Petition for Writ of Certiorari — Lithium Power Technologies, Inc. v. United States ex rel. Longhi

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Ju The ORACE OF THE CLERK

Supreme Court of the Anited States

LITHIUM POWER TECHNOLOGIES, INC.

and M. ZAFAR MUNSHI,

Petitioners,

UNITED STATES OF AMERICA EX REL.

ALFRED J. LONGHI and

UNITED STATES OF AMERICA,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

PETITION FOR A WRIT OF CERTIORARI

DAVID C. HOLMES

LAW OFFICES OF DAVID C. HOLMES

2950 North Loop West, Suite 500

Houston, Texas 77092

(713) 586-8862

Attorney for Petitioners

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

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

Whether the materiality requirement under the

False Claims Act can be satisfied by a mere showing

that a false statement had the abstract potential to

influence a hypothetical government decisionmaker,

without examining the nature of the decisionmaking

process and the criteria used by the actual decision-

makers.

Whether, in a summary judgment proceeding, the

existence of scienter under the False Claims Act may

be inferred as a matter of law from the mere

existence of false statements, even though the

contractor presents summary judgment evidence to

rebut the existence of scienter.

Whether complete disgorgement of all sums paid

to a contractor is a proper measure of damages under

the False Claims Act, when the contractor was

eligible to receive the contract and has fully per-

formed all of the services required by the contract.

QUESTIONS PRESENTED — Continued

Whether federal public policy bars the enforce-

ment of a release and indemnification agreement by

the relator in a gui tam suit under the False Claims

Act, when the relator executed the release after

disclosing his allegations to the government, and

when enforcement of the release is necessary to

prevent a fraud by the relator.

RULE 14.1(B) STATEMENT

All of the parties in the proceeding in the court

whose judgment is sought to be reviewed are

contained in the caption.

RULE 29.6 STATEMENT

No parent or publicly held company owns more

than 10% of the stock of Lithium Power Technologies,

Inc.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ...................0..0...eecee i

PREP Eae BA. TEE) RAR MMI © sccsescscescnevecsessssenssens ili

RULE 29.6 STATEMENT .......cccscsscccccccsccccccccscnces ili

PETITION FOR A WRIT OF CERTIORARI ....... 1

Ce ee OT sid sesesesse<covessrcvecsscsivivavessbaseness 1

ii isenicsunintasapasndicastussbansaialeiieneninns 2

STATUTORY PROVISIONS INVOLVED............ 2

STATEMENT OF THE CASE......................0000200e- 2

REASONS FOR GRANTING THE WRIT ........... 7

A. The Fifth Circuit Adopted a Standard

for Materiality That Is Contrary to This

Court’s Precedent, That Is Contrary to

the Decisions of Other Courts of Appeals,

and That Disregards the Actual Decision-

making Processes of the Relevant Govern-

I i aitaiitetidenscccceictrierccevtidivcanecen 7

B. The Fifth Circuit Inferred Scienter as a

Matter of Law from the Mere Existence

of Alleged False Statements, Which De-

prived Lithium Power of the Right to a

Jury Trial on a Contested Issue of Fact.... 16

TABLE OF CONTENTS -— Continued

Page

C. The Fifth Circuit Approved an Un-

precedented Damages Model Based on

Complete Disgorgement of All Payments

Made to Lithium Power, Which Is Con-

trary to a Prior Decision of the Fourth

Circuit and Which Grants the Govern-

ment a Windfall Recovery That Greatly

Exceeds Any Actual Damages or Loss....... 21

D. The Fifth Circuit’s Application of Federal

Public Policy and the FCA to Bar

Enforcement of a Personal Release and

Indemnity by the Relator Conflicts with

This Court’s Precedent, Conflicts with

Decisions of the Ninth Circuit, and

Effectuates a Fraud by the Relator........... 30

I isin ssincanspievesiscadansacesanshcsatenseanashecs 36

TABLE OF CONTENTS — Continued

Page

APPENDIX

Opinion of the United States Court of Appeals

for the Fifth Circuit, filed July 9, 2009........... App. 1

Final Judgment of the United States District

Court for the Southern District of Texas,

Houston Division, filed March 13, 2008........ App. 38

Memorandum Opinion and Order of the United

States District Court for the Southern

District of Texas, Houston Division, filed

SESE a App. 39

Order of the United States District Court for

the Southern District of Texas, Houston

Division, filed September 27, 2007................ App. 69

Memorandum Order on Summary Judgment of

the United States District Court for the

Southern District of Texas, Houston Division,

TOE BERTEM BS, BOOT ....ccccccosccccccocesesssscccsoscces App. 121

Order on Petition for Rehearing and Rehearing

En Banc of the United States Court of

Appeals for the Fifth Circuit, filed

ke App. 140

Text of 31 U.S.C. § 3729 (amended 2009)....... App. 142

Text of 31 U.S.C. § 3730 (amended 2009)....... App. 145

Vil

TABLE OF AUTHORITIES

Page

CASES

Allison Engine Co. v. United States ex rel.

Sanders, 128 S. Ct. 2123 (2008) ...........ccccccccsccccccscees 8

Costner v. URS Consultants, Inc., 153 F.3d 667

EY dE SETI icaniccnccmuscanaaeeiannatenseuschebanmandonestunnenbnvadesd 8

Crawford-El v. Britton, 523 U.S. 574 (1998)............. 17

Kungys v. United States, 485 U.S. 759 (1988) .... passim

Minotti v. Lensink, 895 F.2d 100 (2d Cir. 1990)......... 35

Town of Newton v. Rumery, 480 U.S. 386

CuK ceuidnatdiactesiksunsciinanandieabinenaanein 31, 32, 33, 34, 36

United States v. Bourseau, 531 F.3d 1159 (9th

aie CITI cicsiakdiugdiedaaitiaremmacicstanalanaaennbdodtniabaniead 8

United States v. Gaudin, 515 U.S. 506 (1995)............. 8

United States v. TDC Management Corp., 288

ne ee Ge Ae hate tccnecssidntetanstccccectonsnesirets 24

United States v. Thomas, 709 F.2d 968 (5th Cir.

SII cicidbokcauccinsnicatumniammnnianencammnanmuainiaainanaadaeaen 24

United States ex rel. Berge v. Board of Trustees,

104 F.3d 1453 (4th Cir.), cert. denied, 522

Sei: ME CPT Oca cvavstcnssunsssanteraaasccesusunbusbadincmmunentns 7,8

United States ex rel. Compton v. Midwest

Specialties, Inc., 142 F.3d 296 (6th Cir. 1998)........ 24

United States ex rel. Green v. Northrup Corp.,

59 F.3d 953 (9th Cir. 1995), cert. denied, 518

UF.BR, BOI CRIB) vcseesit\ncccescosssoscsesesesnsecersseses 32, 33, 34

Vill

TABLE OF AUTHORITIES — Continued

Page

United States ex rel. Hall v. Teledyne Wah

Chang Albany, 104 F.3d 230 (9th Cir. 1997)....33, 34

United States ex rel. Harrison v. Westinghouse

Savannah River Co., 352 F.3d 908 (4th Cir.

"CRTs 26, 27, 28

United States ex rel. Main v. Oakland City

University, 426 F.3d 914 (7th Cir. 2005) ................ 22

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

Se 0D icicctutbcscervees Ses AE CORAL NRE OSE NT 23, 24

United States ex rel. Medshares Management

Group, Inc., 400 F.3d 428 (6th Cir. 2005)................. 8

United States ex rel. Ritchie v. Lockheed Martin

Corp., 558 F.3d 1161 (10th Cir. 2009)...............32, 33

STATUTES

Be a BIE EP aitiissncassacisocescesssnrenens abauentuaianrasiisees 2

ie Feb | | enema Tdeyliaiatns- aakousnianaies 2

2: Bak Fea |. Seen sliaiilnaidiaaismnouiiadaelniesadaciemaiens 2

B1 U.S.C. § 3729 aX1).c0-c--cccccececccsesceescesecesecseeseceeees 7, 22

Gk Fem». | ear Aa Ee A 17

a os euaecbanonbacesusedeseonen 17

ee ey er I esueneannctnaiernseonnioneined 8

i cupennaoununnn’ 8

cea nenemmuennnnsesontbaninnna 2

Se ee ee osc s od ciccluccomibobdondnssusvesectuninecencs 4,35

TABLE OF AUTHORITIES — Continued

Page

31 U.5.C. § 3730(c)(1)..... eevieniacsunesseuieanala ..o1, 35

31 U.S.C. § 3731(d).......... 21, 22

S. Rep. No. 111-10 (2009) .. 8

RULES

Fed. R. Civ. P. 56(c)(2)............. —

Supreme Court Rule 13.1] 2

Supreme Court Rule 13.3.................... | : i

PETITION FOR A WRIT OF CERTIORARI

Lithium Power Technologies and M. Zafar Munshi

respectfully petition for a writ of certiorari to review

the opinion and judgment of the United States Court

of Appeals for the Fifth Circuit.

—__—_ —@ - —

OPINIONS BELOW

The panel opinion of the United States Court of

Appeals for the Fifth Circuit dated July 9, 2009, is

officially reported at 575 F.3d 458 (5th Cir. 2009) and

is reproduced in the Appendix at App. 1-37.

The district court’s opinion and order granting

summary judgment with respect to damages dated

January 3, 2008, is officially reported at 530

F. Supp. 2d 888 (S.D. Tex. 2008) and is reproduced in

the Appendix at App. 39-68.

The district court’s opinion and order granting

summary judgment with respect to liability dated

September 27, 2007, is officially reported at 513

F. Supp. 2d 866 (S.D. Tex. 2008) and is reproduced in

the Appendix at App. 69-120.

The district court’s opinion and order denying

enforcement of the release dated March 23, 2007, is

officially reported at 481 F.Supp. 2d 815 and is

reproduced in the Appendix at App. 121-39.

7 —

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JURISDICTION

The judgment of the United States Court of Ap-

peals for the Fifth Circuit sought to be reviewed was

entered on July 9, 2009. The order denying rehearing

en banc was entered on September 8, 2009. The peti-

tion is timely under 28 U.S.C. § 2102(c) and Supreme

Court Rules 13.1 and 13.3 because it is being filed

within 90 days after the denial of a timely petition for

rehearing. This Court has jurisdiction to review the

judgment of the United States Court of Appeals for

the Fifth Circuit pursuant to 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

The relevant statutory provisions involved are

31 U.S.C. § 3729 and 31 U.S.C. § 3730, which are

reproduced in the Appendix at App. 142-54. Both

statutes were amended in May 2009, while this case

was pending on appeal.

STATEMENT OF THE CASE

The Department of Defense offers funding for

scientific research for military applications under the

Small Business Innovation Research (“SBIR”) pro-

gram. Lithium Power made a number of proposals for

SBIR funding over the years. Some of the proposals

were funded (thus becoming contracts), and others

were not.

This case relates to two sets of SBIR contracts

The first set was funded by the Ballistic Missile De

fense Office (“BMDO”), and the second set was funded

by the Air Force. These are referred to as the BMDO

Phase I and II contracts and the Air Force Phase I

and II contracts.

Lithium Power successfully completed all of these

contracts. Lithium Power provided reports to the

government setting forth the results of the research,

along with a number of sample batteries using the

new technology. The government accepted all of the

reports and batteries without complaint. In fact, the

government praised the work done by Lithium Power.

At the end of the BMDO Phase I contract, Dr. Scott

Roberson trumpeted the success of the work:

The program was successful as ten opera

tional batteries were fabricated and deliv-

ered per contract. The delivered items were

the first to incorporate thin film technology

into rechargeable batteries which increased

the number of charge/discharge cycles by an

order of magnitude over existing battery

technologies.

R. 3364. At the end of the BMDO Phase II contract,

Dr. Dimitrios Lianos stated “I look[ed] through the

final report and it looks great. Thanks very much for

all your efforts.” R. 3366.

At the end of the Air Force Phase I contract,

Dr. David Ryan wrote that “All goals have been

achieved” and that “Final report has been received

and accepted.” R. 3368. During the Air Force Phase II

contract, Dr. Ryan wrote that “Your reports are very

exciting to read” and that the reports were “ex-

cellent.” R. 2150. At the end of the Phase II contract,

Dr. Ryan wrote that “this is a very impressive final

report.” R. 3371.

Alfred Longhi, who was a shareholder of Lithium

Power at the time, filed this qui tam action under the

False Claims Act (“FCA”) on November 18, 2002. The

district court had jurisdiction over the suit pursuant

to 31 U.S.C. § 3730{(b)(1). As required by the FCA,

Longhi filed the lawsuit under seal.

Longhi made extensive allegations of fraud by

Lithium Power in connection with a wide range of

government research contracts. In particular, Longhi

claimed that Lithium Power fraudulently induced

BMDO to award the contracts by making false

statements about its company history, its facilities, its

employees, and its arrangements to use research

facilities of third parties. Longhi also claimed that

Lithium Power fraudulently induced the Air Force to

award contracts by concealing Lithium Power’s prior

work for BMDO.

After filing the lawsuit, Longhi entered into a

business transaction under which he sold his stock in

Lithium Power to Dr. Munshi’s wife for $80,000.00.

Dr. Munshi and his wife were unaware of the lawsuit,

which was under seal. The sale agreement contained

both a release and a covenant not to sue by Longhi.’

Longhi knew that Dr. Munshi and his wife would not

have agreed to the sale if they knew that Longhi had

filed, or planned to file, a qui tam suit. R. 2376-78.

Nonetheless, he proceeded with the stock sale

even though he had no intention of honoring his

contractual promises.

Almost three years later, in September 2005, the

United States decided to intervene in some, but not

all, of Longhi’s claims. At that time, the lawsuit was

finally unsealed.

Lithium Power sought to enforce Longhi’s release

with respect to his personal claims (i.e., the claims

that were not being pursued by the government).

However, the district court not only refused to enforce

* Paragraph 4(3) of the agreement contains a release and

indemnity:

Seller [Longhi’s family trust] and Alfred J. Longhi, Jr.

agree to release and hold harmless the Corporation,

its shareholders, directors, officers, and employees

from any and all pending claims or lawsuits filed by or

on its behalf against the Corporation and/or Purchaser

or which could have been filed or threatened on its

behalf against the Corporation and/or Purchaser.

R. 2342. Paragraph 4(6) of the agreement contains a covenant

not to sue:

Seller and Alfred J. Longhi, Jr. agree not to sue the

Corporation, its officers or directors for loss of Alfred

J. Longhi Jr.’s job at the Corporation, or for any other

matter prior to execution of the Agreement.

R. 2342.

the release; but it dismissed Lithium Power’s claims

for release and indemnification. App. at 121-39.

The parties filed cross motions with respect to

liability. Lithium Power presented summary judgment

evidence showing, among other things, that the

alleged misrepresentations and omissions were not

material and that Lithium Power did not act with the

requisite scienter. Nonetheless, the district court

granted summary judgment in favor of the govern-

ment with respect to liability. App. at 69-120.

The government then filed a second summary

judgment motion with respect to damages, claiming

that Lithium Power was liable for damages based on

disgorgement of all sums that it received under the

BMDO contracts and the Air Force contracts. The gov-

ernment also sought statutory trebling and penalties

under the False Claims Act. The district court granted

that motion, which resulted in an award of over $5

million in damages and penalties. App. at 39-68.

REASONS FOR GRANTING THE WRIT

A. The Fifth Circuit Adopted a Standard for

Materiality That Is Contrary to This

Court’s Precedent, That Is Contrary to the

Decisions of Other Courts of Appeals, and

That Disregards the Actual Decision-

making Processes of the Relevant Govern-

ment Agencies.

In adopting a new definition of “materiality”

under the False Claims Act (“the FCA”), the Fifth

Circuit has decided an important issue of federal law

that conflicts with the decisions of this Court and

other Circuits. Furthermore, the validity of the Fifth

Circuit’s definition of “materiality” and the proper

application of the materiality standard under the

FCA are important issues of federal law that have not

been, but should be, settled by this Court.

Prior to May 2009, the FCA did not contain an

express materiality element. Instead, the statute

merely referred to “false or fraudulent claims.” E.g.,

31 U.S.C. § 3729(aX1) (amended 2009); App. at 142.

Nonetheless, the Circuits universally held that mate-

riality was an element of a claim under the FCA. E.g.,

United States ex rel. Berge v. Board of Trustees, 104

F.3d 1453, 1459 (4th Cir.), cert. denied, 522 U.S. 916

(1997).

This Court has addressed the definition of “mate-

riality” on many occasions in connection with similar

federal statutes. The general formulation is that a

statement is “material” if it has a natural tendency to

influence, or is capable of influencing, the decision of

the decisionmaking body to which it is addressed.

E.g., United States v. Gaudin, 515 U.S. 506, 509

(1995); Kungys v. United States, 485 U.S. 759, 770

(1988). Most of the Circuits have applied that defi-

nition of “materiality” to claims under the FCA.’

E.g., United States v. Bourseau, 531 F.3d 1159, 1171

(9th Cir. 2008); United States ex rel. Medshares

Management Group, Inc., 400 F.3d 428, 445 (6th Cir.

2005); Berge, 104 F.3d at 1460. But see Costner v. URS

Consultants, Inc., 153 F.3d 667, 677 (8th Cir. 1998)

(applying a narrower definition of materiality that is

sometimes referred to as “outcome materiality”).

In applying that standard, this Court conducts a

context-specific analysis that is sensitive to what the

relevant government agency is seeking to accomplish

by requiring a particular disclosure. In order to deter-

mine whether a particular statement has a natural

tendency to influence a decisionmaking body, or is

capable of influencing a decisionmaking body, it is

* The Fraud Enforcement and Recovery Act of 2009

(“FERA”) added a statutory definition of “materiality” to the

FCA. 31 U.S.C. § 3729(b\(4) (2009). The new statutory definition

does not apply retroactively. 31 U.S.C. § 3729 note (2009). In any

event, the new statutory definition tracks the same formulation

that this Court used in cases such as Gaudin and Kungys. The

legislative history shows that Congress added the definition as

part of a statutory revision addressing this Court’s decision in

Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct.

2123 (2008). S. Rep. No. 111-10, at 10-12 (2009). There is no

indication that Congress intended to address the issue before

this Court.

necessary to understand the criteria used by the

decisionmaking body and the process through which

the decision is made. The Court does not analyze

materiality in the abstract.

The Court’s approach is illustrated by Kungys.

That: case arose under immigration law. The defen-

dant had falsely stated his date and place of birth on

his visa and naturalization applications. The govern-

ment sought to denaturalize him based on those false

statements. The issue before the Court was whether

the false statements were material.

The Court was unanimous in approving the

definition of materiality set forth above, but there

was disagreement on the proper application of that

definition. Each of the opinions is nonetheless in-

structive with respect to the proper application of the

definition of materiality.

Justice Scalia, in an opinion joined by Chief

Justice Rehnquist and Justice Brennan, found that

the false statements were not material. Justice Scalia

reasoned that the statements were not relevant to the

defendant’s qualifications for citizenship and that, if

he had disclosed his true place and date of birth, it

would not have “predictably” disclosed other facts

relevant to his qualifications:

There has been no suggestion that those facts

were themselves relevant to his qualifica-

tions for citizenship. Even though they were

not, the misrepresentation of them would

have a natural tendency to influence the

citizenship determination, and thus be a

misrepresentation of material facts, if the

true date and place of birth would predicta-

bly have disclosed other facts relevant to his

qualifications. But not even that has been

found here.

485 US. at 774 (opinion of Scalia, J.).

Justice Stevens, in an opinion joined by Justices

Marshall and Blackmun, agreed that the statements

were not material. However, Justice Stevens objected

to the notion that a statement could be material if it

“would predictably have disclosed other facts relevant

to his qualification.” Jd. at 792-93 (Stevens, J., con-

curring in the judgment). Justice Stevens stated the

test as follows:

To prove that a misrepresentation was mate-

rial, the Government must prove that the

statement concealed a disqualifying fact or

hindered the discovery of a disqualifying

fact.... Together and separately, the mate-

riality and procurement requirements reflect

congressional intent that citizenship status

not be taken away unless the Government

proves that the person was not qualified to

hold that status at the time it was obtained.

Id. at 789 (Stevens, J., concurring in the judgment).

In a dissenting opinion, Justice White argued

that the falsity of the statements, by itself, was a

material fact because it would have caused the

agency to conduct an investigation:

In other words, the proper inquiry is not only

whether the true date and place of birth, in

isolation, would have aroused suspicion, but

also whether an investigation would have

ensued had petitioner revealed the true facts

and thereby disclosed the discrepancy be-

tween them and the false statements in his

supporting documents. Former Ambassador

Seymour Maxwell Finger, Vice-Consul in

Stuttgart in January 1947, testified that if

there were discrepancies between the visa

application and the supporting documents an

investigation certainly would have occurred,

a view that is consistent with the regulations

then in effect.

Id. at 809 (White, J., dissenting). Justice O’Connor

indicated her agreement with this portion of Justice

White's dissent. Jd. at 801 (O’Connor, J., dissenting in

part).

While the members of the Court reached differing

conclusions on the application of the definition of

materiality under the facts of that case, each of the

opinions looked to the context and practical signi-

ficance of the facts in question. Each opinion

examined the purposes of the statute and the goals of

the regulatory scheme. Materiality is not an abstract,

hypothetical proposition, but instead is a practical,

context-specific issue. None of the members of this

Court analyzed the issue in the abstract.

In this case, the Fifth Circuit purported to adopt

the conventional definition of “materiality,” but the

court then proceeded to modify that definition. Citing

broad dictionary definitions of “tendency,” “capable,”

and “influence,” the court adopted an abstract stan-

dard that is not tied to the actual context of the

representations or what the decisionmakers were

seeking to accomplish:

Thus, the “natural tendency to influence

or capable of influencing” test requires only

that the false or fraudulent statements

either (1) make the government prone to a

particular impression, thereby producing

some sort of effect, or (2) have the ability to

effect [sic] the government’s actions, even if

this is a result of indirect or intangible

actions on the part of the Defendants. All

that is required under this test of ma-

teriality, therefore, is that the false or

fraudulent statements have the potential to

influence the government’s decisions.

App. at 21-22. Making the government “prone to a

particular impression” and producing “some sort of

effect” is not the standard applied by any of the

members of this Court in Kungys. Likewise, “indirect

or intangible actions” that “have the ability to affect

the government’s actions” would not be material under

any of the opinions in Kungys. The Fifth Circuit’s

abstract standard is thus contrary to Kungys and to

the opinions of the other Circuits that have adopted

the conventional standard.

The Fifth Circuit’s abstract standard is particu-

larly troublesome because, in this case, the evidence

is overwhelming that the alleged false statements

were not material to the actual decisionmakers. For

example, the Fifth Circuit hypothesizes that the

alleged false statements had the potential to influ-

ence BMDO because “Lithium Power painted a

picture of an established company” when it fact it

“was in its preliminary stages of development that

had yet to demonstrate any proven success.” App. at

26. The Fifth Circuit did not consider evidence from

the actual BMDO decisionmaker, Jeff Bond. For

example, Mr. Bond explained that the business

history of Lithium Power was not one of the selection

criteria:

Whether a company is incorporated or

not, and how long a company has been

in business, were not evaluation cri-

teria. Even if they were brought up during

the formal evaluation and Panel Review

process, they would not have been germane

to the Phase I evaluation process. Potential

companies proposing for an SBIR award did

not have to be an incorporated entity until

“contract award.” Further, how long a

company was in business was not rele-

vant to any facet of the decision making

process during the Panel Reviews. These

two matters therefore had nothing to do

with my decision, as Source Selection

Authority, to fund a proposal by

Lithium Power or any other company.

R. 2163-64 (emphasis added).* Mr. Bond testified that,

if a technical reviewer had raised concerns about the

ability of Lithium Power to complete the work, he

would have “tabled” those concerns as irrelevant. R.

2401-02. If these sorts of facts are not relevant to the

selection process and would not have sparked an in-

vestigation, they cannot possibly be material under

any of the opinions in Aungys.

Similarly, the government argues that Lithium

Power fraudulently induced Air Force personnel to

grant the Air Force contracts by failing to disclose the

existing BMDO contracts in the body of the Air Force

contract proposals. However, Lithium Power presented

evidence that it had, in fact, separately disclosed the

BMDO work to the Air Force and to the final Air

Force decisionmaker, David Ryan. R. 2115, 2912. In

fact, the BMDO work was listed in an attachment to

the Air Force Phase II proposal. R. 1805. Given that

Dr. Ryan awarded the Air Force contracts with actual

knowledge of the BMDO contracts, he obviously did

not consider those contracts to be relevant to the

award of the contract, and in fact he did not com-

mence an investigation. Lithium Power’s failure to

include a reference to the BMDO contracts in the

* The Fifth Circuit noted that one of the technical reviewers

claimed to be influenced by the representations in question. App.

at 26-27. Materiality must be judged with reference *o the

decisionmaking body, not with reference to a subordinate techni-

cal reviewer. A technical reviewer is not the decisionmaking

body. In any event, Mr. Bond made it clear that he would have

“tabled” any such concerns if they had been raised. R. 2401-02.

body of the proposals could not possibly have been

material to his decisionmaking process.

The Fifth Circuit evaded those issues by applying

an abstract standard that considered whether the

alleged false statements could possibly have influ-

enced a hypothetical decisionmaker. That standard

ignores the realities of the evaluation process and the

objectives that the agencies were trying to achieve. In

fact, the Fifth Circuit’s standard virtually nullifies

the materiality requirement, because the government

or a qui tam plaintiff can always think of some

theoretical way in which a minor misrepresentation

could possibly affect the evaluation of a contract

proposal.

The opinions in Aungys illustrate the error of the

Fifth Circuit’s approach. Under Justice Scalia’s

opinion, the statements concerning Lithium Power's

business history would not be material because they

were not relevant to the award of the contracts and

because disclosure of the truth would not “predictably

have disclosed” any disqualifying facts. In fact, there

is no evidence that there were any disqualifying facts

in the first place. Under Justice Steven’s opinion, the

statements would not be material because they did

not conceal a disqualifying fact or hinder the dis-

covery of a disqualifying fact. Under Justice White's

opinion, the statements would not be material

because discovery of their falsity would not have led

to an investigation. These were facts that had no real

world relevance to the decisionmaking process.

The Court should grant the petition to resolve

the conflict between the Fifth Circuit’s formulation of

the materiality standard and the conventional stan-

dard applied by this Court and by the other Circuits.

The Court should settle the proper application of the

materiality requirement by rejecting the Fifth

Circuit’s abstract formulation and applying the

practical, context-specific standard from Kungys.

Materiality should be assessed based on the realities

of the administrative process, not on speculation and

surmise. Under the proper standard, the judgment

against Lithium Power should be reversed.

B. The Fifth Circuit Inferred Scienter as a

Matter of Law from the Mere Existence of

Alleged False Statements, Which Deprived

Lithium Power of the Right to a Jury Trial

on a Contested Issue of Fact.

In affirming the district court’s finding that

Lithium Power acted with the requisite scienter for

purposes of the FCA, the Fifth Circuit inferred sci-

enter from the mere existence of the alleged false

statements. Furthermore, the Fifth Circuit found

scienter as a matter of law, despite the existence of

controverting summary judgment evidence. The prop-

er legal standard for assessing scienter under the

FCA is an important question of federal law that has

not been, but should be, settled by this Court.

The scienter standard in the FCA is found in the

statutory definition of “knowing” and “knowingly”:

Knowing and Knowingly Defined. — For

purposes of this section, the terms “knowing”

and “knowingly” mean that a person, with

respect to information —

(1) has actual knowledge of the in-

formation;

(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) (amended 2009); App. at 144.*

It is, of course, well settled that contested issues of

intent and scienter present questions of fact for the

jury, rather than questions of law for the courts. See

Crawford-El v. Britton, 523 U.S. 574, 589 (1998).

In this case, the government presented no sum-

mary judgment evidence to support a finding of

scienter. Instead, the government simply identified

various alleged false statements and asserted that

Lithium Power, at a minimum, acted with reckless

disregard for the truth.

In response, Lithium Power presented evidence

to rebut the existence of scienter. For example, one of

* The May 2009 amendments to the FCA changed the

format, but not the substance, of the definition. 31 U.S.C

§ 3729 bX 1).

the government’s allegations is that Lithium Power

failed to disclose the existence of the BMDO contracts

in the “related work” section of the Air Force pro-

posals. Lithium Power presented testimony from Dr.

Munshi that he did not interpret the instructions for

the Air Force program to require disclosure of prior

contracts and that he believed he was in compliance

with the disclosure requirements. R. 2120. Lithium

Power also presented testimony from an expert

witness who confirmed Dr. Munshi’s interpretation of

the instructions. R. 2171-72. Finally, Lithium Power

presented evidence that it actually disclosed the

BMDO contracts to the Air Force, including dis-

closures to the actual Air Force decisionmaker. R.

2115, 2912. Lithium Power was not concealing

anything. All of those facts support the conclusion

that Lithium Power did not act with the requisite

scienter.

Rather than addressing the issue of scienter on

an evidentiary basis, the Fifth Circuit engaged in an

unprecedented analysis by inferring scienter from the

mere existence of the alleged false statements and

omissions. For example, in connection with the Air

Force proposals, the Fifth Circuit held that the exis-

tence of the omission established “that the Defen-

dants had no intention to perform according to the

terms of the SBIR.” App. at 26. The Fifth Circuit cited

no actual evidence of such intent, because the govern-

ment had offered none. The Fifth Circuit thus found

scienter as a matter of law based on an inference,

even though Lithium Power presented evidence suffi-

cient to rebut the existence of scienter.

Similarly, Lithium Power stated in the proposals

that it had “cooperative arrangements” for the use of

laboratories and equipment at the University of

Houston and Polyhedron Laboratories. The govern-

ment claims that this statement is false because

Lithium Power’s arrangement to use those facilities

and equipment was on a “fee” basis. Lithium Power

presented evidence from Dr. Munshi showing that Dr.

Munshi believed that his relationships with the

University of Houston and Polyhedron Laboratories

were “cooperative arrangements.” R. 2116-17. Jeff

Bond, the actual decisionmaker at BMDO, indicated

that “cooperative arrangements” was an acceptable

term that could apply to fee-based arrangements. R.

3351. At a minimum, that evidence raises a question

of fact for the jury on the existence of scienter.

Once again, however, the Fifth Circuit simply

inferred scienter from the alleged false statement and

disregarded the actual evidence of intent:

The Defendants either purposefully, or with

reckless disregard to the truth or the falsity

of their statements, misled the BMDO and

the Air Force into believing that Lithium

Power had a formal partnership with these

two organizations. The ability of any mem-

ber of. the public to essentially “rent” the

facility is not synonymous with a cooperative

arrangement of the. type the Defendants

hoped the government would infer by their

statements. These misrepresentations alone

would be sufficient to establish that the

Defendants had no intention to perform

according to the terms of the SBIR. . . .

App. at 24. There was no actual evidence that

Lithium Power “hoped” that the government would

draw a false conclusion from the term “cooperative

arrangement,” nor is there any evidence that Lithium

Power lacked an intention to perform under the

terms of the SBIR. The Fifth Circuit simply inferred

those facts from the existence of the alleged false

statements.

These are not questions of law to be decided by a

court. On the contrary, Lithium Power has the. con-

stitutional right to a jury trial on contested issues of

fact. Instead, the Fifth Circuit decided the issue as a

matter of law based on inferences that were rebutted

by summary judgment evidence. This not only

violated the summary judgment rules, Fed. R. Civ. P.

56(cX2), but it deprived Lithium Power of its right to

a jury trial.

Furthermore, by inferring scienter from the mere

existence of an alleged false statement, the Fifth

Circuit effectively negated the scienter element of an

FCA claim. In any case in which an FCA defendant

makes a false statement, a court can infer that the

defendant must not have intended to perform in ac-

cordance with the contract, or a court can infer that

the defendant was trying to give the federal agency a

false impression. The FCA places the burden of proof

on the government with respect to all elements of its

claim. 31 U.S.C. § 3731(d). Under the Fifth Circuit’s

analysis, the government is relieved of the duty to

prove an essential element of its case.

The Court should grant the petition to settle this

important question of federal law. The Court should

reject the Fifth Circuit’s inference-based approach and

should instead require actual evidence of the requi-

site scienter. When there is conflicting evidence,

scienter should always be a question for the jury, and

not the court. Under the proper approach to assessing

scienter, the judgment against Lithium Power should

be reversed.

C. The Fifth Circuit Approved an Unprece-

dented Damages Model Based on Complete

Disgorgement of All Payments Made to

Lithium Power, Which Is Contrary to a

Prior Decision of the Fourth Circuit and

Which Grants the Government a Windfall

Recovery That Greatly Exceeds Any Actual

Damages or Loss. |

In affirming the district court’s imposition of

damages based on disgorgement of all sums paid by

the agencies to Lithium Power, the Fifth Circuit has

decided an important federal issue on a basis that

conflicts with a prior decision of the Fourth Circuit.

Furthermore, the existence and application of a

disgorgement remedy under the FCA is an important

question of federal law that has not been, but should

be, settled by this Court.

The FCA requires the government to prove

damages by a preponderance of the evidence. 31

U.S.C. § 3731(d). In a typical FCA case, these dam-

ages relate to overcharges, deficient work, non-

conforming products or supplies, and similar issues

that lead to tangible damages to the government. If

the government cannot prove damages, the govern-

ment can still recover a civil penalty against the

defendant. 31 U.S.C. § 3729(a)1).

The government has never attempted to prove

that it suffered actual damages. In fact, it could not

possibly prove actual damages because (1) Lithium

Power completed all of the contracts within budget

and with accolades from the reviewers, and (2) the

agencies received all of the research that they

bargained for in the contracts. Under those cir-

cumstances, the correct statutory remedy for the

government is the civil penalty. See United States ex

rel. Main v. Oakland City University, 426 F.3d 914,

917 (7th Cir. 2005) (“The statute provides for

penalties even if (indeed, especially if) actual loss is

hard to quantify. . . .” (emphasis in original)).

Nonetheless, the government sought a windfall:

disgorgement of all sums paid to Lithium Power by

the agencies under a “fraudulent inducement” theory.

Specifically, the government identified alleged false

statements in the contract proposals submitted by

Lithium Power (for example, that Lithium Power

listed an incorrect date of incorporation in one of the

proposals). The government then argued that the

agencies were fraudulently induced to award the

contracts and that the proper measure of damages

was disgorgement of every penny that Lithium Power

received. The government sought to treble that sum

in accordance with the FCA and also to recover the

statutory civil penalties. Thus, the government

sought a recovery of over $5 million even though it

could prove no damages.

This theory, which was accepted by the district

court and the Fifth Circuit, is a significant expansion

of the FCA. The statute expressly requires the

government to prove damages, while providing a civil

penalty for the situations in which the government is

unable to prove damages. By recognizing a disgorge-

ment remedy, the Fifth Circuit’s decision allows

damage awards that bear no relation to the injury, if

any, suffered by the government. For example, in this

case, Lithium Power must pay over $5 million even

though its work for the agencies received excellent

reviews.

This Court has never recognized a fraudulent

inducement theory or disgorgement remedy under the

FCA.’ A few lower courts have recognized a limited

° The government has cited this Court’s decision in United

States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), to support a

“fraudulent inducement” theory under the FCA. However, the

actual issue in Hess was different. The defendants in Hess had

engaged in collusive bidding to obtain contracts from local

government units. The local government units paid the contracts

using funds from a federal program. The defendants argued that

they were not liable under the FCA because they had never

“presented” a claim to the federal government, but instead dealt

(Continued on following page)

disgorgement remedy for situations in which the

contractor would have been ineligible to receive the

contract absent the misrepresentation. E.g., United

States v. Thomas, 709 F.2d 968, 972-73 (5th Cir. 1983)

(requiring farmers who were ineligible for a cotton

subsidy program to repay the subsidies in full). Other

courts have held that a defendant may be liable for

ordinary damages equal to the total of all payments

from the government, when the defendant’s goods or

services were so deficient that they provided no value

to the government. E.g., United States v. TDC

Management Corp., 288 F.3d 421, 428 (D.C. Cir. 2002)

(because a contractor hired to be an impartial

ombudsman had a conflict of interest, the contractor’s

services had no value to the government); United

States ex rel. Compton v. Midwest Specialties, Inc.,

142 F.3d 296, 304 (6th Cir. 1998) (assessing full

damages when the contractor delivered valueless

brake shoes).

By contrast, the Fourth Circuit rejected the

application of a disgorgement theory when the

defendant gave the government what it paid for:

Harrison first argues that the district

court erred by ruling that he could not seek

disgorgement of all monies paid by DOE to

solely with the local government units. The Court rejected that

argument because the collusive bids caused the federal govern-

ment to advance money to the local government units. Jd. at

542-45. The Court did not address the existence of a disgorge-

ment remedy under a fraudulent inducement theory.

Westinghouse as damages. He claims that

the subcontract was void ab initio because of

the fraud perpetrated by Westinghouse and,

therefore, the $ 9 million that DOE ulti-

mately paid for the work GPC performed

under the subcontract should be disgorged.

The district court ruled that Harrison

failed to prove any actual damages suffered

by the government because there was no

evidence that it cost the government more to

have GPC perform the subcontract than any

other firm. Harrison does not dispute this

finding on appeal.

We conclude that, under the particular

facts of this case, the district court properly

required the plaintiff to prove damages by

showing how much more the government

paid GPC to perform the subcontract than it

would have paid another firm absent the

false no-OCI certification. Although West-

inghouse ran afoul of the fair bidding

requirements, there was no evidence

adduced at trial suggesting that GPC

failed to perform the work that it was

required to perform under the sub-

contract or that the government did not

receive the benefit of the work per-

formed. Harrison presented no evidence

that the government did not get what it

paid for or that another firm could have

performed the work for less. As such,

the district court correctly disallowed

Harrison from recovering disgorgement

of all $ 9 million that the government

paid for the subcontracted work.

United States ex rel. Harrison v. Westinghouse

Savannah River Co., 352 F.3d 908, 922-23 (4th Cir.

2003) (emphasis added). This is the correct analysis:

an award of damages must be related to the actual

loss, if any, suffered by the government. If the con-

tractor performs the work as agreed, there is no basis

for disgorgement.

The Fifth Circuit did not claim that its holding

was supported by any precedent. Instead, the Fifth

Circuit held that the award of disgorgement damages

was justified by the peculiar nature of research

contracts such as those under the SBIR program.

Specifically, the court found that disgorgement was

appropriate because the government never receives

any tangible benefit under such contracts and be-

cause any intangible benefit is impossible to calculate:

The contracts entered into between the

government and the Defendants did not

produce a tangible benefit to the BMDO or

the Air Force. These were not, for example,

standard procurement contracts where the

government ordered a specific product or

good. The end product did not belong to the

BMDO or the Air Force. Instead, the purpose

of the SBIR grant program was to enable

small businesses to reach Phase III where

they could commercially market their

products. The Government’s benefit of the

bargain was to award money to eligible

deserving small businesses. The BMDO and

the Air Force’s intangible benefit of providing

an “eligible deserving” business with the

grants was lost as a result of the Defendants’

fraud. Finally, a direct causal relationship

existed between the funds received by the

Defendants and their false statements.

In a case such as this, where there is no

tangible benefit to the government and the

intangible benefit is impossible to calculate,

it is appropriate to value damages in the

amount the government actually paid to the

Defendants.

App. at 29-30. The court thus entirely discounted the

relevance of the fact that Lithium Power performed

all of its obligations under the contract and delivered

exactly what it promised to deliver. The Fifth Cir-

cuit’s analysis is thus contrary to the Fourth Circuit’s

decision in Harrison and, by the Fifth Circuit’s own

admission, is unsupported by any precedent.

Furthermore, the Fifth Circuit’s analysis proceeds

from the false assumption that a “tangible benefit”

can only flow from the delivery of a “specific product

or good.” Lithium Power performed research and

development services as required by the terms of its

contracts. That was a tangible benefit to the agencies.

Services have value. Regardless of whether the

agencies were the primary beneficiaries of the re-

search in question, the agencies contracted with

Lithium Power for research. Lithium Power performed

the research. Lithium Power bought materials.

Lithium Power paid its employees. Lithium Power

generated reports. In the end, Lithium Power pro-

vided a final report and sample batteries. All of that

was “tangible.”

There are many types of government contracts

that involve services. For example, the government

may contract for consulting services or public rela-

tions services. Under the Fifth Circuit’s rationale,

those contracts would potentially be subject to a

disgorgement remedy under the FCA because the

government received no tangible benefit and because

the intangible benefit is impossible to calculate. The

Fifth Circuit’s rationale simply makes no sense.

The Fourth Circuit’s test in Harrison makes

much more sense: Did the government get what it

paid for? If the answer is yes, then there is no dis-

gorgement remedy. The government can either seek

to prove actual damages or simply rely on the civil

penalty.

By contrast, the Fifth Circuit’s analysis turns the

statutory framework on its head. The statute requires

the government to prove damages. However, if

the government cannot prove damages because the

“intangible benefit” of the contractor’s services is

impossible to calculate, the Fifth Circuit would allow

the government to recover everything that it paid to

the contractor.

Finally, the Fifth Circuit’s analysis makes no

sense even in the limited context of SBIR research

contracts. By definition, the SBIR programs target

small businesses, many of which are start-up com-

panies. Such companies are more prone to making

errors in their proposals than large, established

companies. Under the Fifth Circuit’s rationale, vir-

tually any error in a research proposal could lead to a

claim for disgorgement years later, even though the

small research company did everything that it agreed

to do, and even though the government accepted and

praised the results of the program. The law does not,

and should not, support such a result.

There is no special damages rule for research

contracts in the FCA. In fact, such a rule would have

the ironic result of making small research companies

subject to larger damage awards than big companies

that perform conventional services for the govern-

ment. The Fifth Circuit effectively adopted such a

rule.

If- the agency that awards a research contract

suffered some intangible harm due to the fact that it

could have awarded the contract to some other com-

pany, the correct remedy under the FCA is a civil

penalty. There is no need to fashion a draconian

remedy for an intangible injury.

The Fifth Circuit’s analysis opens the door to

enormous judgments against small research com-

panies in qui tam suits, and perhaps against other

types of service companies. This does not further the

purposes of the FCA. The civil penalty provisions of

the FCA are sufficient to deter fraud, and a windfall

award of damages to the government is inappropriate

when the government has suffered no loss.

The Court should grant this petition to resolve

the conflict between the Fourth and Fifth Circuits,

and also to settle the proper circumstances under

which a disgorgement remedy is appropriate under

the FCA. The Court should approve the reasoning of

the Fourth Circuit and disallow disgorgement when a

contractor has fully performed its contract with the

government. The award of damages against Lithium

Power should be reversed.

D. The Fifth Circuit’s Application of Federal

Public Policy and the FCA to Negate a

Personal Release and Indemnity by the

Relator Conflicts with This Court’s Prece-

dent, Conflicts with Decisions of the Ninth

Circuit, and Effectuates a Fraud by the

Relator.

By invoking federal public policy and the FCA to

relieve Longhi from his release and indemnity, the

Fifth Circuit has decided an important issue of

federal law that conflicts with the decisions of this

Court and the Ninth Circuit. Furthermore, the en-

forceability of a release made after the filing of a qui

tam lawsuit presents an important issue of federal

law that has not been, but should be, settled by this

Court.

As a threshold matter, it should be noted that the

release and indemnity do not affect any of the claims

by the government. Lithium Power has never claimed

that Longhi’s release is binding on the government.

In fact, the FCA provides that the government is not

bound by any act of the qui tam relator. 31 U.S.C.

§ 3730(cX1) (amended 2009); App. at 147. At this

point, the only personal claim by Longhi is his claim

for attorneys’ fees.

The application of a “public policy” bar to the

enforcement of a release must be determined on a

case-by-case basis. The seminal case on this topic is

Town of Newton v. Rumery, 480 U.S. 386 (1987). That

case involved a “release-dismissal” agreement, under

which the plaintiff agreed to release his civil rights

claims against municipal officials in exchange for the

dismissal of criminal .charges. The First Circuit

adopted a “per se” rule that invalidated any such re-

leases because the agreements would tempt prosecu-

tors to trump up charges in order to coerce plaintiffs

into releasing their constitutional claims.

This Court rejected the per se rule, noting that,

“although we agree that in some cases these agree-

ments may infringe important interests of the criminal

defendant and of society as a whole, we do not believe

that the mere possibility of harm to these interests

calls for a per se rule.” Jd. at 392. Instead, the Court

adopted the rule that “a promise is unenforceable if

the interest in its enforcement is outweighed in the

circumstances by a public policy harmed by the

enforcement of the agreement.” Jd. The Court ul-

timately upheld the dismissal-release agreement

because it found “that this agreement was voluntary,

that there is no evidence of prosecutorial misconduct,

and that enforcement of his agreement would not

adversely affect the relevant public interests.” Id. at

398.

The first element of Rumery is that public policy

must actually be harmed by enforcement of the

release. In this case, it is undisputed that Longhi had

met with the government and filed his qui tam

lawsuit prior to signing the release. The whistle had

already been blown. Enforcing the release could not

possibly discourage Longhi from coming forward,

because he had already come forward.

The case law from the lower courts — in particular

the Ninth Circuit — reflects this distinction. When the

relator has not yet filed his gui tam action at the time

of signing the release, the courts have refused to

enforce releases because the releases could discourage

relators from coming forward with their claims.* E.g.,

United States ex rel. Green v. Northrup Corp., 59 F.3d

953, 965-66 (9th Cir. 1995), cert. denied, 518 U.S.

1018 (1996). If the relator has already filed his claim

at the time of signing the release, on the other hand,

* The Tenth Circuit recently created an exception to this

rule in a case in which the company, rather than the relator, had

disclosed the fraud to the government. The court held that the

release was enforceable because, unlike the situation in Green

and similar cases, the government had been made aware of the

fraud even before the qui tam lawsuit was filed. United States ex

rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161, 1168-71

(10th Cir. 2009).

the courts have enforced the releases. E.g., United

States ex rel. Hall v. Teledyne Wah Chang Albany, 104

F.3d 230, 233 (9th Cir. 1997) (“In this case, the

concerns that led us to deny enforcement in Green are

not present. The federal government was aware of

Hall’s allegations regarding false certifications.

Therefore, the public interest in having information

brought forward that the government could not

otherwise obtain is not implicated.”). Because Longhi

had already filed his qui tam action, the release does

not implicate any valid federal public policy concern.’

The second element of Rumery is that the public

policy must outweigh the interest in the enforcement

of the release. In this case, Longhi committed

securities fraud. He cheated Mrs. Munshi out of

$80,000.00, knowing that Mrs. Munshi would never

have bought his stock without the release and

indemnification. Ironically, the Fifth Circuit effectively

sanctioned criminal conduct in the name of federal

" Although the Fifth Circuit did not address the issue,

Longhi previously argued that Hall is distinguishable because

the relator executed the release in that case after the

government had completed its investigation. Longhi thus argued

that his release is unenforceable because it was made prior to

the conclusion of the government’s investigation in this case.

Longhi contended that, because the investigation was still

ongoing, there was a federal public policy interest in his con-

tinued assistance to the government during the investigation.

The Tenth Circuit recently rejected that argument, because the

limited value of continuing assistance from a relator does not

outweigh the public policy interest in enforcing contracts.

Ritchie, 558 F.3d at 1170-71.

public policy. Under the facts of this case, there is no

way that a tenuous public policy argument can

outweigh the interests in enforcing a valid contract

and protecting Mrs. Munshi from fraud by Longhi.

Nonetheless, the Fifth Circuit departed from the

Ninth Circuit’s analysis in Green and Hall by holding

that Longhi’s release was void under federal public

policy. Furthermore, the Fifth Circuit departed from

this Court’s decision in Rumery by adopting a per se

rule. Specifically, the Fifth Circuit held that releases

by relators would always be unenforceable:

The public policy interest implicated in this

case is the ability of the Government to

obtain information from relators it could not

otherwise obtain. It is in the Government’s

best interest to gain full information from

the relator. To enforce the release and in-

demnification clauses contained in the stock

sale agreement against Longhi would ignore

the public policy objectives expressly spelled

out by Congress in the FCA and would

provide disincentives to future relators. In

addition, enforcing the release and indemni-

fication clauses would encourage individuals

guilty of defrauding the United States to

insulate themselves from the reach of the

FCA by simply forcing potential relators to

sign general agreements invoking release

and indemnification from future suit.

App. at 33. The Fifth Circuit did not conduct the

balancing required by Rumery, nor did it perform the

careful analysis of the public policy interests shown

by the Ninth Circuit’s decisions.

The Fifth Circuit also sought to rely on 31 U.S.C.

§ 3730(bX 1) (amended 2009); App. at 145, which pro-

hibits a relator from dismissing an FCA lawsuit

without the permission of the government. The

statute applies only to voluntary dismissals by the

relator, as opposed to involuntary dismissals. Minotti

v. Lensink, 895 F.2d 100, 103-04 (2d Cir. 1990) (“[W]e

find that [the statute] applies only in cases where a

plaintiff seeks voluntary dismissal of a claim or

action brought under the False Claims Act, and not

where the court orders dismissal.”). Given that Longhi

never sought to voluntarily dismiss his claims, the

statute is inapplicable to this case. Nothing in section

3730(b)(1) has any application to a release.

It is important to remember that the government

was never bound by Longhi’s release. 31 U-S.C.

§ 3730(cX1) (amended 2009); App. at 147. Even after

the execution of the release, the government was

entitled to intervene in the qui tam lawsuit and to

pursue all of the claims that Longhi identified. The

only person bound by the release was Longhi. If the

government had decided not to intervene, his claims

would have been subject to involuntary dismissal

because of the release. Section 3730(bX1) would

protect the government from a: premature dismissal

of the case, but it would not save Longhi from an

involuntary dismissal based on his own personal

release. Section 3730(b)(1) simply has no application

to the release.

The Court should grant this petition to resolve

the conflict between the Fifth and Ninth Circuits, to

resolve the conflict between the Fifth Circuit’s holding

and the holding in Rumery, and also to settle the

proper circumstances under which a personal release

by a relator is unenforceable as a matter of federal

public policy. The Court should approve the reasoning

of the Ninth Circuit and hold that a release is

enforceable if executed after the relator’s allegations

have been disclosed to the government. The award of

attorneys’ fees to Longhi, and the dismissal of Lith-

ium Power’s indemnification claim against Longhi,

should be reversed.

CONCLUSION

For the reasons set forth above, the Court should

grant this petition for a writ of certiorari and reverse

the judgment of the United States Court of Appeals

for the Fifth Circuit.

Respectfully submitted,

Davip C. HOLMES

LAW OFFICES OF DAvID C. HOLMES

2950 North Loop West, Suite 500

Houston, Texas 77092

(713) 586-8862 (telephone)

(713) 586-8863 (telecopier)

Attorney for Petitioners

App. 1

REVISED July 15, 2009

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 08-20194

No. 08-20306

United States of America, ex rel;

ALFRED J. LONGHI, JR

Plaintiff-Appellee

UNITED STATES OF AMERICA

Intervenor-Appellee

LITHIUM POWER TECHNOLOGIES INC;

MOHAMMED ZAFAR A MUNSHI

Defendants-Appellants

Appeal from the United States District Court

for the Southern District of Texas

(Filed Jul. 9, 2009)

Before HIGGINBOTHAM, BENAVIDES and

STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

App. 2

In 2002, Alfred J. Longhi, Jr. (“Longhi”), a former

employee of Lithium Power Technologies, Inc.

(“Lithium Power”), filed a qui tam suit under the

False Claims Act (“FCA”), 31 U.S.C. § 3729, against

Lithium Power and its president, Mohammed Zafar

A. Munshi (jointly, “the Defendants”). In 2005, the

United States of America intervened in the suit.

Longhi and the United States of America (jointly, “the

Government”) alleged that the Defendants engaged in

an elaborate pattern of false statements to secure

research grants from the federal government. Ulti-

mately, the district court granted the Government’s

motions for summary judgment on liability and

damages. The court awarded nearly $5 million in

damages and penalties, and the parties voluntarily

dismissed the remaining claims in the lawsuit. The

Defendants moved for reconsideration, and the

district court denied that motion and entered a final

judgment. Longhi then filed a motion for statutory

attorneys’ fees, which the district court granted in

full. The Defendants now appeal the district court’s

finding of liability, award of damages, and award of

attorneys’ fees to Longhi. We AFFIRM.

I. FACTUAL AND PROCEDURAL BACK-

GROUND

In 1982, Congress established the Small Busi-

ness Innovation Research (“SBIR”) program. The goal

of the SBIR program is to provide research assistance

to small businesses in order to maintain and

strengthen the competitive free enterprise system

App. 3

and the national economy. See 15 U.S.C. § 638(a).

Congress directed each federal agency with a

research and development budget exceeding $100

million to establish a SBIR program and to provide

some fraction of its budget to small businesses. 15

U.S.C. § 638(f). Each federal agency with a SBIR

program was charged with selecting awardees for its

SBIR funding. 15 U.S.C. § 638(g).

The Department of Defense (“DoD”) administers

a SBIR program in which twelve military components

participate. The DoD identifies specific research

projects that it is interested in funding and allows

small businesses to seek SBIR grants for these

projects. DoD’s program solicitations explicitly state

that knowingly and willfully making any false,

fictitious, or fraudulent statements or representations

may be a felony under the Federal Criminal False

Statements Act, 18 U.S.C. § 1001. After receiving

proposals, the DoD selects those that they perceive

offer the best value to the government and nation.

The merits of a SBIR proposal are in part measured

by an examination of the applicant’s qualifications.

The DoD specifically considers the: (1) key personnel

available to perform the research, (2) facilities and

equipment available to the applicant, and (3) scope of

any previously funded work performed by the

applicant that may be similar to that proposed. When

the DoD selects a proposal f-r funding, the agency

enters into a contract with the recipient that governs

the terms under which the funds are disbursed. The

DoD generally does not verify all of the information

App. 4

submitted in a proposal, and it depends heavily on

the integrity of SBIR applicants.

Under the DoD’s SBIR program, there are two

types of SBIR grants. A Phase I research grant is

intended for the recipient to determine the scientific,

technical, and commercial merit and feasibility of

ideas submitted under the SBIR program. These

grants typically range from $60,000 to $100,000 and

cover at most a nine-month period. If the DoD deter-

mines that the Phase I grant recipient demonstrates

that future research may potentially yield a product

or process of continuing importance to the DoD and

the private sector, it can award a Phase IJ grant.

Phase II grants are only available to applicants who

previously received a Phase I award and are aimed at

research or a research and development effort. A

Phase II grant is expected to produce a well-defined,

deliverable prototype and typically ranges from

$500,000 to $750,000 over a two-year period. During

Phase III of a research and development project, the

applicant is expected to obtain funding from the

private sector or non-SBIR government sources to

develop the prototype into a viable product.

In 1998, Munshi founded a small business,

Lithium Power. Lithium Power designs and manufac-

tures specialized lithium-based batteries for commer-

cial and government applications. Munshi is Lithium

Power’s majority shareholder, president, chief execu-

tive officer, and chairman of the board.

App. 5

The Defendants submitted four proposals — two

to the Ballistic Missile Defense Office (“BMDO”) and

two to the Air Force — to receive Phase I and IT SBIR

grants for research that could lead to the develop-

ment of very thin rechargeable batteries. In connec-

tion with the four SBIR grants, the Defendants sub-

mitted more than fifty invoices to the BMDO and the

Air Force for payment and received more than $1.6

million.

Lithium Power’s four SBIR proposals contained

the false claims at issue in this case. In 2000, the

relator’ in this action, Longhi, joined Lithium Power

as Vice President for Sales and Marketing. During

2001 and 2002, Longhi began to suspect that the

Defendants were defrauding the federal government.

He began documenting what he believed was the

Defendants’ pattern of fraudulent conduct and inves-

tigating a means to stop the fraud. In August 2002,

Longhi began working with counsel to prepare his

FCA case, and he met with the Government on

September 20, 2002. One month later, Munshi told

Longhi that “due to tough economic times” Longhi

would be placed on a three-day work week beginning

November 2, 2002, and receive a 40 percent decrease

in compensation. Longhi informed Munshi that he

* Suits to collect statutory damages and civil penalties

under the FCA may be brought by the Attorney General or by a

private person, known as a relator, in the name of the United

States. An action brought by a relator is commonly referred to as

a qui tam action. See 31 U.S.C. § 373Q(a) and (bX1).

App. 6

could not afford the extreme decrease in pay and

needed to sell his Lithium Power stock to raise

capital. On November 4, 2002, Munshi told Longhi

that he would be laid off within two weeks and

offered to buy Longhi’s stock for between $80,000 and

$90,000. On November 6, 2002, Munshi explained

that the stock sale would be the subject of a more

detailed agreement.

On November 18, 2002, Longhi filed a qui tam

action against the Defendants to recover statutory

damages and civil penalties under the FCA On

November 21, 2002, Munshi provided Longhi with a

copy of the stock sale agreement. On November 25,

2002, Munshi laid off Longhi. The agreement for the

sale of stock contained a provision stating that

Longhi personally agreed to release the Defendants

from pending claims or lawsuits and agreed not to

sue the Defendants for the loss of Longhi’s job. The

original covenant also disallowed Longhi to sue “for

any other reason,” but Longhi objected to this

language and it was changed to “for any other matter

prior to execution of” the agreement to sell the stock.

The agreement was executed by the parties on

November 29, 2002, eleven days after Longhi filed

suit against the Defendants. Munshi’s wife paid

Longhi $80,000 for the stock.

Longhi’s qui tam action accused Lithium Power

of double billing and of billing for work that was

never completed in connection with twenty-one differ-

ent contracts. The United States investigated and

intervened in 2005 in connection with Longhi’s

App. 7

allegations pertaining to fraudulent billing on the

four SBIR grant proposals. The Defendants denied

Longhi’s allegations, and the Government failed to

uncover evidence that supported Longhi’s allegations.

On November 9, 2006, the Government filed a

motion for partial summary judgment as to liability

and argued that the undisputed record evidence

demonstrated that the Defendants had, at a mini-

mum, shown a reckless disregard for the truth

regarding many of the representations in their four

SBIR grant proposals. On December 22, 2006, the

Defendants filed a cross-motion for partial summary

judgment. The district court granted the Govern-

ment’s motion for partial summary judgment on

March 23, 2007. The district court stated that

fraudulently inducing the Government to provide

funding for a project could give rise to FCA liability,

even if the statements on particular invoices sub-

mitted in connection with the project were true. The

district court explained that the Government needed

only to demonstrate that the Defendants either were

willfully blind to the falsity of the statements or acted

with an extreme form of negligence in making those

statements.

In determining the merits, the district court

examined five separate categories of statements in

the Defendants’ SBIR proposals. First, the district

court explained that the Defendants’ BMDO Phase II

proposal falsely stated that Lithium Power was

incorporated in 1992. Second, the district court

concluded that the Defendants misrepresented the

App. 8

key personnel who would be conducting the research

work in three of the four proposals. The district court

noted, however, that the misrepresentations as to key

personnel resulted from mere negligence, and the

court discounted this evidence. Third, the district

court determined that Lithium Power knowingly

falsified statements regarding its facilities and

equipment. Fourth, the district court concluded that

the Defendants acted with reckless disregard to the

falsity of statements by representing that Lithium

Power had cooperative arrangements with the

University of Houston and Polyhedron Laboratories.

Fifth, the district court noted that the Defendants

failed to disclose in its Air Force SBIR grant

proposals that Lithium Power had previously under-

taken related work in connection with a BMDO SBIR

grant.

The district court then assessed whether these

false statements, omissions, and misrepresentations

were “material.” The district court explained that

under the FCA materiality requires that the false

statement in question have a natural tendency to

influence or be capable of influencing a decision-

maker. The district court concluded that the Govern-

ment offered ample summary judgment evidence that

the misrepresentations were actually material.

The Government then moved for summary

judgment on damages. The district court held that

the Government suffered damages in the amount of

the grants it paid out to the Defendants in connection

with their deceptive proposals — $1,657,455. The

App. 9

court tripled that amount, as required by the FCA,

and awarded $4,972,365 in damages. The district

court rejected the Defendants’ contention that the

damages should be reduced to reflect the benefit the

United States received from the battery research that

Lithium Power performed.

The parties stipulated to a voluntary dismissal of

the Government’s remaining claims and the Defen-

dants’ counterclaims without prejudice. Longhi’s

claims regarding the other seventeen contracts, that

the Government did not intervene in, were among

those dismissed. The district court entered final

judgment for the Government based on that stipu-

lation. The Defendants appeal the district court’s

finding of liability and damages award.’

On February 5, 2008, Longhi filed a motion for

statutory attorneys’ fees and final judgment. On

February 25, 2008, the Defendants objected to

Longhi’s motion on a variety of grounds. Specifically,

the Defendants stated that Longhi’s motion for

attorneys’ fees failed to segregate the hours worked

by his attorney on contracts and claims for which

Longhi was not the prevailing party (i.e., the

seventeen claims that were dismissed). The district

court did not require Longhi to segregate the time his

attorneys worked, and awarded Longhi the full

* The Defendants’ appeal regarding the district court’s

finding of liability and damages award is found in case No. 08-

20194.

App. 10

amount of fees and costs that he requested —

$283,765. The Defendants now also appeal the dis-

trict: court’s award of attorneys’ fees.”

Ii. LIABILITY & DAMAGES AWARD

In appealing the district court’s judgment finding

the Defendants liable and awarding damages to the

Government, the Defendants make four arguments.

First, they allege that the district court erred in

granting the Government’s motion for partial sum-

mary judgment on the merits and finding that the

Defendants violated the FCA. Second, the Defendants

argue that the district court erred in granting the

Government’s motion for summary judgment with

respect to damages and finding that the United

States was entitled to recover the full amount of the

grant awards paid out to the Defendants and to

receive treble damages. Third, the Defendants allege

that the district court erred in determining that their

claims for release and indemnification from Longhi

were against public policy and the text of the FCA.

Finally, the Defendants contend that the district

court erred by denying their summary judgment

motions with respect to liability, damages, and the

enforceability of the release and indemnification

agreement. We discuss each of the Defendants’

arguments in turn.

* The Defendants’ appeal regarding the district court's

award of attorneys’ fees is found in case No. 08-20306.

App. 11

A. Standard of Review

This Court reviews summary judgment orders

de novo, applying the same standards as the district

court. Langhoff Props., LLC v. BP Prods. N. Am. Inc.,

519 F.3d 256, 260 (5th Cir. 2008). Summary judgment

is proper when “the pleadings, the discovery and

disclosure materials on file, and any affidavits show

that there is no genuine issue as to any material fact

and that the movant is entitled to judgment as a

matter of law.” FED. R. Civ. P. 56(c). This Court

resolves any doubts and draws all reasonable

inferences in favor of the nonmoving party. Langhoff

Props., 519 F.3d at 260.

B. Violation of the False Claims Act

The district court granted the Government’s

motion for partial summary judgment on the merits

and found that the Defendants violated the FCA. The

Defendants argue that the district court erred

because: (1) with regards to the BMDO Phase I grant,

the misstatement of Lithium Power’s date of incor-

poration does not give rise to liability under the FCA

because it was an error that resulted from inad-

vertence or mere negligence and was not material; (2)

with regards to the BMDO Phase I grant, statements

regarding Lithium Power’s facilities did not give rise

to liability under the FCA, because the facilities were

under construction when the Defendants made the

statements and were completed by the time the

government funded the proposal; (3) with regards to

App. 12

all four grant applications, the Defendants’ state-

ments concerning “cooperative arrangements,” as

opposed to “cooperative research arrangements,” with

the University of Houston and with Polyhedron were

true and did not give rise to liability under the FCA,

because they had a cooperative arrangement to use

laboratories and scientific equipment, different than

a cooperative research agreement to conduct certain

research for a defined time period, and the statement

was not material; (4) with regards to the BMDO

Phase I and II grants and the Air Force Phase II

grant, that statements regarding specific personnel

indicated an expectation and wish to hire those

individuals, but did not put forth that the individuals

would necessarily accept an offer of employment; and

(5) with regards to the Air Force Phase I and I

grants, the Defendants assert that they properly

disclosed the BMDO contracts to the Air Force when

submitting their proposals, because they informed

individual Air Force personnel of the BMDO SBIR

grants. Thus, the Defendants request that we reverse

and remand the district court’s grant of the Govern-

ment’s motion for summary judgment.

The Government contends that the district court

properly granted summary judgment in its favor after

correctly concluding that the Defendants’ false state-

ments affected the SBIR grant selection process. The

Government argues that the Defendants violated

the FCA by submitting four SBIR proposals replete

with false statements that gave the DoD the mis-

taken impression that Lithium Power was far more

App. 13

qualified than it actually was to engage in the

proposed research. The Government argues that

taken individually, “any one of the falsehoods would

suffice to demonstrate a violation of” the FCA. At a

minimum, the Government argues that the

Defendants acted with a reckless disregard for the

truth and presented false ciaims to the DoD, allowing

Lithium Power to secure more than $1.6 million in

research grants. The Government notes that the

Defendants maintain that several of its

misrepresentations were made inadvertently. In

response, the Government argues that while

subjective inadvertence is relevant to whether the

Defendants had actual knowledge of the falsity of

their statements, it is not relevant to the objective

inquiry into whether the Defendants acted with

reckless disregard of a statement’s truth or falsity.

The Government also argues that the Defendants’

repeated false statements were material to the selec-

tion process. The Government explains that because

an applicant’s qualifications are a critical feature of

the SBIR evaluation process, the Defendants’ false-

hoods had a natural tendency to influence and were

capable of influencing the extremely competitive

process for selecting small businesses to receive SBIR

grants. The Government maintains that each false

statement contributed to the impression that Lithium

Power was better suited to carry out the proposed

research than it accually was.

App. 14

1. Legal Standard for Finding a Vio-

lation of the False Claims Act

An individual violates the FCA when he

(1) knowingly presents, or causes to be

presented, to an officer or employee of the

United States Government or a member of

the Armed Forces of the United States a

false or fraudulent claim for payment or

approval;

(2) knowingly makes, uses, or causes to be

made or used, a false record or statement

to get a false or fraudulent claim paid or

approved by the Government; [or]

(3) conspires to defraud the Government by

getting a false or fraudulent claim allowed or

paid.

31 U.S.C. §$3729(a). We note that while the

underlying fraud that invokes the FCA differs under

§ 3729(a), “the statute attaches liability, not to the

underlying fraudulent activity or to the government’s

wrongful payment, but to the claim for payment.”

Harrison v. Westinghouse Savannah River Co., 176

F.3d 776, 785 (4th Cir. 1999) (quoting United States v.

Rivera, 55 F.3d 703, 709 (1st Cir. 1995)) (internal

quotation marks omitted).

The FCA defines the terms “knowing” and

“knowingly,” which mean that a person, with respect

to information —

(1) has actual knowledge of the informa-

tion;

App. 15

(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.

31 U.S.C. § 3729(b). In addition to the requirements

found in the text, our jurisprudence holds that a false

or fraudulent claim or statement violates the FCA

only if it is material. See United States ex rel.

Thompson v. Columbia/HCA .Healthcare Corp., 125

F.3d 899, 902 (5th Cir. 1997) (stating that the FCA

“interdicts material misrepresentations made to qual-

ify for government privileges or services”) (citation

and quotation marks omitted); see also Allison Engine

Co., Inc. v. United States ex rel. Sanders, 128 S. Ct.

2123, 2126 (2008) (explaining that “a plaintiff

asserting a § 3729(a)(2) claim must prove that the

defendant intended that the false record or statement

be material to the Government’s decision to pay or

approve the false claim”).

We have consistently recognized the require-

ments discussed above, but we have not yet delin-

eated a succinct test recognizing each element. The

Fourth Circuit has concisely stated these various

requirements in one test, which we adopt today:

‘The Defendants argue that Allison Engine Co. is

inapplicable to the instant case because false statements were

made to a government contractor and not directly to the United

States. We see no reason why the FCA would require a

materiality standard in cases involving government contractors

and not the United States.

App. 16

(1) whether “there was a false statement or fraud-

ulent course of conduct; (2) made or carried out with

the requisite scienter; (3) that was material; and (4)

that caused the government to pay out money or to

forfeit moneys due (i.e., that involved a claim).”

United States ex rel. Wilson v. Kellogg Brown & Root,

Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting

Harrison, 176 F.3d at 788) (internal quotation marks

omitted); see also United States ex rel. Hendow v.

Univ. of Phoenix, 461 F.3d 1166, 1177-78 (9th Cir.

2006); Cf. United States ex. rel. Mikes v. Straus, 274

F.3d 687, 695 (2d Cir. 2001) (utilizing a five-part test

where a violation of the FCA is shown when an

individual (1) makes a claim, (2) to the United States

government, (3) that is false or fraudulent, (4)

knowing its falsity, and (5) seeking payment from the

federal treasury).

a. False or Fraudulent Statement

In the instant appeal, the Government alleges

that the Defendants engaged in a fraudulent course

of conduct by submitting false statements in the

SBIR grant proposals. The Government does not

allege that the Defendants submitted false claims for

payment for each SBIR grant proposal. In certain

cases, FCA liability may be imposed “when the con-

tract under which payment is made was procured

by fraud.” United States ex rel. Willard v. Humana

Health Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir.

2003) (citing Harrison, 176 F.3d at 787). This type of

FCA claim is characterized as fraudulent inducement.

App. 17

Under a fraudulent inducement theory, although the

Defendants’ “subsequent claims for payment made

under the contract were not literally false, [because]

they derived from the original fraudulent misrepre-

sentation, they, too, became actionable false claims.”

United States ex rel. Laird v. Lockheed Martin Eng’g

& Science Servs. Co., 491 F.3d 254, 259 (5th Cir. 2007)

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

537, 543-44 (1943)).°

b. Requisite Scienter

The Government contends that the Defendants’

fraudulent conduct was “made or carried out with the

requisite scienter.” The scienter requirement comes

from § 3729(b)’s definition of the terms “knowing”

and “knowingly.” We have explained that “jt/hough

the FCA is plain that ‘proof of specific intent to

defraud’ is not necessary, [the mens rea] requirement

is not met by mere negligence or even gross negli-

gence.” United States ex rel. Farmer v. City of

° We note that Laird outlines a two part test “to succeed on

a fraud-in-the-inducement theory under the FCA.” Laird, 491

F.3d at 259. Under the Laird test the Government must prove

that the Defendants (1) had no intention to perform according to

the terms of the SBIR, and (2) obtained payments under the

SBIR contract that it was not legitimately entitled. See id.

(citations omitted). The second portion of this statement could be

construed as requiring “outcome materiality,” which is discussed

in detail below. Laird, however, expressly declines to rule on the

proper standard for assessing materiality. Jd. at 261 (citation

omitted).

App. 18

Houston, 523 F.3d 333, 338 (5th Cir. 2008) (internal

citation omitted). Thus, the Government must

demonstrate the Defendants had (1) actual knowl-

edge of falsity, (2) acted with deliberate ignorance of

the truth or falsity of the information previded, or (3)

acted with reckless disregard of the truth or falsity

of the information provided when the Defendants

fraudulently induced the BMDO and Air Force to

award them the SBIR grants. See id. at 339.

c. Materiality

The Government next argues that the false state-

ments in the SBIR grant proposals were material.

“No majority decision of this circuit has addressed the

proper standard for assessing the materiality of a

false statement under the FCA’s_ civil-liability

provisions.” Laird, 491 F.3d at 261. The parties and

this Court all recognize that “a false statement is

material if it has a ‘natural tendency to influence, or

[is] capable of influencing, the decision of the

decisionmaking body to which it was addressed.’”

Neder v. United States, 527 U.S. 1, 16 (1999) (quota-

tion omitted) (insertion in original); see also United

States v. Southland Mgmt. Corp. (Southland ID, 326

F.3d 669, 679 (5th Cir. 2003) (en banc) (Jones, J.,

concurring); United States v. Southland Mgmt. Corp.

(Southland I), 288 F.3d 665, 676 (5th Cir. 2002),

vacated by grant of reh’g en banc, 307 F.3d 352 (5th

Cir. 2002) (quoting United States v. Wells, 519 U:S.

482, 489 (1997)).

App. 19

In Southland I, however, we noted two different

interpretations of the “natural tendency to influence

or capable of influencing” standard. Southland I, 288

F.3d at 676. Some courts have defined the standard to

require “outcome materiality” — “a falsehood or mis-

representations must affect the government’s ulti-

mate decision whether to remit funds to the claimant

in order to be ‘material.’” /d. (citing United States ex

rel. Berge v. Bd. of Trs. of the Univ. of Ala., 104 F.3d

1453, 1459-60 (4th Cir. 1997); United States uv.

Intervest Corp., 67 F. Supp. 2d 637, 646-48 (S.D. Miss.

1999)). In contrast, another court required what is

termed “claim materiality” — “a falsehood or mis-

representation must be material to the defendant’s

claim of right in order to be considered ‘material’ for

the purposes of the FCA.” /d. (citing United States ex

rel. Wilkins v. N. Am. Constr. Corp., 173 F. Supp. 2d

601, 630 (S.D. Tex. 2001)). In Southland II, five

judges of this Court suggested that outcome mate-

riality is the correct standard, explaining that a

statement is material only if it actually affects the

government’s decision to pay. See Laird, 491 F.3d at

261 (citing Southland II, 326 F.3d 669 at 679 n.3).°

* Judge Jones’s concurrence first explained that the

accepted definition of materiality for civil FCA claims “equates

materiality with ‘having a natural tendency to influence, or

[being] capable of influencing, the decision of the decision-

making body to which it was addressed.’” Southland II, 326 F.3d

at 679 (quotation omitted) (insertion in original). However, read

it is entirety the concurrence implicitly adopts and applies the

outcome materiality standard.

App. 20

The Government, however, contends that these

definitions are incorrect. It argues that the FCA

requires proof only that the defendant’s false state-

ments “could have” influenced the government’s pay-

ment decision or had the “potential” to influence the

government’s decision, not that the false statements

actually did so. We agree. The outcome and claim

materiality definitions unnecessarily narrow the

“natural tendency to influence or capable of influ-

encing” test, which is unambiguous and easily

applied.’

The lack of ambiguity in this test is clear when

we examine the common meaning of the words used.

The Oxford English Dictionary (“OED”) defines ten-

dency as “a constant disposition to move or act in

some direction or toward some point, end, or purpose;

leaning, inclination, bias, or bent toward some object,

effect, or result.” Oxford English Dictionary Online,

www.oed.com (last visited June 15, 2009) (defining

“tendency”). The Merriam-Webster Dictionary

(“Merriam-Webster”) defines tendency as “a proneness

to a particular kind of thought or action.” Merriam

Webster Dictionary Online, www.merriam-webster.com

" Adopting this test for materiality under the FCA aligns

with our test for materiality under 18 U.S.C. § 1001, the Federal

Criminal False Statements Act. Our decisions state the test

for materiality under § 1001 as “‘tendency’ or ‘capacity to

influence.’” See generally United States v. McIntosh, 655 F.2d 80,

83 (5th Cir. 1981) (citing United States v. Krause, 507 F.2d 113,

118 (5th Cir. 1975); United States v. McGough, 510 F.2d 598, 602

(5th Cir. 1975)).

App. 21

(last visited June 15, 2009) (defining “tendency”). The

OED has two definitions of “capable” that apply in

this context: “able or fit to receive and be affected by;

open to, susceptible” and “able to be affected by; of

a nature, or in a condition, to allow or admit of;

admitting; susceptible.” Oxford English. Dictionary

Online, www.oed.com (last visited June 15, 2009)

(defining “capable”). Merriam-Webster defines capable

as “susceptible <a remark capable of being mis-

understood>.” Merriam-Webster Dictionary Online,

www.merriam-webster. com (last visited June 15,

2009) (defining “capable”). Finally, OED defines

influence as “ascendancy, sway, control, or authority,

not formally or overtly expressed” and as “[a] thing

(or person) that exercises action or power of a non-

material or unexpressed kind.” Oxford English

Dictionary Online, www.oed.com (last visited June 15,

2009) (defining “influence”). Merriam-Webster defines

influence as “the act or power of producing an effect

without apparent exertion of force or direct exercise

of command,” “corrupt interference with authority for

personal gain,” and “the power or capacity of causing

an effect in indirect or intangible ways.” Merriam-

Webster Dictionary Online, www.merriam-webster.com

(last visited June 15, 2009) (defining “influence”).

Thus, the “natural tendency to influence or

capable of influencing” test requires only that the

false or fraudulent statements either (1) make the

government prone to a particular impression, thereby

producing some sort of effect, or (2) have the ability to

effect the government’s actions, even if this is a result

App. 22

of indirect or intangible actions on the part of the

Defendants. All that is required under the test for

materiality, therefore, is that the false or fraudulent

statements have the potential to influence the

government’s decisions.

Our conclusion is buttressed by cases from our

sister circuits. The Ninth Circuit recently recognized

a circuit split to measure materiality under the FCA.

United States v. Bourseau, 531 F.3d 1159, 1171 (9th

Cir. 2008). The court noted that the Fourth and Sixth

Circuits have adopted a “‘natural tendency test’ for

materiality, which focuses on the potential effect of

the false statement when it is made rather than on

the false statement’s actual effect after it is dis-

covered.” Jd. (quoting United States ex rel. A+

Homecare, Inc. v. Medshares Mgmt. Group, Inc., 400

F.3d 428, 445 (6th Cir. 2005)); see also United States

ex rel. Harrison v. Westinghouse Savannah River Co.,

352 F.3d 908, 913, 916-17 (4th Cir. 2003). The court

then explained that the Eighth Circuit has adopted

the “more restrictive ‘outcome materiality test.’”

Bourseau, 531 F.3d at 1171 (citing Costner v. URS

Consultants, 153 F.3d 667, 677 (8th Cir. 1998)). The

Ninth Circuit adopted the Fourth and Sixth Circuits

natural tendency test “for materiality because it is

more consistent with the plain meaning of the FCA.”

Id. (citation omitted).

Moreover, Congress recently codified the defini-

tion of materiality when it enacted the Fraud

Enforcement and Recovery Act of 2009 (FERA), Pub.

L. No. 111-21, §4, 123 Stat. 1617 (2009) (to be

App. 23

codified at 31 U.S.C. § 3729). Congress enacted § 4 of

FERA to clarify the FCA and “to reflect the original

intent of the law.” Jd. Congress’s enactment will add

the following language to § 3729%b): “(4) the term

‘material’ means having a natural tendency to

influence, or be capable of influencing, the payment

or receipt of money or property.” If Congress intended

materiality to be defined under the more narrow

outcome materiality standard, it had ample oppor-

tunity to adopt the outcome materiality standard in

FERA. Instead, Congress embraced the test as stated

by the Supreme Court and several courts of appeals.

While we decline to rule on whether this statute

applies retroactively or prospectively, we find this

enactment to be relevant as to Congress’s intent

when it enacted the FCA. See NCNB Texas Nat'l

Bank v. Cowden, 895 F.2d 1488, 1500 (5th Cir. 1990)

(“[A] legislative body may amend statutory language

to make what was intended all along even more

unmistakably clear.”) (quoting United States v.

Montgomery County, Md., 761 F.2d 998, 1003 (4th Cir.

1985)).

d. Payment of Money

Finally, the Government argues that the Defen-

dants’ knowing, material, false statements caused the

government to pay out money. Neither party disputes

that the government awarded approximately $1.6

million to Lithium Power as a result of the four

SBIR grant proposals. Thus, we are left with deter-

mining whether the Government has successfully

App. 24

demonstrated factors one, two, and three of the above

test.

2. Analysis

The Government has met its burden with regards

to factors one and two — the Defendants knowingly

provided false or fraudulent statements in the SBIR

grant proposals. Most egregiously, the Defendants

lied in all four SBIR grant proposals regarding a

cooperative arrangement with the University of

Houston and Polyhedron Laboratories. The Defen-

dants argued below that because members of the

public could use labs at the University of Houston

and Polyhedron Laboratories for a fee, Lithium

Power, as a member of the public, had an “arrange-

ment” with both institutions. This argument is

patently absurd. The Defendants either purposefully,

or with reckless disregard to the truth or the falsity of

their statements, misled the BMDO and the Air Force

into believing that Lithium Power had a formal

partnership with these two organizations. The ability

_of any member oi the public to essentially “rent” the

facility is not synonymous with a_ cooperative

arrangement of the type the Defendants hoped the

government would infer by their statements. These

misrepresentations alone would he sufficient to estab-

lish that the Defendants had no intention to perform

according to the terms of the SBIR, but these are not

the only false statements contained in the SBIR grant

proposals.

App. 25

The Defendants’ BMDO Phase I grant contained

an incorrect incorporation date for Lithium Power.

This was not a mere typographical error, as Lithium

Power was not incorporated until five months after it

submitted its Phase I grant proposal to BMDO. In

addition, the Defendants lied about the existence of

Lithium Power’s facilities, which were under con-

struction at the time the SBIR Phase I grant proposal

was submitted. These false statements, especially

when considered in conjunction with the misrep-

resentation regarding a cooperative arrangement

with the University of Houston and Polyhedron

Laboratories, left the BMDO with the impression that

Lithium Power was a much more established and.

experienced company than it actually was. Thus, the

Defendants had no intention to perform according to

the terms as outlined in the BMDO SBIR grant

proposals, because they did not portray Lithium

Power accurately in the proposals. Because the re-

ceipt of a Phase II grant was predicated on the Phase

I grant, any false or fraudulent statements made in

the BMDO Phase I grant equally taints the BMDO

Phase II grant.

We also find troubling Lithium Power’s failure to

disclose receipt of the BMDO grants when applying

for an additional SBIR grant from the Air Force. The

SBIR application required applicants to describe

“significant activities directly related to the proposed

effort” and “previous work not directly related to the

proposed effort but similar.” Lithium Power states

that it told individual members of the Air Force that

App. 26

it also received the BMDO grants, but that does not

negate the fact that it failed to account for the BMDO

grants in its SBIR grant proposals to the Air Force.

This omission, again when coupled with the misrep-

resentations regarding Lithium Power’s cooperative

agreements, establish that the Defendants had no

intention to perform according to the terms of the

SBIR.

The Government has also successfully demon-

strated factor three — Lithium Power’s false state-

ments were material. As we explained above, the test

for determining whether a false statement is material

is whether it has a “natural tendency to influence or

is capable of influencing” the government’s decision-

making. We are convinced that Lithium Power’s false

statements had the potential to influence the BMDO

and Air Force’s decisions to award Lithium Power the

SBIR grants. Lithium Power painted a picture of an

established company, that was so well-respected in

the community that it had developed a strong

relationship with two notable research organizations.

In reality, Lithium Power was a company that was in

its preliminary stages of development that had yet to

demonstrate any proven success.

Moreover, in the instant case we also have

evidence that the false statements actually influenced

the decision to award the Defendants the SBIR

App. 27

grants. One of the BMDO Phase I evaluators recom-

mended approving the proposai because Lithium

Power had adequate facilities to conduct the project —

in actuality Lithium Power had no such facilities. In

addition, another BMDO Phase I evaluator stated

that his recommendation to fund Lithium Power’s

proposal was greatly influenced by the false

statements. Finally, the evaluator who approved the

Air Force proposals stated that he would not have

approved funding the Air Force proposals if the

Defendants had included information regarding the

BMDO SBIR grants in Lithium Power’s Air Force

SBIR grant proposal.

Based on the foregoing analysis, we conclude that

the Defendants violated the FCA. The irony of this

situation is not lost on the court. Lithium Power

blatantly deceived the BMDO and the Air Force and

received funds that it was not entitled to. But it

appears that the company then went on to success-

fully design and manufacture lithium-based batteries

that the BMDO and the Air Force found to be

satisfactory. The Defendants ability to deliver on the

hoped for “ends,” however, does not justify the means

it employed to receive the SBIR grants. We affirm the

judgment of liability.

* Thus, even if we were to apply the “outcome” materiality

standard, we would still conclude that Lithium Power’s false

statements were material.

App. 28

C. Damages Award’

The district court held that the Government

suffered damages in the amount of the grants it paid

out to the Defendants in connection with their

deceptive proposals — $1,657,455 — and awarded

treble damages in the amount of $4,972,365. The

Defendants argue that the Government is not entitled

to damages because it did not suffer an “injury.” The

Defendants argue that the district court erred in

granting the damages award and state that no

“court has ever applied a fraudulent inducement/

disgorgement theory in the absence of some tangible

injury to the government.” In response, the Govern-

ment argues that the Defendants’ false statements

caused more than $1.6 million of DoD SBIR funding

to be siphoned off by a company with “dubious

qualifications” and that the funding should have gone

to a better-qualified candidate.

An individual who violates the FCA is liable to

the United States for civil penalties of “not less than

$5,000 and not more than $10,000, plus 3 times the

amount of damages which the Government sustains

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

§ 3729(a). No circuit court has previously addressed

the proper method of calculating damages for a

fraudulently induced research grant. This Court has

held, however, that damages are limited to the

° We review the damages award in this case de novo,

because it was decided through a motion for summary judgment.

App. 29

amount that was paid out by reason of the false

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

1011 (5th Cir. 1972). Before the government may

recover treble damages, it must “demonstrate the

element of causation between the false statements

and the loss.” See United States v. Miller, 645 F.2d

473, 475-76 (5th Cir. 1981). In United States v.

Bornstein, the Supreme Court explained that when

deducting the “bargain” received from a defendant, a

court must begin with the already doubled (and now

tripled) amount. 423 U.S. 303, 314 (1976) (superceded

on different grounds); see also United States uv.

Thomas, 709 F.2d 968, 972 (5th Cir. 1983)."

The contracts entered into between the govern-

ment and the Defendants did not produce a tangible

benefit to the BMDO or the Air Force. These were

not, for example, standard procurement contracts

where the government ordered a specific product or

good. The end product did not belong to the BMDO or

the Air Force. Instead, the purpose of the SBIR grant

” At the time Miller was decided, the Government could

recover only double, not treble, damages under the FCA.

" The Career College Association filed as amicus curiac

urging support of the distric+ court’s damages award. They also

argue, however, that in calculating damages the court should

subtract the value of the benefit that the Defendants conferred

on the Government from the amount the Government paid to

the Defendants and then treble this “actual-damages” figure.

The proposed method does not comport with the Supreme

Court’s holding in Bornstein or our holding in Thomas and we

reject it.

App. 30

program was to enable small businesses to reach

Phase III where they could commercially market

their products. The Government’s benefit of the

bargain was to award money to eligible deserving

small businesses. The BMDO and the Air Force’s

intangible benefit of providing an “eligible deserving”

business with the grants was lost as a result of the

Defendants’ fraud. Finally, a direct causal relation-

ship existed between the funds received by the

Defendants and their false statements.

In a case such as this, where there is no tangible

benefit to the government and the intangible benefit

is impossible to calculate, it is appropriate to value

damages in the amount the government actually paid

to the Defendants. The district court correctly deter-

mined that the proper amount of damages for the

four SBIR proposals was the entire amount the

Defendants’ received — $1,657,455. The district court

then correctly multiplied the amount of damages by

three, as required by statute, for a trebled damages

award of $4,972,365. We affirm the damages award.

D. Claims for Release and Indemnification

The district court ruled that Longhi’s agreement

to release and indemnify the Defendants from suit

related to any “matter prior to execution of” the

agreement to sell the stock was unenforceable

because (1) federal public policy bars the enforcement

of releases in qui tam cases, and (2) the FCA prohibits

a qui tam plaintiff from dismissing a FCA claim. The

App. 31

Defendants argue that the district court erred and

rely on Ninth Circuit case law to support their

assertion that if a relator has already filed his claim

at the time of signing the release, the courts have

enforced the releases. See United States ex rel. Hall v.

Teledyne Wah Chang Albany, 104 F.3d 230, 233 (9th

Cir. 1997). In addition, the Defendants argue that the

FCA does not bar the release and indemnification

agreement because Longhi’s release did not prohibit

the Government from pursuing any of the claims in

this lawsuit. With respect to the indemnification

clause contained on the stock sale agreement, the

Defendants argue that the cases cited by the district

court address common law claims for indemnification

not contractual indemnification, which is governed by

the Supreme Court’s decision in Town of Newton uv.

Rumery, 480 U.S. 386 (1987). Longhi argues that the

district court correctly concluded that the release and

indemnification were unenforceable as they apply to

Longhi’s FCA allegations because, inter alia, the text

of the FCA invalidates the release.

The Defendants’ arguments are unavailing be-

cause the release and indemnification clauses are

invalid under the plain language of the FCA. When

an individual brings a qui tam suit under the FCA,

the action may be dismissed only if the court and the

Attorney General give written consent to the dis-

missal and their reasons for consenting. See 31 U.S.C.

§ 3730(b)(1). Once filed by the relator, the complaint

must remain under seal for at least sixty days, and is

not served on the defendant until the court so orders.

App. 32

§ 3730(bX2). The Government may choose to inter-

vene and proceed with the action within the sixty

days after it receives the complaint, material evi-

dence, and information, but the Government may

extend the sixty-day evaluation period with a

showing of good cause to the court. § 3730(b)(3). The

district court correctly found that Longhi signed the

release eleven days after he filed the qui tam com-

plaint and was therefore unable to personally dismiss

the case. In addition, the district court correctly held

that even if the release and indemnification were

valid, Longhi could not have entered into it at the

time he did without the express knowledge and

consent of the United States, because the statutory

sixty-day review window still governed. This outcome

comports with our decision in Searcy v. Philips

Electronics North America Corp., where we held that

the United States has absolute power to veto any

settlement between a relator and defendant corpora-

tion. 117 F.3d 154, 160 (5th Cir. 1997).

Furthermore, the interest in enforcing the

release and indemnification clauses are outweighed

by public policy concerns. The Supreme Court’s deci-

sion in Rumery establishes the framework for

determining whether public policy prevents enforce-

ment of the release and indemnification in the limited

context of this qui tam case. Specifically, the Supreme

Court held that “a promise is unenforceable if the

interest in its enforcement is outweighed in the

circumstances by a public policy harmed by the

enforcement of the agreement.” Rumery, 480 U.S. at

App. 33

392 (citation omitted). The public policy interest

implicated in this case is the ability of the Govern-

ment to obtain information from relators it could not

otherwise obtain. It is in the Government’s best

interest to gain full information from the relator. To

enforce the release and indemnification clauses

contained in the stock sale agreement against Longhi

would ignore the public policy objectives expressly

spelled out by Congress in the FCA and would

provide disincentives to future relators. In addition,

enforcing the release and indemnification clauses

would encourage individuals guilty of defrauding the

United States to insulate themselves from the reach

of the FCA by simply forcing potential relators to sign

general agreements invoking release and indem-

nification from future suit. The district court correctly

determined that enforcing the release against Longhi

is against public policy. We affirm.

E. Defendants’ Motion for Summary Judg-

ment

The Defendants argue that the district court

should have granted their motion for summary judg-

ment. Because we have affirmed the district court’s

decision to grant the Government’s motion for sum-

mary judgment, we find no error.

Ill. ATTORNEYS’ FEES

The Defendants argue that we should reverse

the award of attorneys’ fees because Longhi failed to

App. 34

segregate the non-compensable work performed by

his counsel. In response, Longhi argues that under

the FCA he is entitled to an award of attorneys’ fees

for all time reasonably expended on his behalf in

pursuit of the achieved result. Longhi asserts that it

is legally irrelevant that he expended a small, limited

amount of time in connection with claims that were

not actively litigated in the case.

A. Standard of Review

The parties dispute the applicable standard of

review. Only two of our cases, both unpublished,

discuss the applicable standard for reviewing a

district court’s award of attorneys’ fees under the

FCA. United States v. Medica Rents Co. Ltd., No. 03-

11297, 2008 U.S. App. LEXIS 17946, at *1 (5th Cir.

2008); U.S. ex rel. Bain v. Georgia Gulf Corp., 208 F.

App’x 280, 282 (5th Cir. 2006). In both instances, we

applied an abuse of discretion standard when

reviewing a district court’s award of attorneys’ fees.”

Thus, we apply an abuse of discretion standard of

review to the instant case. In Bain, we explained that

the abuse of discretion standard of review is

consistent with our review of attorneys’ fees under

similar circumstances. 208 F. Appx. at 282 (citing

Skidmore Energy, Inc. v. KPMG, 455 F.3d 564, 566

“ We note that Bain and Medica Rents involve § 3730(d\4)

of the FCA and the instant case involves § 3730(d\1) of the FCA.

We find this to be a distinction without relevant difference in

determining the appropriate standard of review.

App. 35

(5th Cir. 2006)). “Under the abuse of discretion

standard, a district court’s decision to award

attorneys’ fees will not be disturbed unless the award

is based on (1) an erroneous view of the law or (2) a

clearly erroneous assessment of the evidence.” Id. See

also Travelers Ins. Co. v. St. Jude Hosp. of Kenner,

Inc., 38 F.3d 1414, 1417 (5th Cir. 1994); Alizadeh v.

Safeway Stores, Inc., 910 F.2d 234, 237-38 (5th Cir.

1990); Cobb v. Miller, 818 F.2d 1227, 1231 (5th Cir.

1987) (stating that the ultimate award of attorney's

fees is reviewed for abuse of discretion); EEOC v.

First Ala. Bank, 595 F.2d 1050, 1056 (5th Cir. 1979).

B. Analysis

Section 3730(dX1) of the FCA states that a

relator in a successful qui tam action is entitled to

“receive an amount for reasonable expenses which the

court finds to have been necessarily incurred, plus

reasonable attorneys’ fees and costs. All such ex-

penses, fees, and costs shall be awarded against the

defendant.” 31 U.S.C. §3730(d\1). The question is

whether Longhi’s attorneys’ fee award should be

segregated because he was not “successful” in proving

a violation of the FCA with regards to all twenty-one

contracts, as he initially alleged. We find the

Supreme Court’s decision in Hensley v. Eckerhart, to

be instructive. 461 U.S. 424 (1983).

In Hensley, the Supreme Court reviewed an

award of attorneys’ fees pursuant to the Civil Rights

Attorney’s Fees Awards Act for fees incurred during

App. 36

civil rights litigation where the plaintiffs did not

prevail on all of their claims. Jd. at 426. The Court

stated that “plaintiffs may be considered prevailing

parties for attorney's fees purposes if they succeed on

any significant issue in litigation which achieves

some of the benefit the parties sought in bringing

suit.” Id. at 433 (quotation and internal quotation

marks omitted). The Supreme Court explained that a

plaintiff might bring distinctly different claims that

are based on different facts and legal theories, and in

such an instance “work on an unsuccessful claim

cannot be deemed to have been ‘expended in pursuit

of the ultimate result achieved.’” /d. at 435 (quotation

omitted). The Court also explained, however, that

there are sometimes instances where a “plaintiff’s

claims for relief will involve a common core of facts or

will be based on related legal theories.” Jd. at 435. In

those instances, where much of counsel’s time is

“devoted generally to the litigation as a whole,

making it difficult to divide the hours expended on

a claim-by-claim basis ... the district court should

focus on the significance of the overall relief obtained

by the plaintiff in relation to the hours reasonably

expended on the litigation.” /d.

The district court properly noted the standards

set out by Hensley and expressly determined that the

claims regarding the performance on the contracts

and the claims alleging fraudulent inducement were

not factually distinct. The district court determined

that the claims regarding the four SBIR contracts

arose from the same set of contracts, same actors, and

App. 37

the same illegal intent to defraud the government of

money in violation of the FCA. The district court also

determined that the fees related to the four SBIR

contracts should not be segregated from the other

claims.

We hold that the district court did not abuse its

discretion in finding that the level of success on the

four SBIR contract claims alone was sufficient

enough to merit entitlement to a full attorneys’ fees

award. The district court reviewed the billing records

and found no duplicative efforts or unnecessary

hours, and thus found that Longhi’s counsel’s billing

record to be reasonable. We affirm.

IV. CONCLUSION

For the foregoing reasons, we AFFIRM the

district court’s judgment on all claims

App. 38

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

UNITED STATES OF AMERICA, §

EX REL. ALFRED J. LONGHI, JR., §

Plaintiffs, S Crvi. ACTION

Vv. $ H-02-4329

DEFENDANT,

Defendant. §

FINAL JUDGMENT

(Filed Mar. 13, 2008)

Pursuant to the court’s order of January 177, 2008

granting the parties’ stipulation of dismissal, (Dkt.

116) the court enters FINAL JUDGMENT in this

matter. However, the court retains jurisdiction over

the relator’s motion for attorney’s fees, costs, and

expenses (Dkt. 117) and will issue an order on the

motion at a later time.

This is a FINAL JUDGMENT.

Signed at Houston, Texas on March 13, 2008.

/s/ Gray H. Miller

Gray H. Miller

United States District Judge

App. 39

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

UNITED STATES OF AMERICA,

EX REL. ALFRED J. LONGHI, JR.,

Plaintiffs,

LITHIUM POWER TECHNOLOGIES,

INC., AND MOHAMMED ZAFAR A.

MUNSHI;

Defendants.

CrviL ACTION

H-02-4329

CO? OD LOR 00? 60? C02 COR CO? CO?

MEMORANDUM OPINION AND ORDER

(Filed Jan. 3, 2008)

Pending before the court are the plaintiffs’

motion for summary judgment on damages, and

defendants’ cross-motion for summary judgment on

damages. Dkts. 110 & 112. On September 27, 2007,

the court granted partial summary judgment for the

plaintiffs on their claims against Lithium Power and

Mohammed Zafar A. Munshi (collectively “LPT”) for

violations of the False Claims Act, 31 U.S.C. § 3729(a),

on four contract proposals (“the Four Contracts”)

* Those contracts are: (1) “Army Phase I” — ARMY-8630:

F08630-98-C-0066-P00001, Very Thin Rechargeable Battery; (2)

“Army Phase II” — ARMY-0018: DAS60-00-C-0018, Very Thin

Rechargeable Battery; (3) “Air Force Phase I” — USAF-2122:

F336 15-C-2048, Micro Electrical Mechanical-MEMs; and (4) “Air

(Continued on following page)

App. 40

under the Department of Defense’s Small Business

Innovation Research Program. Dkt. 107. The parties

have not moved for summary judgment on the merits

of the plaintiffs’ remaining claims. Therefore, the

damages at issue in this order are limited to those

stemming from the fraudulent inducement of the

Four Contracts.

I BACKGROUND

The court incorporates by reference its order

granting partial summary judgment on the govern-

ment’s claims. Dkt. 107. At the conclusion of its order,

the court wrote as follows:

The government has unquestionably carried

its burden of proof, even under the movant’s

difficult summary judgment standard, on

several false statements contained in the

contracts. For example, LPT misrepresented

its history and status on the Army Phase I

proposal. Also on the Army Phase I proposai,

LPT misrepresented the physical - facilities

that it had. On all four proposals, LPT

continuously misrepresented the arrange-

ments — or lack thereof — between itself and

Polyhedron Laboratories, and itself and the

University of Houston. On the Air Force

Phase I and II, LPT misrepresented the

amount of related work it had performed

Force Phase IT” USAF-2048: F33615-01-C-2122, Micro Electrical

Mechanical — MEMs.

App. 41

prior to the Air Force proposals when it did

not disclose the prior Army contracts. At one

point in its motion LPT argues that the U.S.

has made a mountain out of a group of small

molehills. But, that encapsulates exactly the

overall misrepresentation that LPT made in

its proposals. It embellished a whole series of

molehills so it could present a mountain of

experience, facilities, and novelty to attract

the reviewers. All of this was done with at

least reckless disregard for the truth of the

statements, and in some cases actual knowl-

edge. The court finds that the defendants

made false claims in violation of sections

372% aX1) and (2) on the contracts des-

ignated as Army Phase I, Air Force Phase I,

and Air Force Phase Il.” Therefore, the in-

voices based on all four contracts at issue

here are “false claims” based on a fraudulent

inducement theory.

Id. Having found lability on the Four Contracts, the

court now moves to the question of the damages to be

assessed against LPT.

ANALYSIS

This seemingly simple inquiry presents the court

with a novel issue of law. The Fifth Circuit has not

addressed the proper way to calculate damages for a

fraudulently induced research grant — nor for that

* Each Phase I contract was a prerequisite for Phase I

funding. Dkt. 107.

App. 42

matter has any other Circuit court. In fact, there does

not appear to be any one specific standard for dam-

ages under the FCA. See, e.g., United States ex rel.

Harrison v. Westinghouse Savannah River Co., 352

F.3d 908, 922 (4th Cir. 2003). Instead, courts have

used several different damage models — adapting

them to the facts of the case. See, e.g., Morse Diesel

Intl, Inc. v. United States, Fed. Cl. __, 2007 WL

3277293 (Fed. Cl. 2007) (pagination not available). A

logical starting point seems to be to examine the

language and underlying purpose of both the False

Claims Act itself and the government program

through which the funds were channeled — in this

case the Small Business Innovation Research Pro-

gram. Then, having established a frame of reference,

the court can determine which model best suits the

damages caused by LPT’s misrepresentations.

I. False Claims Act

Sometimes called the Abraham Lincoln Act, the

False Claims Act became law in 1863 in response to

“widespread corruption and fraud in the sales of

supplies and provisions to the union government

during the Civil War.” 132 Conc. Rec. H9382-03

(daily ed. Oct. 7, 1986) (statement of Rep. Glickman).

In: 1986,° finding that fraud had become an even more

pervasive and costly problem — approximately $10 to

$100 billion annually — Congress again turned to the

* A little more than five score years later.

App. 43

FCA as its “primary litigative tool for combatting [sic]

fraud.” S. Rep. No. 99-345, at *3 (1986) reprinted in

1986 U.S.C.C._A.N. 5266, 5266-67. As the Senate

Report went on to point out, “[tlhe cost of fraud

cannot always be measured in dollars and cents ...

fraud erodes public confidence in the Government’s

ability to efficiently and effectively manage its pro-

grams.” Jd. In order to make the FCA a more effective

deterrent, the report concluded that the Act needed

better incentives for relators combined with harsher

penalties for violators. Id. And, based on the available

statistics, the 1986 amendments have certainly

achieved their goal.“

The court has previously addressed two of the

three main areas Congress enhanced in the 1986

amendments: the incentive to the relator, and the

level of knowledge required for liability. Dkts. 101 &

107. In this motion, the court must now address the

third area enhanced by the 1986 amendments: the

penalty scheme. The FCA clearly delineates two

* According to the Department of Justice, as of Septernber

30, 2003, the United States hac recovered in excess of 12 billion

dollars since Congress passed the 1986 amendments. Press

Release, Department of Justice, Justice Dept. Civil Fraud

Recoveries Total $2.1 Billicn for FY 2003; False Claims Act

Recoveries Exceed $12 Billion since 1986 (Nov. 10, 2003)

available at http-//www.usdoj.gov/opa/pr/2003/November/03_civ_

613.htm (last visited Dec. 19, 2007). Moreover, the number of qui

tam cases filed jumped from 33 in the year 1987 to 326 in the

year 2003 — an increase of over 900%. Taxpayers Against Fraud

Education Fund, The False Claims Act Legal Center, Statistics,

http//www.taf.org/statistics. html (last visited Dec. 19, 2007).

App. 44

separate calculations, which comprise the amount of

a violator’s liability. 31 U.S.C. §3729(a). First, the

court must assess a civil penalty of not less than

$5,500 and not more than $ 11,000 for each instance.’

Id. And second, the court must award “3 times the

amount of damages which the government sustains

because of the act of that person.” Jd. The Supreme

Court has described the purpose of the treble

damages plus civil penalty framework as making

“sure that the government would be made completely

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

537, 551-52 (1943). At base, the FCA is an aggressive

Congressional plan to recover money defrauded from

the government, including the costs to recover the

defrauded money, in such a way as to be a deterrent

to others.

Ul. Small Business Innovation Research Pro-

gram

The Small Business Act came into being in 1953.

Act of Jul. 30, 1953, ch. 282, 67 Stat. 232 (codified at

i5 U.S.C. §§ 631 et seq.). Under the current law,

Congress describes the policy underlying the Act as

follows:

° Prior to August 30, 1999, the minimum and maximum

penalties were $5,000 and $10,000 respectively. See 28 C.F.R.

§ 85.3(aX9) (2007). Any civil penalties assessed by the court for

instances occurring before August 30, 1999 will use the penalty

range in force at the time.

App. 45

The essence of the American economic sys-

tem of private enterprise is free competition.

Only through full and free competition can

free markets, free entry into business, and

opportunities for the expression and growth

of personal initiative and individual judg-

ment be assured. The preservation and

expansion of such competition is basic not

only to the economic well-being but to the

security of this Nation.

15 U.S.C. § 631(a).° In 1958, Congress amended the

Small Business Act and added what has come to be

known as the Small Business Innovation Research

Program. See Pub. L. No. 85-536, § 2[9], 72 Stat. 391

(codified at 15 U.S.C. § 638). Congress found that

federal research projects went primarily to large

firms which in turn led to large federal procurement

contracts going to those same large firms who had

developed products from those federal grants. S. REP.

No. 85-1714 (1958), reprinted in 1958 U.S.C.C.A.N.

3071, 3076. The goal of the amendment was to help

small businesses obtain government research con-

tracts. Id. Congress reasoned that more government

research and development contracts going to small

businesses would in turn lead to more government

procurement contracts and more opportunity in the

* In 1980, Congress made an even stronger policy statement

when it declared that it is the “policy and responsibility of the

Federal Government to use all practical means and to take such

actions as are necessary .. . [to] foster the economic interests of

small businesses.” 15 U.S.C. § 631a.

App. 46

market as a whole for small businesses. Jd. The

declaration of policy in the current version of the

SBIR reflects these goals.

Research and development are major factors

in the growth and progress of industry and

the national economy. The expense of carry-

ing on research and development programs

is beyond the means of many small-business

concerns, and such concerns are handicapped

in obtaining the benefits of research and

development programs conducted at Govern-

ment expense. These small-business concerns

are thereby placed at a competitive dis-

advantage. This weakens the competitive

free enterprise system and prevents the

orderly development of the national economy.

It is the policy of the Congress that

assistance be given to small-business

concerns to enable them to undertake

and to obtain the benefits of research

and development in order to maintain

and strengthen the competitive free

enterprise system and the national

economy.

15 U.S.C. § 638(a) (emphasis added).

Ironically, todays SBIR is big business.’ In the

fiscal year 2007, the Department of Defense alone

” A Google search of the term SBIR retrieves approximately

9 commercial websites — just in the first page of results — touting

winning strategies for procuring SBIR funding. For example:

www.sbir-sttrgrantshelp.com, www.SBIRcoach.com, and www.

(Continued on following page)

App. 47

funded approximately $1.14 billion in SBIR pro-

grams. See Department of Defense, Small Business

Innovation Research & Small Business Technology

Transfer, Overview, http://www.acq.osd.mil/osbp/sbir/

overview/index.htm (last visited Dec. 19, 2007). Con-

sidering the funds tunneled annually into research

performed by small businesses, the SBIR has re-

mained true to its stated purpose, allowing small

businesses to compete on a level playing field with

large research firms and universities.

Il. Damages

As discussed above, the FCA does not specify how

courts should calculate “the amount of damages which

the government sustains because of the act of” the

person found liable. 31 U.S.C. § 3729(a). However,

case law gives the basic conceptual starting point.

The Fifth Circuit has held that damages are limited

“to the amount that was paid out by reason of the

false claim.” United States v. Aerodex, Inc., 469 F.2d

1003, 1011 (5th Cir. 1972). The D.C. Circuit has re-

stated this proposition as “only those damages that

would not have come about if the defendant’s mis-

representations had been true.” United States ex rel.

Schwedt v. Planning Research Corp., 59 F.3d 196, 200

(D.C.Cir. 1995) (citing United States v. Miller, 645

F.2d 473, 475-76 (5th Cir. 1981)). For example, in

sbirworld.com. See, Google, Web Search, http://www.google.com/

search?7hl=en&q=SBIR (last visited Dec. 28, 2007).

App. 48

Aerodex the Navy contracted with Aerodex for a

specific type of bearings. Aerodex, 469 F.2d at 1006.

Instead Aerodex supplied the Navy with inferior

bearings that had been reworked to look like the

correct type of bearings. Jd. When the substitutions

were discovered, the Navy spent approximately

$160,000.00 removing the inferior bearings from

planes in which they were installed and replacing

them. Jd. The court reasoned that the punishable act

was the actual presentment of an invoice for specific

bearings that the government did not receive. Jd. at

1011. Since the Fifth Circuit requires a direct causal

nexus between the actual false statement and the

damage sustained by the government, any conse-

quential damages due to the reworking could not be

assessed as part of the damages under the FCA." Jd.

(“The submission of these vouchers was not the cause

of the government’s consequential damages. The de-

livery and installation of the bearings in the air-

planes, not the filing of the false claim, caused the

consequential damages.”). Put another way, if Aerodex

had submitted invoices that reflected the correct part

number and that the bearings were reworked, the

government’s remedy would not lie in the False Claims

Act at all. Although, the Fifth Circuit has not had an

opportunity to address the method for calculating

actual damages since the FCA was amended, it is

* The court did, however, allow recovery of the conse-

quential damages under a breach of warranty theory. United

States v. Aerodex, 469 F.2d 1003, 1011-12.

App. 49

likely that it will continue to use the proximate cause

model. In the instant case, the court has already de-

termined that the false statements in LPT’s proposals

were actually material. Dkt. 107 at 32-35. Therefore,

a direct causal relationship exists between all funds

received under the Four Contracts and LPT’s false

statements.

A. Benefit of the Bargain Theory

The defendant urges the court to adopt a benefit

of the bargain approach to damages in this case. LPT’s

argument is very simple: the government got what it

paid for and was therefore not damaged.’ And, there

is some case law to support this concept. See, e.g.,

Harrison, 352 F.3d at 923; United States ex rel.

Stebner v. Stewart & Stevenson, 305 F. Supp. 2d 694,

701 (S.D.Tex. Jan. 30, 2004); Ab-Tech Constr., Inc. v.

United States, 31 Fed. Cl. 429 (1994). But cf. Young-

Montenay, Inc. v. United States, 15 F.3d 1040, 1043

n. 3 (Fed. Cir. 1994) (upholding the lower court’s find-

ing that the government sustained actual loss when it

was “denied the use of the overpaid money.”). In most

of the cases where courts found that the government

* The government sought, and the court granted, summary

judgment based solely on a theory of fraudulent inducement.

Dkt. 107. Therefore, the court assumed for the sake of argument

that the invoices were accurate. However, the court made no

&ndings with regard to the accuracy of the invoices and as ex-

plained later in this opinion, its adoption of the fraudulent

inducement theory should not be regarded as such.

App. 50

had gotten the benefit of its bargain, the contract at

issue was some type of procurement contract the end

product of which was tangible and had value to the

government. See, e.g., United States v. Bornstein, 423

U.S. 303, 96 S. Ct. 523 (1976) (radio kits); United

States ex rel. Roby v. Boeing Co., 302 F.3d 637 (6th

Cir. 2002) (helicopters); Stebner, 305 F. Supp. 2d at

701 (trucks with non-corrosive treatment); Ab-Tech,

31 Fed. Cl. at 431-32 (data processing system). In

some instances, the goods were conforming and ac-

cepted by the government, but due to collusive bidding

or under-delivery the government was overcharged.

Under those circumstances, many courts have meas-

ured damages as the difference between what the

government paid for the items or services and what

the government should have paid. See, e.g., United

States v. Coop. Grain & Supply Co., 476 F.2d 47, 61-

65 (8th Cir. 1973); United States v. Woodbury, 359

F.2d 370, 379 (9th Cir. 1966). In other procurement

cases, when goods were non-conforming, the courts

have fashioned appropriate damages based on the

facts of the case and the value of the end-product

received. See Aerodex, 469 F.2d at 1006 (allowing

recovery of full amount of contract for unusable non-

conforming goods); Faulk v. United States, 198 F.2d

169, 172 (5th Cir. 1972) (damages included a estimate

of the amount of sub-standard milk left in soldiers’

glasses on the mess hall tables). The Fifth Circuit has

recognized that whatever damage model a court

chooses, it must provide some type of deterrent. Faulk,

198 F.2d at 172 (“Under [appellant’s suggested jury

instruction on damages] appellant would not have

App. 51

risked losing anything by his misconduct except the

illegal profit to which he was never entitled anyway,

while had he never been brought to account for his

fraud he would have been free to enjoy his unlawful

gains with impunity.”).

However, the benefit of the bargain analysis

cannot completely relieve a defendant from actual

damages. In United States v. Bornstein, the defendant

had already made compensatory payments to the

government. Bornstein, 423 U.S. at 314. Defendant

argued that all compensatory payments should be

subtracted before the damages were multiplied. /d.

The Supreme Court disagreed and held that the total

or gross amount of damages should first be doubled

(now tripled) and only then should any compensatory

payments or set-offs be subtracted. Jd. at 316. The

Court explained that this method would (1) help

compensate the government for the “costs, delays,

and inconveniences occasioned by fraudulent claims’;

(2) keep penalties consistent among violators guilty of

similar acts; and (3) prevent violators from avoiding

damages by simply paying the government back at

any time before judgment. /d. at 315-16. Therefore,

even if the court agreed with LPT’s argument that

the government got what it paid for — which it does

not — Bornstein holds that the total amount paid

out under the four contracts must first be tripled,

and only then whatever value the government

received from LPT under the Four Contracts would

App. 52

be subtracted.” The Fifth Circuit agrees. See United

States v. Thomas, 709 F.2d 968, 972 (5th Cir. 1983)

(“The damages must be doubled [now tripled] and

then reduced by the amount of any previous payments

on the claim.”). Moreover, this damage model holds

true even when the claims at issue are not for pro-

curement contracts. See United States ex rel. Purcell

v. MWI Corp., __ F. Supp. 2d ___, 2007 WL 3287443

(D.D.C. Nov. 6, 2007) (“The math my be [sic] tricky, but

the case law is simple: fraudulently induced govern-

ment loans (even if eventually repaid in full) are part

of the original loss to the government.”) (citing Bornstein,

423 U.S. at 316; United States v. Globe Remodeling

Co., 196 F. Supp. 652 (D.Vt.1960) (insurance); United

States v. Ekelman & Assocs., Inc., 532 F.2d 545, 550

(6th Cir. 1976) (mortgage loans); United States v. Hill,

676 F. Supp. 1158, 1182 (N.D. Fla. 1987) (guaranteed

* Notably, the Bornstein case has been cited by other courts

for the proposition that “[t]he Government’s actual damages are

equal to the difference between the market value of the [items

under contract] it received and retained and the market value

that the [items] would have had if they had been of the specified

quality.” United States ex rel. Roby v. Boeing Co., 302 F.3d 637,

646 (6th Cir. 2002); United States v. TDC Mgmt., 288 F.2d 421,

428 (D.C.Cir. 2002); Commercial Contractors, Inc. v. United

States, 154 F.8d 1357, 1372 (Fed. Cir. 1998). However, this

comment on the part of the Court is dicta as evidenced by both

its placement in a footnote and its reference without disparage-

ment to two Fifth Circuit cases where the court did not use this

formula. Cf. United States ex rel. Fago v. M & T Mortgage Corp.,

___ F. Supp. 2d, 2007 WL 2840412 at *17 (D.D.C. Oct. 2, 2007).

Unsurprisingly, neither the Fifth Circuit nor any district court

in the Fifth Circuit has ever cited Bornstein for this proposition.

App. 53

bank loans); United States v. Heck, No. 86-0875

(SSB), 1987 WL 49253, at *6 (D.N.J. Mar. 26, 1987)

(mortgage loans)). Accordingly, the question really

becomes what was the benefit of the government’s

bargain with LPT.

B. The Benefit of the Government’s Bar-

gain

Assuming for the sake of argument that the four

contracts were standard procurement contracts and

damages could be measured using some type of quid

pro quo, the government has not received the benefit

of its bargain for two main reasons. First, the con-

tracts produced no tangible benefit to the govern-

ment. A standard procurement contract is usually an

agreement for an.end product like the construction of

a bridge, or delivery of a specific widget. In those

cases, although the bidding may have been tainted in

some way or the cost overruns may have’ been fraudu-

lent, at the end of the day, the government owned a

bridge or some widgets. Under a standard benefit of

the bargain model, the government should not be able

to keep its bridge or widgets — assuming they are

conforming — and get damages for the entire amount

it paid. RESTATEMENT (SECOND) OF TorTS § 549. Here,

however, there is no tangible end product belonging

to the government. As explained in the court’s

previous order, the SBIR program consists of three

phases. Dkt. 107 at 1-2. In Phase III, the small

business must obtain its own funding and take its

product to market. 15 U.S.C. §§ 638(e4(C) & 638(r);

App. 54

see also Dkt. 67, Ex. 8 at 1. The batteries developed

through the SBIR funding belong to LPT — not the

government. Jd. And, as evidenced by its own state-

ments in its proposals and final reports, LPT had

every intention of marketing those batteries to the

government and private industry. See, e.g., Dkt. 67,

Ex. 2 at 6 (“The time is ripe to exploit our advances in

a market-driven battery that tentuples [sic] the

energy per dollar of a rechargeable battery.”); see also

Dkt. 67, Ex. 1 at 17 (“LPT"s strategy and goals in the.

commercialization of this product will be first to ob-

tain adequate patent protection on its ideas, processes

and developments,” then to manufacture the batteries

for the BMDO and other small niche markets, and

last to license the technology to “the larger commer-

cial and military sectors for applications such as

space use, weaponry, consumer portable electronics

and electric vehicles. .. .”); Ex. 2 at 32 (listing poten-

tial markets as cellular phones, laptops, handheld

devices, geophysical equipment, and medical devices);

and Ex. 3a at 42 (In addition to the Air Force, “our

immediate customers will be Micromodular Data

Solution, Inc. (San Jose, CA) and Telpus Groups for

credit card size batteries; Cyberfinders for smart

watch with telecommunications capabilities; and

Stanford University for Mesicopter batteries and an

interest from Rujisink, a German company, for micro

model airplanes and model helicopters.”).. Therefore,

even if the court treated this contract like a standard

procurement contract — which it most distinctly is not

~— the defendants would be liable for all sums paid out

under all four contracts for the simple reason that the

App. 55

government has no tangible assets of value as a

result of the contracts.

Second, even if the benefit to the government was

the invention of these precise batteries, the Fifth

Circuit has expressly rejected this “no harm; no foul”

argument. For example, in Aerodex, the defendants

argued that the bearings they actually supplied —

rather than the ones for which the Navy contracted —

were considered interchangeable by the entire avia-

tion industry. Aerodex, 469 F.2d at 1007. The court

disagreed and explained that “[t]he mere fact that the

item supplied under contract is as good as the one

contracted for does not relieve defendants of liability

if it can be shown that they attempted to deceive the

government agency.” Id. Although, the Aerodex court

eventually found that the two type of bearings were

not, in fact, interchangeable, it based its holding in

part on the falsity of the statement rather than the

end product delivered. Jd. at 1008, 1011.

Later, in Peterson v. Weinberger, the Fifth Circuit

again rejected a “no harm, no foul” argument. 508

F.2d 45 (5th Cir. 1975). In Peterson, James Peterson

submitted Medicare claims for physical therapy per-

formed by Peterson’s company, but used his brother’s

name and provider number. 7d. at 48. Peterson

argued that the patients had received the physical

therapy performed by qualified people, so the govern-

ment was not harmed. Jd. at 52. The court rejected

this argument as unsound, explaining that had

Peterson submitted the claims under his own name,

they would not have been paid. Jd. The benefit of the

App. 56

government's bargain was medical services provided

by eligible doctors. Jd. Even though fully qualified

staff may have performed the physical therapy, the

claims for payment were false. Therefore, the court

found that the government had been damaged for the

full amount.

In the instant case, according to the testimony of

the reviewers assigned to the LPT proposals, had

LPT submitted truthful proposals, neither reviewer

would have recommended the proposals for funding.

Dkt. 107 at 33-35. As in Peterson, the person who

performed the work under the contracts — assuming

arguendo that all of the work was completed and not

duplicative — was not the person eligible to receive

funds under the government program. The govern-

ment’s benefit of the bargain was to award money to

eligible deserving small businesses. That is precisely

what LPT denied to the government. Accordingly, the

government did not get the benefit of its bargain.

C. Value of the SBIR Programs

The government argues that it has been damaged

for the entire amount of SBIR funding under the four

contracts. According to it, the government’s total

damage is incalculable. Through LPT’s fraudulent

inducement of the SBIR research funds, it diverted

those same funds from deserving eligible small busi-

nesses, undermining Congress’s objectives for the

SBIR program. The funds for each SBIR program

are finite. Additionally, the government reminds the

App. 57

court, that there is simply no way to measure

the innovations lost by not funding these other,

deserving, small businesses. Lastly, the government

argues that LPT’s misrepresentations went directly to

the heart of the SBIR. programs - their ability to

perform research on technology that was novel and

innovative. The question becomes: what is the value

derived by the government from its SBIR programs?

LPT could argue that the value the government

received from all of this was the availability of

battery technology that did not exist prior to LPT’s

research. Therefore, it could be argued that the

government did receive value — albeit intangible

value — from LPT in return for funding. But, that

argument would misstate the whole purpose of fund-

ing under the SBIR. The government’s objective, both

statutorily and contractually, is not to confer a benefit

upon itself. See 15 U.S.C. § 638(a). Instead, its goal is

to give funding opportunities to small businesses to

make those businesses more competitive. /d.; see also

15 U.S.C. §631(a). If, for example, Congress had

merely wanted the innovation for the Department of

Defense, it had many other more straightforward

means of achieving that goal. The SBIR and STTR”

" The STTR Program is the Small Business Technology

Transfer Program. It was created in 1992 and funds cooperative

research projects between a small business and research insti-

tution. 15 U.S.C. § 638(n}(p); Department of Defense, Small

Business Innovation Research Small Business Technology

Transfer, Overview, http//www.acqg.osd.mil/osbp/sbir/overview/

index.htm (last visited Dec. 26, 2007).

App. 58

programs could have been recodified under Chapter

63 of Title 15, entitled Technology Innovation. 15

U.S.C. §§ 3701 et seq.” Or, they could have been added

to Chapter 148 of Title 10 authorizing cooperative

agreements for research and development projects for

the armed forces. 10 U.S.C. §§ 2511-2519. Congress

did neither of these things. It chose instead to enact

the programs under the umbrella of the Small

Business Act with the stated purpose of encouraging

entrepreneurship and free competition. 15 U.S.C.

§ 631(a).

The D.C. Circuit has recently had occasion to

address a government program whose value was

lost entirely though [sic] fraud. In United States v. TDC

* It is the purpose of this chapter to improve the economic,

environmental, and social well-being of the United States by —

(1) establishing organizations in the executive

branch to study and stimulate technology;

(2) promoting technology development through the

establishment of cooperative research centers;

(3) stimulating improved utilization of federally

funded technology developments, including inven-

tions, software, and training technologies, by State

and local governments and the private sector;

(4) providing encouragement for the development of

technology through the recognition of individuals and

companies which have made outstanding contribu-

tions in technology; and

(5) encouraging the exchange of scientific and

technical personnel among academia, industry, and

Federal laboratories.

15 U.S.C. § 3702.

App. 59

Management Corporation, Inc., the defendant TDC

had contracted with the Urban Mass Transit Author-

ity to find private investors and sureties for minority

enterprises wanting to bid on large transportation

construction projects. 288 F.3d 421, 422-23 (D.C. Cir.

2002). TDC’s role in the project was as an impartial

ombudsman. Jd. However, TDC did not maintain its

impartiality. Jd. at 428. TDC began charging fees to

the minority businesses for its assistance, and par-

ticipating in joint ventures with private investors. Id.

The D.C. Circuit agreed “that the Program no longer

had any value to the government.” Jd. Additionally,

the court explained that the valuation of damages

was different from regular benefit of the bargain FCA

cases, because the Program “did not call for TDC to

produce a tangible structure or asset of ascertainable

value.” Jd. (distinguishing Ab-Tech Construction, Inc.

v. United States, 31 Fed. Cl. 429 (1994) and United

States v. Woodbury, 359 F.2d 370, 379 (9th Cir. 1966)).

However, the loss of the intangible benefit of a

program does not automatically vitiate the value of

the program. In Ab-Tech Construction v. United States,

Ab-Tech contracted with the government to build an

automated data processing facility. 31 Fed. Cl. 429,

431-32 (1994). The agreement was made under the

auspices of Section 8(a) of the Small Business Act

which mandates that subcontracts be given to small

businesses owned and controlled by “socially and

economically disadvantaged individuals.” Jd. In viola-

tion of the SBA’s mandate, Ab-Tech entered into an

indemnity agreement with a third company which,

App. 60

had it been revealed to the Small Business Adminis-

tration, would not have been approved. Jd. at 432-34.

The court found that “by deliberately withholding

from SBA knowledge of the prohibited contract

arrangement with [the third company], Ab-Tech not

only dishonored the terms of its agreement with that

agency but, more importantly, caused the Govern-

ment to pay out funds in the mistaken belief that it

was furthering the aims of the 8(a) program.” /d. at

434. The government asked the court for damages

equaling the amount of the progress payments made

under the contract — $1.4 million out of a total $1.5

million ~ times three. Jd. The court declined saying

that the government had suffered no damages

because it “got essentially what it paid for — an

automated data processing facility built in accordance

with the contract drawings and specifications.” /d.

Notably, however, the government had a tangible

asset of value at the end of the contract. The Sixth

Circuit has explained that even under a benefit of the

bargain theory, if the end-product has no value to the

government, then it is entitled to full recovery. United

States ex rel. Compton v. Midwest Specialties, Inc.,

142 F.3d 296, 304 (6th Cir. 1998). Since the legislative

history of the SBIR demonstrates that the value of

the program lies not in innovation, but in innovation

by eligible small businesses, it is clear that any

alleged end-product of the Four Contracts is valueless

from the government’s standpoint.

App. 61

C [sic]. Actual Damages

Although they differ dramatically on the nature

of the government’s intended benefit under the Four

Contracts, the parties agree that whether the govern-

ment received a benefit is the heart of the question. If

the benefit is tangible, like a bridge or a widget (or a

battery), then the government has no end-product.

The SBIR was expressly written to foster commer-

cialization by the small businesses, not produce

bridges or widgets.” 15 U.S.C. §§631(a), 631la7

638(a). If the government has gained some intangible

benefit because of the invention of these new batteries,

that is clearly offset by the lost opportunity for inno-

vation by the eligible deserving small businesses that

did not receive the funds which LPT fraudulently

induced from the government. There is simply no way

to speculate whether an eligible small business would

have created an innovation of greater or lesser value.

If the benefit to the government is the encouragement

of entrepreneurship and free competition by eligible

small businesses, then the government again has

gained no benefit. Therefore, the proper amount of

actual damages for the Four Contracts is the amount

paid out on the Four Contracts — $1,657,455.00 —

multiplied by three for a total of $4,972,365.00.

“ Under the general terms of the Department of Defense’s

SBIR Program, it retains a royalty-free license to use the

innovation, but no intellectual property rights. Dkt. 67, Ex. &(a)

at 12. However, the license has no value to the government

because (1) it is not in the business of manufacturing batteries,

and (2) it is not the benefit contemplated by the SBIR.

App. 62

LPT argues that “the government is seeking a

windfall so great that it would offend due process

under the Fifth Amendment.” Dkt. 112 at 7. This

argument misstates the law. The Supreme Court in

Cook County, Illinois v. United States ex rel. Chandler

explained that the FCA’s treble damage provision is

not the equivalent of classic punitive damages. 538

U.S. 119, 120 (2003). Because the FCA has no pro-

vision for compensatory damages, the treble damages

amount is intended to repay the government for the

expense of tracking down and prosecuting the fraud.

Id. Additionally, the FCA requires that a percentage

of the award be paid to the relator. Jd. Moreover,

“Congress considered and was satisfied that the 1986

amendments to the False Claims Act did not violate

any constitutional rights.” Morse Diesel Int'l, Inc. v.

United States, Fed. Cl. __, 2007 WL 3277293

(Fed. Cl. 2007) (citing 132 Conc. Rec. S9806 (1986))

(pagination not available). The treble damages plus

civil penalty framework relates directly to Congress’s

goal of deterring the rampant fraud in federal

contracting. Id. (providing an exhaustive examination

of the Due Process argument in an FCA context).

Therefore, an award of treble damages does not

violate the Constitution. As for LPT’s “windfall” argu-

ment, it is specious at best. Moreover, no matter what

damages the court awards, LPT still has all of its

intellectual property. Accordingly, the windfall argu-

ment also fails.

And last, LPT argues that “[njo court has ever

applied a fraudulent inducement/disgorgement theory

App. 63

in the absence of some tangible injury to the govern-

ment.” Dkt. 112 at 6-7. LPT cites Harrison and Laird

for this proposition. Neither case supports this

position. Laird found that there had been no false

statement and thus never addressed damages. United

States ex rel. Laird v. Lockheed Martin Engineering &

Science Servs. Co., 491 F.3d 254, 259 (5th Cir. 2007).

Harrison addressed damages in the situation where

there was a tangible benefit to the government, not a

lack of tangible injury. Harrison, 352 F.3d at 923. The

court in Harrison was unwilling to make the defen-

dant contractor disgorge all of the money that the

government paid under its contract, because the

government had received the benefit of the work

performed. Jd. However, this holding does not support

the reverse proposition that absent a tangible injury

disgorgement is inappropriate. Additionally, this

argument is weakened because the facts here are

novel.

D. Civil Penalty

The second part of the penalties awarded under

the False Claims Act is a civil penalty of not less than

$5,500 and not more than- $11,000. 31 U.S.C. § 3729.

The government argues that the court should assess

a penalty for each of the 54 vouchers submitted under

the Four Contracts. And, case law suggests that a

forfeiture for each invoice may be appropriate. Born-

stein, 423 U.S. at 311; see also United States ex rel.

Marcus v. Hess, 317 U.S. 537, 552, 63 S. Ct. 379

(1976); Faulk, 198 F.2d at 171. LPT argues that it

App. 64

should be subject only to the minimum fine, and then

only once for each of the Four Contracts. Dkt. 112 at

7. However, in support of this, it merely offers the

same arguments discussed in the section above.

The calculation of the forfeitures, both in number

and amount is not automatic. In Bornstein, the Court

cautioned that courts should focus on “the specific

conduct of the person from whom the Government

seeks to collect the statutory forfeitures.” Bornstein,

423 U.S. at 313. For example in Bornstein, the gov-

ernment asked for a forfeiture on each of the 35

invoices submitted for the radio tubes at issue. /d.

But, the district court assessed only one forfeiture,

because the radio tubes were shipped under one

contract. Jd. However, the Supreme Court found that

the subcontractor had committed three separate

causative acts — three shipments of falsely marked

tubes. Jd. Therefore, the subcontractor was liable for

three forfeitures. /d.

In Hess, electrical contractors colluded to remove

competition from the bidding process for P.W.A. con-

tracts. Hess, 317 U.S. at 543. The government argued

that it was entitled to a forfeiture on “every form

submitted by respondents in the course of their

enterprise.” Jd. at 552. The defendants argued that

there should be only one single forfeiture. Jd. The

district court decided that instead a forfeiture would

be paid for each separate P.W.A. project. Jd. The

Supreme Court agreed, saying that “[t|he incidence of

the fraud on each additional project is as clearly

individualized as is the theft of mail from separate

App. 65

bags in a post office.” Jd.; see also United States v.

Krizek, 111 F.3d 934, 939 (D.C. Cir. 1997) (“The grava-

men of these cases is that the focus is on the conduct

of the defendant. The Court asks, ‘With what act did

the defendant submit his demand or request and how

many such acts were there.’”) (citing Miller v. United

States, 550 F.2d 17, 24 (1977) (assessing five forfei-

tures because contractor sent five monthly billings

even though each billing contained eleven separate

invoices); United States v. Woodbury, 359 F.2d 370,

378 (9th Cir. 1966) (ten forfeitures awarded on ten

applications for payment containing numerous in-

voices each); United States ex rel. Garibaldi v.

Orleans Parish Sch. Bd., 46 F. Supp. 2d 546, 554

(E.D.La. Apr. 27, 1999) rev’d on other grounds 244

F.3d 486 (5th Cir. 2001) (“It is the number of applica-

tions for funds, and not the number of coded items on

each application, or the number of invoices generated

by the applications, or the number of contracts the

applications represent, that determines the number

of claims made”). But see United States v. Conway

TEC Corp., No. H-86-1198, 1996 WL 41842 at *1

(S.D.Tex. Jan. 23, 1996) (Black, J.) (fifty-two forfei-

tures on fifty-two invoices). Accordingly, the court

considers the acts of the defendants in determining

the number of forfeitures.

In the instant case, like Hess, liability was predi-

cated on fraudulent inducement of contracts. In Hess,

the Court assessed a forfeiture for each contract.

Id. Here, the government moved for and the court

granted summary judgment on liability premised on

App. 66

the fraudulent inducement of the Four Contracts. In

its order, the court stated that:

The court finds that the defendants made

false claims in violation of sections 3729(a\1)

and (2) on the contracts designated as Army

Phase I, Air Force Phase I, and Air Force

Phase II. Therefore, the invoices based on all

four contracts at issue here are “false claims”

based on a fraudulent inducement theory.

Dkt. 107. However, the court made no finding re-

garding the falseness of the individual invoices

themselves. Instead, the court found that the false

statements were the Four Contracts and that false-

ness was imputed to the invoices. The court’s state-

ment was based in part on the Supreme Court’s

finding in Hess that “[t]his fraud did not spend itself

with the execution of the contract. Its taint entered

into every swollen estimate which was the basic

cause for payment of every dollar paid by the P.W.A.”

Hess, 317 U.S. at 542-43. In Hess, although the Court

imputed the taint to every demand for money, it only

awarded forfeitures on each P.W.A contract. Jd. at

552. Hess then would suggest that although the

invoices are tainted by the initial fraud, it is the

contracts themselves that trigger the forfeiture. This

methodology comports with the Court’s holding in

Bornstein awarding forfeitures on each of the defen-

dant’s causative acts. Bornstein, 423 U.S. at 313.

Here, the court has found that the causative acts are

the Four Contracts. Therefore, in light of Bornstein

and Hess, the court will assess one forfeiture for each

App. 67

of the Four Contracts. However, because the defen-

cants’ fraud was systematic and knowing, the court

will assess the maximum amount for each forfeiture.

The forfeiture for Army Phase I is $10,000 and the

forfeiture for each of the remaining three contracts is

$11,000. Therefore, the total forfeiture is $43,000.00.

IV. CONCLUSION

Pending before the court is the plaintiffs’ motion

for summary judgment on damages, and defendants’

cross-motion for summary judgment on damages.

Dkts. 110 & 112. Upon consideration of the motion,

response, reply, the record, the applicable, and for the

foregoing reasons, the court awards damages as

follows:

It is ORDERED that for the contract desig-

nated by the court as Army Phase I, judgment is

entered against the defendants for $175,605.00

(3 x $58,535.00) in actual damages, plus a forfeiture

of $10,000.00.

It is further ORDERED that for the contract

designated by the court as Army Phase I, judgment

is entered against the defendants for $2,247,444.00

‘ Prior to August 30, 1999, the minimum and maximum

penalties were $5,000 and $10,000 respectively. See 28 C.F-R.

§ 85.3(aX9) (2007). The Army Phase I Contract predated the

change in civil penalties. Therefore, the court awards a civil

penalty based on the rule in place at the time of the offense.

App. 68

(3 x $749,148.00) in actual damages, plus a forfeiture

of $11,000.00.

It is further ORDERED that for the contract

designated by the court as Air Force Phase I,

judgment is entered against the defendants for

$299,973.00 (3 x $99,991.00) in actual damages, plus

a forfeiture of $11,000.00.

It is further ORDERED that for the contract

designated by the court as Air Force Phase II,

judgment is entered against the defendants for

$2,249,343.00 (3 x $749,781.00) in actual damages,

plus a forfeiture of $11,000.00.

The total damag

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