Petition for Writ of Certiorari — Boeing Co. v. United States Ex Rel. Roby

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0214 11 wR 21208

No. 02- ——

IN THE

Supreme Court of the GAnited States

THE BOEING COMPANY,

Petiticner,

UNITED STATES OF AMERICA EX REL. BRETT ROBY,

Respondent.

Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Sixth Circuit

PETITION FOR CERTIORARI

CARL S. RAUH CARTER G. PHILLIPS*

AMY SABRIN P. DAVID RICHARDSON

SKADDEN, ARPS, SLATE, STEPHEN B. KINNAIRD

MEAGHER & FLOM LLP JENNIFER M. COLLINS

1440 New York Avenue, NE SIDLEY AUSTIN BROWN &

Washington, D.C. 20005 WOOD LLP -

(202) 371-7000 1501 K Street, N.W.

Washington, D.C. 20005

JOHN W. WALBRAN (202) 736-8000

THE BOEING COMPANY

P.O. Box 516 PAUL J. EHLENBACH

MC § 100-3340 THE BOEING COMPANY

Saint Louis, MO 63166 100 N. Riverside

(314) 234-6857 MC 5003-101

Chicago, IL 60606

(312) 544-2804

Counsel for Petitioner

March 21, 2003 * Counsel of Record

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 - WASHINGTON, D. C. 20001

QUESTIONS PRESENTED

1. Whether the government can hold a contractor liable

under the False Claims Act for damages for the loss of a

helicopter due to 1 defective part, notwithstanding that the

government, pursuant to a federally-mandated contract clause,

expressly relieved the contractor of liability for loss of or

damage to government property resulting from defects or

deficiencies in the goods supplied.

2. Whether the court below erred in holding, in conflict

with the United States Court of Appeals for the Fifth Circuit,

that damages recoverable under the False Claims Act, before

trebling, are not limited “to the amount wrongfully paid to

satisfy the false claim,” United States v. Aerodex, Inc., 469

F.2d 1003, 1011 (Sth Cir. 1972).

STATEMENT REQUIRED BY RULE 29.6

Pursuant to Rule 29.6 of the Rules of this Court, petitioner

states that it has no parent corporation and no other publicly

held corporation owns more than 10% of petitioner’s stock.

All parties to the proceeding are listed in the caption of the

case.

TABLE OF CONTENTS

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STATEMENT REQUIRED BY RULE 29.6.................

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RELEVANT PROVISIONS OF STATUTORY AND

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REASONS FOR GRANTING THE PETITION ...........

I. THIS COURT SHOULD RESOLVE THE CON-

FLICT OVER IMPLIED FCA EXEMPTIONS

FROM GOVERNMENT CONTRACTS...............

II. THIS COURT SHOULD RESOLVE WHETHER

FCA DAMAGES, BEFORE TREBLING, CAN

EXCEED THE TOTAL AMOUNT PAID OUT

BY REASON OF THE CLAIM ALLEGED TO

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TABLE OF AUTHORITIES

CASES Page

Andover Newton Theological Sch., Inc. v. Con-

tinental Cas. Co., 930 F.2d 89 (1st Cir. 1991)..... 20

Australia v. Lockheed Aircraft Corp., No. 69-

1623-WPG, 1972 US. Dist. LEXIS 15742

(C.D. Cal. Jan. 10, 1972) .....cccceccccesescesesveseeveseee 4

Cook County v. United States ex rel. Chandler,

No. 01-1527, 2003 WL 890268 (U.S. Mar. 10,

y | Se NA a ie ES Dart re er 2, 8, 24, 27

Daff v. United States, 78 F.3d 1566 (Fed. Cir.

| SURE AR PRA acl teat yd in GRU nBas rho he Sakti dere 28

North Bank v. Cincinnati Ins. Cos., 125 F 3d 983

Ej SERS AI NR Sra tet OT 20

Rainwater v. United States, 356 U.S. 590

RE ONS AIRE My ei renhat, 7

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

ns NEE sapiaccckdedi aaccconion uietndececee eset passim

United States v. Bankers Ins. Co., 245 F.3d 315

SE SEE caceitsnucacucanuuthicosncanmen 17, 18

United States v. Borin, 209 F.2d 145 (Sth Cir.

cs , 7

United States v. Bornstein, 423 US. 303

SINE baniicatce-cuaicile waencionmpausonchestoncie tas 11, 22, 28, 29

United States v. General Dynamics Corp., 19

ee ls, Ce iscnisicceicecescsionsssncctsactonens 28

United States v. Hibbs, 568 F.2d 347 (3d Cir.

go WER RA Te array Wve aceite re ae rp Ey Te FURR AI NNDD 26

United States v. McNinch, 356 U.S. 595 (1958)... 6

United States v. Mead, 426 F.2d 118 (9th Cir.

United States v. United States Cartridge Co., 198

F.2d 456 (8th Cir. 1952)........................ 10, 15, 16, 17

United States vy. Winstar Corp., 518 U.S. 839

LENS Ri pntninne fearon se eran va bet near Nn se 17, 19

TABLE OF AUTHORITIES -— continued

Page

United States v. Woodbury, 359 F.2d 370 (9th

as vis ankvcunctenusnnes vba seres aps oanvenntaner eats 29

United States ex rel. Marcus v. Hess, 317 US.

FEF SII ciiiciinstuciixcdenesideadiarcapesemisaceansa 7, 22, 23, 25

Vermont Agency of Natural Res. v. United States

ex rel. Stevens, 529 U.S. 765 (2000).................. €

STATUTES AND REGULATIONS

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98 Ries Ae PTI ceccds rs exsccorireceeoaeeeaeeae passim

§ 3731(D) occ ceccecceseee aE ice Seno 20

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ie le We Ris ceawiccss bens eoedtaaiebanater ae 3

Be Pt ahspaiscakccatccens sxx deus armen 3

OS BE Bree PIGRIIOD vensxvsnacincdshtracenceéves 13

I oats cmniesssnactnatetuceserinatiay 6

ey RT TRA RON Sa 1,3

IEE iatccakecieestees ces eens 1,3, 14

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ID ivpiracievcccovesecsuien sane 6

I a crcareicslsiessnecponus stoheaire ae 6

OD PE A x csisddvussccacenncteevectans 1, 3, 4, 6, 14

Ei cicasscsnosseccaresacchadeaepenanes 6

Pe OD goss racescecdsvinnsntnacntotie 6

46 Fed. Reg. 40,221 (Aug. 7, 1981) .............000.... 6

61 Fed. Reg. 67,408 (Dec. 20, 1996)...............000.... 6

LEGISLATIVE HISTORY

S. 1562, 99th Cong. (2d Sess. 1986).............0........ 28

H.R. 4827, 99th Cong. (2d Sess. 1986) ................. 28

S. Rep. No. 99-345 (1986), reprinted in 1986

Ra ee, MMi tiekicicacceaterssedotouetitmenind 27

FLR. Rep. No. 97-651 (1982)...................00ccccceeeneee 22

TABLE OF AUTHORITIES — continued

Page

132 Cong. Rec. H6480 (daily ed. Sept. 9, 1986)... 27

H9388 (daily ed. Oct. 7, 1986)..... 27

OTHER AUTHORITIES

Armed Serv. Procurement Regulations § 7-

PO TI EE oisvcsdsitsnvushidisnecvienv cannes 5

Armed Serv. Procurement Regulations § 7-

104.45(b) (1974) oooc.cccccccccccecesesceseseeveveveesveveveee 5,6

By Retr: PT PR saat ncinnsccualstabcnimanidhieeey 29

ASPR Coverage of Warranties and Consequential

Damages, attached to Letter from Council of

Defense and Space Industry Associations, to

Captain E.C. Chapman, Chairman, ASPR

Committee (Aug. 12, 1971)................ccccsssesseees 5

Defense Procurement Circular 86 (1971) ............. 4,5

Memorandum from the Department of ithe Air

Force, for the Chairman, ASPR Committee

ES FR PD siksrsiccig sins cee ceube ena oniat 6

Restatement (Second) of Torts (1976) ................... 25

Center for Def. Info., Military Almanac 2001-

BIE CE ii cicclconstiaviscaneieieric dante 20

Department of Justice, Civil Division Fraud

Monograph (Nov. 1988).................:::ccccssceeeeeeees 29

4 U.S. Comm’n on Gov’t Procurement, Report of

the Commission on Procurement (1972).......... 4, 5,21

1 J. White & R. Summers, Uniform Commercial

Ce BE GE Fi ivan sarreecireonscasapenaens 29

PETITION FOR WRIT OF CERTIORARI

Petitioner the Boeing Company (“Boeing”) respectfully

requests that this Court grant its petition for a writ of

certiorari to review the judgment of the United States Court of

Appeals for the Sixth Circuit.

OPINIONS BELOW

The opinion of the court of appeals is published at 502 F.3d

637 (6th Cir. 2002), and appears in the Appendix to this

petition (“App.”) at la-26a. The unpublished order of the

court of appeals denying the petition for rehearing and

rehearing en banc appears at App. 103a. The orders of the

district court under review are published at 73 F. Supp. 2d

897 (S.D. Ohio 1999) and at 79 F. Supp. 2d 877 (S.D. Ohio

1999), and are reproduced at App. 65a-96a and 27a-64a. The

district court’s unpublished order certifying an appeal to the

court of appeals pursuant to 28 U.S.C. § 1292(b) appears at

App. 99a-102a, and the unpublished order of the court of

appeals accepting certification appears at App. 97a-98a.

JURISDICTION

The court of appeals entered judgment on September 12,

2002, and denied a timely petition for rehearing and rehearing

en banc on January 24, 2003. This Court has jurisdiction

under 28 U.S.C. § 1254(1).

RELEVANT PROVISIONS OF STATUTORY

AND REGULATORY LAW

The relevant provision of the False Claims Act is codified

at 31 U.S.C. § 3729, and is reproduced at App. 104a-106a.

The relevant provisions of the Federal Acquisition Regula-

tions are codified at 48 C.F.R. §§ 46.802-46.803 and 52.246-

24, and are reproduced at App.111a-112a and 124a-126a.

STATEMENT OF THE CASE

This case presents two important questions of federal law

that divide the lower courts and have broad ramifications for

the allocation of risk and liability in government contracting.

First, the United States Court of Appeals for the Sixth Circuit

held that the standard limitation-of-liability clause for high-

value items in government contracts set forth in the Federal

Acquisition Regulations (“FAR”) does not apply to limit

liability for damages under the False Claims Act (“FCA”).

App. 8a-14a. This ruling is in conflict with decisions of other

circuits that hold that there is no implied FCA exemption

from limitation-of-liability or other clauses in government

contracts. This ruling also contravenes the text and history of

the regulation, threatens the federal policy of reducing the

government’s procurement costs through self-insurance, and

upsets reliance interests by shifting massive business risks

associated with high-value civil and defense procurement

from the government to private industry.

Second, the Sixth Circuit held that damages recoverable

under the FCA, before trebling, are not limited by the total

amount the government paid on the claim alleged to be false.

Specifically in this case, which involved a contract to retrofit

existing helicopters with upgraded components, the court held

that the government’s damages would be measured by the full

value of a helicopter that was lost due to a defective part, an

amount far in excess of the claim submitted by Boeing for the

upgrade work. App. 18a-19a. This ruling directly conflicts

with the rule established in United States v. Aerodex, Inc.,

469 F.3d 1003 (Sth Cir. 1972), and recently recognized by

this Court in Cook County v. United States ex rel. Chandler,

No. 01-1527, 2003 WL 890268 (U.S. Mar. 10, 2003), that

consequential damages — defined in Aerodex as “additional

losses” beyond the amount the government “wrongfully

paid,” 469 F.3d at 1011 — are not recoverable under the FCA.

Background

1. The FAR are prescribed and administered “jointly by the

Secretary of Defense, the Administrator of General Services,

and the [NASA] Administrator,” and govern the acquisition

by contract of supplies and services throughout the federal

government. 48 C_F_R. §§ 1.103(b), 1.104. It is the declared

policy of the FAR that “[t]he Government will generally act

as a self-insurer by relieving contractors, as specified in this

subpart, of liability for loss of or damage to property of the

Government” from defective supplies or services. /d.

§ 46.803(a).

The FAR _ prescribe mandatory _limitation-of-liability

clauses for inclusion in various kinds of government

contracts. The most important of these is at issue in this case:

the High-Value Item Clause, or HVIC. /d. § 52.246-24(a). A

“high-value item” is a designated “contract end item that ...

has a high unit cost (normally exceeding $100,000 per unit),

such as an aircraft, an aircraft engine, a communication

system, a computer system, a missile, or a ship.” /d.

§ 46.802. The HVIC specifically provides, subject to

enumerated exceptions, that:

notwithstanding any other provision of this contract, the

Contractor shall not be liable for loss of or damage to

property of the Government (including the supplies

delivered under this contract) that (1) occurs after

Government acceptance of the supplies delivered under

this contract and (2) results from any defects or

deficiencies in the supplies.

Id. § 52.246-24(a). The only defects or deficiencies excluded

from the limitation of liability are those resulting from

“willful misconduct or lack of good faith on the part of any of

the Contractor’s managerial personnel,” a term defined to

a ee a ne

encompass only the most senior management of the company.

Id. § 52.246-24(b).!

The policy of government self-insurance embodied in the

HVIC dates back to World War II. As the volume of

procurement and hence’ insurance costs expanded

dramatically during wartime, the military began self-insuring

(1) to obviate the need for contractor insurance and thus

reduce the proper pass-through costs to the government of

insurance premiums, and (2) to encourage contractors to

cooperate fuliy in investigating the causes of accidents.

Australia vy. Lockheed Aircraft Corp., No. 69-1623-WPG,

1972 U.S. Dist. LEXIS 15742, at *2 (C.D. Cal. Jan. 10,

1972), CA. J.A. 388-89; 4 US. Comm’n on Gov't

Procurement, Report of the Commission on Procurement 96

(1972) (“Commission Report’), C.A. J.A. 406 (noting that

government payment of contractor insurance costs would be

more expensive than self-insurance because premiums reflect

not only the government’s loss experience but also

administrative costs and insurer profit). Thus, in the postwar

era “the general practice of Government in _ military

contracting was to accept risk for loss or damage except for

the warranted item that was defective.” Commission Report

at 92,C.A. J.A. 402.

To bring certainty and uniformity to government practice,

the Department of Defense in 1971 issued Armed Service

Procurement Regulations (“ASPR”) that were “aimed at

reducing Government procurement costs by limiting the

contractor’s risk.” Defense Procurement Circular 86 (“DPC

86”), at 1 (1971), C.A. JA. 434. One ASPR provision,

' Under the HVIC, “Contractor’s managerial personnel” means the

Contractor’s directors, officers, or managerial personnel who supervise or

direct “all or substantially all of the Contractor’s business”; “all or

substantially all of the contractor’s operations” at a plant, laboratory, or

separate location for performance of the contract; or “[a] separate and

complete major industrial operation connected with the performance of

this contract.” 48 C.F.R. § 52.246-24(b).

Bias wee A hain nite SI BN nea ilies etl WEA aha bared Mabpodecainsiec

entitled “Limitation of Liability for Defects — Major Items,”

prescribed a standard contract clause for all high-value items,

ASPR § 7-104.45(b) (1974), C.A. J.A. 485-86, and was the

prototype HVIC regulation. In issuing the regulation, the

Department of Defense noted that the limitation-of-liability

“policy and the clauses prescribed by this item are worded in

terms of liability arising from supplies delivered to the

Government,” and that “no distinction is made between

liability founded in contract and in tort.” DPC 86, at 2, C.A.

J.A. at 435; Commission Report at 96, C.A. J.A. at 406

(express repair/replacement remedies in the clause are

“exclusive” remedies for wrongs “both in contract and tort”).

The original HVIC set forth in DPC 86 excluded from its

liability protection product defects resulting from two kinds

of contractor conduct: (1) “fraud or gross negligence as

amounts to fraud, on the part of any personnel of the

Contractor,” and (2) willful misconduct and bad faith on the

part of the Company’s high management. ASPR § 7-

104.45(b) (1971), in DPC 86, at 3, C.A. J.A. 437. The first of

these exclusions drew protest from defense industry

representatives, who explained in comments upon the rule

that if a contractor were potentially liable for the fraud of any

personnel, the business risk would be “more than any prudent

management would be willing to accept without the

protection of substantial liability insurance.” ASPR Coverage

of Warranties and Consequential Damages 4, attached to

Letter from Council of Defense and Space Industry

Associations, to Captain E.C. Chapman, Chairman, ASPR

Committee (Aug. 12, 1971), CA. JA. 464. “[T]he

introduction of this exception goes a long way to negating the

main purpose of DPC 86” by raising a “serious question

whether DPC 86 implementation would have any real effect

upon the cost of Contractor insurance included in the overall

cost of the Government procurement program.” /d. at 5, C.A.

J.A. 465. The Department responded by deleting the general

fraud exception from the HVIC in reissuing the regulation in

1974. ASPR § 7-104.45(b) (1974), C.A. J.A. 485-86;

Memorandum from the Department of the Air Force, to the

Chairman, ASPR Committee 3 (Jan. 14, 1972), C.A. J.A. 652

(noting that deleting this exception “would eliminate

contractor’s responsibility for damage te Government

property resulting from defective items and caused by the

fraud or gross negligence as amounts to fraud of any

personnel of the contractor”).

The HVIC, without substantive change as to its scope, was

subsequently incorporated into the FAR, 46 Fed. Reg. 40,221

(Aug. 7, 1981), and now also extends to certain nondefense

government contracts. 48 C.F.R. § 46.801(a). Accordingly,

from at least 1974 to the present, the loss or damage to

government property from product defects for which a

government contractor is liable under the HVIC (and indeed

under many other limitation-of-liability clauses under the

FAR)’ are only .°»se that arise from “willful misconduct or

lack of good faith on the part of any of the Contractor’s

managerial personnel.” Jd. § 52.246-24(b).°

2. The False Claims Act was first enacted in 1863 “with

the principal goal of ‘stopping the massive frauds perpetrated

by large [private] contractors during the Civil War.”

Vermont Agency of Natural Res. v. United States ex rel.

Stevens, 529 U.S. 765, 781 (2000) (bracket in original)

(quoting United States v. Bornstein, 423 U.S. 303, 309

(1976)). “[T]he False Claims Act was not designed to reach

every kind of fraud practiced on the Government,” United

? See, e.g.,48 C.F.R. §§ 52.246-23(b) (defects in supplies not subject to

the HVIC), 52.246-25(b) (defects in services), 252.228-7001(b) (“damage

to, or loss or destruction of aircraft in the open, during operation, and in

flight” prior to delivery to the government), 52.245-2(g) (loss or

destruction of government-furnished property in the hands of the

contractor), and 52.245-8(c) (loss of or damage to government facilities).

> The re-promulgation of section 52.246-24 in 1997 did not amend the

HVIC in any way that is material here. See 61 Fed. Reg. 67,408, 67,426

(Dec. 20, 1996).

States v. McNinch, 356 U.S. 595, 599 (1958), but was enacted

with the specific purpose “to stop this plundering of the

public treasury,” id., and “to protect the funds and property of

the Government from fraudulent claims.” Rainwater v.

United States, 356 U.S. 590, 592 (1958) (emphasis added).

The FCA created a statutory remedy for fraudulently

obtaining money and property that supplemented the common

law. United States v. Mead, 426 F.2d 118, 123 n.4 (9th Cir.

1970); United States v. Borin, 209 F.2d 145, 148 (Sth Cir.

1954).

As amended, section 2(a) of the FCA creates civil liability

for any person who “knowingly presents, or causes to be

presented, to an officer or employeeof the United States

Government or a member of the Armed Forces of the United

States a false or fraudulent claim for payment or approval,” or

who makes certain false statements or engages in other

defined conduct to obtain fraudulently the money or property

of the government. 31 U.S.C. § 3729(a). The scienter

required under the current FCA is less than that required for

common law fraud; the term “knowingly” is defined to

include not only actual knowledge of the relevant information

and deliberate ignorance, but also “reckless disregard of the

truth or falsity of the information.” Jd. § 3729(b).

From its inception, the FCA allowed recovery of damages

sustained from the prohibited acts in order “to provide for

restitution to the government of money taken from it by

fraud,” and authorized doubling of those damages “to make

sure that the government would be made completely whole.”

United States ex rel. Marcus v. Hess, 317 U.S. 537, 551-52

(1943) (emphasis added). It had long been held, however,

that any “additional losses” sustained by the government

beyond what it “wrongfully paid” were not within the

purview of the Act. Aerodex, 469 F.3d at 1011. As this

Court has recognized, during the 1986 revisions of the Act, a

provision of the House bill that purported to overrule the

Aerodex rule and provide for the recovery of such

“consequential damages” was rejected in the House-Senate

conference. Cook County, 2003 WL 890268, at *7 & n9;

infra at 26-28. Congress opted instead to provide for the treb-

ling of damages “as a substitute for consequential damages.”

Cook County, 2003 WL 890268, at *7 n.9. Accordingly, the

FCA, as amended, limits recovery to “3 times the amount of

damages which the Government sustains because of the

[prohibited] act.” 31 U.S.C. § 3729(a) (emphasis added).

Facts and Proceedings Below

1. Boeing has long supplied helicopters to the United

States military. In the 1970’s, Boeing commenced research

and development of a “next-generation” alloy to allow the

manufacture of extremely durable helicopter gears that would

extend service lives and withstand harsh battlefield conditions

(including loss of engine lubrication). Boeing succeeded in

developing that technology, which has been incorporated in,

among other products, the Army’s Chinook 47 (“CH-47”)

line of military airlift helicopters.

In 1985 and 1989, Boeing entered into two contracts with

the Army to upgrade certain components and systems of the

Army’s CH-47 helicopters to a more advanced “D-Model”

configuration. This task involved modernizing flight control,

hydraulic, electrical, and drive systems (including redesigned

transmissions). The Army requested that Boeing rely on two

sources to manufacture the helicopter gears, and, after a

rigorous qualification process, the Army approved the Speco

Corporation as one of those sources. Because the hardness of

the new advanced alloy posed significant challenges in

machining the gears, Boeing set up an elaborate (and

government-approved) quality assurance process at Speco

that numerous witnesses testified without contradiction was

unprecedented in its stringency. Army inspectors were

deeply involved in this process.

Among the 359 remanufactured helicopters that Boeing

upgraded was No. 89-0165. Boeing invoiced the government

$4.1 million for the upgrade of this helicopter in 1990. In

1991, this helicopter made an emergency landing in Saudi

Arabia during Operation Desert Storm. None of the crew

suffered any serious injury, but the helicopter and its contents

were destroyed in an ensuing fire. A joint Boeing-Army

study later determined that the cause of the mishap was a

previously undetected microscopic manufacturing defect in a

gear made by Speco.

2. In 1997, the United States intervened in a qui tam action

filed in the United States District Court for the Southern

District of Ohio under the FCA by relator Brett Roby, a

former Speco employee. The government’s amended

complaint alleged that Boeing installed nonconforming

Speco-made gears in Army helicopters in reckless disregard

of information that the gears might contain microscopic

manufacturing defects, and that Boeing therefore submitted

false claims for payment because the claims certified contract

compliance. App. 8a (“The allegedly fraudulent act in this

case is Boeing’s ‘false[] represent[ation] that the helicopters

conformed to contract requirements and fail[ure] to disclose

their faulty manufacture to the United States Government.”

(alterations in original) (quoting Am. Compl. at 3)). The

allegations of recklessness centered upon the response of

Boeing quality-assurance personnel to information about

certain manufacturing processes employed by Speco. For the

lost Saudi helicopter, the government claimed damages in

excess of $38 million (treble the value of a new CH-47D

helicopter). Jd. at 3la & n.7.

As the court of appeals noted, Boeing “‘vigorously denies’

any knowing submission of a false claim in this case,” App.

8a n.3, but those fact issues were never tried. On cross-

motions for partial summary judgment, the district court first

ruled that the HVIC did not operate to restrict liability for

damages under the FCA. Jd at 90a-95a. On the issue of

damages, the district court held that consequential damages

were unavailable under the FCA. /d. at 54a-S6a. Nonethe-

less, disregarding the distinction between direct and

consequential damages, the district court held that the

government was entitled to prove all foreseeable damages

proximately caused by the filing of the false claim, including

“the replacement and repair value of the destroyed and

damaged helicopters, as well as the related costs and expenses

associated with it.” /d. at S6a.

After these rulings, the parties entered into a settlement (1)

resolving other claims unrelated to the loss of the Saudi

helicopter, (2) preserving the right of Boeing to appeal the

HVIC and FCA damages rulings as to the Saudi helicopter

claim, and (3) providing for liquidated damages, contingent

on the disposition of the issues appealed. App. 3a-4a. As

part of the settlement, the parties stipulated, inter alia, that the

HVIC exception for misconduct by “Contractor managerial

personnel” was not at issue in this case, and that the loss of

the helicopter was caused by the defective Speco gear. /d. at

9a. The district court certified an interlocutory appeal on both

the HVIC and FCA issues, and the court of appeals accepted

jurisdiction. Jd. at 98a, 100a-101a.

3. A divided Sixth Circuit affirmed. On the HVIC issue,

the majority acknowledged the “fairly broad terms” of the

HVIC’s limitation on liability, but refused to construe the

clause to limit liability under the FCA. App. 8a. The

majority ruled simply that “[b]ecause nothing in the HVIC

suggests that its limitation of contractor liability covers

statutory violations, we hold that the district court did not err

in concluding that the HVIC does not provide a defense to

damages sought under the FCA.” Jd. at 10a. The majority

conceded that “[o]n one level, the dispute in this case is

essentially the same as the one in” United States vy. United

States Cartridge Co., 198 F.2d 456 (8th Cir. 1952), see App.

10a, in which the Eighth Circuit held that a broad limitation-

of-liability clause that did not reference the FCA nonetheless

precluded FCA liability. 198 F.2d at 465. Relying upon the

allegedly different context of United States Cartridge (a

Si eee aute Bent Pw EN RAD ED sR RET EA RELI E BASU ELD APTLY EEO Dore cash Datel Lee CPE PH, SE Aly Se —

wartime contract with government supervision of production),

however, the majority distinguished the present case based on

its view that the helicopter remanufacturing contract was one

performed “almost entirely during peacetime” and _ that

“Boeing was not subject to government supervision or

control.” App. 12a.

On the issue of FCA damages, the majority purported to

apply the “‘diminished value’” test of United States v.

Bornstein, 423 U.S. 303 (1976), under which the court will

“subtract the market value of what the Government received

from what it was promised.” App. 16a. The majority then

equated the market value of what “was promised” in the

instant case with the market value of a fully-conforming

. remanufactured helicopter. /d at 16a-17a. It then held that

the market value of the helicopter “as received” was zero

because the defective gear was flight-critical. /d. at 18a. The

government was therefore entitled to recover treble “the value

that Aircraft 89-0165 would have had if it had been of the

specified quality.” /d. at 19a.

Judge Boggs dissented on the grounds that the HVIC

foreclosed recovery for the lost helicopter: “the Government

[is] trying to do exactly what the plain and obvious wording

of its contractual term says it will not do: recover from ‘the

Contractor’ for the ‘loss of or damage to property of the

Government.”” App. 20a. Judge Boggs refuted the

majority’s claim that the HVIC could not be harmonized with

the FCA:

The HVIC does not overwrite or preempt the FCA by

relieving contractors of liability for fraud. The FCA is

still applicable to the contractors; the only difference

made by the HVIC is that the Government has agreed

that it will not hold the contractors liable under any

theory for the value of the helicopter. Accordingly, the

Government can sue the contractors under the FCA and

seek a finding of liability for fraud; the Government

merely can not seek damages for the value of the

equipment. The other penalties under the FCA are still

applicable, and if the Government feels that it has been

defrauded, it may debar Boeing from Government

contracts.

Id. at 21a-22a. Moreover, recounting the history of the HVIC

outlined above, Judge Boggs declared that the majority’s

decision was contrary to the purpose of the HVIC, which was

to reduce government procurement costs by eliminating the

need for contractor insurance. Jd. at 25a. Under the

majority’s decision, “contractors will have to insure against

potential FCA liability for treble damages for the loss of high-

value items resulting from actions that might be held to be

fraudulent on the part of any personnel,” and “[p]resumably,

this cost will be passed on to the Government.” /d.

REASONS FOR GRANTING THE PETITION

Review by this Court of both of the Sixth Circuit’s separate

holdings is necessary (i) to resolve conflicts between the

Sixth and other Circuits with respect to each such holding,

and (ii) to provide for the uniform resolution of critical and

unsettled questions relating to the relationship between the

United States and its suppliers of major military systems and

other materiel.

The Sixth Circuit’s holding that the limitation of liability

plainly expressed in the High Value Items Clause (“HVIC”)

does not in any way limit a contractor’s liability for damages

in an FCA case is irreconcilable with Eighth Circuit

precedent. Moreover, the construction of the HVIC espoused

by the court below vitiates the settled contractual

understanding between the government and its suppliers of

major weapons systems and other equipment that the

government generally bears the risk of loss of “high value”

items (such as ships, missiles or, as in this case, aircraft)

resulting from defects in their manufacture. Thus, the

decision below, if not reviewed, will force the government’s

most important suppliers to decide whether to obtain

commercial insurance against the risk of loss of every

airplane, ship or other multi-million dollar system they

manufacture and to charge the very high cost of such

insurance to the government, as the FAR permits;* to self-

insure and risk insolvency; or to cease doing business with the

government altogether.

The Sixth Circuit’s second holding -— that damages

recoverable under the FCA, before trebling, are not limited in

any way by the total amount paid by the government on the

claim alleged to be false — conflicts squarely with the Fifth

Circuit’s holding that baseline damages under the FCA are

limited to “the amount wrongfully paid to satisfy the false

claim.” Aerodex, 469 F.2d at 1011. Moreover, as shown in

detail infra at 22-30, the Sixth Circuit has done in this case

precisely what Congress -declined to do in the 1986

Amendments to the FCA: namely, overrule Aerodex and

permit consequential damages under the FCA.

Thus, the decision below deals a double blow to

longstanding government procurement policies and those who

do business with the government. First, by eviscerating the

HVIC, it upsets decades-old reliance interests of government

contractors and threatens to increase government procurement

costs. Second, the Sixth Circuit’s dramatic expansion of FCA

damages leaves contractors faced with nearly unbounded

exposure to three times potentially massive damages (such as

an entire aircraft), no matter how small their claim. The

Court should grant certiorari to foster and restore uniformity

among the courts, and prevent undue disruption of the

contractual relationships between the United States and its

suppliers, large and small, of military and other equipment.

* The costs of insurance for the risk of loss of or damage to government

property may be passed through to the extent a contractor is liable for such

loss or damage. 48 C.F.R. § 31.205-19(a)(2)(iv).

I. THIS COURT SHOULD RESOLVE THE CON-

FLICT OVER IMPLIED FCA EXEMPTIONS

FROM GOVERNMENT CONTRACTS.

The decision of the divided court of appeals creates a

substantial conflict among the circuits about whether the

HVIC operates as limitation on damages under the FCA. In

holding that it does not, the Sixth Circuit has read an

exception into the Clause that is not encompassed in its plain

language, thereby disrupting the settled expectations of

defense contractors about the clear rules that have governed

contractor liability for the past 5O years. Federal regulation

requires the HVIC to be included in virtually every

government contract for the purchase of high-end military

systems such as planes, ships and missiles, as well as many

civilian systems. 48 C.F.R. § 46.803(b). The Sixth Circuit’s

unprecedented decision negates the FAR’s carefully crafted

rules r2garding assumption of risk for damages to these

critical defense systems, and thus leaves military contracting

in a state of great uncertainty at a particularly critical juncture

in our Nation’s diplomatic and military history.

1. The HVIC expressly states that a “Contractor shall not

be liable for loss of or damage to property of the Govern-

ment ... that (1) occurs after Government acceptance of the

supplies delivered under this contract and (2) results from any

defects or deficiencies in the supplies.” Jd. § 52.246-24

(emphasis added). As even the majority below conceded, this

provision plainly “limits contractor liability for high-value

items in fairly broad terms.” App. 8a. Despite the plain

language and history of the HVIC, see supra at 3-6, the

majority held that the protections of the HVIC did not extend

to damages arising under the False Claims Act, because

“nothing in the HVIC suggests that its limitation of contractor

liability covers statutory violations.” App. 10a. Thus, as

Judge Boggs emphasized in his dissenting opinion below:

Put most simply, this case is about the Government

trying to do exactly what the plain and obvious wording

ARE ARRNNY ENO ADE Mi TIS id esa Rete SOI ERT ANS MOE Si dak

of its contractual term says it will not do: recover from

“the Contractor” for the “loss of or damage to property

of the Government.”

Id. at 20a (Boggs, J., dissenting).

The decision below is in direct conflict with the United

States Court of Appeals for the Eighth Circuit, which refused

to exempt FCA claims from an express contractual provision

limiting a defense contractor’s liability to the government.

United States v. United States Cartridge Co., 198 F.2d 456

(8th Cir. 1952). United States Cartridge involved a contract

for the mass production of ammunition that contained a

clause strikingly similar to (although predating) the HVIC; it

provided “‘that the Contractor shall not be liable’” for any

loss or damage to government property unless it resulted from

the misconduct “‘of the corporate officers of the Contractor or

of other representatives of the Contractor having supervision

and direction of the operation of the Plant as a whole.’” /d. at

461. The government brought an action against the con-

tractor under the FCA, arguing that if the contract clause were

“construed to exempt” the contractor fiom liability for fraud,

it would be “void because in derogation of the False Claims

Statute, [and] contrary to public policy.” /d.

The Eighth Circuit rejected the government’s argument and

affirmed the dismissal of its FCA claims. The court stated

that “(t]he Secretary of War ... unquestionably by the contract

in suit undertook to allocate the risks and obligations which

were to be assumed by the [contractor] and those which were

to be borne by the Government.” /d at 465. The Secretary

was empowered to decide that the national interest was best

served by the government bearing the risk of fraud by non-

managerial employees, and the government would be held to

the terms of the bargain it struck. Jd.

In direct conflict with this ruling, the Sixth Circuit has

refused to allow a similar contractual allocation of risk,

holding that “[t]he HVIC does not foreclose the FCA as a

means for the Government to recover damages.” App. 14a;

see also id. at 20a (objecting to the majority’s holding “that

the Government can seek under the FCA exactly what it has

contracted through the HVIC not to” (Boggs, J., dissenting)).

Indeed, the majority even acknowledges that “the dispute in

this case is essentially the same as the one” in United States

Cartridge. Id. at 10a.

The majority sought to distinguish United States Cartridge

on the basis that the contract in question was a response to a

wartime crisis and involved unusual government supervision,

but its proposed distinction is unavailing.’ First, because of

its experience in World War II, the Department of Defense

deemed it to be in the government’s interest to formalize and

extend its policy of self-insuring to virtually all contracts for

the procurement of high-value defense systems. Hence, the

HVIC has applied since its inception to all high-value

weapons procurement (including any wartime procurements),

regardless of the nature of the government’s involvement in

the execution of the contract. Second, Congress has drawn no

distinction between the Secretary’s statutory power to enter

into procurement contracts during war and peacetime, and

there is no substantive difference between the Secretary’s

statutory powers now and at the time of the United States

Cartridge contract. Compare 10 U.S.C. §§ 2202, 2302-2331,

with 198 F.2d at 463; see also 41 U.S.C. § 405(a). Third,

these are high-value military systems, purchased by the

government to assist in the nation’s defense and, if necessary,

to utilize in armed conflict. In fact, the helicopter in this case

was lost in Saudi Arabia in the midst of Operation Desert

* The Sixth Circuit also suggested that “Boeing was not subject to

Government supervision or control” to the same extent as the U.S.

Cartridge Company, and therefore that the two contracts could be

distinguished on that basis. App. 12a. To the contrary, as is true with

many high-value defense contracts in the modemi era, government

supervision of contract performance was extensive and included the

placement of numerous government quality assurance representatives and

inspectors at both Speco and Boeing. C.A. J.A. 334, 761.

Storm. The meaning of plain contract language cannot shift

depending on the happenstance of whether the contract is

signed — typically years before the damage — when the nation

is at war or at peace.

Most fundamentally, the Eighth Circuit discussed the

special circumstances of the United States Cartridge contract

to explain why it was not against public policy for the

Secretary “to limit the defendant’s risks in that regard to

whatever extent he deemed necessary in order to secure its

managerial services to produce, under Government

supervision, ammunition for the armed forces.” 198 F.2d at

465. The risks facing that contractor may have been different

from the contractor risks (catastrophic loss) that animate the

HVIC, but that difference in no way affects the core holding

of United States Cartridge: when the Department of Defense,

pursuant to statutory authority, determines that it is in the

national interest for the government to assume the risk of loss

from nonmanagerial fraud through unqualified limitation-of-

liability clauses, those clauses must be enforced by their plain

terms even against claims for damages under the FCA. The

government can and should be held to the terms of its bargain.

The decision of the majority below, by refusing to enforce the

plain language of the HVIC, directly conflicts with United

States Cartridge. See also United States v. Winstar Corp.,

518 US. 839, 909 (1996) (plurality) (noting that an

“allocation of risk” to the government “that was essential to

the contract between the parties” must be enforced according

to its terms).

The majority’s decision also conflicts with the Fourth

Circuit’s recent decision in United States v. Bankers

Insurance Co., 245 F.3d 315 (4th Cir. 2001). In that case, the

government argued that it should not be bound by a

contractual provision mandating submission of a dispute to

arbitration because it wished to pursue a separate statutory

FCA claim. The government argued that the “FCA claim

[was] premised on a unique statutory right,” id at 325, and

that enforcement of the arbitration provision would dilute “the

statutory authority of the Attorney General as the exclusive

enforcer of the FCA.” /d. at 323-24.

In rejecting the government’s arguments, the Fourth Circuit

began with the “well settled” principle “that, when the United

States is a party to a contract, ordinary principles governing

contracts and their interpretation remain applicable.” Jd. at

321. The court then held that “[t]he Government should

comply with its contract obligations, and it cannot avoid them

merely by invoking a statutory civil claim, such as one

contemplated under the FCA.” Jd. at 324. The majority

below attempted to distinguish Bankers Insurance on the

ground that the contract provision there only delayed the

government’s FCA claim, because the government retained

the right to litigate after arbitration. App. 12a-13a. But, as

Judge Boggs rightly observed, this is a false distinction,

because “the reasoning of Bankers Insurance still applies to

the case at hand” and commands a different result. /d at 22a

n.2. The Sixth Circuit in this case condoned the govern-

ment’s attempt to do what the Fourth Circuit ruled it cannot:

evade enforcement of the plain language of a contractual

provision because of the existence of an alleged FCA

violation.

The Sixth Circuit’s decision is not justified by the need to

reconcile the HVIC with the FCA, as it suggests. App. 7a,

13a. As Judge Boggs pointed out, the HVIC does not prevent

enforcement of the FCA, it merely prevents the government

from recovering one element of loss for which the

government by contract explicitly assumed the risk as a

matter of sound and longstanding policy. /d. at 21a-22a.

Such a result, Judge Boggs observed, does not override the

FCA; it merely “uphold[s] the obvious coverage of a standard

assumption of risk clause, under which the Government

agreed not to exercise certain rights it would otherwise have

in exchange for a benefit.” Jd at 25a. The government,

moreover, can still recover FCA damages other than for the

loss of the helicopter; collect civil penalties; proceed

criminally; and debar the violator from government

contracting. /d. at 2la-22a, 25a.

2. The conflicts of authority identified above alone justify

certiorari, but the overriding importance of this issue makes

this Court’s immediate review imperative. Assumption of

risk clauses “ensure[] ... the government is able to obtain

needed goods and services from parties who might otherwise,

quite rightly, be unwilling to undertake the risk of

government contracting.” Winstar, 518 U.S. at 913 (Breyer,

J., concurring). Yet, under the Sixth Circuit’s ruling, not just

the HVIC but numerous assumption-of-risk clauses

incorporated in government contracts pursuant to the FAR,

supra at n. 2, are ineffective against FCA damages claims.

The exemption of FCA damages claims from the HVIC

creates broad exposure for contractors. Contractor liability

under the FCA is not limited to common law fraud, but now

includes “deliberate ignorance” and “reckless disregard of the

truth or falsity of the information,” 31 U.S.C. § 3729(b),

which the government in this and other cases has asserted

amounts to gross negligence. In the aftermath of an accident,

even good-faith actions on mission-critical parts (which are

ubiquitous in complex weapons systems) can be recast as

“reckless” conduct in breach of contract. The act of a single

low-level employee, among perhaps thousands who may

work on a major weapon system, can thus create substantial

liability for contractors under the treble damages provision of

the FCA.

The reliance interests undercut by the decision below are

staggering. Given the clear Department of Defense policy of

self-insurance that has been in effect since World War II, and

the amendment of the HVIC in 1974 to eliminate an

exception for fraud by all personnel save the most senior

managers, contractors have forgone the purchase of insurance

that would protect against risk of damage or loss of high-

value government items. Now, as a result of the Sixth

Circuit’s unprecedented and unexpected decision, contractors

face potentially massive retroactive liability against which

they could have, and surely would have, insured. See, e.g.,

North Bank v. Cincinnati Ins. Cos., 125 F.3d 983, 988 (6th

Cir. 1997) (intentional misconduct insurable); Andover

Newton Theological Sch., Inc. vy. Continental Cas. Co., 930

F.2d 89, 91 (Ist Cir. 1991) (same). This exposure encom-

passes almost every major space and military contract of

recent vintage: contracts that may have been executed many

years (even decades) ago but because of their complexity are

still being performed, as well as the fully performed contracts

that are still subject to the lengthy FCA limitations period

(which extends up to 10 years from the date of violation, 31

U.S.C. § 3731(b)).

The financial risks to contractors and subcontractors who

supply, retrofit or repair aerospace and defense systems dwarf

even the substantial liability the government sought to impose

here. A B-2 Bomber or a Virginia Attack Submarine has a

unit cost of over $2 billion; a LPD-17 Landing Ship or a

DDG-51 Destroyer nearly $1 billion; a J-STARS Recon-

naisance Aircraft $560 million; a Trident missile $61 million.

Center for Def. Info., Military Almanac 2001-2002, at 36

(2002). Spacecraft and satellite risks are of similar or greater

magnitude. Risk is not limited to total loss of the craft;

damage to even a single subsystem may run well into the

millions of dollars. All these potentially ruinous losses are

subject to trebling under the FCA if, the government

maintains, as little as gross negligence by any employee is

found in relation to a defective part.

The decision below immediately shifts billions of dollars of

risk from the government to private industry. Given the plain

meaning and history of the HVIC, it would be manifestly

unfair to allow the government to reap such a windfall at

contractors’ expense. Over the last half century, the

government has avoided significantly higher procurement

a A ee Me ee TS ee

costs by inducing contractors and subcontractors to forgo the

purchase of insurance through a promise of self-insurance.

Now in_the face of a significant loss, the government has

disclaimed its previous bargain and sought to impose an

unbargained-for liability on its contractors. At a minimum,

the legality of such massive risk-shifting is an issue that

should be decided by this Court, and not left in the hands of a

badly divided Sixth Circuit.

The prospective effects of the decision below are equally

intolerable because of the pervasive uncertainty in

government contracting that will persist until this Court

settles the scope of the HVIC and other FAR limitation-of-

liability clauses. No contractor can accurately price bids for

weapons or other major systems without knowing its liability

risks. Furthermore, so long as it is uncertain whether the

HVIC operates to limit damages under the FCA, no prudent

contractor will leave potentially ruinous risks uninsured

where insurance can be purchased. Indeed, not only prime

contractors, but also subcontractors will now have to insure,

because each subcontractor will face potential liability to

prime contractors that no longer would be protected by the

HVIC. The resulting pyramid of insurance “premiums tor

product liability insurance protection throughout the complete

subcontracting chain” for risks of great magnitude would add

vast sums to government procurement costs, Commission

Report at 97, C.A. J.A. 407, which defeats the very purpose

of the HVIC program. Where commercial insurance is

unavailable, companies that cannot afford the risk of self-

insurance (particularly suppliers of low-value but mission-

critical parts) may abandon government contracting, those

that can self-insure must raise contract prices to cover the

risks.

Judge Boggs recognized the disastrous implications of the

majority’s holdin;; in his dissent:

[U]nder [the court’s decision today], contractors will

have to insure against potential FCA liability for treble

damages for the loss of high-value items resulting from

actions that might be held to be fraudulent on the part of

any personnel. Presumably, this cost will be passed on

to the Government.

App. 25a (Boggs, J., dissenting). This Court should review

the decision below, which manifestly undermines the HVIC

regulation that has been a cornerstone of government

procurement policy, as well as decades of reasonable reliance

by contractors upon that regulation.

Il. THIS COURT SHOULD RESOLVE WHETHER

FCA DAMAGES, BEFORE TREBLING, CAN

EXCEED THE TOTAL AMOUNT PAID OUT BY

REASON OF THE CLAIM ALLEGED TO BE

FALSE.

The Sixth Circuit’s holding on damages recoverable under

the FCA deepens the divisions among the Circuits and adds

substantially to the uncertainty and lack of uniformity in the

courts concerning the measure of damages under the FCA. In

particular, the Sixth Circuit’s decision is out of step with

United States v. Bornstein, 423 U.S. 303 (1976) and United

States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), and

conflicts squarely with the Fifth Circuit’s holding in Aerodex

that “a proper application of the [FCA] damage provision

limits the government’s claim to the amount that was paid out

by reason of the false claim.” 469 F.2d at 1011.° Aerodex

teaches that damages that exceed the amount the government

paid for a defective product, such as the cost of repairing the

defect or replacing the product, may be recoverable by the

government under breach of warranty, common law fraud or

other theories, but they are not the measure of baseline

damages to be multiplied under the FCA. Moreover, by

° At the time of the Aerodex decision, the FCA referred to damages

sustained “by reason of” the defendant’s act. This phrase was changed to

the current language, “because of,” 31 U.S.C. § 3729(a), as part of a

recodification in 1982, but the change was not intended to make any

“substantive changes in the law.” See H.R. Rep. No. 97-651, at 2 (1982).

or Pie i iva

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allowing damages, before trebling, that are a multiple of the

amount of the allegedly false claim, the Sixth Circuit works a

change in the FCA that Congress expressly rejected in

connection with the comprehensive 1986 Amendments to the

FCA, when it specifically refused to overrule Aerodex, and

rejected consequential damages under the Act.

No court has ever before ruled that, under the damages

formulation endorsed by this Court in Bornstein, see infra at

n. 11, a supplier of remanufacturing services and upgraded

components could be liable under the FCA for three times the

value of an entire aircraft if a single upgraded part is

defective. In that sense, the Sixth Circuit’s ruling is at odds

with every court that has addressed these issues. By

dramatically expanding a contractor’s liability under the

Bornstein rule, the Sixth Circuit’s opinion threatens disastrous

consequences for government contractors and underscores the

need for this Court to speak authoritatively on this issue.

1. This Court long has recognized that “the chief purpose

of the [FCA] was to provide for restitution to the government

of money taken from it by fraud, and that the device of double

damages plus a specific sum [as a penalty for each false

claim] was chosen to make sure that the government would be

made completely whole.” Hess, 317 U.S. at 551-52.’ Thus,

the “device” in the FCA for ensuring complete recovery by

the government is to provide for multiplication of the

damages caused by the act of fraudulently inducing the

government to pay out money, not to provide for recovery of

all “reasonably foreseeable” damages that are the

consequence of the facts that render the claim false, then

trebling those damages. In the current Term, sixty years after

Hess and in light of the 1986 Amendments to the FCA, the

Court has again recognized this principle: “The treble

damage provision [of the FCA] was, in a way, adopted by

’ As noted supra at 7-8, the 1986 FCA Amendments changed the

statute to provide for treble, rather than double, damages. 31 U.S.C.

§ 3729(a).

Congress as a substitute for consequential damages.” Cook

County, 2003 WL 890268, at *7 n.9.

The Fifth Circuit’s decision in Aerodex comports

completely with this analysis, while the Sixth Circuit’s

decision in the instant case directly conflicts with it. In

Aerodex the defendant had sold aircraft engine bearings to the

Navy that were mislabeled so as to appear to meet a contract

specification that they did not, in fact, meet. The Navy paid a

total of $27,000 for the bearings themselves, but after the

discrepancy was discovered, the Navy incurred an additional

cost of nearly $161,000 in removing and replacing bearings

that had been installed. 469 F.2d at 1010. The district court

had computed the government’s damages by first adding

these two amounts together, before doubling (as the FCA then

provided) the resultant sum. The Fifth Circuit reversed:

Upon careful analysis, we hold that the language of

the False Claims Act does not include consequential

damages resulting from delivery of defective goods.

The statute assesses double damages attributable to the

“act,” which in this case is the submission of the false

vouchers. The submission of these vouchers was not the

cause of the government’s consequential damages. The

delivery and installation of the bearings in the airplanes,

not the filing of the false claim, caused the consequential

damages.

Id. at 1011. Accordingly, the Fifth Circuit ruled that “a

proper application of the [FCA] damage provision limits the

government’s claim to the amount that was paid out by reason

of the false claim.” Id.

The decision of the Sixth Circuit in the instant case is in

irreconcilable conflict with Aerodex.* First and most

obviously, the Sixth Circuit here has held that the FCA

permits recovery of damages before trebling for the value of

* Although all parties in the court below briefed the Aerodex issues

extensively, the Sixth Circuit does not even refer to the case in its opinion.

an entire remanufactured aircraft “if it had been of the

specified quality” (possibly as much as $13 million), App.

19a & n.9, which is far in excess of the Aerodex limit of the

amount paid out by reason of the claim alleged to be false

(here, $4.1 million). Second, the Sixth Circuit has staked out

a construction of the FCA that cannot be squared either with

Aerodex, with the plain language of the statute, or with

legislative intent. As the Aerodex court reasons, the plain

language of the FCA provides for recovery of the damages

that the government “sustains because of the act” of the

defendant — that is, the submission of a false claim for

payment. 31 U.S.C. § 3729(a). The damage sustained by the

government because of the submission of a false claim is the

payment of money that the government should not have had

to pay. 469 F.2d at 1011. The consequences of the facts that

make the claim false (in Aerodex, the fact that the bearings

were defective) may cause other damages to the government,

even the loss of an aircraft. Those damages, even if

recoverable under a number of other theories, are not

recoverable under the FCA.” Jd. The FCA is about

recovering money the government was fraudulently induced

to pay, not about fashioning remedies for the consequences of

allegedly substandard parts. See Hess, 317 U.S. at 551-52.

The Sixth Circuit’s decision sidesteps the causation

language of the FCA’s damages provision and jumps straight

to the conclusion that the submission of a false claim

° In fact, the Aerodex court permitted the government in that case to

recover, on a breach of warranty theory, precisely the same consequential

damages it disallowed under the FCA. 469 F.2d at 1011-12. The

government’s amended complaint in the instant case (as is typical in cases

of this nature) also contains a common law fraud count, see C.A. J.A. 118,

and consequential damages typically are recoverable in common law fraud

cases. See Restatement (Second) of Torts § 549(1)(b) & cmt. d (1976).

Thus, if the HVIC were not a bar, the government would have other

avenues for fully recovering its consequential damages, but should not be

permitted first to add consequential damages to the contract price, then

recover three times that combined amount under the FCA.

“caused” the helicopter in question to crash: “Although the

loss of [the helicopter] occurred after Government acceptance

and resulted from the defective Speco gear, it was actually

caused by Boeing’s initial misrepresentation that the

helicopter conformed to contract requirements.” App. 9a-10a.

This analysis confuses and conflates the damage caused by |

submission of the false claim, i.e., the unjustified payment of

money, and the accident caused by the underlying product

defect, independent of any certification of quality or product

conformance.

As the analysis of the FCA’s language in Aerodex makes. .

clear, the conduct at which the False Claims Act is directed is :

inducement of payment under false pretenses, not negligence ?

in manufacture or design, and the injury sought to be

remedied is the direct financial harm represented by that

payment, not consequentia] damages from product defects.

Even if it could be said that the mishap here may not have

occurred “but for” a multitude of events culminating in the |

operation of the helicopter with a defective part, the Sixth

Circuit’s holding that damage to property is compensable

under the FCA if it would not have occurred “but for” the

alleged false claim expands the statutory remedy far beyond

its plain language and Congress's underlying intent. This

expansive reading also has been consistently rejected by other

circuits. See, e.g., United States v. Hibbs, 568 F.2d 347, 351-

52 (3d Cir. 1977) (discussing cases).

2. Congress’s actions in passing the 1986 Amendments to

the FCA confirm that the plain language of the FCA

regarding damages means what Aerodex says it means and

that the Sixth Circuit, by construing the statute in a way that

conflicts with Aerodex, has done precisely what Congress

refused to do in 1986. Amendments proposed in both the

Senate and the House would have modified the FCA to allow

for recovery of “consequential” damages. The precise

purpose of these amendments, as made clear in the Senate

Tw er ee GL ands ee OR et ae Foe eee Eee, eS eee

ee ee Ser

Report describing its proposed amendment, was to overrule

Aerodex:

[The proposal] also amends [the FCA] to permit the

Government to recover any consequential damages it

suffers from the submission of a false claim. For

instance, where a contractor has sold the Government

defective bearings for use in military aircraft, the

Government could recover not only the cost of the new

ball bearings, but the much greater cost of replacing the

defective ball bearings. See United States v. Aerodex

Inc., 469 F.2d 1003 (Sth Cir. 1972).

S. Rep. No. 99-345, at 19 (1986), reprinted in 1986

U.S.C.C.A.N. 5266, 5284. Advocates of the House version of

the amendments also understood that by making

“consequential” damages available the government would be

able, if the FCA were amended as proposed, to recover

replacement costs. See, e.g., 132 Cong. Rec. H6480 (daily

ed. Sept. 9, 1986) (remarks of Rep. Brown) (the proposed bill

includes “consequential damages” to ensure that “recovery

will reflect actual replacement cost in every instance”).

In the end, however, these proposed amendments to the

FCA were rejected by Congress in the bill as passed. 132

Cong. Rec. H9388 (daily ed. Oct. 7, 1986). The bill’s leading

proponent in the House, Representative Glickman, explained

why: While the previous version of the bill passed by the

House had included “double damages, consequential damages

and costs,” the version that ultimately was enacted into law

“provides for treble damages and deletes consequential

damages.” /d. Representative Glickman identified this

change as one of two “major differences” between the

original House bill and the bill as compromised with the

Senate, and noted that these compromises were “necessary in

order for this legislation to become law.” /d. It is clear from

this history that, as this Court recently noted in Cook County,

treble damages were adopted in 1986 as a “substitute” for

“consequential” damages. 2003 WL 890268, at *7 n9.

Moreover, under both the House and the Senate proposals,

“consequential” damages were added on only after actual

damages had been doubled or trebled, as the case may be.'”

Thus, none of the 1986 proposals before Congress went

nearly so far as the government asks the courts to do in this

case: /.e., to include “consequential” damages in the baseline

damages to be trebled.

3. The Sixth Circuit’s decision in this case also deepens

existing divisions among the courts as to the proper measure

of damages in an FCA case involving substandard products.

The court below pays lip service to the FCA measure of

damages endorsed by this Court in Bornstein,'' but no other

court has extended the Bornstein rule as far as the Sixth

Circuit in the instant case, which treated the value of the

entire remanufactured aircraft as the benefit of a bargain to

upgrade specified components of helicopters already owned

by the government. The cases do reflect, however, division

and uncertainty as to the meaning of the Bornstein rule.”

'° See S. 1562, 99th Cong (2d Sess. 1986), as passed by the Senate

(providing for “3 times the amount of damages” unless the court finds

certain conditions indicating the defendant’s cooperation with federal

officials, “in which case the court may assess not less than 2 times the

amount of damages, in addition to the amount of consequential

damages”); H.R. 4827, 99th Cong. (2d Sess. 1986), as reported from the

House Comm. on the Judiciary, June 26, 1986 (providing for “an amount

equal to consequential damages ... plus 2 times the amount of damages

(other than such consequential damages)”).

'' Under Bornstein, “[t}he Government’s actual damages are equal to

the difference between the market value of the [goods] it received and

retained and the market value that the [goods] would have had if they had

been of the specified quality.” 423 U.S. at 316 n.13.

'? For example, the Federal Circuit in Daff v. United States, 78 F.3d

1566 (Fed. Cir. 1996), allowed damages under the FCA, without analysis

of the Aerodex or Bornstein issues, for the Government’s costs of testing

and repair of defective components. In contrast, the Second Circuit, in

United States vy. General Dynamics Corp., 19 F.3d 770, 777 (2d Cir.

1994), stated that “consequential damages” are recoverable “under the

FCA and federal common law,” but the only damages at issue in that case

While the damages permitted by the Sixth Circuit would

typically be considered “consequential” under the Uniform

Commercial Code or the common law,” the taxonomy of

“direct” versus “consequential” damages has engendered

considerable confusion. Indeed, as if to capitalize on the

confusion, the Department of Justice (“DOJ”) has instructed

its attorneys that, “in attempting to recover damages which

flow from the false claim, they should not be labeled

‘consequential damages[,]’ .... [but] should be shown to be

the ‘natural and proximate’ result of the defendant’s

misrepresentations.” DOJ, Civil Division Fraud Monograph

161 (Nov. 1988). Indeed, this “labeling” tactic worked for

the government below, the district court held that

“consequential” damages are not recoverable under the FCA,

but that the government could nonetheless potentially recover

damages, before trebling, up to and including the aircraft’s

replacement cost. App. 54a, 56a, 63a.

A consistent application of the Bornstein measure of FCA

damages and the Aerodex rule limiting recovery to the

amount improperly paid out by the government would

contribute considerable certainty in this area. This solution

would entail reaffirmation of the measure of damages first

articulated by the Ninth Circuit many years ago in a case cited

with approval by this Court in Bornstein, 423 U.S. at 317

n.13. In United States v. Woodbury, 359 F.2d 370, 379 (9th

Cir. 1966), the court stated: “Ordinarily the measure of the

were actual overcharges to the government resulting from a kickback.

The recovery of an actual overcharge in an FCA case cannot in any sense

be considered “consequential” damages.

'S See, e.g., 1 J. White & R. Summers, Uniform Commercial Code § 10-

4, at 567 n.10 (4th ed. 1995) (“Whenever a defective component part

causes an accident that damages the entire product, a large part of the total

damage may be consequential.”); U.C.C. § 2-715(2)(b) (“Consequential

damages resulting from the seller’s breach include ... injury to person or

property proximately resulting from any breach of warranty.”); id. cmt. 5

(consequential damages include those flowing from “the use of goods

without discovery of the defect causing the damage”).

government’s damages would be the amount that it paid out

by reason of the false statements over and above what it

would have paid if the claims had been truthful.” This

measure of damages is consistent with Bornstein, consistent

with Aerodex and the Congress’s refusal to overrule it, and

consistent with the plain language of the FCA."

4. The consequences of the Sixth Circuit’s decision, if

unreviewed, on the government contracting community

would be breathtaking. In this case, a supplier that submitted

a claim for $4 million to the government for retrofitting an

existing aircraft could be found liable for nearly $40 million

in damages, depending on the valuation of the aircraft it had

upgraded. Indeed, under the Sixth Circuit’s analysis, it would

make no difference if the “remanufacturing” contract had

been for only $1 million per aircraft or less and the value of

the upgraded aircraft (like a B-2 bomber) stretched to more

than a billion dollars; the contractor would still be liable for

“the value that [the aircraft] would have had if it had been of

the specified quality,” App. 19a, times three. Nothing in the

FCA justifies such a perverse rule, and it is unclear how many

companies would continue to be willing to contract, or at

what prices, with the government in such circumstances.

Review by this Court is therefore essential.

CONCLUSION

For the foregoing reasons, the petition for writ of certiorari

should be granted.

'* Not only did the Sixth Circuit state the wrong standard for FCA

damages, but its analysis is absurd on its own terms. The market value “as

received” of a remanufactured helicopter with a defective gear is not zero,

see App. 18a, any more than a 2003 Mercedes Benz with a defective

transmission part has a market value of zero. Moreover, the market value

of what Boeing “promised” was not the market value of the entire aircraft,

id. at 18a-19a. Boeing contracted to upgrade an existing CH-47 helicopter

owned by the government; the independent, pre-existing value of the

government's helicopter was no part of what Boeing bargained to provide.

CARL S. RAUH

AMY SABRIN

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM LLP

1440 New York Avenue, NE

Washington, D.C. 20005

(202) 371-7000

JOHN W. WALBRAN

THE BOEING COMPANY

P.O. Box 516

MC S§S 100-3340

Saint Louis, MO 63166

(314) 234-6857

Respectfully submitted,

CARTER G. PHILLIPS*

P. DAVID RICHARDSON

STEPHEN B. KINNAIRD

JENNIFER M. COLLINS

SIDLEY AUSTIN BROWN &

WOOD LLP

150i K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

PAUL J. EHLENBACH

THE BOEING COMPANY

100 N. Riverside

MC 5003-101

Chicago, IL 60606

(312) 544-2804

Counsel for Petitioner

March 21, 2003

* Counsel of Record

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

SIXTH CIRCUIT

No. 00-4157

UNITED STATES OF AMERICA ex rel. BRETT ROBY,

Plaintiff-Appellee,

BOEING Co.,

Defendant-Appellant.

Argued: Jan. 25, 2002

Decided and Filed: Sept. 12, 2002

Before MERRITT, BOGGS, and MOORE, Circuit Judges.

MOORE, J., delivered the opinion of the court, in which

MERRITT, J., joined. BOGGS, J. (pp. 649-52), delivered a

separate dissenting opinion.

OPINION

MOORE, Circuit Judge.

This action was brought under the False Claims Act

(“FCA”), 31 U.S.C. §§ 3729-3733, to recover damages for

the loss of a helicopter that Defendant-Appellant Boeing Co.

(“Boeing”) had remanufactured or overhauled for military

use. Boeing now raises the questions of law certified for

interlocutory appeal by the district court, arguing that the

district court erred in holding (1) that the High-Value Items

Clause (“HVIC”), set forth in 48 C.F.R. (“FAR”) § 52.246-

24, and incorporated into the helicopter contract between the

United States (“Government”) and Boeing, does not operate

as a defense to damages sought under the FCA and (2) that

the Government may recover damages for the loss of the

helicopter. We AFFIRM the judgment of the district court.

I. BACKGROUND

In 1985 and 1989, the United States Army (“Army”)

awarded multiyear procurement contracts totaling approxi-

mately $2 billion to Boeing for the remanufacture of almost

four hundred Boeing-manufactured CH-47A/B/C Chinook

helicopters to the CH-47D configuration. As part of these

contracts, Boeing was required to inspect and to ensure the

quality of all of the parts used for the remanufacture,

including those items purchased from its chosen subcon-

tractors. The contracts provided warranty coverage for the

helicopters from all defects in material and workmanship for

the lesser of two-hundred flight hours or twenty-four months

after acceptance.

On August 28, 1990, the Army accepted delivery of a

remanufactured CH-47D helicopter (“Aircraft 89-0165”).

The next day, Boeing submitted a claim for payment to the

Government, in the form of a $4.1 million invoice for Aircraft

89-0165. On January 11, 1991, after fifty-six flight hours,

Aircraft 89-0165 suffered the failure of a defective flight-

critical transmission gear' and crashed during a low-level

contour flight over the Saudi Arabian desert as part of

Operation Desert Shield. Aircraft 89-0165 and its contents

were totally destroyed at a loss of at least $10 millio... The

Army replaced Aircraft 89-0165 with a new CH-47D

helicopter that cost almost $13 million.

On May 22, 1995, Relator Brett Roby (“Roby”) filed a gui

tam action under seal pursuant to 31 U.S.C. § 3730(b) on

behalf of himself and the Government, alleging that Boeing

' A “flight critical part” is necessary for flight; its failure could cause

the loss of the aircraft. J.A. at 1451 (Gray Dep.).

and its supplier, Speco Corp. (“Speco”), had violated the FCA

by making false statements about the manufacture and sale

of defective transmission gears to the Army via Boeing’s

remanufactured CH-47D helicopters. Speco manufactured the

gears that Boeing installed into the CH-47D helicopters

before their delivery to the Army. On April 30, 1997, the

Government intervened and filed an Amended Complaint

against Boeing, which was unsealed on May 1, 1997.

In its Answer, Boeing denied the allegations of FCA

violations and raised a total of twelve affirmative defenses.

Specifically, Boeing claimed: (1) that the HVIC, included by

regulation in the helicopter contract, barred the damages

sought under the FCA and (2) that consequential damages

were not available under the FCA.

On December 21, 1998, the Government filed a motion for

partial summary judgment, challenging Boeing’s assertion of

the HVIC as an affirmative defense. After hearing oral argu-

ment, the district court granted the motion. United States ex

rel. Roby v. Boeing Co., 73 F.Supp.2d 897, 912 (S.D.Ohio

1999) (“Roby I’). On February 5, 1999, Boeing filed a cross-

motion for partial summary judgment as to the measure of

damages. After hearing oral argument, the district court

granted Boeing’s motion in part, with respect to the general

issue of consequential damages, but denied the motion as it

related to the Government’s damages in this case. United

States ex rel. Roby v. Boeing Co., 79 F.Supp.2d 877, 895-96

(S.D.Ohio 1999) (“Roby IP’).

On August 3, 2000, before trial, the parties reached a set-

tlement under which Boeing made an immediate payment of

$25 million. The settlement did not include the FCA claim

arising from the Saudi crash; an additional payment of $15

million is contingent upon the outcome of this appeal. The

district court accepted the settlement and certified for

interlocutory appeal the following questions of law:

1. Whether the [Government] can recover damages under

the [FCA] for loss of a helicopter resulting from the

failure of a defective flight-critical component part; and

2. Whether the [HVIC] contained in [FAR] § 52.246-24

and incorporated in the Boeing CH-47D helicopter

contract operates as a defense to damages sought under

the [FCA] for the loss of or damage to a helicopter

resulting from the failure of a defective component part.

J.A. at 214 (Order to Amend and Certify). On September 18,

2000, we granted Boeing’s petition for permission to appeal.

We have no question before us concerning whether and to

what extent Boeing’s conduct was fraudulent. Rather, the

question is whether the HVIC precludes liability under the

FCA, assuming that liability would otherwise exist.

Il. ANALYSIS

In an interlocutory appeal, we review a district court’s legal

conclusions de novo. Northwestern Ohio Adm’rs, Inc. v.

Walcher & Fox, Inc., 270 F.3d 1018, 1023 (6th Cir.2001).

A. Mootness

We first consider sua sponte the jurisdictional question

whether the parties’ settlement of August 3, 2000, renders

this case moot. Under Article III of the Constitution, our

exercise of judicial power is limited to “actual cases or con-

troversies.” Affholder, Inc. v. Preston Carroll Co., 866 F.2d

881, 885 (6th Cir.1989) (quoting Allen v. Wright, 468 U.S.

737, 750, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984)) (internal

quotation marks omitted). “Settlement of a claim before a

final adjudication moots the claim and deprives the federal

judiciary of jurisdiction over the claim.” /d. Agreements to

limit recoverable damages, however, do not moot cases and

therefore do not affect our jurisdiction. /d.

The parties’ settlement in this case is essentially the same

as the agreement to liquidate damages that was reached in

Nixon v. Fitzgerald, 457 U.S. 731, 102 S.Ct. 2690, 73

L.Ed.2d 349 (1982), where a discharged air force employee

sought civil damages from the former president. /d. at 733,

102 S.Ct. 2690. Under the terms of the agreement, the

employee accepted $142,000, with an additional amount of

$28,000 contingent upon the Supreme Court’s ruling that the

former president was not entitled to absolute immunity. /d. at

744, 102 S.Ct. 2690. Observing that “[t]he limited agreement

between the parties left both petitioner and respondent with a

considerable financial stake in the resolution of the question

presented in this Court,” the Court concluded, “Given

respondents’ continued active pursuit of monetary relief,

this case remains definite and concrete, touching the legal

relations of parties having adverse legal interests.” /d.

(quotation omitted).

In this case, Boeing has already paid the Government $25

million; it has agreed to pay an additional amount of $15

million contingent upon our rulings with respect to the scope

of the FCA and the HVIC. Therefore, because the parties

have “a considerable financial stake,” the case is not moot,

and we will proceed to the merits of this appeal.

B. The FCA and the HVIC

The history of the FCA dates back to 1863, when it was

enacted “with the principal goal of stopping the massive

frauds perpetrated by large [private] contractors during the

Civil War.” Vt. Agency of Natural Res. v. United States ex rel.

Stevens, 529 U.S. 765, 781, 120 S.Ct. 1858, 146 L.Ed.2d 836

(2000) (quotation omitted). The FCA has since become the

primary means by which the Government combats and deters

fraud. H.R.Rep. No. 99-660, at 18 (1986). As amended in

1986, the FCA provides for a civil penalty from $5,000

to $10,000 and treble damages when an individual know-

ingly acts to defraud the Government and does not “fully

cooperate[ ] with any Government investigation of such vio-

lation.” 31 U.S.C. § 3729(a). The Supreme Court under-

stands the current version of FCA damages to be “essentially

punitive in nature.” Vt. Agency, 529 U.S. at 784, 120 S.Ct.

1858 (explaining that the Court had “suggested that damages

under an earlier version of the FCA were remedial rather than

punitive [because] that version of the statute imposed only

double damages and a civil penalty of $2,000 per claim”

(citations omitted)).

Whereas the FCA allows the Government to recoup losses

from fraud, the HVIC helps to manage the costs of liability

insurance. Since 1984, the Federal Acquisition Regulations

(“FAR”) have prescribed the insertion of the HVIC in certain

government contracts to limit the liability of contractors “for

loss of or damage to property of the Government (including

the supplies delivered under th[e] contract) that (1) occurs

after Government acceptance of the supplies delivered under

th[e] contract and (2) results from any defects or deficiencies

in the supplies.” FAR § 52.246-24(a).” The HVIC covers the

loss of or damage to a high-value item, defined as “‘a contract

end item that (a) has a high unit cost (normally exceeding

$100,000 per unit) . . . and (b) is designated by the contract-

ing officer as a high-value item.” Jd. § 46.802. Regarding

such high-value items, the Government’s stated policy is to

“act as a self-insurer” and to “relieve contractors of con-

tractual liability for loss of or damage to those items.” /d.

§ 46.803. In short, the HVIC represents the Government’s

assumption of the risk that a high-value item such as Aircraft

89-0165 may be lost or damaged after acceptance as a result

? From 1971 to 1984, when the FAR became effective, Armed Services

Procurement Regulation (“ASPR”) 7-104.45 relieved contractors of such

liability. See J.A. at 437 (Defense Procurement Circular 86 (“DPC 86”) at

4), 485-86.

of a defect or deficiency in the item. It does not necessarily

imply that the Government has self-insured for the damages

that result from violations of federal law.

Boeing itself accepts the fact that, “[a]ssuming the govern-

ment could prove a false claim, a contractor would remain

liable for penalties and, if there be any, other appropriate

FCA damages, notwithstanding the HVIC.” Appellant’s Br.

at 31. However, relying on the text and history of the HVIC,

Boeing argues that the HVIC prohibits the recovery of

damages under any and all causes of action, when those

damages result from the fraud of non-managerial personnel,

meaning that there would be no appropriate FCA damages in

this case. The issue before us is whether the HVIC’s limi-

tation of contractor liability extends to cases brought under

the FCA. Specifically, we must decide whether the Govern-

ment has agreed to limit damages that would otherwise be

recoverable under the FCA.

In holding that the HVIC provides no defense to claims of

FCA violations, the district court first noted that the FAR

limit the application of the HVIC “to contractual remedies

and not to claims premised under the [FCA]”; indeed, the

HVIC and the FCA are silent with respect to each other.

Roby I, 73 F.Supp.2d at 910. Therefore, the district court

declined to find them inconsistent. Jd. Because FCA claims

arise from the submission of a false or fraudulent claim, the

district court concluded that the HVIC’s limitation on con-

tractual liability did not limit a contractor’s liability under the

FCA, finding no evidence in the record of any such intent on

the Government’s part. Jd. at 910-11. Finally, the district

court distinguished United States v. United States Cartridge

Co., 198 F.2d 456 (8th Cir.1952), cert. denied, 345 U.S. 910,

73 S.Ct. 645, 97 L.Ed. 1345 (1953), which held that a lia-

bility-limiting contract provision did limit the Government's

FCA claims, id. at 465, on the ground that the contract was

made in the emergency situation preceding World War II,

making the case unique. Roby J, 73 F.Supp.2d at 911-12.

We agree with the district court that the HVIC does not bar

the Government from suing Boeing under the FCA to recover

damages for Aircraft 89-0165. We look first to the language

of the FCA, which holds a defendant liable for a civil penalty

“plus 3 times the amount of damages which the Government

sustains because of the act of that person.” 31 U.S.C.

§ 3729(a). The allegedly fraudulent act in this case is Boe-

ing’s “false[ ] represent[ation] that the helicopters conformed

to contract requirements and fail[ure] to disclose their faulty

manufacture to the United States Government.” J.A. at 87

(Am. Compl. at 4 3) Because of this false claim, the Gov-

ernment sustained the loss of Aircraft 89-0165. Therefore,

the Government argues that Boeing is liable under the FCA

for treble damages as well as a civil penalty.

At this point, Boeing would direct us to the HVIC, which

limits contractor liability for high-value items in fairly

broad terms:

Except as provided in paragraphs (b) through (e) below,

and notwithstanding any other provision of this contract,

the Contractor shall not be liable for loss of or damage to

property of the Government (including the supplies

delivered under this contract) that (1) occurs after Gov-

ernment acceptance of the supplies delivered under this

contract and (2) results from any defects or deficiencies

in the supplies.

FAR § 52.246-24(a). The HVIC does not reference the FCA,

but it does expressly refuse to limit a contractor’s liability

* We note that Boeing “vigorously denies” any knowing submission of

a false claim in this case. Reply Br. at 4. However, we must assume such

a submission to address whether the HVIC precludes FCA damages when

incorporated as a contract provision.

when “the Government’s acceptance of [a high-value item]

results from willful misconduct or lack of good faith on the

part of any of the Contractor’s managerial personnel.” FAR

§ 52.246-24(b).* The parties have stipulated that this excep-

tion is not at issue in this case. Therefore, according to

Boeing, the HVIC’s limitation of liability for loss or damage

is absolute, precluding the Government from recovering any

damages (as opposed to a civil penalty) under the FCA.

We cannot dispose of the FCA claim so easily. Although

the loss of Aircraft 89-0165 occurred after Government

acceptance and resulted from the defective Speco gear, it was

actually caused by Boeing’s initial misrepresentation that the

*This exception originally included “fraud or gross negligence as

amounts to fraud[ ] on the part of any personnel of the Contractor.” J.A. at

437 (ASPR 7-104.45(b)(ii) (1971)). The defense industry objected to this

provision on the following grounds:

Today’s exposure to possible infiltration by any number of dissident

factions in our society serves to highlight the impossibility of any

management to reasonably accept as an uninsured risk the results

of any individual’s actions regardless of the extreme nature of

such acts.

Therefore, the introduction of this exception goes a long way

toward negating the main purpose of DPC 86; that is, to remove

from the Contractor the risk of potential liability for damage to

Government property and eliminate from Governmen’ procurement

the cost of Contractors’ liability insurance against such liability for

damage to Government property.

Unless the insurance exception is substantially modified and the

exception regarding fraud of any personnel is removed, there is

serious question whether DPC 86 implementation will have any real

effect upon the cost of Contractor insurance included in the overall

cost of the Government procurement program.

J.A. at 464-65 (Letter from Council of Defense and Space Industry

Associations, to Captain E.C. Chapman, Chairman, ASPR Committee 4-5

(Aug. 12, 1971)). The Department of Defense eventually accepted the

recommendation to delete the provision.

10a

helicopter conformed to contract requirements.’ This misrep-

resentation, which triggered FCA liability, is the key to this

case. Boeing argues from the “willful misconduct or lack of

good faith” language in the managerial personnel provision,

FAR § 52.246-24(b), that damages for FCA violations must

be covered by the general limitation of liability. We do not

agree. Were the HVIC a typical insurance policy, we would

consider resolving the ambiguity in Boeing’s favor. Cf

North Bank v. Cincinnati Ins. Cos., 125 F.3d 983, 986-87 (6th

Cir.1997) (stating that Michigan law requires courts to con-

strue ambiguous provisions and exclusionary clauses in insur-

ance policies against the insurer). The aim of the HVIC,

however, is to “reduc[e] Government procurement costs by

limiting the contractor’s risk.” J.A. at 434 (DPC 86 at 1).

The HVIC insures contractors only indirectly; it is, by its own

terms, a self-insurance policy, which means that the Gov-

ernment is both insurer and insured. Because nothing in the

HVIC suggests that its limitation of contractor liability covers

statutory violations, we hold that the district court did not err

in concluding that the HVIC does not provide a defense to

damages sought under the FCA.

On one level, the dispute in this case is essentially the

same as the one in United States Cartridge Co., where the

defendant operated a Government-owned ammunition plant

during World War II. United States Cartridge Co., 198 F.2d

at 458. The Government alleged that the defendant had

presented claims for payment that were false because it

“failfed] to maintain a proper system of inspection and to

produce the quality of ammunition called for by the contract.”

Id. In its answer, the defendant denied any wrongdoing and

* In other words, the loss would not have occurred as it did if Boeing

had not warranted conformance, because the Government would have

required the correction, repair, or replacement of the gear, which was

under warranty. The HVIC itself emphasizes this obligation. FAR

§ 52.246-24(d)(1).

lla

argued that its liability was limited by contractual terms

similar to the HVIC. /d. at 459-60. After a bench trial, the

district court dismissed the case, noting that the limitation of

liability was stated in “broad terms” and did not violate pub-

lic policy. /d. at 460-63. The Eighth Circuit affirmed the

dismissal. /d. at 465.

Not surprisingly, the parties disagree as to whether and

how the United States Cartridge Co. decision should affect

our disposition of this case. We think that the district

court correctly distinguished the two cases. See Roby I, 73

F.Supp.2d at 911-12 (emphasizing “the emergency situation”

of war in United States Cartridge Co. and contrasting the

“extensive governmental control of a prime contractor” in

that case with the “limited governmental monitoring” in the

case at bar). Moreover, we believe that the Government’s

public policy argument in this case is stronger than it

was in United States Cartridge Co., where the Eighth Cir-

cuit concluded:

If this contract were to be regarded as one creating the

conventional relationship between the Government and a

commercial corporate contractor not subject to Govern-

ment supervision and control, for the supplying of goods

or services, and if the provisions limiting liability were

to be viewed merely as an attempt to relieve such a

contractor from liability for its own fraud, the Govern-

ment’s argument [that the limitation of liability was

void] might perhaps be unanswerable.

But this was not a conventional Government contract

made under normal conditions; it was an unusual ar-

rangement made to meet a crisis... . “The industrial

units thus created are unique. * * * These plants

embody a new and tripartite relationship among Govern-

ment, labor, and management.”

United States Cartridge Co., 198 F.2d at 464-65 (internal

citation omitted). The contract in this case was a conven-

Ome 2 em tee ere acts

12a

tional one for the remanufacture of helicopters almost entirely

during peacetime, and Boeing was not subject to Government

supervision or control. These differences suggest that the

limitation of liability in United States Cartridge Co. allocated

risks in a way much more favorable to the defendant than

does the HVIC. In short, we do not read the HVIC as an

agreement by the Government to assume the risk of damages

to high-value items that it sustains because of FCA violations.

Boeing implores us to hold the Government to its con-

tractual responsibilities and points us to the Fourth Circuit’s

recent decision in United States v. Bankers Insurance Co.,

245 F.3d 315 (4th Cir.2001), where the question on appeal

was “whether the existence of an FCA claim precludes

arbitration of a contract dispute involving the Government.”

Id. at 318. The contract dispute concerned a federal agency

and a private insurance company that had agreed to arbitrate

any misunderstandings or disputes. Jd. at 317-18. The

Government contended that the Attorney General was not

bound by the arbitration agreement because (1) he had not

been a party to the agreement, id. at 319, and (2) arbitration

would impair his exclusive authority to enforce the FCA. Jd.

at 324. Unpersuaded by these arguments, the Fourth Circuit

ultimately required the Government to submit to nonbinding

arbitration before litigating the FCA claim. /d. at 324-25.

According to Boeing, the holding in Bankers Insurance

that the Government must satisfy its contractual obligations

supports the proposition in this case that the Government may

comply with the HVIC only by refraining from seeking

damages under the FCA. That the Government is bound by

the contracts that its authorized officials sign is incon-

trovertible. However, we cannot as readily agree with the

inference that Boeing draws from Bankers Insurance for the

resolution of this case. The Fourth Circuit recognized that

FCA claims are “premised on a unique statutory right” and

explicitly noted that “the statutory authority of the Attorney

13a

General [to enforce the FCA would] not [be] comprc.nised

by” making the Government honor its previous agreement to

arbitrate. Bankers Ins., 245 F.3d at 325. In other words, the

contract in Bankers Insurance merely deferred the litigation

of the FCA claim until the nonbinding arbitration process had

been completed.

In this case, however, Boeing’s interpretation of the HVIC

would absolutely foreclose the Government from recouping

anything more than a $10,000 civil penalty for damages

sustained because of a false claim for a high-value item, when

the damages sustained could be far greater than the general

$100,000 threshold for such items. Given Congress’s explicit

recognition while amending the FCA “that a large number of

fraud cases and many of the larger-dollar cases arise out of

Department of Defense contracts,’ H.R.Rep. No: 99-660,

at 20,° it strikes us as incongruous that the HVIC would

relieve contractors for high-value items from the FCA’s dam-

ages provision. After all, the motivating purpose of the FCA

is to combat and to deter fraud, which would not be served in

the context of defense contracts by the civil penalty alone.

In its brief, Boeing expounds at length on the negative

implications, both fiscal and otherwise, of holding military

contractors liable under the FCA for damages to high-value

items. We agree with the Government and Roby that we

should leave any revision of the FCA or the HVIC to

Congress. In the case before us, Boeing was contractually

°See also S.REP. No. 99-345, at 2-3 (1986), reprinted in 1986

U.S.C.C.A.N. 5266, 5267 (“In 1985, the Department of Defense Inspector

General, Joseph Sherick, testified that 45 of the 100 largest defense con-

tractors, including 9 of the top 10, were under investigation for multiple

fraud offenses. Additionally, the Justice Department has reported that in

the last year, four of the largest defense contractors, General Electric,

GTE, Rockwell and Gould, have been convicted of criminal offenses

while another, General Dynamics, has been indicted and awaits trial.”

(citations omitted)).

l4a

required to ensure the quality of the parts used for the

remanufacture of the Army’s helicopters; its failure to do so

resulted in the Government’s acceptance and use of a

helicopter that was not flight-ready and the subsequent loss of

the helicopter. The HVIC does not foreclose the FCA as a

means for the Government to recover damages for the loss of

Aircraft 89-0165.

C. FCA Damages

The crux of this case is the appropriate measure of

damages under the FCA, which simply provides for “3 times

the amount of damages which the Government sustains

because of the act of th[e] person” who submitted the false or

fraudulent claim. 31 U.S.C. § 3729(a). We have previously

observed that FCA damages “typically are liberally calculated

to ensure that they ‘afford the government complete indem-

nity for the injuries done it.’” United States ex rel. Compton

v. Midwest Specialties, Inc., 142 F.3d 296, 304 (6th Cir.1998)

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

549, 63 S.Ct. 379, 87 L.Ed. 443 (1943)). “[T]he government

is entitled to full damages where it proves it received no value

at all.” Jd.

In Marcus, the Supreme Court indicated that “restitution to

the government of money taken from it by fraud” was the

motivating purpose of the FCA; therefore, “the device of

[then-] double damages plus a specific sum was chosen to

make sure that the government would be made completely

whole.” Marcus, 317 U.S. at 551-52, 63 S.Ct. 379. Three

decades later, in United States v. Bornstein, 423 U.S. 303, 96

S.Ct. 523, 46 L.Ed.2d 514 (1976), the Supreme Court

understood the baseline to be “the Government’s actual

damages,” measured as “equal to the difference between the

market value of the [goods] it received and retained and the

market value that the [goods] would have had if they had

been of the specified quality.” /d. at 316 & n. 13., 96 S.Ct.

523 The Bornstein Court favored this formula because it

lSa

“maximizes the deterrent impact of the [then-] double-

damages provision and fixes the relative rights and liabilities

of the respective parties with maximum precision.” /d. at

317, 96 S.Ct. 523.

In this case, the district court held that the Government

could recover damages under the FCA that were “the direct,

proximate, and foreseeable result of the claims submitted by”

Boeing for Aircraft 89-0165; Boeing had argued that its lia-

bility at most was limited to “the price of a fully-conforming

transmission gear.” Roby II, 79 F.Supp.2d at 895. On appeal,

Boeing continues to maintain that “the proper measure of

direct FCA damages is the amount wrongfully paid on the

claim,” Reply Br. at 23, or the value of the defective Speco

gear. However, Boeing now concedes that damages under

the FCA could equal—but never exceed—the amount of the

claim, which in this case would be the approximately $4.1

million value of Boeing’s contract to remanufacture Aircraft

89-0165.

Negotiation strategy aside, we are at a complete loss as to

how Boeing can understand “the amount wrongfully paid” to

be limited to “the portion of the contract price allocated to the

defective gear.” Reply Br. at 21. According to our reading of

the contract and the subsequent invoice, Boeing billed the

Government for the remanufactured helicopters as units, not

as assemblages of assorted parts. Cf Bornstein, 423 U.S. at

307, 96 S.Ct. 523 (invoices for radio kits that contained

falsely marked electron tubes “included claims for payment

for the falsely marked tubes”). The fact that every com-

ponent but one conformed to contract requirements is not

legally significant when the defective gear was “flight criti-

cal” and thus necessary for flight. Because the Speco

gear was defective, Aircraft 89-0165 was defective, making

Boeing’s entire claim for payment false for the purposes of

the FCA.

l6a

This understanding of Boeing’s FCA violation informs our

analysis of how to calculate damages under the FCA. Under

the “diminished value” or “benefit of the bargain” test, which

Boeing cites as controlling, we subtract the market value of

what the Government received from what it was promised.’

” See generally JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM

ACTIONS § 3.01[D][1], at 3-34 to 3-35 (2d ed. Supp.2002). The facts of

Bornstein, where the Supreme Court articulated this rule, are similar to

those of this case and deserve some attention. Bornstein involved a

Government contract for radio kits, which were to contain electron tubes

of a certain quality. Bornstein, 423 U.S. at 307, 96 S.Ct. 523. The

subcontractor who supplied these tubes sent tubes that were falsely

marked as meeting the Government’s specifications. /d. The contractor

then incorporated the falsely marked tubes into the radio kits and shipped

them to the Government. /d. The contractor’s invoices were thus false

because they “included claims for payment for the falsely marked tubes

that had been supplied” by the subcontractor. /d. After recovering

damages for the tubes from the contractor, presumably by settlement, the

Government brought an FCA action against the subcontractor. /d. at 307-

08, 96 S.Ct. 523. In holding “that the Government’s damages should be

doubled [as the FCA then provided] before any compensatory payments

are deducted,” id. at 314, 96 S.Ct. 523, the Bornstein Court stated that

those damages were “equal to the difference between the market value of

the tubes it received and retained and the market value that the tubes

would have had if they had been of the specified quality.” /d. at 317 n.

13, 96 S.Ct. 523.

We recount these facts in detail because the similarity between Born-

stein and this case might prompt the all-too-easy substitution of “gear” for

“tubes” in the equation quoted above. In both cases, the claim for pay-

ment was false because of a defective part that a subcontractor had

supplied. However, as the district court correctly noted, “Bornstein was

concerned only with the issue of damages and penalties against a sub-

contractor who causes the prime contractor to submit false claims.” Roby

II, 79 F.Supp.2d at 893 n. 47. The defendant in this FCA action, of

course, is Boeing, not Speco. We cannot know why the Government

settled with the contractor in Bornstein for only the cost of the falsely

marked tubes when it had contracted and paid for radio kits—perhaps the

tubes did not affect the reliability of the radios. See Bornstein, 423 U.S. at

318-20, 96 S.Ct. 523 (Rehnquist, J., concurring in part and dissenting in

part) (describing the subcontractor’s scheme). In this case, however, the

17a

That the contract in this case was for the remanufacture rather

than the sale of a helicopter gives us some pause, but

ultimately does not affect the issue before us.* We will

therefore frame the following discussion in terms of the

market value of remanufactured helicopters.

Under Compton, the market value of Aircraft 89-0165 as

delivered was zero. Boeing, of course, would disagree, and

we are aware of the fact that the Army did get fifty-six hours

of flight time from the helicopter, when the warranty was

good for two-hundred flight hours. However, as we con-

cluded in Compton:

[A] setoff based on value purportedly received would

create a perverse incentive system in which govern-

ment contractors could endanger the lives of American

soldiers by providing substandard materiel, and the

Army would be deterred from correcting the danger

because it would be forced to bear the cost of any use it

received from the substandard goods before their defects

were discovered.

Compton, 142 F.3d at 305 n. 8. We believe that this policy

argument, which was compelling with respect to untested

jeep brake-shoe kits, id. at 297-98, has even more force in the

context of this case.

Compton is not as helpful in determining the market value

of Aircraft 89-0165 as promised. In Compton, we held that

the Government could recover the contract price because

Speco gear was not simply of lesser quality than specified; it was a

defective flight-critical part, which made the loss of Aircraft 89-0165

inevitable.

* Again, we note that the question certified for appeal is “[w]hether the

[Government] can recover damages under the [FCA] for loss of a heli-

copter resulting from the failure of a defective flight-critical compon-

ent part.” J.A. at 214. The answer to this question does not depend on

whether the underlying contract was for remanufacture or sale.

18a

damages were the same whether we applied the diminished-

value test, as the defendant urged, or the Uniform Com-

mercial Code’s rejection provision. /d. at 305. However,

contrary to Boeing’s reading of the case, Compton does not

necessarily signify that the recovery of damages in FCA cases

is “limited to the contract price originally paid.” Reply Br.

at 26. Although the Government apparently did not claim

that its full or actual damages were more than the contract

price in Compton, it does so in this case.

Boeing characterizes the Government’s claim as one for

replacement costs, which it argues are consequential damages

and thus unrecoverable under the FCA. We think that this

characterization confuses the issue. Under the diminished-

value test that Boeing itself favors, actual damages depend on

“market value.” Bornstein, 423 U.S. at 317 n. 13, 96 S.Ct.

523. Boeing conflates market value and contract price, but

the concepts are clearly distinct. Cf. U.C.C. § 2-713 (2001)

(“[T]he measure of damages for non-delivery or repudiation

by the seller is the difference between the market price at the

time when the buyer learned of the breach and the contract

price ...”). In this case, the Government contracted for

Aircraft 89-0165 to be remanufactured to specific standards.

The helicopter as received by the Government did not meet

those specifications. Therefore, the Government’s damages

equal the difference between the market value of Aircraft 89-

0165 as received (zero) and as promised. We do not presume

to estimate the market value of a remanufactured helicopter.

For our present purposes, we answer the question certified for

interlocutory appeal in the affirmative—that is, the Govern-

ment may recover damages under the FCA for the loss of a

helicopter that results from the failure of a defective flight-

critical component part. We note that these damages do not

represent replacement costs.” Because the Government did

° The Federal Circuit has observed that the diminished-value test is

“the normal measure of damages” in FCA cases but held that “[i]n the

19a

not contract for a new helicopter, it may not recover the

roughly $13 million value of the helicopter bought to replace

the destroyed Aircraft 89-0165. However, it may recover the

benefit of its bargain with Boeing, which would be the value

that Aircraft 89-0165 would have had if it had been of the

specified quality.

III. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment of

the district court.

unusual case in which actual loss in value cannot be ascertained, the

injured party may recover the replacement cost, but only if that cost is not

clearly disproportionate to the probable loss in value caused by the defects

in question.” Commercial Contractors, Inc. v. United States, 154 F.3d

1357, 1372-73 (Fed.Cir.1998). “The cost of remedying defects is not

regarded as disproportionate if the defects significantly affect the integrity

of a structure being built. In that setting, the injured party is entitled to

recover the cost of remedying the defects despite the fact that the cost may

be very high.” /d. at 1372.

So instructed, we observe that if the actual loss in Aircraft 89-0165’s

value could not be ascertained, then the Government would be entitled

under Commercial Contractors to recover the very high cost of replacing

the downed helicopter, because the defect concerned a flight-critical gear

and significantly affected the structural integrity of the helicopter.

20a

BOGGS, Circuit Judge, dissenting.

I respectfully dissent from the court’s restrictive reading of

the HVIC and its resultant holding that the Government can

sue Boeing under the FCA to recover damages for Aircraft

89-0165.

As the court admits, the HVIC “limits contractor liability

for high-value items in fairly broad terms.” Majority Op. at

643 (emphasis added). The plain language of the HVIC states

that, with limited exceptions that the parties agree are not

applicable to the present case, “the Contractor shall not be

liable for loss of or damage to property of the Government

. that (1) occurs after Government acceptance of the

supplies delivered under this contract and (2) results from any

defects or deficiencies in the supplies.” 48 C.F.R. § 52.246-

24. Put most simply, this case is about the Government trying

to do exactly what the plain and obvious wording of its

contractual term says it will not do: recover from “the

Contractor” for the “loss of or damage to property of

the Government.”

The court’s holding—that the Government can seek under

the FCA exactly what it has contracted through the HVIC not

to—flows in large part from the inherent tension the court

sees between the FCA and the HVIC. The court states well

the history and purpose of each—the FCA was adopted to

combat fraud perpetrated on the Government by its contrac-

tors, and the HVIC is included as a self-insurance provision

in certain Government procurement contracts to limit the

insurance that contractors must acquire (and the resultant

costs those contractors pass on to the Government). Majority

Op. at 641-42. The court then explains that if the HVIC is

given a natural reading, it will conflict with the goals of the

FCA. Majority Op. at 645.'

' | note that the court mentions in passing the district court’s reading of

the HVIC, which would alleviate any perceived tension between the

2la

However, the court unnecessarily complicates the case.

Contrary to the court’s reading, the FCA and HVIC can easily

be read in harmony. The HVIC does not overwrite or

preempt the FCA by relieving contractors of liability for

fraud. The FCA is still applicable to the contractors; the only

difference made by the HVIC is that the Government has

agreed that it will not hold the contractors liable under any

theory for the value of the helicopter. Accordingly, the

Government can sue the contractors under the FCA and seek

a finding of liability for fraud; the Government merely can

not seek damages for the value of the equipment. The other

penalties under the FCA are still applicable, and if the

Government feels that it has been defrauded, it may debar

HVIC and the FCA by limiting the HVIC’s effect to only contractual

remedies; in this reading, the HVIC would be completely inapplicable to

the Government’s statutory remedy under the FCA. Majority Op. at 642

(citing Roby /, 73 F.Supp.2d at 910). To the extent that the court relies on

this distinction, it appears incorrect. First, while the word contractual is

used to modify the remedies limited by the HVIC in its enabling regu-

lation, that modifier does not appear in the form contract language set out

in the regulations, 48 C.F.R. § 52.246-24, or in the parties’ contract

(which incorporated the form language). Therefore, the clause as it

appears in the parties’ contract facially covers all remedies. Second, the

word contractual as used in the enabling regulation for the HVIC is open

to interpretation. In addition to the definition the district court gave it,

that its protection only applies to contract remedies the Government might

have against Boeing, the use of the word contractual might merely be

shorthand for any remedies that come out of the relationship embodied in

the contract. Indeed this broader reading is more in line with the history

of the HVIC. For example, in the case that prompted the Government to

turn its unwritten practice of self-insurance into a formal rule, Australia v.

Lockheed Aircraft Corp. & Menasco Mfg. Co., No. 69-1623-WPG

(C.D.Cal. Jan. 10, 1972), the practice was discussed as a defense to

contract, products liability, and negligence claims. Obviously neither

negligence nor products liability claims are contract remedies in the

narrow sense; they do not arise from a contract, just as a fraud claim does

not. However, they can all arise out of a relationship between the parties

that is based in a contract.

22a

Boeing from Government contracts. In short, the better

reading of the HVIC is as an assumption of risk clause; the

Government has contractually agreed to assume the risk of

the loss of the helicopter, and while legal means remain open

to the Government against Boeing (including that pursuant to

the FCA), the Government can not seek recompense for the

value of the equipment.”

There is support in both the wording and purpose of the

HVIC for enforcing a natural reading of the contractual

clause—that the Government has contracted away its right to

seek property damages from suppliers of high-value items.

First, the wording of the HVIC supports the proposition

that it was intended in the usual case to protect contractors

from Government actions utilizing a fraud theory. Pursuant

to it, contractors are not liable for any damages for the loss of

a high-value item caused by a product defect, unless one of

the few listed exceptions applies. As the court points out, one

of those exceptions is for “willful misconduct or lack of good

faith” on the part of managerial personnel. Majority Op. at

643 (citing FAR § 52.246-24(b)). Though not using the word

“fraud,” willful misconduct and a lack of good faith fairly

? Contrary to the court’s contention, the argument that the Government

can contract away part of its rights under the FCA is supported by the

recent Fourth Circuit decision in United States v. Bankers Insurance Co.,

245 F.3d 315 (4th Cir.2001). In that case, the Government was held to an

arbitration agreement contained in a contract it had signed when the

Government sought instead to bring an FCA action in court against the

other party to the contract. The court tries to distinguish Bankers Insur-

ance by noting that the contract at issue in that case permitted the

Government the unfettered right to sue under the FCA after it engaged in

the required arbitration. Majority Op. at 645. Nevertheless, the reasoning

of Bankers Insurance still applies to the case at hand: “[T]he Government

has no special right to ignore its contract responsibilities. The Govern-

ment should comply with its contract obligations, and it cannot avoid

them merely by invoking a statutory civil claim, such as one contemplated

under the FCA.” Bankers Insurance, 245 F.3d at 324.

23a

describe fraud. Therefore, the HVIC expressly exempts from

protection losses due to fraud on the part of managerial

personnel. The negative pregnant, therefore, would be that

the HVIC does protect contractors from losses due to non-

managerial fraud (which the parties have stipulated to be the

extent of the fraud, if any, in the present case).

Second, the purpose of the clause supports the proposition

that it was intended to provide protection no matter the legal

theory. In order to explain why, however, I provide a slightly

broader history of the HVIC.

As the district court in this case explained, the clause

represents a long-standing Department of Defense (DOD)

practice of self-insuring for damage to high-value items. See

Roby I, 73 F.Supp.2d at 908-09. At first it was just a practice,

under which the DOD would not hold manufacturers liable

for the loss of this type of equipment, regardless of whether

the DOD found any fault, negligence, or breach of warranty

to have occurred on the part of the manufacturer. /d. at 909.

Then, in the 1960s, the landing gear on an airplane purchased

by the United States military and resold to the Australian

Navy failed, resulting in the destruction of the plane. The

Australian government sued the manufacturer, seeking tort,

contract, and products liability damages. /bid. Referring to

the long-standing practice of the Government self-insuring

against the loss of military equipment, a California district

court found that the United States Navy could have been

estopped from pursuing any claim based on the loss of the

aircraft, because the airplane industry was aware of and relied

upon this practice. See Australia v. Lockheed Aircraft Corp.

& Menasco Mfg. Co., No. 69-1623-WPG (C.D.Cal. Jan. 10,

1972). Specifically, the court found that the self-insurance

practice had two ceniral purposes: (1) to encourage manufac-

turers not to obtain liability insurance, the cost of which

would be passed on to the Government; and (2) to encourage

the manufacturers to cooperate fully in investigating the cause

of equipment failures. /d. at 2-3.

24a

As the district court in this case pointed out, around this

time, the United States Commission on Government Pro-

curement issued a report stating similarly, that defense

contractors had long “[u}nderstood that the general practice of

the government in military contracting was to accept the risk

for loss or damage. . . .” Roby J, 73 F.Supp.2d at 909. Still,

the Menasco case shook the faith of Government contractors

in the protection offered by the unwritten policy. In response,

in 1971, the DOD issued Defense Procurement Circular 86,

which, as the court notes, put in writing this limited liability.

Majority Op. at 642 n. 2.

The original 1971 version of the DOD’s self-insurance

policy stated that the clause did not apply “when the defects

or deficiencies in such supplies . . . resulted from fraud or

gross negligence as amounts to fraud, on the part of any

personnel of the Contractor.” DPC 86 at 4 (emphasis added).

However, as the court notes, defense industry representatives

warned that this would defeat the purpose of the clause, and

when the clause was reissued in 1974, the phrase had been

removed. Majority Op. at 643 n. 4. It was replaced with a

more limited exception, which—much like the one in the

current HVIC—excluded only “willful misconduct or lack of

good faith on the part of any of the Contractor’s directors or

officers, . . . managers, superintendents, or other equivalent

representatives. ...”” ASPR 7-104.45 (July 1, 1974).

Importantly, the Government made this change expressly

recognizing its effect. In a memorandum discussing pro-

posed revisions to the HVIC, the Armed Services Procure-

ment Regulations Committee, which promulgated the HVIC,

explained that the removal of the original fraud provision

would “eliminate contractor’s [sic] responsibility for damage

to Government Property resulting from defective items and

caused by the fraud or gross negligence as amounts to fraud

of any personnel of the contractor.” J.A. at 652 (January 14,

1972). In 1984, the HVIC regulation relevant to this case

25a

became effective and provides substantially the same pro-

tection to military contractors providing high-value items.

See 48 C.F.R. § 52.246-24.

From its history, it is clear that the DOD’s self-insurance

policy was intended to preclude liability for the loss of certain

Government equipment—even when such loss was the result

of non-managerial fraud—so that contractors would not

purchase liability insurance, which otherwise would be costly

and would be a cost passed on to the Government. The plain

language of the HVIC at issue in the present case conforms to

that purpose. However, the court’s decision today does not;

under it, contractors will have to insure against potential FCA

liability for treble damages for the loss of high-value items

resulting from actions that might be held to be fraudulent on

the part of any personnel. Presumably, this cost will be

passed on to the Government.

In sum, the court today holds that the HVIC does not apply

in a situation wherein its plain terms and historical purpose

seem to suggest it does apply—a contractor being held liable

to reimburse the Government for the loss of a high-value

item. Now, the Government argues that this case is not

about recovering the amount lost when the helicopter was

destroyed, but is instead about holding Boeing responsible for

fraud. However, if the Government were really only con-

cerned about fraud, it could seek the other penalties pos-

sible under the FCA or debar Boeing from participation in

future Government contracts. Instead, the Government seeks

trebled payment for the helicopter.

As explained above, if this court had held the HVIC

applicable to Government actions for reimbursement under

the FCA, it would not have been overriding or preempting the

FCA. It would, instead, merely have been upholding the

obvious coverage of a standard assumption of risk clause,

under which the Government agreed not to exercise certain

rights it would otherwise have in exchange for a benefit.

26a

This court would not have been holding that the FCA can not

be relied upon by the Government; it would merely have been

saying that the Government, in accordance with the express

language and historical purpose of the HVIC, can not seek

compensation for the loss of the helicopter under any theory,

including under the FCA. Because the court does not so hold,

I must respectfully dissent.

27a

APPENDIX B

UNITED STATES DISTRICT COURT,

S.D. OHIO,

WESTERN DIVISION.

No. C-1-95-375.

UNITED STATES OF AMERICA ex rel. BRETT Rosy,

Plaintiff,

THE BOEING COMPANY,

Defendant.

Dec. 30, 1999.

ORDER

SPIEGEL, Senior District Judge.

This matter is before the Court on Defendant’s Cross-

Motion for Partial Summary Judgment as to the Measure

of Damages (doc. 340); Government’s Response (doc. 366);

Relator’s Response and Cross-Motion for Summary

Judgment as to the Measure of Damages (doc. 367);

Defendant’s Reply (doc. 401); Aerospace Industries of

America, Inc’s Motion in Support of Defendant’s Cross-

Motion as to the Measure of Damages (doc. 402); Relator’s

Reply (doc. 432); and Defendant’s Motion Requesting the

Court to Rule on Defendant’s Cross-Motion for Partial

Summary Judgment as to the Measure of Damages

(doc. 556).

BACKGROUND

On May 22, 1995, Relator Brett Roby (hereinafter,

“Relator”) filed this action under seal pursuant to Title 31

28a

U.S.C. § 3730(b) on behalf of himself and the United States

Government (hereinafter, “the Government” or “the United

States”) in the United States District Court for the Southern

District of Ohio (doc. 2). Relator alleges that The Boeing

Company (hereinafter, “Boeing” or “Defendant”) and its

supplier, The Speco Corporation (hereinafter, “Speco”),'

violated the False Claims Act, Title 31 U.S.C. § 3729, et seq.,

by manufacturing and selling defective transmission gears to

the United States via Boeing’s CH-47(D) Chinook Army

helicopters” (hereinafter, “CH-47(D) helicopters”) (/d.). On

April 30, 1997, the Government intervened and filed an

Amended Complaint against Boeing (doc. 34). In the

Amended Complaint, the Government alleges that Speco

manufactured defective, transmission gears at its Springfield,

Ohio facility before Boeing installed the gears in the CH-

47(D) helicopters, and, thereafter, supplied the gears to the

United States Army (/d.). The Amended Complaint was

unsealed on May |, 1997.

Government and Relator allege in Count I of the Amended

Complaint that Defendant submitted false claims under Title

31 U.S.C. § 3729-3133, as amended by Pub.L. 99-562, 100

Stat. 3153 (1986) (doc. 34). Specifically, the Government

contends that in 1991, one of the Speco-made gears failed in

flight, while in service in Saudi Arabia, leading to the total

loss of a CH- 47(D) helicopter and all of its contents, at an

' Although Speco was initially a party to this action, as‘ the original

maker and supplier of the gears in question to Boeing, Speco filed for

bankruptcy during the course of the present litigation. The trustee

appointed by the United States Bankruptcy Court subsequently settled this

action with the Government and Relator, with the approval of the

bankruptcy court on behalf of Speco and its creditors.

2 The CH-47(D) Chinook helicopter is the Army’s medium, tactical,

heavy-lift, and transport helicopter, and is normally operated and crewed

by a total of four soldiers (doc. 34).

29a

estimated loss of approximately $10 Million (/d.).° In

addition, the Government alleges that in 1993 another Speco-

made gear failed in another helicopter incident resulting in a

hard landing near Ft. Meade, Maryland,* causing approxi-

mately $1 million in damage to that helicopter (/d.).° Relator

alleges that at a total cost to the United States of about

$2,100,000,000, Boeing re-manufactured the Army’s fleet of

Chinook CH-47 A/B/C model helicopters into Chinook CH-

47(D) and MH47D/E helicopters, and the contracted work to

those helicopters was performed in an “incompetent and

dangerous manner” by Defendant (doc. 367). Moreover,

Relator asserts that each of these “unsuitably, re-manu-

factured helicopters” were delivered by Boeing to the

Government by operation of a claim for payment in the form

of a “Standard Form DD-250” that falsely represented that

’ Specifically, Relator asserts that “Aircraft 89-0165” (a CH-47(D)

helicopter) was shipped by the Army, after delivery from Boeing, to the

Persian Gulf for use in Operation Desert Shield/Desert Storm (doc. 367).

Relator alleges that on January 11, 1991, during its 56th hour of operation,

the defective transmission gear exploded, causing Aircraft 89-0165 to

crash and catch fire (/d.). The resulting fire consumed the entire heli-

copter, a HMWWW truck, ammunition, and various essential equipment,

including a howitzer and its tow vehicle (/d.). Relator contends that the

United States Army replaced Aircraft 89-0165 by buying a new CH-47(D)

fully-equipped helicopter at a replacement cost of more than $12.7

million (/d.).

* Relator submits that approximately eighteen months after the Saudi

crash, and a year after Boeing reinspected the Speco-made gears, another

transmission gear also broke due to a grinding crack and proximately

caused the second helicopter incident at Ft. Meade, Md. (doc. 367).

Relator alleges that about a half-a-dozen more Speco-made gears were

pulled from service or inventory as a result of the 1993 Ft. Meade incident

(/d.).

* Although there were reported injuries and the loss of military

equipment associated with the helicopter incidents in question, there were

no reported fatalities in either the Saudi crash or the Ft. Meade hard

landing (/d.).

30a

the contracted helicopters conformed to all of the specified

contract requirements (/d.). Relator avers that it has evidence

that Defendant acted in a reckless manner by installing the

defective gears without adequate inspection (/d.). For

example, Relator alleges that Boeing for at least ten years

prior to the Saudi crash had prior knowledge that the

transmission helicopter gears were prone to certain grinding

cracks and breakage (/d.). Relator further alleges that the

material from which the gears were made are especially

susceptible to exactly the kind and type of burning and

cracking that resulted in the crash of Aircraft 89-0165 (/d.).

Moreover, the Government and Relator aver in the

Amended Complaint that “[b]y virtue of the acts described

above, Boeing, by and through its officers, agents, and

employees, knowingly submitted, and caused to be submitted,

false or fraudulent claims for payment or approval to [its]

officers, employees, or agents of the United States Govern-

ment” (doc. 34). The Government concludes Count I with the

contention that “[b]y reason of these payments made upon

these false claims, the United States Government has been

damaged as a result of Defendant’s violations of the False

Claims Act, arising under 31 U.S.C. §§ 3729(a)(1), (2), (3) &

(7), for damages to be determined at trial. . . .” (/d.).

The Amended Complaint further asserts claims against

Defendant for: (1) payment by mistake, (2) unjust enrich-

ment, (3) breach of contract, and (4) common law fraud (doc.

34). The Government seeks to recover treble damages based

on the value of the first CH-47(D) helicopter and its contents,

for the cost of repairing the second aircraft, and to treble

those damages under the False Claims Act of 1986 (Id.).° In

addition, the Government asserts that it is entitled to treble

° Relator asserts that Boeing paid Speco $4,874 for the cost of the

defective gear involved in the Saudi crash, which Relator estimates to be

less than one percent of the Government’s actual loss (doc. 367).

3la

damages for the delivery of other U:S. Army Chinook heli-

copters with allegedly non-conforming engine transmission

gears that were manufactured by Speco from 1987 to 1995,’

and statutory penalties of $5,0000 to $10,000 for the

submission of each purportedly false claim for the helicopters

in question (Id. ).

In its Answer, Defendant submits a general denial of the

Government’s allegations of false claims, violations of the

False Claims Act, and the resulting compensatory and

statutory damages (doc. 161). Defendant defends by origi-

nally asserting a total of twelve ( 12) affirmative defenses that

would individually or collectively relieve Defendant of all

liability from the Government’s claims (id.).® Specifically,

Defendant’s Fifth Affirmative Defense states that the “United

States cannot recover damages under the False Claims Act for

the two helicopters, or their contents, which the [G]overn-

ment alleges were lost or damaged as a consequence of

defective parts... .” (doc. 340). Defendant asserts that the

False Claims Act precludes recovery for product defects,

’ The Government contends that while the cost of the remanufactured

helicopter involved in the Saudi crash was estimated at about $4 million,

the cost for its replacement was well over $12 million (doc. 34).

* Defendant asserts the following affirmative defenses to the

allegations set forth in the Amended Complaint: (1) failure to state a claim

upon which relief can be granted; (2) the fraud cause of action is time-

barred; (3) the damages sought are barred by the High-Value Items

Clause; (4) estoppel due to the High-Value Items Clause; (5)

consequential damages are not available; (6) no injury; (7) failure to plead

fraud with particularity; (8) laches; (9) express contract; (10) special

damages are not pled with specificity; (11) punitive damages are not pled

with particularity; and (12) equitable estoppel (doc. 161). Note:

Defendant’s Third Affirmative Defense, the High-Value Items Clause,

was dismissed pursuant to this Court’s Order of November 2, 1999

(doc. 554).

32a

consequential damages ® or any other recovery not found in

the statute itself (/d.).

On February 5, 1999, Defendant filed a Cross-Motion for

Partial Summary Judgment as to the Measure of Damages

(doc. 340) asserting that consequential damages are not

recoverable under the False Claims Act. Thereafter, the

Government filed a Response (doc. 366), Relator followed

with his Response and Cross Motion for Summary Judgment

as to the Measure of Damages (doc. 367), and Defendant filed

its Reply on May 28, 1999 (doc. 401). Shortly thereafter,

Relator filed his Reply (doc. 432). In addition, this Court

heard oral arguments on the issue of consequential damages

in relation to the False Claims Act on June 2, 1999 (doc.

444). On November 2, 1999, this Court issued an Order

granting Aerospace Industries of America, Inc.’s (hereinafter,

‘“‘Aerospace’”’) an appearance in this action as Amicus Curiae

and this Court will consider Aerospace’s Motion in Support

of Defendant’s Cross-Motion for Partial Summary Judgment

(doc. 402) in the Court’s rulings on this matter. In addition,

in our November 2nd Order, the Court also dismissed

Defendant’s Third Affirmative Defense, the High-Value

Items Clause, and granted the Government’s and Relator’s

motion for partial summary judgment on that issue (doc.

296) (Id.).'° Finally, on November 12, 1999, Defendant filed

a Motion Requesting the Court to Rule on Boeing’s Cross-

” Defendant argues that the Government’s alleged replacement cost of

over $12 million for the Saudi helicopter is considered to be consequential

damages under the False Claims Act (doc. 340). Therefore, even if

Defendant is found liable for submitting a false claim for the defective

gears to the Government, Defendant avers that, it would be at most liable

to the Government for the cost of the gears, and not the consequential

damages that allegedly follows the submission of the false claim (/d.).

(S.D.Ohio 1999) (doc. 554).

33a

Motion for Partial Summary Judgment as to the Measure of

Damages (doc. 556).

The Court believes it is important to note that, this Order

will only address the primary issue of the applicability of

Defendant’s Fifth Affirmative Defense, which states that,

“consequential damages are not recoverable under the False

Claims Act” (doc. 340). Furthermore, any issues concerning

the merits of the Government’s and Relator’s claims, or

Defendant’s remaining affirmative defenses will not be

addressed by the Court in this Order. The Parties stipulate

that for the purpose of summary judgment only, the Court

may assume that liability against Defendant could be proven

by the Government and Relator by a trial on the merits (docs.

340, 366 & 367). The Parties now move this Court to decide

the purely legal question of what is the proper measure of

damages in relation to the False Claims Act, and, specifically,

are consequential damages available under the Act.

STANDARD OF REVIEW

The narrow question that we must decide on a motion for

summary judgment is whether there exists a “genuine issue as

to any material fact and [whether] the moving party is entitled

to judgment as a matter of law.” Fed.R.Civ.P. 56(c). The

Supreme Court elaborated upon the appropriate standard in

deciding a motion for summary judgment as follows:

entry of summary judgment, after adequate time for

discovery and upon motion, against a party who fails to

make a showing sufficient to establish the existence of

an element essential to that party’s case and on which

that party will bear the burden of proof at trial.

Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548,

91 L.Ed.2d 265 (1986).

The moving party has the initial burden of showing the

absence of a genuine issue of material fact as to an essential

element of the non-movant’s case. Id. at 321, 106 S.Ct. 2548:

34a

Guarino v. Brookfield Township Trustees, 980 F.2d 399, 405

(6th Cir.1992); Street v. J.C. Bradford & Co., 886 F.2d 1472,

1479 (6th Cir.1989). If the moving party meets this burden,

then the non-moving party “must set forth specific facts

showing there is a genuine issue for trial.” Fed.R.Civ.P.

56(e); see Guarino, 980 F.2d at 405.

As the Supreme Court stated in Celotex, the non-moving

party must “designate” specific facts showing there is a

genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct.

2548; Guarino, 980 F.2d at 405. Although the burden might

not require the non-moving party to “designate” facts by

citing page numbers, “‘the designated portions must be

presented with enough specificity that the district court can

readily identify the facts upon which the non-moving party

relies.”” Guarino, 980 F.2d at 405 (quoting /nterRoyal Corp.

v. Sponseller, 889 F.2d 108, 111 (6th Cir.1989), cert. denied,

494 U.S. 1091, 110 S.Ct. 1839, 108 L.Ed.2d 967 (1990)).

Summary judgment is not appropriate if the evidence is

such that a reasonable jury could return a verdict for the non-

moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Conclusory

allegations, however, are not sufficient to defeat a motion for

summary judgment. McDonald v. Union Camp Corp., 898

F.2d 1155, 1162 (6th Cir.1990).

35a

DISCUSSION

I. Introduction To The False Claims Act

A. The “Qui Tam” Provisions of the FCA '"'

The False Claims Act (hereinafter, “the FCA”), which

Congress originally enacted in 1863, is the government’s

“primary litigative tool for combating fraud” against the

federal government. S.Rep. No. 99-345, 99th Cong., 2d Sess.,

at 2, reprinted in 1986 U.S.C.C.A.N. 5266. The Act

authorizes both the Attorney General and private persons to

bring civil actions to enforce the Act. 31 U.S.C. § 3730

(1999). Congress amended the FCA in 1986 to increase

the financial and other incentives for private individuals to

bring suits under the Act in the hopes of enlisting the aid of

the citizenry in combating the rising problem of

“sophisticated and widespread fraud.” S.Rep. No. 99-345,

at 2, 23-24 (1986).

Section 3730(b) of the FCA as now constituted provides

that a person may bring a civil action for a violation of the

substantive provisions of the Act “for the person and for the

United States Government.” 31 U.S.C. § 3730(b)(1). The

action must be brought in the name of the government. /d.

An action under this provision is termed a “qui tam”' suit,

and the person who brings such an action is referred to as a

'' The following summary of the history of the FCA was compiled in

its entirety by a review of the Congressional Record and from the relevant

portions of the Seventh Circuit’s decision in United States ex rel. Kelly v.

Boeing Co., 9 F.3d 743, 745-46 (9th Cir.1993) (holding that a former

employee of a government contractor who brought an action against the

contractor under the qui tam provisions of the FCA, met the Article III

standing requirements and did not violate the Due Process Clause of the

U.S. Constitution).

? The term “qui tam” is short for “qui tam pro domino rege quam pro

se imposo sequitur,” which is interpreted as he “who brings the action as

well for the king as for himself.” Bass Anglers Sportsman’s Soc’y of

America v. U.S. Plywood-Champion Papers, Inc., 324 F.Supp. 302, 305

(S.D.Tex.1971).

36a

| “relator” or “informer.” Jd. If the government files an ac-

| tion to enforce the FCA, a would-be relator may not later

bring any action based on the same underlying facts. /d.

§ 3730(e)(3). Nor may a private party litigate a qui tam suit

| based on the public findings of a government investigation or

| on disclosures made in the news media, unless that party is an

| original and independent source of the information on which

| the complaint is based. /d. § 3730(e)(4)(A)-(B).

| Upon bringing a qui tam action, a relator must serve on the

government a copy of the complaint and written disclosure of

| substantially all material evidence and information the relator

possesses. The complaint must be filed in camera and remain

under seal for at least sixty (60) days so that the government

may investigate the relator’s allegations; though upon a

showing of “good cause,” the government may move the

court for an extension of the sixty (60) day period. /d.

§ 3730(b)(2), (3). By the end of the period provided for the

government to complete its investigation, the government

must decide whether to intervene and proceed with the action,

“in which case the action shall be conducted by the

government;””” or whether to decline to take over the action,

“in which case the person bringing the action shall have the

right to conduct the action.” /d. § 3730(b)(4)(B).

The original version of the FCA allowed anyone to bring a

qui tam action and receive up to fifty percent (50%) of the

amount recovered. S.Rep. No. 99-345, at 8-10 (1986). This

broad provision led to abuse and in 1943, following the

Supreme Court’s decision in United States ex rel. Marcus v.

Hess, 317 U.S. 537, 546-47, 63 S.Ct. 379, 87 L.Ed. 443

(1943)," Congress amended the statute. The 1943 version of

Id. § 3730(b)(4)(A).

'* In Marcus, the Supreme Court held that a relator could bring a qui

i fam action even though the action was based entirely upon information

1 contained in the government indictment. /d., 317 U.S. at 547-48, 63 S.Ct.

379 (1943).

37a

the FCA precluded actions “based on evidence or information

the Government had when the action was brought.” United

States ex rel. Stinson v. Prudential Ins. Co., 944 F.2d 1149,

1153 (3d Cir.1991). This led to claims being barred even in

cases where the qui tam supplied the information to the gov-

ernment before filing the claim. See United States ex rel.

State of Wis. v. Dean, 729 F.2d 1100, 1106-07 (7th

Cir.1984).'°

In 1986, Congress again amended the FCA in order “to

encourage any individual knowing of governmental fraud to

bring that information forward.” S.Rep. No. 99-345, at 2

(1986). According to the Third C‘rcuit, in order “[t]o

revitalize the gui tam provisions, the amendment provided

incentives for private enforcement, including increased

monetary awards, adopted a lower burden of proof, and

allowed a qui tam to remain a party in the action even if the

government intervenes.” Stinson, 944 F.2d at 1154 (1991).

B. FCA Case Law Applied

As amended in 1986, the False Claims Act provides that

the terms “‘knowing and knowingly’ mean that a person, with

respect to information: (1) has actual knowledge of the

information, (2) acts in deliberate ignorance of the truth or

falsity of the information, or (3) acts in reckless disregard of

the truth or falsity of the information, and no proof of specific

intent to defraud is required.” 31 U.S.C. § 3729(b).

The archetypal gui tam action is filed by an employee at a

private company who discovers his employer has over-

charged for services or supplies under a government contract.

See United States ex rel. Green v. Northrop Corp., 59 F.3d

953, 968-69 (9th Cir.1995) (holding that a former employee

of a federal contractor, who had signed a release of all claims

'S The holding in Dean, was subsequently superseded by statute in a

number of states (including Illinois, California, Maryland, Oklahoma,

Virginia, Wisconsin, and Vermont).

38a

against the contractor in settlement of an earlier litigation,

then the same employee brought a qui tam action against the

same contractor under the FCA, and, nonetheless, was

allowed to sue that confractor). However, FCA actions have

also been sustained under theories of supplying substandard

products ox services;'® false negotiation, including bid rigging

and defective pricing; '’ and false certification’®.

In United States v. Bornstein, 423 U.S. 303, 311, 96 S.Ct.

523, 46 L.Ed.2d 514 (1976), the Supreme Court reviewed the

FCA in order to differentiate contracts from claims'” that

were submitted under contracts, holding that only the latter

gave rise to liability under the FCA. The Supreme Court heid

that the defendant was liable under the statute because he

engaged in conduct that caused the false claims to be

submitted to the United States, and the Court explained that:

[w]hile it is true that no false claims would have been

submitted had [the defendant] and [its prime contractor]

not entered into a contractual relationship, the entry into

that relationship did not in itself cause the submission of

'” See United States v. Ehrlich, 643 F.2d 634 (9th Cir.1981); see also

United States ex rel. Compton v. Midwest Specialties, Inc., 142 F.3d 296

(6th Cir.1998).

'§ See United States ex rel. Hopper v. Anton, 91 F.3d 1261 (9th

Cir. 1996).

'? The term “claim” is defined in 31 U.S.C. § 3729 of the False Claims

Act and provides, in pertinent part, that:

[flor purposes of this section, “claim” includes any request or

demand, whether under a contract or otherwise, for money or

property, which is made to a contractor, grantee, or other recipient if

the United States Government provides any portion of the money or

property which is requested or demanded, or if the government will

reimburse such contractor, grantee, or other recipient for any portion

of the money or property which is requested or demanded.

Id. § 372%c).

39a

any false claims . . . The language of the statute focuses

on false claims, not on contracts.

id. at 311 (1976) (discussing Marcus, 317 U.S. at 552, 63

S.Ct. 379 (1943)). Similarly, in United States v. Ueber, 299

F.2d 310, 313 (6th Cir.1962), the Sixth Circuit held that a

cause of action under the FCA did not arise “until the first

voucher seeking payment of the false claims was presented to

the United States.”*? In another case, the Sixth Circuit

explained that if the “government [is] seeking to state a claim

under the FCA [the government] must allege a false claim for

payment made upon the government, not merely a fraudulent

contract.” Kaminski v. Teledyne Indus., Inc., 121 F.3d 708,

No. 96-3620, 1997 WL 415314, at *4 (6th Cir. July 21,

1997).

ll. The Proper Measure Of Damages Under The False

Claims Act

A. Introduction

The amended FCA provides that any person who know-

ingly presents a false or fraudulent claim to the United States

“is liable to the United States Government for a civil penalty

. . . plus three (3) times the amount of damages which the

Government sustains because of the act of that person.” 31

U.S.C. § 3729(a) (1999).7! The FCA itself does not specify

how to quantify damages, but instead states that the

Government should be awarded damages that it “sustains

because of” the contractor’s fraudulent acts. /d. § 3729(a),

2° See also United States v. Ekelman & Assocs., Inc., 532 F.2d 545,

551-52 (6th Cir.1976) (stating that “no cause of action arises . . . until the

[defendant] presents a claim to the [government] for payment... .”).

?! The FCA also contains an exception for those who voluntarily

inform the government within thirty (30) days of learning of the false

claim and were not subject to a governmental investigation prior to the

disclosure to the government. Persons falling within this exception can

limit their damages to two (2) times the amount of damages sustained by

the government. /d.

40a

(b) (1999). In United States ex rel. Marcus v. Hess, the

Supreme Court established a simple “out of pocket” measure

for the recovery of damages. 317 U.S. at 551-52, 63 S.Ct.

379 (1943). The Court found that damages under the FCA

are intended to “provide for restitution to the government of

money taken from it by fraud... .” /d. Trebling the damages

and imposing penalties “was chosen to make sure that the

government would be made completely whole.” /d. The

Marcus Court used a “but for” test in its analysis of FCA

damages.” In other words, a court should ask the question

of, “How much would the government have paid for the item

at issue ‘but for’ the fraudulent actions of the defendant?””’

This amount would be the proper measure of damages ac-

cording to the Marcus court. Id. at 551-52, 63 S.Ct. 379

(1943).

Because each case under the FCA involves unique types of

damage to the government, a formula for calculating damages

must be created for each case that will provide the gov-

ernment with its damages directly caused by the filing of a

false claim. BMY—Combat Systems Div. of Harsco Corp. v.

United States, 44 Fed.Cl. 141, 147-48 (Fed.Cl. 1999). In

addition, the Ninth Circuit Court of Appeals found that

“(ojrdinarily the measure of the government’s damages

would be the amount that it paid out by reason of the false

[claims] over and above what it would have paid if the claims

had been truthful.” United States v. Woodbury, 359 F.2d 370,

379 (9th Cir.1966). In United States v. Bornstein, the Court

applied a similar “benefit of the bargain” approach to calcu-

lating damages in FCA cases. 423 US. at 317 n. 13, 96 S.Ct.

523 (1976). The Supreme Court held that “[t]he Govern-

ment’s actual damages are equal to the difference between the

market value [of the item] it received and retained, and the

2 See Michael A. DiSabatino, Measure and Elements of Damages

Under the False Claims Act, 1977 WL 45669, 35 A.L.R. Fed. 805 (1977).

3 Id.

4la

market value [that the item] would have had if they had been

of the specified quality.” Jd.** The Bornstein Court cited

United States v. Ben Grunstein & Sons Co.,”° as a basis for its

choice of the “benefit of the bargain” or “market value”

approach. Jd. The district court in Grunstein defined the

proper measure of damages as “the value of the property

which the person defrauded would have received but for the

fraud, less, as a credit, the value of the property which he has

in fact received.” /d., 137 F.Supp. at 205 (1955).

Courts which have decided the issue thus far have confined

their decisions to the particular type of fraud involved in each

case. While the Supreme Court in Bornstein used a “benefit

of the bargain” theory of damages, it did not overturn the “out

of pocket” measure applied by the Marcus Court; which

would infer that the Supreme Court will consider any

reasonable method of calculating damages which will fairly

reimburse the government for its losses and expenses, without

creating a windfall for the government. See Daff v. United

States, 31 Fed. Cl. 682, 695 (1994) (awarding as FCA

damages the government’s inspection and repair costs when

the contractor had fraudulently concealed the failure of the

product to pass the contractually required tests).7°

We will now review the case law on consequential

damages as applied in the federal courts. In the Fifth Circuit

case that is highlighted in the next section, the court held that

4 This is also referred to as a product’s “diminished value,” and is

measured by calculating the fair market value of the product(s) the

government contracted to buy less the fair market value of the product(s)

that was actually received and retained. See C. Stanley Dees, Beyond

“Diminished Value”: New Challenges in the Law of Civil False Claims

Act Damages, 25 Pub. Cont. L.J. 597, 599 (1996). However, in cases in

which the market value of the product(s) is speculative, the court may

utilize the contract price to establish damages. /d.

25 137 F.Supp. 197, 205 (D.N.J.1955).

6 See also Anna Burke, Qui Tam; Blowing the Whistle for Uncle Sam,

21 Nova L.Rev. 869, 911 (1997).

42a

the government could not recover consequential damages

resulting from the delivery of defective goods under a FCA

theory of recovery.”

B. United States v. Aerodex and Consequential Damages

Questions regarding the meaning of “damages” under the

FCA have their roots in the old act, which contained language

virtually identical to the current damages provision.» The

scope of the term “damages” was first addressed in the

seminal case of United States v. Aerodex. In Aerodex,

defendants were found civilly liable under the FCA for

knowingly delivering contractually nonconforming ball bear-

ings to the Navy Department. /d. 469 F.2d at 1013 (1972).

Under its contract, Aerodex had delivered 300 noncon-

forming bearings at a price of $90 each for a total contract

price of $27,000. Jd. at 1006. The Navy subsequently

7 The following excerpt on the common law rule of contract damages

is taken from the contract treatise of John D. Calamari, The Law of

Contracts § 14.5 (4th ed.1998):

The Rule of Hadley v. Baxendale—

(a) Economic Injury—Prior to 1854 there were almost no rules of

contract damages. The assessment of damages was for the most

part left to the unfettered discretion of the jury. In 1854, Hadley v.

Baxendale was decided. 156 Eng. Rep. 145 (1854). It has won

almost universal acceptance in the common law world and remains

the leading case in the field. Under the first rule of Hadley v.

Baxendale, certain damages will so naturally and obviously flow

from the breach that everyone is deemed to contemplate them.

Frequently such damages are known as “general damages.” Under

the second rule, less obvious kinds of damages are deemed to be

contemplated if the promissor knows, or has reasons to know, the

special circumstances which will give rise to such damages. Such

damages are frequently known as “special” or “consequential

damages.”

Id.

8 See Michael Waldman, “Damage Control’: A Defendant’s

Approach to the Damage and Penalty Provisions of the Civil False

Claims Act, 21 Pub. Cont. L.J. 131, 136 (1992).

43a

discovered the product substitution, removed the ball bearings

and replaced them at a cost of $160,000. Jd. In assessing

damages, the district court included not only the contract

price the Navy paid, $27,000, but also the $160,000 in “repair

costs.” Id.

The Fifth Circuit reversed the district court’s damages

calculation. Jd. at 1011 (1972). The court noted that in cases

involving defective products, the United States should receive

as damages the difference between the reasonable value of

the goods delivered and the price the government actually

paid for the goods. /d. The Aerodex court concluded that the

repair costs were consequential damages, and, as such, those

costs were not recoverable under the Act:

[W]e hold that the language of the False Claims Act

does not include consequential damages resulting from

the delivery of defective goods. The statute assesses

double damages attributable to the “act,” which in this

case is the submission of the false vouchers. The sub-

mission of these vouchers was not the cause of the

government’s consequential damages. The delivery and

installation of the bearings in the airplanes, not the filing

of the false claim, caused the consequential damages.

Id. at 1011 (1972); see also Woodbury, 359 F.2d at 379

(1966) (“In a case of this kind, damages under the False

Claim Act must be measured by the amount wrongfully paid

to satisfy the false claim.”). Thus, the United States in

Aerodex was entitled to only the contract price doubled, or

$54,000, and not the more than $370,000 that was originally

awarded the government by the district court. /d.

The FCA cases that came after Aerodex, but before the

1986 Amendments, “muddied the waters” as to the recov-

erability of consequential damages.” While some of these

° See James Dever, Double Jeopardy, False Claims, and United States

v. Halper, 20 Pub. Cont. L.J. 56, 86 (1990).

44a

decisions adhered closely to Aerodex in denying any eco-

nomic or consequential loss outside of the contract price,” ;

other courts have showed a greater willingness to allow the

recovery of the various costs incurred by the government

beyond the mere value of the contract.’! Like a number of

post-Aerodex courts, the Sixth Circuit in Ekelman & Assocs,

found that Aerodex was distinguishable on its facts and also

found that its holding “was not inconsistent with” the Fifth

Circuit’s holding in Aerodex. 532 F.2d at 545 (1976).*”

*° See, e.g., United States v. Miller, 645 F.2d 473, 475-76 (Sth

Cir.1981) (holding that the United States cannot recover consequential

damages under the Act); United States v. Hibbs, 568 F.2d 347, 351-352

(3d Cir.1977) (holding that the United States must show a causal

connection between the loss and the fraudulent conduct, and also finding

that a broad “but for” test is not consistent with the Act).

*' se [sic] See e.g, Toepleman v. United States, 263 F.2d 697, 700-01

(4th Cir.1959) (holding that the United States is entitled to recover double

the loss it suffered “but for the fraud”); United States v. Woodbury, 359

F.2d 370, 379 (9th Cir.1966) (holding that the United States may recover

“money spent by its employees in straightening out the mess [caused by

the false claims] and in protecting its interest thereafter”); United States v.

Ekelman & Assocs., Inc., 532 F.2d 545, 550-51 (6th Cir.1976) (holding

that the United States can recover not only the payment to discharge

insured loans obtained through false claims, but also the reasonable

expenses incurred in preserving the properties that served as collateral for

the loans).

** In Ekelman & Assocs., the government spent money maintaining

property after the defendants went into default on a loan obtained through

falsified applications. /d., 532 F.2d at 547. These “maintenance costs”

(i.e., “incidental expenses”) incurred after foreclosure, were included

within the government’s damage award. /d. The Sixth Circuit

distinguished Aerodex, stating that it was not inconsistent with this

decision, indicating a possible effort to distinguish between “incidental or

maintenance” damages and “economic or consequet.tial” damages. /d.;

see also Kara Nicole Schmidt, Privatizing Enviromental Enforcement:

The Bounty Incentives of the False Claims Act, 9 Geo. Int'l Envtl. L.Rev.

663, 678 (1997).

45a

C. The 1986 Amendments and Consequential Damages *°

Initially, Congress indicated that the 1986 Amendments

would permit the recovery of consequential damages under

the Act. The Senate bill would have amended 31 U.S.C.

§ 3729(a) to read as follows: “A person is liable to the

United States Government for a civil penalty of $10,000, an

amount equal to three (3) times the amount of damages, in

addition to the amount of consequential damages the

Government sustains because of the act of that person... .”

S.Rep. No. 345, 99th Cong., 2d Sess. 39 (1986). The bill

defined consequential damages as those which the United

States would not have sustained “but for” the violation of the

Act or “having entered into or made any contract or grant as a

result of any material part of any false statement.” /d. at 39-

40 (discussing changes to § 3729(b)). The Senate expressly

rejected the “narrow and form bound interpretation of the act”

found in Aerodex. S.Rep. No. 345, 99th Cong., 2d Sess. 19,

reprinted in 1986 U.S.Code Cong. & Admin. News 5284.

Originally, the House bill also contained language concerning

consequential damages. H.R.Rep. No. 660, 99th Cong., 2d

Sess. 1-2 (1986). The House bill would have amended

§ 3729(a) to read as follows: “[Any person who violates the

Act] is liable to the United States Government for a civil

penalty of not less than $5,000 and not more than $10,000,

for an amount equal to consequential damages as set forth in

subsection (b)(1) pius two (2) times the amount of damages

(other than such consequential damages) which the

Government sustains because of the act of that person... .”

* The following summary of the legislative history of the 1986

Amendments in relation to the issue of consequential damages was

compiled in its entirety by a review of the Congressional Record and from

relevant portions of the following law review article: James Dever,

Double Jeopardy, False Claims, and United States v. Halper, 20 Pub.

Cont. L.J. 56, 86 (1990).

46a

Id. Subsection (b)(1) defined consequential damages in a

manner similar to the Senate bill. /d. at 2.

Although both the House and the Senate initially agreed

that consequential damages would be recoverable under the

Act and that such damages would not be trebled, Senator

Grassley offered an amendment on October 3, 1986, deleting

any mention of consequential damages. 132 Cong. Rec.

S$15018-23 (daily ed. Oct. 3, 1986). Senator Grassley

explained that House and Senate negotiators had met and

reconciled their differences in the House and Senate bills. 132

Cong. Rec. $15515 (daily ed. Oct. 7, 1986) (statement of Sen.

Grassley); cf. 132 Cong. Rec. H6481 (Sept. 9, 1986)

(statement of Rep. Brown) (expressing hope that the Con-

gressional conference would limit consequential damages to

those which are reasonably foreseeable and proximately

caused by the prohibited acts). As part of tha: process,

forfeitures would be determined by the court “within the

range of $5,000 to $10,000, and consequential damages will

not be recoverable under the Act.” 132 Cong. Rec. S15515

(daily ed. Oct. 7, 1986) (statement of Sen. Grassley). The

House agreed to the change, but did not explain why the

change was made. See 132 Cong. Rec. H9382-83, 9388

(daily ed. Oct. 7, 1986) (statement of Rep. Glickman).

Thus, post-1986 Amendments courts are left to analyze

arguments concerning causation in order to determine

whether damages were sustained “because of the act.”

31 U.S.C. § 3729(a) (1988).

Furthermore, the question of consequential damages does

not appear to be settled at the present time. After a review of

the most recent and relevant case holdings addressing this

issue, we find that almost all of these cases are distinguished

by the particular facts of the case in question. The holdings

range from those that adhere strictly to the Aerodex ruling,

and those that expand upon the holding of Aerodex in their

award of additional recovery beyond the value of the item in

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