United States Ex Rel. Hayes v. CMC Electronics Inc.
2003 U.S. Dist. LEXIS 23261, 2003 WL 23112382, 297 F.Supp.2d 734 (2003)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The False Claims Act (FCA) applies to a contractor's false claims submitted to the U.S. Government for payment, even if the government is acting as an intermediary for a foreign military sale, and actual monetary loss to the U.S. Treasury is not a prerequisite for FCA liability as long as the claim seeks payment from U.S. funds.
Facts:
- Russell Hayes was a project manager for Canadian Marconi Corporation (which changed its name to CMC Electronics Inc., hereafter 'CMCE').
- CMCE designed and manufactured AN/GRC 103(v) Radio Sets, selling most of these to the U.S. Department of Defense.
- Throughout the 1990s, the U.S. Government entered contracts under the Foreign Military Sales (FMS) program to sell military hardware, including radio sets, to Saudi Arabia.
- On September 29, 1993, the United States Army Communications-Electronics Command (CECOM) contracted with AEC Electronics (AEC) for the purchase of 97 radio sets, which the Government intended to resell to Saudi Arabia.
- On September 30, 1993, AEC entered a subcontract with CMCE for the sale of the radio sets to the U.S., where CMCE agreed that all equipment provided would be newly manufactured and no used, reconditioned, or overhauled equipment would be supplied.
- CMCE allegedly violated this agreement by filling the contract with radio sets and multiplexers built with parts and components that were either previously used or obtained from the government surplus market.
- According to Hayes and the U.S., CMCE significantly overstated the cost of producing the contract for the radio sets, charging for new radios while supplying used ones.
Procedural Posture:
- Russell Hayes, a former project manager for CMCE, initiated a qui tam action under the False Claims Act, alleging fraud committed by CMCE.
- The United States Government intervened in Hayes's qui tam action.
- CMCE filed a Partial Motion to Dismiss Counts I and II of the Complaint pursuant to Fed.R.Civ.P. 12(b)(6), arguing that the Plaintiffs did not have a cause of action under the FCA because the Government could not sustain losses or damages.
- In the alternative, CMCE filed a Motion for Partial Summary Judgment pursuant to Fed.R.Civ.P. 56(c), arguing that the Government's maximum recovery should be limited to the FCA's statutory penalties.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the False Claims Act (FCA) apply to a contractor's false claims submitted to the U.S. Government for goods ultimately resold to a foreign government under the Arms Export Control Act, even if the foreign government is contractually obligated to cover the full cost and direct monetary loss to the U.S. is not explicitly proven?
Opinions:
Majority - Hochberg, District Judge
Yes, the False Claims Act applies to a contractor's false claims submitted to the U.S. Government for goods ultimately resold to a foreign government, even if the foreign government is contractually obligated to cover the full cost, and direct monetary loss to the U.S. is not explicitly proven. The court found that CMCE's alleged submission of fraudulent invoices to the U.S. Government for payment at an inflated rate was sufficient to state a claim under the FCA. The court rejected CMCE's argument that the 'no loss' provision of the Arms Export Control Act (requiring foreign governments to cover procurement costs) insulates it from FCA liability, citing U.S. ex rel. Marcus v. Hess. It emphasized that foreign funds, once received by the U.S. Government, become U.S. funds, making the claim a demand on the U.S. Treasury, as supported by U.S. v. Lockheed Martin Corp. The court clarified that the FCA does not require the U.S. Government to prove actual, quantifiable monetary damages; rather, the purpose and effect of inducing the Government to part with money, or the potential for loss, is sufficient. The court distinguished Hutchins v. Wilentz, Goldman & Spitzer, noting that CMCE's claim was for funds in the U.S. Treasury, unlike the third-party funds in Hutchins. The court also identified several ways the Government sustained losses, including overpaying, potential reimbursement to Saudi Arabia, damage to the integrity of the contracting process, and potential increased defense expenditures. Regarding CMCE's motion for partial summary judgment, the court found a genuine issue of material fact existed concerning the actual damages sustained by the Government (alleged at least $14.6 million), thus precluding summary judgment to limit recovery solely to statutory penalties.
Analysis:
This case significantly clarifies the broad reach of the False Claims Act, affirming its applicability to complex government contracts involving foreign military sales where the U.S. acts as an intermediary. It reinforces the principle that contractors cannot evade FCA liability by asserting that the U.S. Treasury will not suffer a direct, quantifiable monetary loss due to third-party funding mechanisms. This decision bolsters the government's ability to combat fraud in all its procurement activities, safeguarding the integrity of the contracting process and ensuring accountability for those who submit false claims, regardless of the ultimate source of funds.
