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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2010
- **Citation:** 559 U.S. 1067

## Text

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= 09-666 DEC 7 - 2008

Ju The ORACE OF THE CLERK

Supreme Court of the Anited States

*

LITHIUM POWER TECHNOLOGIES, INC.
and M. ZAFAR MUNSHI,

Petitioners,

V.

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

Re

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.

2.

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.

3.

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.

ii
QUESTIONS PRESENTED — Continued

4.

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.

1V

TABLE OF CONTENTS

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2

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

4

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

D

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.

6

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.

4
vw

7

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

8

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.

9

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

10

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:

11

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

12

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

13

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.

14

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.

16

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”:

17

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).

18

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,

19

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

20

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

21

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.

22

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

23

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)

24

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.

25

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

26

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

27

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.

28

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

29

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

30

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

31

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,

32

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).

33

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.

34

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

35

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.

36

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.

a
wv

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

v.

UNITED STATES OF AMERICA
Intervenor-Appellee

V.

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 .” 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,
V

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 pa

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_1322%3A1. Public record. Not legal advice.