Case Study: Hooper V. Lockheed Martin - Alston & Bird LLP

Extracted from Law360:
Case Study: Hooper V. Lockheed Martin
Law360, New York (August 27, 2012, 12:46 PM ET) -- When the government tells you your bid is too high and
you lower your bid in a best and final offer, do you have potential liability under the False Claims Act?
In a case that posed a series of interesting issues, the Ninth Circuit Court of Appeals faced this question of first
impression in Hooper v. Lockheed Martin Corporation, 2012 U.S. App. LEXIS 16003 (Aug. 2, 2012). One of
the key questions is: How may this decision affect how contractors finalize their bid number?
Background
The False Claims Act lawsuit in Hooper was brought by a relator and former employee of Lockheed who
worked on the Air Force’s RSA IIA Program. The objective of the program was to “automate, standardize and
modernize software and hardware used to support the nation’s space launch operations.” The government issued
a request for proposal soliciting “cost reimbursement, plus fee” proposals, and received three proposals. The
RFP indicated that for the evaluation of proposals the technical elements of the proposal would be first in
importance with cost being of secondary importance.
Subsequent to the receipt of proposals, the Air Force met with the bidders to receive best and final offers.
During the meeting with Lockheed, the Air Force advised Lockheed that its cost proposal was too high. As a
result, Lockheed reduced its proposal from $ 439.2 million to $ 432.7 million. A Lockheed employee who was
involved in the preparation of the cost proposal testified that he was instructed to lower cost estimates without
regard to actual costs. He also testified that some of the cost work-ups that were included in the proposal were
“bad guesses” but were not “false.”
Subsequent to the receipt of Lockheed’s BAFO, the Air Force consulted with independent consultants to review
the bid process. While finding that Lockheed had overstated the potential for cost savings, and that its risk
analysis was “unrealistic,” the consultants concluded that Lockheed’s cost factors were “realistic” and
Lockheed’s proposal presented the best value. Despite not being the low bidder the contract was awarded to
Lockheed.
After the contract was awarded, Lockheed disclosed to the Air Force that a portion of the software Lockheed
would utilize to perform its scope of work would be “free downloadable open source software (“FOSS”)”
instead of being proprietary software. The Air Force did not object to the use of the FOSS.
Plaintiff Nyle Hooper worked for Lockheed on the program until he was terminated by Lockheed. Hooper filed
a qui tam action against Lockheed in the United States District Court for the District of Maryland alleging
several violations of the False Claims Act, including (1) knowingly underbidding the contract, (2) utilizing
undisclosed FOSS software, (3) failing to perform all required testing or improperly conducting those tests, and
(4) wrongful discharge in retaliation for FCA-protected activity. At the time of the filing of the lawsuit,
Lockheed had been paid approximately $900 million.
The case was transferred to the Central District of California after the Maryland District Court granted
Lockheed’s transfer of venue motion based upon forum non conveniens grounds. Subsequent to the transfer,
Lockheed filed a motion to dismiss Hooper’s retaliation claim which was granted on the grounds that
California’s two-year statute of limitations barred that claim.[1] Thereafter, Lockheed filed a motion for
summary judgment which was granted by the California district court essentially on the grounds that Hooper’s
claims were unsupported.

The “False Estimate” Issue
The Ninth Circuit upheld the district court’s dismissal of two of the three FCA claims involving the “untimely”
disclosure of the use of FOSS software and failure to properly perform testing on the grounds that those claims
were entirely lacking in evidentiary support. This left the question of whether Lockheed’s alleged false estimate
was sufficient to constitute a claim under the FCA. While other circuits had decided the question, the court
noted that it was a question of first impression in the Ninth Circuit.
First, the court noted that in United States ex rel Marcus v. Hess, 317 U.S. 537 (1943), the Supreme Court found
contractors liable under the FCA when they obtained a contract by collusive bidding. It noted that most courts
interpreting Hess concluded that it stood for a “fraud in the inducement” theory of the FCA and therefore
applied the FCA to bid-rigging cases. Lockheed argued that Hess and its progeny were distinguishable in that its
bid could not be the basis for FCA liability because the cost proposal was an estimate — in essence a statement
of opinion, as opposed to a statement of fact.
The Hooper court reviewed decisions out of the First and Fourth Circuits which held that a false estimate, even
based opinion, could be the basis of a false claim violation. It cited the Fourth Circuit Court’s decision in United
States ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 766 (4th Cir. 1999), in which the
defendant was alleged to have made false statements to obtain approval of a subcontract. It cited to the Fourth
Circuit finding that even an opinion could establish liability for a false claim because “an opinion or estimate
carries with it an ‘implied assertion, not only that the speaker knows no facts which would preclude such
opinion, but that he does know facts which justify it.’”
The court also endorsed the reasoning of the First Circuit’s opinion in Loughren v. Unum Group, 613 F. 3d 300,
310-312 (1st Cir. 2010), where that court found that false statements on a social security application were false
statements within the FCA so long as the applicants knew of facts that would reasonably preclude such an
opinion.
Based on these decisions, the court held: “we conclude that false estimates, defined to include fraudulent
underbidding in which the bid is not what the defendant actually intends to charge, can be source of liability
under the FCA, assuming that the other elements of a FCA are met.”
Notwithstanding the court’s finding that a claim could be stated, the question remained whether the facts
presented by plaintiff were sufficient to raise a material issue of fact as to whether Lockheed’s reduction of it
proposal cost constituted a false claim. Here the court focused on the FCA alternative scienter requirements,
i.e., whether (1) the defendant had actual knowledge of the falsity of the estimate, (2) the defendant acted in
deliberate ignorance of the truth or falsity of the estimate, or (3) the defendant acted in reckless disregard of the
truth or falsity of the estimate.[2]
Turning to the facts of the case, the court highlighted testimony of a Lockheed employee who acknowledged
that after the Air Force would not accept Lockheed’s original bid, he was instructed to change the cost without
applying any engineering judgment. That same employee also testified that in connection with a bid on a
separate contract, he was told to lower his cost notwithstanding that he had advised his superiors that his
numbers represented the “real cost.”
In addition, the court cited to the Air Force’s consultant’s contradictory findings that Lockheed’s bid was
“unrealistic” in its assessment of risk but that it provided the “best overall value,” even with its problems. Based
on these facts, the Hooper court concluded that a genuine material issue existed on the issue of whether
Lockheed acted with knowledge, deliberate ignorance or reckless disregard that its estimate was false.

Commentary
Obviously, the rub in this case is that Lockheed only reduced its proposal cost after the Air Force told Lockheed
that its costs were too high and that it would not accept Lockheed’s bid unless it was reduced.[3] While equity
might argue against a finding of liability under these circumstances, FCA liability principally focuses on the
defendant’s frame of mind in submitting a claim. While the government’s knowledge of the falsity of a
representation may preclude FCA liability, the cases that address the “government knowledge” defense focus on
the fact that the government’s knowledge was known to the defendant, thereby negating the existence of an
intent to deceive. (Indeed, this was one of the grounds for the court upholding the district’s dismissal of
plaintiff’s FOSS claim.)
But this case presents a real dilemma to parties bidding on federal projects. For example, how often does a
contractor perform a detailed workup of its estimate only to apply a percentage factor reduction to attempt to
submit what it believes is a bid that is competitive? Doesn’t that happen all of the time when a bid is reviewed
by management and adjusted to make it more competitive? The answer is that these kinds of bid adjustments
happen all of the time and they are based upon very subjective factors which may not be subject to a
mathematical calculation.
However, it is doubtful that the Hooper decision will cause contractors to no longer adjust their bids.
Competitive pressures on bidders are simply too great. However, at the very least, contractors will need to be
able to make a showing that an adjustment is tied to some cost evaluation factor.
--By Chris Roux, Alston & Bird LLP
Chris Roux is a partner in Alston & Bird's Washington, D.C., and Los Angeles offices and co-chairman of the
firm’s construction and government contracts group.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or
Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes
and is not intended to be and should not be taken as legal advice.
[1] Because the federal FCA contains no express limitations period, courts borrow from the most analogous
state statute of limitations. See Graham County Soil & Water Conservation Dist. V. U.S. ex rel Wilson, 545
U.S. 409, 422 (2005). The Ninth Circuit reversed the district court’s dismissal of the retaliation claim on the
grounds that the state statute of limitations which would have been applied by the transferor court was the
appropriate limitations period to apply. In this case, Maryland had a three-year statute of limitations as opposed
to California’s three-year limitations period.
[2] The district court had ruled that since Lockheed did not knowingly make a false estimate, that it was not
liable. The Ninth Circuit concluded that the district court applied an incorrect standard because it failed to
consider the other two bases for establishing the requisite FCA scienter.
[3] Another anomaly is that Lockheed’s cost was higher than at least some of the other bidders. Does that mean
that other bidders also artificially reduced their proposals?