated

$1.4 million to settle a qui tam suit alleging that the

company’s parts and services equipment did not

meet contract specifications. DOJ press release De-

cember 15, 1994

Ethyl Corporation

$4.75 million to settle a qui tam suit alleging that

the petroleum additives it sold companies for use in

tions or pass required testing. FCR April 29, 1996

Fairchild Industries

$8.2 million to settle a qui tam suit alleging that the

company submitted false statements to the Air

Force. DOD IG SAR October 1, 1994-March 31,

1995

FMC Corporation

$13 million to settle a qui tam suit alleging that the

company inflated independent research and devel-

opment and bid and proposal costs for the Bradley

Fighting Vehicle and the M113 tank. DOJ press

release October 8, 1996

y-a

General Dynamics Corporation

$1.8 million to settle a qui tam suit alleging that the

— overbilled F-16 testing. QTQR April

General Electric Company

1. $7.1 million to settle a qui tam suit alleging that the

company failed to satisfy electrical bonding re-

quirements for its jet engine contracts, thereby cre-

ating a safety risk. FCR August 14,1995

2. $5.87 million paid by GE and Martin Marietta, to

settle a qui tam suit associated with improper sales

of radar system to Egypt. DCLR January 26, 1995

Grumman Corporation

$2.2 million to settle allegations that a former

Grumman Data Systems vice-president knowingly

overstated the cost of installing a supercomputer for

NASA. This settlement was in addition to a previ-

-— pe settlement of $1.1 million. FCR July 11,

GTE

1. $3.25 million to settle allegations that the company

10 1994

2. $3.2 million paid by GTE Government Systems

Corporation and Canadian Marconi Corporation, to

settle a qui tam suit alleging that the company did

meet requirements. FCR July 17, 1995

8-a 9-a

Harris Corporation Litton Industries

$1.6 million to settle allegations that it improperly

obtained confidential information to win a contract

with the Federal Emergency Management Agency.

DOJ press release June 21, 1995

$1.5 million to settle allegations that it overesti-

mated labor costs in a Navy contract. FCR May 8,

1995

Hughes Aircraft Company, Incorporated

$4.05 million to settle a qui tam suit alleging that

the company failed to perform tests on electronic

equipment for the military. DOJ press release Sep-

tember 10, 1996

$1.3 million paid by company and CEO Fermando

Niebla to settle allegations that the company

made false statements to receive an Air Force con-

tract. Boston Herald July 30, 1996

Israel Aircraft Industries Ltd.

$8.5 million (plus interest) to settle allegations that

the company knowingly submitted false cost data in

negotiating several Navy contracts. FCR July 24,

1995

Korry Electronics

$250,000 to settle allegations that the company

made unauthorized design changes on switches for

the Defense Department. DCLR May 12, 1994

$82 million to settle a qui tam suit alleging com-

mercial data processing costs were passed on to the

government. FCR July 18, 1994

Lockheed

$6.3 million to settle allegations that the company

withheld cost information that inflated the contract

price. FCR December 26, 1994

$500,000 to settle allegations that Randtron Sys-

tems Incorporated, a unit of Lockheed, did not give

the government relevant information that would

have lowered the price of military contracts for ra-

dar antennas. DOJ press release October 18, 1996

Lucas Industries

$88 million to settle a qui tam suit alleging defec-

tive parts and falsification of data for the Navy’s

F/A-18. FCR October 9, 1995

Martin Marietta

Monroe Wire and Cable Corporation

$532,000 to settle allegations that the company’s

cable did not meet specifications. DOD IG SAR

October 1, 1993-March 31, 1994

Parker-Hannifin

$7.8 million to settle allegations of mischarging and

defective pricing, as well as misrepresentations in

their submission to the DOD Voluntary Disclosure

Program. DOJ press release September 15, 1994

10-a

Parsons Engineering

$3.2 million to settle a qui tam suit alleging the

company overcharged on labor costs for environ-

mental surveys and similar services at Brooks Air

Force Base, TX. FCR October 16, 1995

Philips Electronics North America Corporation

$65.3 million settlement for selling improperly

tested capacitors and resistors for a number of mili-

tary and aerospace programs. This amount includes

the $9.6 million submitted by Philips in 1992

through the DOD Voluntary Disclosure Program.

DOJ press release February 26, 1996

Pneumo Abex Corporation

$12.5 million to settle allegations that the company

mischarged labor costs. DOJ press release January

2, 1996

PRC

$72,500 to settle a qui tam suit alleging that the

company falsely billed the Commerce Department

for equipment that was not delivered. FCR May 23,

1994

Richardson Electronics

$4.7 million to settle allegations that it falsely

stated it could manufacture night vision military

equipment and passed off another company’s

equipment as its own. DOJ press release June 1,

1995

Rockwell International Corporation

$27 million to settle allegations that the company

did not provide accurate, complete, and current in-

ll-a

formation involving the B1-Bomber. FCR August

7, 1995

Raytheon

$4 million to settle allegations the company inflated

missile detection site contract prices. FCR Novem-

ber 11, 1994

Science Applications International Corporation

1. $2.5 million to settle a qui tam suit alleging that

Science Applications International Technology

failed to perform its contract and misled the Air

Force about its work. FCR December 25, 1995

2. $230,000 paid by Science Applications Interna-

tional Corporation, AlliedSignal Technical Services

Corporation and Lloyd Electric Company to settle

allegations that they improperly tested electric ca-

bles. DOJ press release May 10, 1995

SL Industries and SL_ Auburn Incorporated

$600,000 to settle a qui tam suit alleging that the

companies produced defective and substandard air-

craft and tank engine igniters. FCR December 4,

1995

SMTEK Incorporated

$200,000 to settle a qui tam suit alleging that the

company falsely represented its capability to test

space station components. FCR June 5, 1995

Support Systems Associates, Incorporated

$400,000 to settle allegations of cost mischarging

including cross-charging labor hours and billing for

services not provided. DOD IG SAR April 1, 1994-

September 3, 1994

12-a

$765,000 to settle a qui tam suit alleging that the

company overcharged for labor and overhead. FCR

August 15, 1994

Teledyne Industries Incorporated

l.

$85 million to settle a qui tam suit alleging the

Teledyne Relays division falsely certified relay

switches sold to the U.S. military. DCLR April 28,

1994

$27.5 million to settle a qui tam suit alleging Tele-

dyne Systems arbitrarily inflated cost data and rep-

resented it as current, accurate, and complete.

DCLR April 28, 1994

$5.65 million to settle a qui tam suit alleging the

company charged the government for nonproductive

time and did not properly test “identification friend

or foe” systems for military aircraft. FCR October

24, 1994

$2 million to settle a qui tam suit alleging that the

company improperly tested and failed to calibrate

test equipment in manufacturing “identification

friend or foe” components for the Air Force. FCR

November 13, 1995

$850,000 to settle a qui tam suit alleging defective

pricing when the company charged the government

for less costly equipment that the company already

had in stock. DOJ press release November 10, 1994

$500,000 to settle allegations that Teledyne Elec-

tronics substituted parts and failed to perform re-

quired tests in connection with radar test sets

supplied to the Army. DOJ press release December

6, 1994

13-a

TRW Incorporated

$29 million to settle allegations of mischarging la-

bor costs on military subcontracts. DCLR May 12,

1994

United Technologies

$150 million to settle a qui tam suit alleging that its

Sikorsky Aircraft Division prematurely billed work

not yet performed on a helicopter contract with the

U.S. military. This setilement followed an allegedly

inadequate DOD voluntary disclosure. DCR April

14, 1994

Varo Incorporated (Imo Industries Incorporated)

$2 million to settle a qui tam suit alleging that

Varo, its Ni-Tec division and Optic Electronic

Corporation delivered night vision equipment com-

ponents for the Army that did not meet reliability

ig requirements. DOJ press release July

Westinghouse Electric Corporation

$1.88 million to settle allegations that the company

did not tell the Air Force about other sales of spare

parts that should have lowered the unit cost. This

amount includes the $258,030 paid to the Air Force

under the DOD Voluntary Disclosure Program. DOJ

press release December 12, 1994

$141 million civil and $20 million criminal set-

tlement for alleged kickbacks and fraud in its home

infusion, oncology, hemophilia and human growth

hormone businesses. Payments were allegedly

made to doctors to refer patients to the company.

U.S. Attorney, Southern District of Ohio press re-

15-a

health care company. DOJ press release October 18,

1996

Florida Club Care Center

$245,488 for allegedly submitting claims for sup-

plies used by residents that had not been used, also

using Handle With Care as the billing agent. DOJ

press release June 23, 1995

GMS Management-Tucker, Incorporated et al.

$600,000 settlement for ailegedly not providing

adequate nutritional or wound care needs to their

nursing home residents, yet billing for these serv-

ices to Medicaid and Medicare. QTQR July 1996

lease Apeil 22, 1996 Health Care Capital, Central Park Lodges,

Charter Westbrook Behavioral Health Systems Health Resources Northwest

Incorporated - Virginia $2.2 million to settle allegations that these three

$2 million to settle a qui tam suit alleging improper

compensation to physicians for referrals. DOD IG

SAR October 1 94-March 31 95

CHR Claridge House - Florida

$415,000 for allegedly improperly billing the gov-

companies that manage nursing homes and nursing

facilities submitted false Medicare bills for supplies.

DOJ press release December 1, 1995

Mt. Sinai Medical Center of Cleveland

$472,000 for allegedly resubmitting Medicare

ernment for medical supplies in treatment of CHR claims for blood work under new codes after having

residents using a third party billing agent, Handle been denied reimbursement for them. DOJ Health

With Care. Settlement Agreement March 27, 1995 Care Fraud Report® FY 94.

Clinical Practices of the University of Pennsylvania National Medical Enterprises

$30 million settlement for alleged inadequate docu- $324 million civil settlement for allegedly paying

mentation and false Medicare billings by attending kickbacks for patient referrals and providing unnec-

physicians for services performed by residents in essary treatment at psychiatric hospitals in 30 states.

training. QTQR January 1996 Criminal fines and penalties totalled $53 million.

Settlement Agreement June 29, 1994

First American Health Care of Georgia

$20 million of a $255 million settlement for over-

billed and fraudulent Medicare claims by the home

* Henceforth noted as DOJ HCFR.

16-a

$1.4 million for allegedly referring railroad em-

ployees for unnecessary drug and alcohol treatment

and paying kickbacks to a firm that recruited pa-

tients. DOJ HCFR FY94

“Ohio Hospital Project”

$6.6 million settlement by 17 Ohio hospitals for

allegedly billing Medicare and Medicaid for indi-

vidual blood tests even though they were performed

in “bundles” on automated machines. Cleveland

Plain Dealer, Dec. 4, 1996

Park Medical Center - Ohio

$1.45 million settlement for allegedly billing Medi-

care and Medicaid for geriatric psychiatric services

that were not reasonable or necessary. QTQR Octo-

ber 1996

$2.5 million to settle a qui tam suit alleging

fraudulent billing by a hospital association and two

doctors, over a ten year period, for work not per-

formed. QTQR July 1995

Respro - Kentucky

$90,000 for allegedly participating in a scheme to

increase the volume of Medicare claims so it could

boost reimbursements to itself. DOJ press release

Sept. 29, 1994

“72 Hour Rule” Investigation

$3.4 million settlement paid by 83 Massachusetts

hospitals for alleged duplicate billing to Medicare.

17-a

Massachusetts General Hospital paid the highest

fine --$400,000. This settlement is part of an on-

going nationwide government probe into Medicare

outpatient billing practices. DOJ press release May

22, 1996

Sterling Medical Associates -Ohio

$700,000 to settle a qui tam suit alleging Sterling, a

provider of civilian physicians to military hospitals,

misrepresented the size of the company to obtain

federal small business contracts. Government Con-

tract Litigation Reporter, Jan. 4, 1996

Sutter Memorial Hospital - California

$1.265 million to settle a qui tam suit alleging im-

proper billing for cardiac device implant procedures

not covered by Medicare. Part of ongoing gui tam

suit against 130 hospitals for improperly charging

Medicare for experimental medical devices. DOJ

press release February 14, 1996

T2 Georgia

$500,000 from national provider of outpatient and

home infusion therapy for allegedly offering stock

options to physicians in exchange for referrals. DOJ

press release Sept. 26, 1994

Thomas Jefferson University and the Jefferson Faculty

Foundation - Pennsylvania

$12 million settlement for alleged inadequate

documentation and billings by attending physicians

when tesidents actually performed the services.

QTQR October 1996

U.S. HomeCare Corporation

$650,000 to settle a qui tam suit alleging submis-

sion of false Medicare claims, and inadequate

18-a

documentation including forged nurses signatures

and “canned” nursing notes in their Miami opera-

tions. QTQR July 1995

MEDICAL EQUIPMENT AND DRUGS

Advanced Care Associates, Incorporated et al.

$4.03 million to settle a qui tam suit for allegedly

falsifying documents on the medical condition of

Medicare beneficiaries to obtain reimbursement for

lymphedema pumps. DOJ press release June 19,

1996

Becton Dickinson & Company

$3.3 million to settle a qui tam suit for allegedly over-

charging the Department of Veterans Affairs for medi-

Circa Pharmaceutical Incorporated

$2.7 million settlement for allegedly selling untested

generic drugs to Medicare, Medicaid, and the Depart-

ment of Veterans Affairs. DOJ press release March 28,

1996

Curative Industries Incorporated, UltraMed Incorporated

$2.1 million to settle a qui tam suit for allegedly sub-

$4.9 million to settle a gui tam suit alleging false repre-

sentations to dealers and suppliers that it qualified for

Medicare’s highest reimbursement rate for their lym-

phedema pump, causing the dealers and suppliers to

sion of thousands of false invoices for health care prod-

ucts, equipment and supplies to the Department of

Veterans Affairs. Medline failed to disclose that certain

of its items were manufactured in non-designated coun-

tries. QTQR July 1996

Modern Wholesale Drug Midwest, Incorporated (Rugby

Laboratories)

$7.5 million to settle a qui tam suit for allegedly

overcharging Department of Veterans Affairs for

generic drugs. DOJ press release, October 31, 1995

National Medical Systems

$1.5 million to settle a qui tam suit for alleged bill-

ing of Medicare for top-of-the-line lymphedema

$10.75 million settlement for alleged false claims

on potentially fatal artificial heart valves. FDA ap-

proval of the valves was based on false statements.

DOJ HCFR FY94

Summit Healthcare Systems, Incorporated and Global

Medical Systems, Incorporated

$500,000 for allegedly overbilling Medicare by as

much as 700% for durable medical equipment. DOJ

press release June 11, 1996

20-a

Superior Surgical Manufacturing Co., Incorporated

$6.5 million settlement for allegedly overcharging

the Department of Veterans Affairs, the General

Services Administration and other agencies for

medical and clothing items. Superior pled guilty

to a one-count felony information. QTQR July

1996

United States Surgical Corporation

$10 million settlement for alleged failure to dis-

close accurate and complete pricing information to

government negotiators for surgical instruments.

DOJ press release December 7, 1995

MEDICAL LABORATORIES

Allied Clinical Laboratories, Incorporated

$4.° million to settle a qui tam suit for alleged false

claims for Medicare reimbursement of laboratory

tests to Medicare. DOJ press release March 20,

1995

Corning Clinical Laboratories Incorporated

1.

Damon Clinical Laboratories, Incorporated

$84 million to settle a gui tam suit and $35 million

criminal fine for allegedly manipulating doctors to

order blood tests that were not medically necessary

and improperly billing the tests to Medicare. Da-

mon is currently owned by Corning Clinical Labo-

ratories. DOJ press release October 9, 1996

Metpath Incorporated

$8.6 million to settle a qui tam suit for allegedly

submitting claims to Medicare and Medicaid for

lab tests not performed. Méetpath is owned by

Corning Clinical Laboratories. QTQR July 1995

2l-a

Metpath Incorporated

$7 million to settle a qui tam suit (along with $4

million by Unilab Corp.) for allegedly billing for

certain blood tests that were not ordered or medi-

cally necessary. QTQR October 1996

Bioran

$6.675 million settlement for allegedly manipulat-

ing doctors into receiving medically unnecessary

tests whenever doctors ordered simple blood tests.

These were then improperly billed to Medicare.

Bioran is owned by Corning Clinical Laboratories.

Settlement Agreement Feb. 1996

Laboratory Corporation of America

$182 million gui tam settlement, plus a criminal

fine of $5 million, for allegedly billing Medicare

for lab tests that were not performed, or that had not

been requested by physicians. DOJ press release,

November 21, 1996

Unilab Corporation

$4 million to settle a qui tam suit (along with $7

million by Metpath Incorporated) for allegedly

billing for certain blood tests that were not ordered

or medically necessary. QTQR October 1996

RESEARCH COLLEGES AND UNIVERSITIES

The Board of Trustees of the University of Alabama et al.

$1.66 million judgement in qui tam case for false

representations on grant proposals and progress re-

ports to NIH. QTQR July 1995

22-a

$45,920 to settle a qui tam suit for alleged mis-

charging labor, training and research costs not cov-

ered in NIH contract for radiology services. QTQR

July 1995

University of Utah, University of California and

Dr. Ninneman

$1.6 million to settle a qui tam suit alleging the two

Universities ($950,000 paid by University of Utah

and $625,000 paid by University of California)

knowingly allowed Dr. Ninneman to falsely report

research results to NIH. DOJ HCFR FY94

AMBULANCE SERVICES

Crescent City EMS, Inc - Louisiana

$1.86 million to settle a gui tam suit alleging billing

for ambulance service for Medicare dialysis patients

who they claimed as being confined to bed when

they could actually walk. DOJ HCFR FY94

Fire Protection District No. 5, Mason County et al. -

Washington State

$160,000 to settle a qui tam suit alleging fraudulent

billing for ambulance services. QTQR July 1996

Health Careers, Incorporated et al.

$12 million settlement for allegedly billing for am-

of Connecticut

$700,000 settlement by three ambulance companies

for allegedly billing Medicare for unnecessary

services. DOJ press release December 18, 1996

Blue Cross Blue Shield of Florida

$10 million to settle a qui tam suit alleging mishan-

dling of claims and knowingly choosing a data

processing firm that could not handle the claims

volume. DOJ HCFR FY94

Blue Cross Blue Shield of Massachusetts

$2.75 million to settle a qui tam suit for allegedly

submitting false Medicare reports.

Blue Cross Blue Shield of Michigan

1. $27.6 million to settle a qui tam suit alleging improper

billing and submitting false documentation to Medicare,

and inadequate audits of hospital cost reports. DOJ Press

release January 18, 1995

2. $24 million settlement for unlawfully billing Medicare

for thousands of claims that should have been paid

from private insurance funds. DOJ press release January

18, 1995.

Provident Accident Life and Accident Insurance Co.

$27 million to settle a qui tam suit for alleged false

Medicare billing. National Health Lawyers News

Report, May 96.

24-a

PHYSICIANS

Dr. Anthony et al. - Ohio

$1.52 million qui tam settlement by nine physicians

and their medical imaging corporations for alleged

improper Medicare and Medicaid referrals to diag-

nostic firms in which the doctors had a financial in-

terest. QTQR July 1995

Dr. Marlou Davis - Missouri

$4.1 million judgement for soliciting elderly pa-

tients from nursing homes, supermarkets, malls and

drug stores and promising them early detections of

illnesses including heart disease and strokes. He

then charged Medicare for the tests. BNA Medicare

Report October 25, 1996

Dr. Jaramillo, Medical Institute for Mental Health, and

Memorial Hospital - New Mexico

$700,000 to settle a qui tam suit alleging billing

Medicare, Medicaid and CHAMPUS for psychiatric

services that were not provided or were provided by

a non-physician assistant without appropriate super-

vision. QTQR July 1996

Dr. Schwartz, Dr. Barr & Dr. Silver et al. - Washington,

$278,800 to settle a qui tam suit against group of

doctors for allegedly billing for chemotherapy

treatment even though the treatment was provided

by nurses, and no doctors were present at the hos-

pital at the time of treatment. DOJ press release,

July 24, 1996

-New York

$875,000 settlement to settle a gui tam suit

($25,000 by Dr. Schwartzman personally) for al-

leged false claims of having performed full medical

exams on Social Security Administration disability

applicants, when in fact only brief interviews were

performed. QTQR January 1996

Dr. Wurtzel, MD and Life Centers Limited - Pennsylvania

$500,000 paid by physician/owner of mental health

clinic to settle a qui tam suit for allegedly fraudu-

lently charging Medicaid for services never per-

formed or otherwise not reimbursable. QTOR

January 1996