Amicus Curiae Brief — Boeing Co. v. United States Ex Rel. Roby

MOTION FILED 6)

2005 No. 02-1411

MAT 2 7,

In The

Supreme Court of the Anited States

THE BOEING COMPANY,

Petitioner,

V.

UNITED STATES OF AMERICA EX REL.

BRETT ROBY,

Respondent.

r

_

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Sixth Circuit

42

Vv

MOTION FOR LEAVE TO FILE BRIEF AMICUS

CURIAE; and BRIEF AMICUS CURIAE OF

NATIONAL DEFENSE INDUSTRIAL ASSOCIATION

IN SUPPORT OF PETITIONER

2

v

DAVID J. BURMAN

Counsel of Record

STEVEN S. BELL

STEVE Y. KOH

ADAM N. STEINMAN

PERKINS CoIE LLP

1201 Third Avenue, Suite 4800

Seattle, WA 98101-3099

(206) 583-8888

Attorneys for Amicus Curiae

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

MOTION FOR LEAVE TO FILE BRIEF AMICUS

CURIAE IN SUPPORT OF PETITIONER

Petitioner The Boeing Company (“Boeing”) and

Respondent the United States have each consented to the

filing of this brief by amicus curiae National Defense

Industrial Association (“NDIA”). Because the relator, Brett

Roby, has withheld consent, NDIA hereby moves, pursuant

to Supreme Court Rule 37.2(b), for leave to file an amicus

curiae brief in support of Petitioner.

The National Defense Industrial Association (“NDIA”)

is a non-partisan, non-profit, international association

representing over 1,000 companies and 24,000 individuals

from the defense and national industrial bases. NDIA’s

mission is to provide a forum for the interchange of ideas

between the government and industry to address problems

of joint concern, including business and technical aspects

of the government acquisition and procurement process.

NDIA represents companies and individuals who

contract with the government to provide vital military

equipment, weapons, and machinery. The High-Value

Items Clause (“HVIC”) that is implicated in this case is a

fundamental part of contracts for the design, manufacture,

and delivery of high value items. NDIA members have an

interest in the scope of protection afforded by the HVIC

and are directly affected by the Sixth Circuit’s decision.

The relator’s letter responding to NDIA’s request for

consent to file this amicus brief baselessly asserts that this

brief is “no more than a second bite at the apple for Boeing.”

* This letter and other correspondence regarding NDIA’s requests

for consent have been filed in the office of the Clerk.

2

Although Petitioner is a member of NDIA, it has not made

any financial contribution to this brief’s preparation or

submission. NDIA’s members have their own vital and

practical interest in the legal issues raised by this case,

particularly the application of the HVIC. NDIA members

are many of the very companies who stand to lose the

protections intended by this important contract provision.

It is notable, moreover, that the United States — which is

the real party in interest in a False Claims Act case — has

consented to the filing of this amicus brief. See, eg., —

United States ex rel. Killingsworth v. Northrop Corp., 25

F.3d 715, 720 (9th Cir. 1994) (United States is the real

party in interest); United States ex rel. Milam v. Univ. of

Tex. M.D. Anderson Cancer Ctr., 961 F.2d 46, 50 (4th Cir.

1992) (same).

NDIA frequently represents the interests of its mem-

bers as amicus curiae in federal courts. NDIA’s back-

ground and experience in areas such as the business and

technical aspects of the government-industry relationship

are highly germane to this case. NDIA submits this brief

to illustrate the impact of the Sixth Circuit’s decision on

the defense industry and on government procurement

costs. Certiorari_review is meeded to correct the Sixth

Circuit’s erroneous interpretation of the HVIC and to

resolve the far-reaching uacertainty occasioned by that

decision. Given the ramifications of this case on NDIA

members and on the costs of our national defense, NDIA

respectfully requests leave to file the attached brief

amicus curiae in support of Petitioner.

3

Respectfully submitted,

DAVID J. BURMAN

Counsel of Record

STEVEN S. BELL

STEVE Y. KOH

ADAM N. STEINMAN

PERKINS COIE LLP

1201 Third Avenue,

Suite 4800

Seattle, WA 98101-3099

(206) 583-8888

Attorneys for Amicus Curiae

TABLE OF CONTENTS

Page

I. INTEREST OF AMICUS CURIAE................. 1

II. SUMMARY OF ARGUMENT...................0000008 2

Bene | SEITE Wine scinissanechntataadavidanilintaaciiabicninian 4

A. THE SIXTH CIRCU'T’S DECISION

EVISCERATES THE LONG-SETTLED

MEANING OF A CRITICAL CONTRAC-

TUAL PROTECTION ON WHICH DE-

FENSE CONTRACTORS HAVE RELIED

FIG SP ean cniennitereniidthianscsagseinnnens 4

1. The High-Value Items Clause

CNET. Biennninnsusslanniosieamdmnensalinennians 5

2. History of the EIVIC ........cccccccscssssessees 6

3. By Upsetting the Long-Established

Meaning of the HVIC, the Sixth Cir-

cuit’s Decision Creates Virtually

Unlimited Contractor Liability for

Losses that the Government Intended

to Self-Insure and Will Significantly

Increase Government Procurement

RD ssiccscanctaiivatisicd veakntsiashpbeidaemudaimnnbannieaaien 10

B. THE SIXTH CIRCUITS EXPANSION OF

THE DAMAGES AVAILABLE UNDER THE

FALSE CLAIMS ACT IS UNPRECE-

DENTED AND UNJUSTIFIABLE............... 14

SY, CFSE tisiscvececsccnsnonnictnncovcsssnenneestecsens 16

TABLE OF AUTHORITIES

Page

CASES

Australia v. Lockheed Aircraft Corp., No. 69-1623-

Wee CD. Cal Gam, TG, TTD cicerrecrctacksinssmericintsnenvenian 6

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

(2G) .cs0sec0ccsnccsnisopincsecalllisiasnasasticuiiinmbaidmaiieailiniieilies 14, 15

United States v. Aerodex, Inc., 469 F.2d 1003 (5th

CRE: BTID cnescniccsvrsstessessvehuideteniialinieiinitinaiianiaancaiéaial 14

United States v. United States Cartridge Co., 198

Fae GD Ce Bee tessinscinsvinsttasenarcininntabienaniats 7,10

STATUTES

BE UBAG © BP veecnssctcinsinniisinsveinnipesiistiananisteaiaiamiiaaa 15

SE CLE Bee vicitctsshitsncsnidpstnainecitieisaatiiabsmmmaann’ 14

RULES

GB OFis BSR rae itercsernroscictsoninasitinindibiaiainaiamiaiaaiie 13

4B GF: FG cestivtitivicorsivcttiniiiaaimbeaaniadadain 5

$B O.Fs FG ttrreniicigerinniinntmeanl 12

4B CF F FR Da oi cticvensovcevcnsvcaningenseboininaittinencceaei 5, 10

GD C.F. F Gr i evi seccnssnntinnvicivenaciiiataeadaiiag 5, 10, 11

UD. Cin FE. FF Boi iosessvesnenssnrnensonssnorvenenciiiniiiaeiaaasidaeiantana 1

Bere, CE: i BU voc cencccivcnscorintaienanenan enn 1

TABLE OF AUTHORITIES — Continued

Page

OTHER AUTHORITIES

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

Comm’n on Gov't Procurement (1972)........c.ccsscsssscsssseees 8

Defense Procurement Circular 86 (1971)............ssscsccseseees 8

Letter from Council of Defense & Space Indus.

Ass’ns, to Captain E.C. Chapman, Chairman,

ASPR Committee (Aug. 12, 1971).............ccccccccsseeeeeeees 8,9

Mem. from Dep't of the Air Force to the Chmn. of

I I, Ti inccnic ci, sacclinccthincnstallinbieienasedmaainnnes 9

Stability Amid Turmoil, Risk & Insurance, no. 5,

ee ee te Ses MITE cecntebieiecbeciesnibcikkcelhiadibiansideatenniasbbasdaiininnsieti 13

1

BRIEF OF NATIONAL DEFENSE INDUSTRIAL

ASSOCIATION AS AMICUS CURIAE IN

SUPPORT OF PETITIONER

This amicus curiae brief is submitted on behalf of the

National Defense Industrial Association (“NDIA”).’ Peti-

tioner The Boeing Company and Respondent the United

States have consented to NDIA’s filing of this brief. The

relator, Brett Roby, has withheld consent. A motion for

leave to file an amicus brief under Supreme Court

Rule 37.2(b) is included with this brief. The correspon-

dence regarding NDIA’s requests for consent have been

filed in the office of the Clerk.

+

I. INTEREST OF AMICUS CURIAE

The National Defense Industrial Association (“NDIA”)

is a non-partisan, non-profit, international association

representing over 1,000 companies and 24,000 individuals

from the defense and national industrial bases. NDIA’s

mission is to provide a forum for the interchange of ideas

between the government and industry to address problems

of joint concern, including business and technical aspects

of the government acquisition and procurement process.

* This brief was authored by ottside counsel for NDIA. Counsel for

NDIA served as co-counsel to Petitioner in the trial court, but do not

represent Petitioner in this Court and did not represent Petitioner in

the court of appeals. No person or entity, other than NDIA’s members,

made a monetary contribution to this brief’s preparation or submis-

sion. See Sup. Ct. R. 37.6. Although Petitioner is a member of the

NDIA, it has not made any financial contribution to this brief’s

preparation or submission.

| a. aR a ion iii

2

NDIA members support our national defense by

contracting with the government to provide vital military

equipment, weapons, and machinery. The High-Value

Items Clause (“HVIC”) is a fundamental part of contracts

for the design, manufacture, and delivery of high value

items. The government’s policy of self-insurance, which is

embodied in the HVIC, provides defense contractors

important protections from liability. This, in turn, allows

the government to enjoy significantly reduced procure-

ment costs when purchasing the military products that

form the backbone of our national security.

The Sixth Circuit’s decision dramatically undercuts

the HVIC. It expands liability for defense contractors and

opens the door to correspondingly higher procurement

costs for critical military equipment. NDIA submits this

brief to illustrate the impact of the Sixth Circuit’s decision

on the defense industry and government procurement

costs, and to argue that certiorari review is needed to

correct the Sixth Circuit’s erroneous interpretation of the

HVIC and to resolve the far-reaching uncertainty occa-

sioned by that decision.

4

Vv

Il, SUMMARY OF ARGUMENT

For the last six decades, self-insurance has been a

cornerstone of the government's efforts to minimize

procurement costs in the critical realm of defense

contracting. The High-Value Items Clause (“HVIC”)

implements this system of government self-insurance by

limiting a contractor’s liability for loss of government

property due to product defects. Because contractors are

not liable for such losses, they do not need to purchase

3

insurance for such losses and, therefore, private insurance

costs are not passed on to the government.

The Sixth Circuit’s decision runs roughshod over this

long-standing system by holding a contractor liable under

the False Claims Act (“FCA”) for the full value of a sophis-

ticated military helicopter, even though the loss was

indisputably caused by a product defect as defined by the

HVIC. The Department of Defense long age made a

conscious decision to self-insure such losses even where, as

here, they result from alleged fraud by low-level employ-

ees.

The exception now created by the Sixth Circuit is

nothing less than a judicial overhaul of a half-century of

government self-insurance in defense contracting. Because

claims based on defective military products can easily be

couched as FCA claims, the Sixth Circuit’s decision ex-

poses defense contractors to massive liability for which

they justifiably have not insured. Likewise, the Sixth

Circuit short-sightedly condemns the government to

increased future procurement costs, as contractors are

forced to seek insurance for this newly imposed potential

liability. The Court should grant a writ of certiorari to

consider the decision’s severe impact on the procurement

of military products critical to our national defense — a

decision that defies plain meaning, regulatory history, and

prior judicial interpretation.

Additionally, the Sixth Circuit’s decision contravenes

the established principle that the amount of damages

available under the FCA, before trebling, cannot exceed

the total amount paid by the government on the allegedly

false claim. Regardless of the HVIC, allowing the govern-

ment to recover the full value of a destroyed product is an

4

unprecedented and unjustifiable expansion of FCA reme-

dies.

@

Vv

Ill, ARGUMENT

A. THE SIXTH CIRCUITS DECISION EVISCER-

ATES THE LONG-SETTLED MEANING OF A

CRITICAL CONTRACTUAL PROTECTION ON

WHICH DEFENSE CONTRACTORS HAVE RE-

LIED FOR DECADES

Since World War II, the government has adopted a

policy of self-insuring vital military products it obtains from

manufacturers. The High-Value Items Clause (“HVIC”) is a

fundamental part of this self-insurance system. The HVIC

insulates manufacturers from liability for damage to

government property, including the product itself, caused

by a defect or deficiency in the product and occurring after

delivery to the government. Up until the Sixth Circuit’s

decision, it was well-settled that the government self-

insurance policies embodied in the HVIC protect govern-

ment contractors from such liability, regardless of whether

it is sought to be imposed under the False Claims Act

(“FCA”) or some other statutory or common law theory.

The Sixth Circuit’s decision upsets this decades-long

understanding of the HVIC. By allowing the government

to recover the full value of a helicopter governed by the

HVIC, the decision is directly contrary to the plain mean-

ing, regulatory history, and appellate court interpretation

of government contractor self-insurance provisions.

5

1. The High-Value Items Clause (“HVIC”)

The HVIC, one of several limitation of liability regula-

tions, provides that “the Contractor shall not be liable for

loss of or damage to property of the Government... that

... results from any defects or deficiencies in the sup-

plies.” 48 C.F.R. § 52.246-24(a). The Federal Acquisition

Regulations (“FARs”) require this clause to be included in

every government contract for high-value items.’ The

FARs explicitly state that the HVIC’s limitation of liability

stems from the government’s policy that “it will generally

act as a self-insurer” with respect to post-acceptance

damages that result from defects or deficiencies in the

supplies. Jd. § 46.803(a).

The only exceptions to the HVIC and the government’s

policy of self-insurance are expressly listed in the FARs,

and the exceptions prove that the regulation was intended

to apply in these circumstances. The only possibly relevant

exception applies where the defect or deficiency “results

from willful misconduct or lack of good faith on the part of

any of the Contractor’s managerial personnel.” Id. § 52.246-

24(b). Here, the parties stipulated that there was no such

conduct by “managerial personnel,” Pet. App. 9a, which

the FARs define as a limited subset of the contractor’s

high-level executives. See id. § 52.246-24(b)(1)-(3). NDIA

does not dispute that this exception eliminates a contrac-

tor’s HVIC protection where such executives are guilty of

* The FARs define a “high-value item” as one having “a high unit

cost (normally exceedi ig $100,000 per unit), such as an aircraft, an

aircraft engine, a communication system, a computer system, a missile,

or a ship,” as well as any item designated as a high-value item by the

contracting officer. 48 C.F.R. § 46.802.

6

willful misconduct or bad faith. It necessarily follows,

however, that damages arising from such misconduct by

employees other than these top executives are within the

purview of the HVIC and may not be recovered under the

FCA or any other theory of liability.

2. History of the HVIC

The government's policy of self-insurance, now embod-

ied in the HVIC, begar. during World War II. In early

1942, the Department of the Navy decided to self-insure

the risk of loss or damage to certain complicated struc-

tures and machines. See Affidavit of H. Struve Hensel

(June 4, 1971) ¥7 (“Hensel Aff.”), Appendix of Amicus

Curiae NDIA (“NDIA App.”) 4-5.° The policy was a deliber-

ate response to the costs of insurance that contractors, by

necessity, include in the price of military supplies. See id.

q{ 6-7, NDIA App. 4-5. These prices had become “astro-

nomical,” and after studying the issue the Navy decided

that self-insurance would be the most economical solution.

Id. 16, NDIA App. 4. As one key architect of the self-

insurance policy explained:

[If the United States assumed all such risks of loss

and eliminated all appropriate costs in respect

* This affidavit was prepared in connection with Australia v.

Lockheed Aircraft Corp., No. 69-1623-WPG (C.D. Cal. Jan. 10, 1972).

Mr. Hensel served in three capacities during World War II: Special

Assistant to Under Secretary of the Navy Secretary James Forrestal;

Head of the Navy’s Office of General Counsel; and Assistant Secretary

of the Navy. See Hensel Aff. ¢ 3, NDIA App. 2-3. During the Eisenhower

Administration, Mr. Hensel served as General Counsel of the Depart-

ment of Defense and as Assistant Secretary of Defense. See id. 79,

NDIA App. 6.

7

thereof from the contract price, the contract price

would be appreciably lower, since the United

States would have a spread of risk unattainable

by any private insurance company and the

United States would be able to eliminate the

overhead expenses, commissions and profit re-

quirements of the private insurance companies.

Id. { 7, NDIA App. 4-5.

Following the war, the U.S. military implemented this

policy with respect to all procurement programs. Id. { 11,

NDIA App. 6-7. Litigation shortly following World War II

confirmed to the defense industry that the government’s

policy of self-insurance relieved a manufacturer from

liability for covered damages, even where the government

sought to recover such damages under the False Claims

Act. Litigation shortly following World War II confirmed

that the government’s policy of self-insurance relieved a

manufacturer from liability for covered damages, even

where the government sought to recover such damages

under the False Claims Act. In United States v. United

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

government argued that it was free to pursue FCA reme-

dies for alleged quality control lapses in the production of

ammunition, despite clear contractual language relieving

the contractor of liability for losses that were not the

result of high level misconduct. The Eighth Circuit

squarely rejected the government’s argument that the FCA

could provide a remedy for losses that the government, by

contract, had agreed to bear. Id. at 465.

In 1971, the Department of Defense issued the Armed -

Services Procurement Regulations (‘ASPR”), which formal-

ized the government’s practice of self-insurance and were

expressly “aimed at reducing Government procurement

8

costs by limiting the contractor’s risk.” Defense Procure-

ment Circular 86 (“DPC 86”), at 1(1971), C.A. J.A. 434.

This limitation on contractor liability was expansive,

covering both contract and tort liability. Id., C.A. J.A. 485

(“[S]ince the policy and the clauses limit liability in terms

of loss of or damage to the property of the Government

resulting from the deficient supplies ... no distinction is

made between liability founded on contract or in tort.”).

Such a comprehensive protection was critical to achieve

the policy’s objectives. Too many exceptions would be “self-

defeating,” because contractors would require “some

continuation of product liability insurance protection for

the risk exposure that the Government has not assumed.”

4U.S. Comm’n on Govt Procurement, Report of the

Comm’n on Gov't Procurement (“Comm’n Rep.”) (1972),

C.A. J.A. 406. Consequently, the ASPRs provided that a

contractor would be liable only in the event of certain

expressly designated conditions.

One exception contained in the original ASPRs pro-

vided that the contractor could be liable “when the defects

or deficiencies ... resulted from fraud or gross negligence

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

Contractor.” DPC 86, C.A. J.A. 487 (ASPR § 7-104.45(b)).

It was soon recognized, however, that this was precisely

the kind of self-defeating provision that would thwart the

goal of eliminating the cost of contractor liability insur-

ance from government procurement. Accordingly, a group

of defense associations urged the Department of Defense

to eliminate this exception. See Letter from Council of

Defense & Space Indus. Ass’ns (““CODSIA”), to Captain

E.C. Chapman, Chairman, ASPR Committee (Aug. 12,

1971), C.A. J.A. 464-65. Although defense contractors had

accepted the risk of liability stemming from willful or bad

iereenreeteeiiiieiiiiiiaiaiaiiiiiiil

9

faith misconduct by high-level management personnel,

imposing liability based on amy such conduct by any

contractor personnel would create the need for “substan-

tial liability insurance.” Jd. (“Unless ... 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.”).

In direct response to this concern, the Department of

Defense deleted the fraud exception in 1974. ASPR § 7-

104.45(b) (July 1, 1974), C.A. J.A. 485-86. The regulatory

history of this change confirms that it was designed to

insulate the contractor from liability 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.” Mem. from Dep’t

of the Air Force to the Chmn. of the ASPR Comm. 3, C.A.

J.A. 652.‘

The current HVIC is virtually unchanged from the

1974 version of the ASPRs, which were intended to protect

contractors from liability even where defects stem from

fraud by the contractors’ employees. There is no subse-

quent regulatory history indicating any intent to modify

the scope of the HVIC. To the contrary, the HVIC’s plain

terms provide that contractors are not liable for “loss of or

* NDIA is a member of CODSIA, the organization that originally

urged the Department of Defense to remove the fraud exception. The

National Security Industrial Association (which became NDIA when it

combined with the American Defense Preparedness Association) was

one of CODSIA’s founding members. Accordingly, NDIA has a strong

interest in ensuring that this significant regulatory change is given

effect.

10

damage to property of the Government (including the

supplies delivered under this contract) that ... results

from any defects or deficiencies in the supplies.” 48 C.F.R.

§ 52.246-24(a). Although the government does not bear the

risk of losses stemming from fraudulent conduct by the

contractor’s high-level managerial personnel, id. § 52.246-

24(b), it has consciously accepted risks that might result

from the fraud of other personnel, in order to accomplish

the overriding objective of minimizing procurement costs.

3. By Upsetting the Long-Established Meaning

of the HVIC, the Sixth Circuit’s Decision

Creates Virtually Unlimited Contractor Li-

ability for Losses that the Government In-

tended to Self-Insure and Will Significantly

Increase Government Procurement Costs

1. NDIA members who contract with the government

have relied for decades on the plain language and purpose

of the HVIC, which precludes recovery for damages to

government property stemming from “defects or deficien-

cies in the supplies.” Jd. § 52.246-24(a). In accordance with

the HVIC and the government’s general policy of self-

insurance, contractors have not insured against such

liability, and therefore have not passed corresponding

insurance costs on to the government.

The Eighth Circuit’s decision in U.S. Cartridge made

clear that the government’s practice of self-insurance,

embodied in the HVIC, also prevents recovery of such

damages under the FCA. The 1974 amendments to the

procurement regulations confirm that the HVIC applies to

damages resulting from fraud by contractor employees

other than high-level executives. In the instant case,

however, the Sixth Circuit concluded that the HVIC

ee

11

provides no protection because the loss “was actually

caused by Boeing’s initial misrepresentation that the

helicopter conformed to contract requirements.” Pet.

App. 9a-10a. Fraud by lower-level employees that results

in a defective product necessarily also results in a product

that is out of conformity with contract requirements. Yet

such fraud does not eliminate the HVIC’s protections.’ The

Sixth Circuit’s ruling is in conflict with that of the Eighth

Circuit and ignores the Defense Department’s conscious

decision in 1974 to limit the fraud exception.

2. Although the Sixth Circuit’s opinion is limited to

FCA claims, it could create nearly unlimited liability for

contractors with respect to losses that the HVIC purport-

edly covers. Aclaim arising from “defects or deficiencies” is

easily cast as an FCA claim based on the allegation that

the contractor misrepresented the product’s conformance

with contract requirements. See, e.g., Pet. App. 29a-30a

(noting that plaintiff’s FCA claims are based on allegation

that Petitioner had “falsely represented that the con-

tracted helicopters conformed to all of the specified con-

tract requirements.”). Accordingly, every defective or

deficient product can potentially give rise to an FCA claim

where, as here, the contractor has allegedly certified such

compliance. The Sixth Circuit’s judicially created excep-

tion for FCA claims, therefore, would substantially nullify

the protections afforded by the HVIC.

* It is stipulated in this case that there was no willful misconduct

or lack of good faith by managerial personnel. Pet. App. 9a; see 48

C.F.R. § 52.246-24(b).

12

Moreover, the Sixth Circuit’s logic could eliminate

HVIC protection for all non-contractual bases for liability.

The Sixth Circuit agreed that the loss of the helicopter in

this case satisfied the core elements of the HVIC: “the loss

of the helicopter occurred after Government acceptance

and resulted from the defective Speco gear.” Pet. App. 9a.

Nonetheless, the court held that the HVIC’s clear limita-

tion on contractor liability could be evaded because the

loss “was actually caused by Boeing’s initial misrepresen-

tation that the helicopter conformed to contract require-

ments.” Pet. App. 9a-10a. On this logic, the fact that a

defect caused the loss is irrelevant, so long as the govern-

ment can point to some additional theory of liability. In

fact, counsel for the government endorsed this position in

its briefs below, arguing that the “High Value Items

Clause applies solely to ‘contractual liability”” Br. of

Plaintiff-Appellee the United States at 22 (quoting 48

C.F.R. § 46.803(b).

3. The uncertainty occasioned by the Sixth Circuit’s

decision will have a widespread impact on the defense

industry and the government’s ability to keep procurement

costs low, at a time when our national security can ill

afford such consequences. The Sixth Circuit’s decision

exposes defense contractors to massive liability that they

justifiably have not insured in light of the HVIC. In

addition, the Sixth Circuit’s decision will substantially

increase the costs of future government procurement. The

decision puts defense contractors in the position of seeking

to purchase insurance for losses that previously had been

covered by the HVIC. Ultimately, the costs of this insur-

ance will be passed on to the government, resulting in

exactly the higher procurement costs that the HVIC seeks

13

to avoid. 48 C.F.R. §31.205-19 (allowing inclusion of

insurance costs).°

These insurance costs will be substantial, because the

added costs of insurance will be factored in at each stage of

the “procurement pyramid.” The Sixth Circuit’s eviscera-

tion of the HVIC impacts not only prime contractors, but

also lower tier subcontractors and suppliers. Thus, compa-

nies at every level of the manufacturing process may

obtain insurance to cover a single risk. If this happens,

then the increased cost to the government for the contract

deliverable will be exponential rather than incremental.

This exponential cost increase will be exacerbated by the

fact that insurance premiums have increased since the

September 11th attacks. See Stability Amid Turmoil, Risk

& Insurance, no. 5, vol. 13, at 62 (Apr. 15, 2002) (noting

that property and liability insurance premiums in-

creased an average of twenty to fifty percent after

September 11th).

* Section 31.205-19 states in pertinent part:

(2) Costs of insurance maintained by the contractor in

connection with the general conduct of its business are

allowable, subject to the following limitations:

* * .

(iv) Costs of insurance for the risk of loss of or dam-

age to Government property are allowable only to the

extent that the contractor is liable for such loss or

damage and such insurance does not cover loss or

damage that results from willful misconduct or lack of

good faith on the part of any of the contractor’s direc-

tors or officers or other equivalent representatives.

48 C.F.R. § 31.205-19.

14

Finally, the impact of the Sixth Circuit’s decision will

be felt nationwide, not merely in the four states that

comprise the Sixth Circuit. The FCA allows actions to be

brought anywhere a defendant transacts business. See 31

U.S.C. § 3732(a). Thus, major contractors who transact

business nationwide must presume that they will be

subject to the Sixth Circuit’s rule and will be forced to

purchase insurance for these newly created risks. Also,

FCA claimants (whether individual relators or the gov-

ernment itself) may select Sixth Circuit fora to bring FCA

claims involving the HVIC clause, and this will reduce the

likelihood that other federal appellate courts will have the

opportunity to consider the issue. Accordingly, the implica-

tions of the Sixth Circuit’s decision require prompt guid-

ance from this Court. It is critical that the Court review a

question that is so vital to the government’s defense

procurement and the companies that support our national

defense.

B. THE SIXTH CIRCUIT’S EXPANSION OF THE

DAMAGES AVAILABLE UNDER THE FALSE

CLAIMS ACT IS UNPRECEDENTED AND UN-

JUSTIFIABLE

The NDIA also agrees with Petitioner that the amount

of damages available under the False Claims Act (“FCA”),

before trebling, cannot exceed the total amount paid by the

government on the allegedly false claim. See United States

ex rel. Marcus v. Hess, 317 U.S. 537, 551-52 (1943) (“[T]he

chief purpose of the [FCA] was to provide for restitution to

the government of money taken from it by fraud.”); United

States v. Aerodex, Inc., 469 F.2d 1003, 1011 (5th Cir. 1972)

(“[A] proper application of the [FCA] damage provision

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

15

out by reason of the false claim.”). Accordingly, certiorari is

required to correct the Sixth Circuit’s erroneous expansion

of the FCA to allow the government to recover the full

value of the product at issue, regardless of the amount of

the contractor’s claim for payment. The expanded scope of

FCA liability exacerbates the concerns discussed supra

regarding the suddenly increased liability facing defense

contractors and the higher procurement costs stemming

from the need for contractors to insure against future

losses.

The government already has at its disposal a substan-

tial arsenal of remedies, such as debarment, suspension,

FCA statutory penalties, fees and costs, see 31 U.S.C.

§ 3729(a), as well as any contractual and warranty rights

that it negotiates. FCA damages have never included

recovery for the full value of a destroyed product. Rather,

FCA damages have historically been limited to recovery of

payments made as a result of the false claim. See Hess,

317 U.S. at 551-52. The Sixth Circuit’s decision directly

contravenes the established scope of FCA damages.

¢

16

Iv. CONCLUSION

As argued by the Petitioner, and supported by the

foregoing additional reasons, the petition for writ of

certiorari should be granted.

Respectfully submitted,

DAVID J. BURMAN

Counsel of Record

STEVEN S. BELL

STEVE Y. KoH

ADAM N. STEINMAN

PERKINS COIE LLP

1201 Third Avenue,

Suite 4800

Seattle, WA 98101-3099

(206) 583-8888

Attorneys for Amicus Curiae

App. 1

APPENDIX

AFFIDAVIT OF H. STRUVE HENSEL

STATE OF NEW YORK )

) ss.

COUNTY OF NEW YORK )

H. STRUVE HENSEL, being duly sworn, deposes and

says:

1. Since 1925 I have been admitted to practice law

before the highest Court of the State of New York. Since

1943 I have been admitted to practice before the United

States District Court for the District of Columbia. I have

actually been engaged in that practice of law in such State

and District since such dates, respectively, except for two

periods of service with the United States Government —

the first being from December 1940 to March 1946 with

the Department of the Navy and the second being from

January 1953 to June 1955 with the Department of

Defense.

2. In this case I have been consulted by and advised

Menasco Manufacturing Co. both as to the law and facts

and as attorney for said defendant I have examined

certain witnesses in depositions taken herein. At the same

time, I am, to the best of my knowledge and belief, the

only living official of the Department of the Navy who

participated with the late Under Secretary of the Navy

James Forrestal in establishing at the start of World War

II the practice and policy of the Department of the Navy

with respect to the assumption of risk by the Navy De-

partment as to loss of or damage to end products by reason

App. 2

of defects or deficiencies in components and the elimina-

tion of all insurance premiums or contingency allowances

in respect of said risk from the prices paid for such end

products by the Navy Department.

3. The service with the Department of the Navy

commenced in December 1940 when I became a Special

Assistant to Under Secretary of the Navy James Forrestal,

in the course of which work I made, at his request, certain

recommendations with respect to the practices and proce-

dures to be followed in negotiation and preparation and

signing of contracts for materiel and facilities by the

Department of the Navy. Such recommendations which

were made during March 1941 resulted in the establish-

ment of a legal office, known as the Procurement Legal

Division, in the office of the Under Secretary of the Navy

and my appointment in July 1941 as Chief of such Divi-

sion. The Procurement Legal Division of which I was the

head was a separate legal office operated and controlled by

civilians, entirely separate from the Office of the Judge

Advocate General and concerned with rendering all legal

services in respect of the procurement of materiel, includ-

ing the negotiation, preparation, execution and admini-

stration of contracts with respect to such procurement.

This was a complete innovation insofar as United States

Government practice was concerned in that the equivalent

of a self-contained law office or firm was created in ‘e

Department of the Navy to work on a lawyer-client rei«-

tionship with the various procurement Bureaus of the

Navy, with all lawyers reporting only to the head of the

Procurement Legal Division and the head of that Division

reporting only to the Under Secretary of the Navy. For a

period of time, the members of the Procurement Legal

Division, all of whom had experience in the practice of

App. 3

commercial law, acted also as business advisors to the

Under Secretary and the Bureaus and as negotiators of

contracts in the various procuring Navy Bureaus. In

August 1944 the name of the Procurement Legal Division

was changed to the Office of the General Counsel for the

Department of the Navy with, to quote the pertinent

directive of the Secretary of the Navy “cognizance of all

legal matters relating to the procurement or disposition of

Naval materiel and facilities and such other legal duties

as may be assigned * * * by the Secretary of the Navy, the

Under Secretary or the Assistant Secretary for Air.” I, as

head of the Office of General Counsel, was designated as

the General Counsel for the Department of the Navy,

which position I held until January 30, 1945, when I

became Assistant Secretary of the Navy with administra-

tive cognizance over the procurement and disposition of

materiel and facilities which cognizance had been previ-

ously exercised by James Forrestal, the Under Secretary of

the Navy. I served as such Assistant Secretary of the Navy

until March 1, 1946, when I resigned and returned to the

private practice of law in New York City as a senior

partner of the law firm of Carter, Ledyard & Milburn.

4. As Chief of the Procurement Legal Division and

General Counsel of the Navy Department immediately

preceding and during World War II, I participated actively

as Under Secretary Forrestal’s advisor in a complete

reorganization of the procurement practices and contract

forms in vogue at that time.

5. One of the problems encountered at the start of

World War II in the procurement of materiel and facilities

was the practice, dictated in part by statute, of requiring

performance bonds in the construction of facilities and

long term warranties of conformance to specifications and

App. 4

freedom from defects with respect to supplies. This was

very expensive for the United States as the costs of insur-

ance and allowances for contingencies in respect thereof

were included in the contract price or prices and paid for

by the United States. It is axiomatic that all risks as-

sumed by a manufacturer and seller must be covered by

the contract price or the manufacturer and seller is soon

out of business.

6. As the volume of procurement mushroomed from

the millions of dollars into the billions, the cost of such

insurance and allowances for such contingencies became

astronomical. I became impressed with the mounting cost

of insurance included in contract prices and it seemed to

me that as the spread of risk to insurance companies

greatly increased, the premium rate per $1.00 of insurance

should have decreased, but such was not the case. I can

remember calling a meeting of selected insurance brokers

and representatives of insurance carriers which was held

in Washington some time — according to my best recollec-

tion — before the outbreak of the war. At such meeting, I

made a plea for reduced insurance premium rates in view

of the increased spread of risk. When such reduction was

refused, Under Secretary Forrestal ordered a study of the

need for insurance and the most economical method of

protecting the Navy against the inescapable risk of loss

and damage.

7. The problem was studied and analyzed as solely a

question of price, i.e., would it be ultimately cheaper to

continue to impose the risk of loss on the contractor with

the cost of such assumption being included in the contract

price or would it be cheaper for the United States to —

eliminate all insurance and contingencies of that type

from the contract prices and to assume the risk of loss

App. 5

itself? It was recognized that insurance premiums would

have to include all losses and also provision for brokerage

commissions, insurance company overhead and profit and

that such premiums would have to be included in the price

paid by the Navy. Almost as soon as the problem was

stated it became apparent that, if the United States

assumed all such risks of loss and eliminated all appropri-

ate costs in respect thereof from the contract price, the

contract price would be appreciably lower, since the United

States would have a spread of risk unattainable by any

private insurance company and the United States as self-

insurer would be able to eliminate the overhead expenses,

commissions and profit requirements of the private insur-

ance companies. As a result, I recommend to Under

Secretary Forrestal that title to complicated structures

and machines such as buildings, ships, airplanes and the

like be vested in course of construction and manufacture

in the United States and that the United States assume

the risk of loss with respect to such complicated structures

and machines and eliminate from contract prices all costs

of insurance against such risks by the contractor. Such

policy was adopted for the Department of the Navy by its

Under Secretary early in 1942. Insurance costs against

loss and damage from defects in end products and compo-

nents were excluded from allowable costs in cost-plus-

fixed-fee types of contracts and from the negotiated prices

in fixed-price contracts. As a result, the United States

Navy thereafter became the equivalent of a self-insurer

(without creating any separate insurance fund) with

respect to the loss and destruction of supplies and equip-

ment inspected and accepted by the United States Navy in

the performance of procurement contracts. Such policy

continued throughout the war.

App. 6

8. During the war, the Forrestal administration

established its procurement procedures and practices by

word-of-mouth, frequent staff meetings and the selection

of personnel with a common background of education and

commercial experience. The concept which later led to the

establishment of the comprehensive set of prescribed

contract clauses and detailed prescription of contract

administration embodied in the current Armed Services

Procurement Regulations was opposed in the Department

of the Navy at that time. The Navy operated its materiel

and facilities procurement with a minimum of written

directives and circular letters. Nevertheless, attached

hereto as Exhibit 1 is a circular letter dated August 6,

1942, and signed by Admiral S. M. Robinson, Chief of

Procurement and Material. which sets forth certain

practices directed to be followed with respect to the as-

sumption of risks and attached hereto as Exhibit 2 is a

letter dated 1 April 1944 and signed by Capt. Gokey in the

Bureau of Ships, Department of the Navy, and sent to

contractors with the Navy with respect to the same subject

matter, i.e., the assumption of risk by the Navy and the

elimination of insurance premiums from contract prices.

9. Shortly after the election of President Eisenhower

in 1952, I was asked to become General Counsel of the

Department of the Defense, which I did in January 1953.

Such Office of the General Counsel of the Department of

Defense was organized at that time along lines similar to

those I had recommended and followed in the organization

of the Office of the General Counsel of the Department of

the Navy during World War II, except that, in addition to

cognizance of legal matters concerning the procurement

and disposition of materiel and facilities, I was the general

legal advisor to the Secretary of Defense. I held that

App. 7

position until the spring of 1954 when I became Assistant

Secretary of Defense in charge of International Security

Affairs with cognizance over the foreign military aid

program running into the billions of dollars and the

relations between the Department of Defense and the

Department of State, from which position I resigned as of

June 30, 1955.

10. As General Counsel of the Department of De-

fense, I was in charge of all legal services rendered in the

military departments in respect of the procurement and

disposition of materiel and facilities. Pursuant to my

recommendation, Trowbridge vom Baur was appointed

General Counsel of the Department of the Navy and he

served in that capacity from December 15, 1953, to April

30, 1960.

11. Between my resignation from the Navy in 1946

and my entering service in the Department of Defense in

1953, my practice kept me in contact with procurement

policies in the military departments and, to the best of my

knowledge and belief, the same policy continued in all

such departments excluding the cost of insurance against

loss of the supply item from both cost-plus-fixed-fee and

fixed-price contracts and the suppliers of materiel to the

military departments entered into contracts with such

military departments at prices which excluded all insur-

ance or contingency allowances against such risk of loss. It

was also generally understood in the negotiation of mili-

tary contracts that the sole liability of any contractor in

respect of a defective part or component was to replace or

correct that defective part or component and no one ever

thought that a defective part meant that the entire item

was defective.

App. 8

12. Following my resignation from the Department

of the Defense in 1955, I practiced law in Washington,

D.C. on various bases, part of the time as a single practi-

tioner, part of the time as a joint venturer with Simpson,

Thacher & Bartlett of New York City and part of the time

as a partner of Trowbridge vom Baur. In September 1966,

I became a partner in the New York City, Washington,

Paris and London firm of Coudert Brothers and am still

engaged in the practice of law with that firm, with offices

at 200 Park Avenue, New York, New York 10017. From

time to time, I have advised contractors with the various

military departments and, since 1966 I have been general

counsel to the National Security Industrial Association, a

non-profit association of military contractors organized by

James Forrestal in World War II to advise, first, the Navy

Department and, then, on its formation, the Department

of Defense, with respect to the most satisfactory commer-

cial practices and procedures in respect of military pro-

curement. At no time prior to April 11, 1968 have I heard

anyone in or out of the Department of Defense suggest

that there had been any change in the policy of the as-

sumption of risk by the military departments and the

elimination of insurance premiums from contract prices as

described above in paragraphs 7 and 11.

DATED: June 4, 1971.

/s/ Hensel

H. Struve Hensel

SUBSCRIBED AND SWORN to before me this 4th

day of JUNE, 1971.

SIGNATURE: /s/ Ann Bushong

(Name typed or printed)

Notary Public in and for said County and State.

App. 9

My Commission Expires:

ANN BUSHONG

Notary Public, State of

New York

No. 31-5550300

Qualified in New York

County

Commission Expires

March 30, 1972

BRIEF

Supreme Court, i$.

i / FLLE®

a

JUN 9 ~ 2003

No. 02-1411

IN THE |

Supreme Court of the Gnited States

THE BOEING COMPANY,

V.

Petitioner,

UNITED STATES OF AMERICA EX REL. BRETT ROBY,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Sixth Circuit

REPLY BRIEF

CARL S. RAUH

AMY SABRIN

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM LLP

1440 New York Avenue, N.W.

Washington, D.C. 20005

(202) 371-7000

JOHN W. WALBRAN

THE BOEING COMPANY

P.O. Box 516

MC § 100-3340

Saint Louis, MO 63166

(314) 234-6857

CARTER G. PHILLIPS*

P. DAVID RICHARDSON

STEPHEN B. KINNAIRD

JENNIFER M. COLLINS

SIDLEY AUSTIN BROWN

& WOOD LLP

1501 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

June 9, 2003

* Counsel of Record

TABLE OF CONTENTS

TABLE OF AUTIIORRITIES..............50.cccceeceetneer ees

EE I 25 ook ictnng ey re Sener oes

UII oon everett ccatcn eaereacmo cals psoas

il

TABLE OF AUTHORITIES

CASES Page

Cook County v. United States ex rel. Chandler,

UZ AA. TEP viva dec hee nice 9

Leo Sheep Co. v. United States, 440 U.S. 668

(FTEE bike BS ee eee 2

Shutte v. Thompson, 82 U.S. (1S Wall.) 151

UPD ikiesss suction pace ae ee ae res

TRW Inc. v. Andrews, 534 U.S. 19 (2001)............. ]

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

ef EN ania RN TUE ee 7, 9, 10

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

AT Si a ee 3

United States v. Bornstein, 423 U.S. 303 (1976)... 8,9

United States v. United States Cartridge Co., 198

P20 050 CRN GO. SP cist scons i

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

CRED sisincciikasdcocesmnmepeieeniia asta uuceaees gaceeras 5

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

ae: sks Gari ecrace meee ae oan 10

White v. Western Title Ins. Co., 710 P.2d 309

tS | RERUN RMD Pini nacceo ent l

REGULATIONS

MESSE. 33... 3,

A as, 1

46 Fed. Reg. 40,221 (Aug. 7, 1981) ........cccccscc000

OTHER AUTHORITIES

Armed Serv. Procurement Regulations § 7-

PR TRE eis cieliinscrcsirctn jects vee tapes 2

DAR-FAR Comparison Spread Sheet for Part 46.. 4

Defense Procurement Circular 86 (1971) ............. ra

Settlement Agreement 8

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

the Commission on Procurement (1972)

ee ee

REPLY BRIEF

The petition demonstrated that the rulings below

contravene the plain language of the High-Value Item Clause

(“HVIC”) and the False Claims Act (“FCA”), conflict with

decisions of other courts, and effect a massive shift of

business risk from the government to private industry in

derogation of longstanding federal policy. Respondents’

arguments, notable for what they ignore, do nothing to cast

doubt on the worthiness of this case for review by the Court.

I. A. Respondents’ arguments cannot be reconciled with —

and indeed disregard — the plain meaning, the history, and the

purpose of the HVIC. The HVIC provides that “the Con-

tractor shall not be liable for loss of or damage to property of

the Government (including the supplies delivered under this

contract)” due to product defects. 48 C.F.R. § 52.246-24(a)

(emphasis added). Respondents claim that the Government

should not be deemed to have self-insured against fraud, but

the above-quoted language expressly shields the contractor

from any kind of damages resulting from product defects,

with only one exception not involved here: those caused by

the “willful misconduct or lack of good faith’ by the

contractor’s most senior management. Jd. § 52.246-24(a),

(b). The HVIC on its face thus necessarily covers damage to

high value items arising from fraud or gross negligence by

any other contractor employees. As Judge Boggs stated in

dissent, “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.’”” Pet. App. 20a.'

' The express exclusion of senior management misconduct means that

there can be no additional implied HVIC exclusions, for FCA violations or

otherwise. Pet. App. 23a (Boggs, J., dissenting); see also TRW Inc. v.

Andrews, 534 U.S. 19, 28 (2001) (if express exceptions are enumerated,

“additional exceptions are not to be implied, in the absence of evidence

of a contrary legislative intent.””); White v. Western Title Ins. Co., 710

2

Notwithstanding the HVIC’s plain meaning, respondents

insist that its limitations do not apply to “liability under

sources of law other than the contract itself,” U.S. Opp. 8.

Remarkably, respondents maintain this position without even

mentioning the history of the HVIC. That history shows that

the clause purposefully was drafted to shield contractors from

paying product-defect damages regardless of the nature of the

legal claim asserted. The Defense Department intentionally

worded the HVIC “in terms of liability arising from supplies

delivered to the Government,” rather than referencing specific

legal claims, and thus drew “no distinction ... between

liability founded in contract and in tort.” Defense

Procurement Circular 86, at 2 (1971) (“DPC 86”), C.A. J.A.

435. This is because “fragmentation of the policy of

Government self-insurance by numerous exclusions ... is self-

defeating because it necessitates some continuation of product

liability insurance protection for the risk exposure that the

Government has not assumed.” 4 U.S. Comm’n on Gov't

Procurement, Report of the Commission on Procurement 96

(1972), C.A. J.A. 406.

Most fundamentally, when the Government amended the

HVIC in 1974, it consciously chose to assume the risk for

losses arising from fraud and gross negligence — the very

conduct that violates the FCA. As originally drafted, the

HVIC expressly excluded not only losses from senior

management misconduct and bad faith, but also losses from

“fraud or gross negligence as amounts to fraud, on the part of

any personnel of the Contractor.” ASPR § 7-104.45(b)(1)

(1971), in DPC 86, at 3, C.A. J.A. 437. Had that exception

survived, it would have covered liability for damages under

the FCA and for common law fraud. Yet, in response to

defense industry comments that companies would be forced

to insure against fraud of lower-level personnel and thus

increase procurement costs, the Defense Department

P.2d 309, 314 n4 (Cal. 1985) (same canon applies to contracts); Leo

Sheep Co. v. United States, 440 U.S. 668, 669 (1979).

ee

3

eliminated the exception. Pet. 5-6; Br. of National Defense

Industry Ass’n (“NDIA”) 6-10. Failing even to acknowledge

this history, respondents contend that there must be “very

clear” contractual language before the Government will be

“presumed” to self-insure for losses arising from fraud. U.S.

Opp. 9. They cite no authority for such a standard,” but in

any event it is well satisfied by the crystal clear language of

the HVIC, as confirmed by the record of the Department’s

unmistakable intent. Pet. App. 20a (Boggs, J., dissenting).

Respondents base their argument, not on the operative

language of the HVIC that limits contractor liability and

defines exemptions, but on the _ prefatory phrase

“notwithstanding any other provision of this contract” that

appears in the HVIC, 48 C.F.R. § 52.246-24(a). U.S. Opp. 8.

This phrase does not remotely suggest a broad exemption of

noncontract damages from the HVIC, much less overcome

the rule that exceptions may not be implied beyond those

enumerated. It simply clarifies that no warranty or other

clause in the contract derogates from the HVIC; this is

evident from the predecessor version, which provided that

“{njotwithstanding any other provision of this contract,

including specifically the ‘Inspection’ clause and any

“Warranty of Supplies,’ ‘Correction of Deficiency’ or other

warranty clause, the Contractor shall not be liable ....”- DPC

86, at 4, C.A. J.A. 437. The phrase is intended to prevent

contracting officers from undercutting the HVIC by

specifying other contract remedies.

Similarly unsound is respondents’ reliance on the reference

to “contractual liability” in the policy statement of 48 C.F.R.

? The authority that exists is to the contrary. See United States v.

United States Cartridge Co., 198 F.2d 456, 460-61 (8th Cir. 1952)

(enforcing broad assumption-of-risk clause nearly identical to the HVIC to

preclude FCA liability — notwithstanding that the contract did not

expressly reference fraud or the FCA); United States v. Bankers Ins. Co.,

245 F.3d 315, 324 (4th Cir. 2001) (“The Government should comply with

its contractual obligations, and it cannot avoid them merely by invoking a

statutory civil claim, such as one contemplated under the FCA.”).

4

§ 46.803(b). First, as Judge Boggs noted, this phrasing “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).” Thus, respondents

cannot invoke the policy statement, a form of parol evidence,

to vary contract terms. Pet. App. 2lan.1. Indeed, the policy

statement itself provides that, if it conflicts with the specific

contract term, the contract will control. 48 CFR.

§ 46.803(d). Second, as Judge Boggs further observed, the

term “contractual liability” in context means any liability that

“arise[s] out of a relationship between the parties that is based

in contract.” Pet. App. 21a n.1. The FCA liability claimed

here undoubtedly arises from the performance of the contract:

respondents alleged that Boeing submitted a false claim for

payment under a contract because the gears failed to comply

with contract specifications.”

Giving the HVIC its intended effect also does not

“undermine Congress’s efforts, in amending the FCA in 1985

and 1986, to combat fraud in military contracting,” U.S. Opp.

9. “The HVIC does not overwrite or preempt the FCA by

relieving contractors of liability for fraud.” Pet. App. 2la

(Boggs, J., dissenting). It simply holds the Government to its

bargain of assuming the risk of property loss from defective

supplies in order to reduce procurement costs, regardless of

whether the FCA or any other law authorizes the Government

to recover damages for that loss.‘

—

> Moreover, the respondents’ contrary interpretation is inconsistent not

only with the history of the HVIC, Pet. App. 2la nl. (Boggs, J.,

dissenting), but also with the drafting history of the policy statement itself.

The “contractual liability” language, which did not appear in the prior

Department of Defense policy statement, was added at the time of the

codification of the FAR simply to “conform to [Office of Federal

Procurement Policy] guidelines,” and no substantive change was intended.

DAR-FAR Comparison Spread Sheet for Part 46, C.A. J.A. 683-85; 46

Fed. Reg. 40,221 (Aug. 7, 1981).

“The relator’s principal HVIC argument — that a party by contract

cannot release or limit rights conferred by statute, but only nghts given by

5

It is notable that the Sixth Circuit, citing the history above,

did not embrace the respondents’ strained construction of the

HVIC as encompassing only liability in contract. Pet. App.

Ja-9a. The Sixth Circuit instead implied a more limited

exemption for “statutory violations,” id. at 10a, but its ruling

likewise has no colorable warrant in the text or history of the

clause, and is in conflict with other circuits. See supra, n.2.

The disarray reflected in these conflicting Government and

judicial interpretations regarding one of the most critical

regulations governing major federal procurement contracts

underscores the need for this Court’s review.

B. Respondents fail to rebut the conflict of decisional

authority demonstrated in the petition. The Eighth Circuit

held, in direct conflict with the decision below, that where the

Defense Department has statutory authority to allocate risk,

and has assumed the risk of damages without excluding fraud,

a contractual limitation clause must be enforced to limit FCA

damages, even though the FCA is not specifically referenced

in the contract. United States v. United States Cartridge Co.,

198 F.2d 456, 465 (8th Cir. 1952). Respondents deny a split,

but they rely on distinctions without a difference. They argue

that the Cartridge contract was authorized by a different

statute, but do not contest that the Department’s present

statutory authority (Pet. 16) is equally broad. They make too

much of the Eighth Circuit’s emphasis on the “uncon-

ventional” Government supervision of the contractor’s

operations. U.S. Opp. 11. While unconventional in 1940,

such supervision is standard now, and the production of the

Speco gears here was monitored on-site by Government

quality assurance representatives. The exigencies of war did

create special liability risks for the contractor in Cartridge,

198 F.2d at 463, but the exigencies of modern warfare and

modern procurement (hugely expensive, complex weapons

the contract itself, Roby Opp. 7-10 — is legally wrong. Shutte v.

Thompson, 82 U.S. (15 Wall.) 151, 159 (1872) (“A party may waive any

provision, either of a contract or of a statute, intended for his benefit”).

See also United States v. Winstar Corp., 518 U.S. 839 (1996) (plurality).

6

systems built by a multitude of contractors and workers)

likewise create substantial risks of FCA liability that

companies would not assume without costly insurance.

C. The ramifications of the decision below justify certiorari

independently of the circuit conflicts. Respondents do not

deny that the rule below exposes contractors to potentially

billions of dollars of uninsured risk under existing contracts.

Their pat claim that contractors could not reasonably rely on

the HVIC is refuted by its plain meaning and history, by

Cartridge, and by the amici curiae. Respondents also

wrongly contend that there is no windfall to the government;

it, however, avoided paying contractor charges for insurance

costs that otherwise would have been incurred. Nor are

respondents’ arguments regarding prospective effects persua-

sive. Their claim that few contractors will be affected by

having to bear the risk of liability for “knowing fraud” is

disingenuous. The FCA defines “knowing” to include “reck-

less disregard,” which the Government contends is satisfied

by gross negligence. Pet. 19. Even the most responsible and

prudent contractor cannot completely eliminate the possibility

of manufacturing defects in its own operations or those of its

suppliers at any tier. Under the Sixth Circuit’s interpretation

of the HVIC and the FCA, it is but a short leap from such

defects to allegations of gross negligence and the threat of

treble damages liability under the FCA. That means the

contractor must either purchase insurance, raise prices, or

exit. Respondents claim it is the Government’s prerogative to

weigh and allocate those risks, but the government agencies

that promulgated the HVIC already did so. The Government

may change the policy, but only prospectively (since it cannot

abrogate existing contracts) and then, by rulemaking. It

remains imperative that this Court resolve the meaning of the

HVIC, which is incorporated in every major procurement

contract, and which allocates the huge risks associated with

7

modern weapons, space, and other systems between the

government and private industry. See NDIA Br. 10-14.°

II. A. The Petition showed that the holding below, that

FCA damages 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), independently warrants

review. Pet. 22-30. Mustering little substantive argument in

response, respondents attempt to hide behind their faulty

construction of the August 3, 2000 Settlement Agreement as a

reason not to decide this issue. Respondents contend that,

even if Boeing had won in the Sixth Circuit as to the FCA

measure of damages, Boeing nevertheless would have “lost”

under the Agreement and would have owed the additional $15

million. See, e.g., U.S. Opp. 13-16. The Government asserts

that, consequently, the Sixth Circuit’s ruling on FCA damages

“does not warrant this Court’s review ... because it has no

bearing on the proper disposition of [this] case.” /d at 14.

The relator asserts that this renders the Petition “moot.” Roby

Opp. 19. These contentions are wrong for several reasons.

First, respondents’ construction of the Settlement

Agreement is contrary to its plain language. The first clause

of the provision they cite — a clause which the Government

does not discuss and which the relator does not even disclose

in the text of his brief — states clearly that Boeing will be

deemed to be the “prevailing party” if the court of appeals (or

*The relator’s brief brims with invective and outright misrepre-

sentations that are irrelevant to the questions presented. Boeing vigorously

denies these accusations. During five years of litigation, no evidence was

ever developed supporting the meritless accusation that Boeing knowingly

installed defective gears in any aircraft. The dispute concerns whether

Boeing adequately supervised a subcontractor’s manufacturing and

inspection processes. Boeing replaced the few gears found to have micro-

scopic grinding cracks; there has been no mishap involving Speco gears

for over a decade; and the Army has since ordered hundreds of additional

gears from Boeing made to the same specifications with the same alloy.

Moreover, the Honduras mishap referenced by relator (Roby Opp. 3 n.1)

did not involve a Speco gear, and the Army found no gear defeci.

8

this Court) holds “that the United States cannot recover

damages under the False Claims Act for loss of a helicopter

resulting from the failure of a defective flight — critical

component part.” Settlement Agreement 9 2.h.i.(a) (Roby

App. 8-9) (emphasis added.) Boeing argued below (and

argues here) that the Government cannot recover for the loss

of the entire helicopter, but instead is limited by the language

of the FCA to the amount paid out by reason of the alleged

false claim. If this Court agrees, Boeing will indisputably be

the “prevailing party” under the Settlement Agreement.

Second, because of the disjunctive “or” between the first

and second clauses of §] 2.h.i.(a), as long as Boeing is deemed

to be the prevailing party under the first clause, discussed

above, the meaning of the second clause (on which

respondents’ arguments are entirely based) is irrelevant.°

Third, the mere possibility that the respondents might on

remand argue that they have prevailed under the Settlement

Agreement (see id. J 2.h.iii., Roby App. 10) even if they lose

in this Court is not a credible basis for avoiding review of the

critical, but plainly incorrect, ruling below.

B. Respondents’ other arguments concerning the FCA

measure of damages are equally unavailing. For example,

while contending that the decision below is consistent with

this Court’s ruling in United States v. Bornstein, 423 U.S.

303, 316 n.13 (1976), the respondents make no attempt to

refute Boeing’s point (Pet. 28-29) that no court, in the 27

years since Bornstein was decided, has ever extended the

FCA measure of damages articulated in that case to

Sin any event, respondents misconstrue the second clause. Boeing did

not advocate a position below that would cause it to pay an additional

$15 million even if the Sixth Circuit ruled in Boeing’s favor. The terms

“contract value or price” that parenthetically qualify “value of the

helicopter” refer to the contract price of a new helicopter (the measure of

damages advocated by respondents, Pet. App. 19a), not to the contract

price of the remanufacturing contract. Boeing would prevail under the

second clause as well if this Court were to adopt the Aerodex rule.

9

encompass the type and extent of damages that the Sixth

Circuit’s decision would allow here. Indeed, the relator

concedes this point. Roby Opp. 25-26. The FCA is a statute

addressing false claims, not products liability. ’

Moreover, the Government’s attempt to distinguish

Aerodex misses the mark. See U.S. Opp. 17-18. Aerodex

holds that “damages under the False Claims Act must be

measured by the amount wrongfully paid to satisfy the false

claim.” 469 F.2d at 1011. Contrary to the Government’s

contention (see U.S. Opp. 18), the phrase “[iJn a case of this

kind,” which qualifies the sentence quoted above, in no way

limits the Aerodex rule to that one case. Instead, the “kind” of

case referred to is an FCA case like this one, in which the

Government seeks “consequential damages incurred as a

result of the delivery of defective goods.” 469 F.3d at 1011.°

Relator’s Opposition tries to avoid the circuit conflict by

suggesting that all FCA cases are limited to their facts:

“[{njeither the Fifth Circuit in Aerodex nor any other court has

’ In response to Boeing’s position that FCA damages are limited to

“recovering money the government was fraudulently induced to pay,”

(Pet. 25), the relator asserts — without citing any authority — that “[t)his

completely misstates the purpose of the FCA.” Roby Opp. 21. Boeing’s

position, however, fulfills precisely the “‘chief purpose’” of the FCA

damages provision as articulated by this Court: namely, “‘to provide for

restitution to the government of money taken from it by fraud.’”

Bornstein, 423 U.S. at 314 (emphasis added).

® The Government fails even to address Boeing’s argument (see Pet.

26-28) that Congress, in amending the FCA in 1986, declined to overrule

Aerodex, and thus declined to make damages like those here recoverable.

While the relator suggests that the reasons for deleting the proposed

consequential damages provisions are a mystery (Roby Opp. 27-29), this

Court recently explained that Congress in 1986 allowed trebling of

baseline damages as a “substitute” for consequential damages. Cook

County v. United States ex rel. Chandler, 123 S.Ct. 1239, 1247 n.9 (2003).

Neither respondent addresses petitioner’s point that the damages allowed

by the Sixth Circuit here would exceed even those contemplated by the

proposal Congress rejected in 1986, by allowing damages for the loss of

the entire helicopter before trebling. See Pet. 27-28.

10

either established or even hinted at a ‘rule’ restricting FCA

damages in every case to the amount of the false claim.”

Roby Opp. 17-18 (emphasis added). The Fifth Circuit in

Aerodex, however, stated: “Upon careful analysis, we hold

that the language of the False Claims Act does not include

consequential damages resulting from delivery of defective

goods.” 469 F.2d at 1011. The Ninth Circuit stated in United

States v. Woodbury. “Ordinarily the measure of the govern-

ment’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.” 359 F.2d 370, 379

(9th Cir. 1966). These courts clearly articulate generally

applicable principles intended to extend beyond the four

corners of the cases before them. And the principles stated

irreconcilably conflict with the Sixth Circuit’s erroneous

holding in this case.

Relator’s central thesis seems to be that the Court should

embrace, not resolve, these conflicts; that there are not and

should never be any “rules” governing this arena, only

“flexibility.” Roby Opp. 20-21. To be sure, the determin-

ation of damages involves a fact-specific, case-by-case

inquiry, but the analysis still must be bounded by clear legal

principles that are required by the statutory language and

applied uniformly by the federal courts. See Pet. 25

(analyzing statute). The cases cited by relator as exemplars of

a desirable “flexibility” (see Roby Opp. 29 & n.20) only

underscore the uncertainty, confusion and incentives to forum

shop that prevail in this area. This Court, therefore, should

clarify what damages are available under the FCA.

CONCLUSION

The petition for writ of certiorari should be granted.

CARL S. RAUH

AMY SABRIN

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM LLP

1440 New York Avenue, N.W.

Washington, D.C. 20005

(202) 371-7000

JOHN W. WALBRAN

THE BOEING COMPANY

P.O. Box 516

MC § 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

1501 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

June 9, 2003

*Counsel of Record