United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
June 27, 2007
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 06-20225
United States of America, ex rel; PATRICIA LAIRD; ET AL,
Plaintiffs,
United States of America, ex rel; JAMES MAYFIELD,
Plaintiff-Appellant,
versus
LOCKHEED MARTIN ENGINEERING
& SCIENCE SERVICES CO.
Defendant-Appellee.
Appeal from the United States District Court
For the Southern District of Texas
Before JONES, Chief Judge, and HIGGINBOTHAM, and CLEMENT, Circuit
Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
In this qui tam action challenging Lockheed’s performance of
a government contract, the plaintiff, James Mayfield, appeals from
the district court’s grant of Lockheed Martin’s motion for summary
judgment. We affirm.
I
In 1993 Lockheed bid on an Evaluation, Testing, and Analysis
contract, a research-and-development project of NASA. The research
contract followed on the heels of an Engineering Support Contract,
for which Lockheed had been the dominant contractor since 1987.1
Lockheed’s bid for the research contract responded to NASA’s
Request for Proposal, an encyclopedic document detailing the
anticipated scope of work to be performed. The RFP described a
hypothetical workforce designed by NASA that it required bidders to
use to calculate their bids. NASA projected a need for 13,411,404
man-hours – give or take 15% – to complete the research contract’s
projected tasks. It is undisputed that those tasks required
less–skilled labor and lower staffing levels than Lockheed used for
the engineering contract. The research contract’s base term was to
run from January 1994 through September 1998, with a contract
value during that period of roughly $510,187,031. Lockheed won the
contract. Its Best-and-Final-Offer, in government contracting
parlance BAFO, promised 13,411,995 labor hours at a cost of
$425,341,412.
As we will explain, the structure of the research contract
itself answers most of the questions in this case. It was a cost-
1
NASA terminated the engineering contract ahead of schedule because it
had consumed the labor hours it purchased. If Lockheed’s bid succeeded, it
might be able to dovetail its preexisting engineering contract work structure
at the Johnson Space Center into production for the potentially lucrative
research contract.
2
plus-award-fee (“CPAF”) contract. According to the Federal
Acquisition Regulations, under a CPAF a contractor is paid a base
fee fixed at the inception of the contract, plus an award fee.2
The award is based on the government’s unilateral evaluation of the
contractor’s performance at regular intervals, adjusted in
accordance with the work performed under the contract, a
compensation arrangement designed to enhance incentive for timely
and sound performance.3
The research contract provided this incentive through its
“Award-Fee Plan,” NASA’s periodic evaluation of the quality of
Lockheed’s technical work and the project’s actual costs in
relation to the contract’s value. The research contract provided
that Lockheed might earn an award fee of as much as $31,667,248
over the life of the contract. The actual fee was to be calculated
at ten fee-evaluation periods and paid out in semi-annual
installments.
The award paid in any given period was discretionary and
determined by NASA. NASA evaluated Lockheed’s performance under a
100-point system that corresponded to the maximum allowable award
fee available in a period. Lockheed’s “cost performance” with
respect to contract value constituted 30 grading points; the other
70 points were awarded for technical performance. An overall score
2
See FAR §§ 16.305; 16.405.2(a).
3
Id. § 16.405-2(a).
3
of 60 or below was a “failing” grade, in which case Lockheed would
receive no award in that period. The research contract’s base
fixed-fee amount was zero: if Lockheed failed each award period, it
earned nothing.
The research contract’s Award-Fee Plan was not the only
variable in the contract. Because the precise level of effort and
the nature of the work to be done on a CPAF-type contract are, by
definition, both unknown at the outset, neither NASA nor Lockheed
knew how much the research contract’s labor requirements would
cost.4 For example, NASA considered – and ultimately rejected –
exercising the RFP’s “Space-Station Option,” which would have
transitioned Lockheed’s existing engineering contract projects into
research contract projects. Prior to signing the research contract
with Lockheed, NASA demurred on the space station, instead
instructing Lockheed to finish the engineering contract’s space-
station-related tasks, but to charge the hours to the research
contract. This agreement was representative of many uncertainties
inherent in the structure of the research contract and, says
Lockheed, is why the research contract was overbudget from the
start.
4
The only immutable limitation was the research contract’s “Limitation
of Funds” clause, which provided that costs would be limited according to the
constraints of the NASA budgetary process. Both parties anticipated,
correctly, that NASA’s funding amount would increase yearly. See FAR §
16.306(b)(1) (CPAF contracts are appropriate in open-ended R&D-type
situations).
4
Appellant and qui tam relator James Mayfield was a Specialist
at Lockheed responsible for preparing the cost estimates for the
research contract project. Lockheed reported its accrued costs and
anticipated future costs to NASA monthly and quarterly using “533”
forms. Mayfield was concerned that the “wrap rate”5 projections
reported to NASA in the 533s greatly underestimated the actual cost
of labor needed to fulfill the research contract task assignments.
Mayfield’s concern was not unfounded. Early on, Lockheed
failed to meet its baseline projections, incurring cost overruns of
13.7% and 18.1% in the first two evaluation periods. NASA and
Lockheed both took steps to remedy the situation: Lockheed revised
the skill mixes it applied to certain tasks and laid off workers,
and NASA ordered Lockheed to submit a “Cost-Recovery Program” that
would bring the research contract’s costs back to Earth.6 Mayfield
questioned the accuracy of several 533s and was eventually fired in
February 1995.
5
A “wrap rate” is calculated by dividing the total cost of the contract
(excluding incidentals like travel, fees, and burdened material) by the number
of man-hours ordered by NASA. The figures reported by Lockheed in its BAFO
provided for 13,411,995 labor hours at a cost of $425,341,412.20, yielding a
wrap rate of $31.71/hour. Mayfield alleges that that submission, inter alia,
is a false claim because at the time Lockheed knew that the actual wrap rate
needed to perform under the research contract was actually $39.46/hour — 27.5%
higher than the bid wrap rate, meaning that Lockheed underbid the research
contract by around $114 million.
6
It seems that NASA’s practice was to renegotiate the contract and allow
for an increase in the total contract value. NASA, however, refused to
renegotiate the research contract’s baseline costs, instead ordering Lockheed
to tighten its belt.
5
He responded by bringing a wrongful-discharge action in Texas
state court, which granted summary judgment for Lockheed in 1996.
The Texas Court of Appeals subsequently affirmed.7 This suit,
filed in the Southern District of Texas, followed. The district
court granted summary judgment for Lockheed, holding that the
wrongful-discharge judgment was a res-judicata bar to some of
Mayfield’s qui tam claims and that his remaining claims were barred
by the False Claims Act’s “original source” rule.8
This court reversed, holding that res judicata was not a bar
and that Mayfield was an independent source of the cost information
at issue.9 On remand the district court in a careful opinion
granted summary judgment in favor of Lockheed, ruling that: (1)
there was no evidence that Lockheed submitted a false bid within
the meaning of the FCA; (2) the parties had established a post-
contract relationship that precluded FCA liability; (3) Lockheed’s
533 cost projections were neither false nor material and therefore
not false claims; and (4) NASA ratified Lockheed’s facilities
overcharges.
7
See Mayfield v. Lockheed Eng'g & Sci. Co., 970 S.W.2d 185 (Tex. App.
1998) ("Mayfield I").
8
See United States ex rel. Mayfield v. Lockheed Martin Eng'g & Scis.
Co., 186 F. Supp. 2d 711 (S.D. Tex. 2002); see 31 U.S.C. § 3730(e)(4)
(disallowing federal jurisdiction in any false-claims action based upon public
disclosure of the transactions in a civil dispute unless the action is brought
by the "original source" of the information).
9
See United States ex rel. Laird v. Lockheed Martin Eng'g & Sci. Servs.
Co., 336 F.3d 346 (5th Cir. 2003) ("Mayfield II").
6
Mayfield appeals, arguing that Lockheed swindled the United
States out of $22,491,500 in award fees and $10,902,978 in illicit
facilities costs, totaling $33,394,478 in damages, swelled by the
FCA’s treble-damages provision to $100,183,434.10 Mayfield asserts
that Lockheed made false claims in its submission of (1) the bid,
(2) the 533s, and (3) the claims for certain rental costs.
Mayfield has standing to bring all three claims.11 We address each
in turn.
II
Mayfield first attacks Lockheed’s underbid as an actionable
“false bid” because “Lockheed knew from day one that it could not
deliver the hours under the contract for the amount represented in
its BAFO.” He argues that Lockheed’s allegedly knowing
misrepresentation in the BAFO was a fraudulent act rendering each
subsequent claim for payment made by Lockheed during Mayfield’s
employment a false claim within the meaning of the FCA. Lockheed
responds that Mayfield has produced no evidence to suggest that the
BAFO was fraudulent, and explains that the cost overruns resulted
10
31 U.S.C. § 3729(a)(7).
11
The Supreme Court's recent opinion in Rockwell International v .
United States, No . 05-1272 (Mar. 27, 2007) held that the statutory phrase
"information on which the allegations are based" refers to the information on
which the relator's allegations are based rather than the information
on which the publicly disclosed allegations are based. The Court rejected
"contrary conclusion of some lower courts," citing our prior decision in this
case United States ex rel . Laird v. Lockheed Martin Eng. & Science Servs . Co
., 336 F .3d 346, 354 (5th Cir . 2003). Although Rockwell overrules our prior
precedent, Mayfield has standing nevertheless. It is plain from the record
and the parties’ concessions at oral argument that Mayfield has direct and
independent knowledge of the information on which the allegations are based.
7
from NASA’s mid-contract alterations of the research contract’s
task assignments.
The FCA imposes civil liability on any person who “knowingly
presents...to an officer or employee of the United States
Government...a false or fraudulent claim for payment or approval”
or “knowingly makes [or] uses...a false record or statement to get
a false or fraudulent claim paid or approved by the Government.”12
In statutory terms, Mayfield’s argument is that submission of the
BAFO to NASA constituted the fraudulent presentment of a claim
under section 3729(a)(1), and that Lockheed subsequently used the
533 forms completed pursuant to the research contract to
fraudulently obtain award fees in violation of section 3729(a)(2).
Mayfield’s argument that Lockheed intentionally undervalued
the BAFO is essentially a fraud-in-the-inducement claim. The
archetypal fraud-in-the-inducement case is United States ex rel.
Marcus v. Hess,13 in which the Supreme Court held that FCA liability
was triggered when contractors colluded to inflate artificially the
bid price on a public-works project, thereby inducing the
government to pay more than it otherwise would have.14 Even though
the contractor’s subsequent claims for payment made under the
12
31 U.S.C. §§ 3729(a)(1)-(2).
13
317 U.S. 537, 63 S. Ct. 379 (1943).
14
Cf. United States ex rel. Schwedt v. Planning Research Corp., 59 F.3d
196, 199 (D.C. Cir. 1995) (submission of false progress reports about the
status of a computer project fraudulently induced the government to pay for
extraneous components).
8
contract were not literally false, since they derived from the
original fraudulent misrepresentation, they, too, became actionable
false claims.15
Hess stands for the proposition that, to succeed on a fraud-
in-the-inducement theory under the FCA, Mayfield must prove (1)
that Lockheed had no intention to perform the research contract
according to the terms of the BAFO; and (2) that Lockheed obtained
payments under the research contract to which it was not
legitimately entitled.16 Mayfield has not created a genuine issue
of material fact as to either element.
Without more, a contract underbid is not a false claim.17 For
FCA liability, there must be a nexus between the underbid and a
request for payment that the contractor would not have been
entitled to absent the contract.18 That nexus is absent here.
The record shows, and Mayfield doesn’t deny, that the research
contract was doomed to run over-budget from the start. The terms
15
See Hess, 317 U.S. at 543-44, 63 S. Ct. at 384. (“This fraud did not
spend itself with the execution of the contract. Its taint entered into every
swollen estimate which was the basic cause for payment of every dollar paid by
the P.W.A. into the joint fund for the benefit of respondents. The initial
fraudulent action and every step thereafter taken, pressed ever to the
ultimate goal – payment of government money to persons who had caused it to be
defrauded.”).
16
See United States ex rel. Willard v. Humana Health Plan of Tex., Inc.,
336 F.3d 375, 384 (5th Cir. 2003); see also United States ex rel. Bettis v.
Odebrecht Contractors of Cal., Inc., 393 F.3d 1321, 1325 (D.C. Cir. 2005).
17
See Chicago Coll. of Osteopathic Med. v. George A. Fuller, Co., 719
F.2d 1335, 1347-48 (7th Cir. 1983).
18
See Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 787-88
(4th Cir. 1999).
9
of the RFP required that all bidders design their proposals using
the hypothetical skill mix NASA demanded and, accordingly,
Lockheed’s projected labor costs were derived from NASA’s model.
The research contract mandated roughly equivalent projects to those
included in the engineering contract, but included a lower skill
mix. Put otherwise, the research contract was designed in part to
accomplish the same tasks as the engineering contract using lower-
cost, lower-skilled labor. Lockheed willingly complied with these
optimistic – perhaps unrealistic – requirements and submitted a
bargain-basement-priced bid. Lockheed concedes that it “hedged its
bets by bidding the lower cost elicited by the RFP.”
Mayfield infers incorrectly from this admission that Lockheed
“underbid the [research contract] even though it intended to charge
NASA its real cost from the very beginning.” This statement – and
Mayfield’s entire theory of fraud-in-the-inducement liability –
ignores the realities involved in projecting labor costs under
CPAF-type contracts. Under contracts like the research contract,
labor requirements over the life of the contract are determined by
the government, not the contractor.19 The central purpose of a
CPAF-type contract is to afford the government flexibility in
requisitioning labor in an unpredictable environment.20
19
See FAR § 16.306(b)(2); Bettis, 393 F.3d at 1325.
20
See FAR § 16.301-2 (“[C]ost-reimbursement contracts are suitable for
use only when uncertainties involved in contract performance do not permit
costs to be estimated with sufficient accuracy to use any type of fixed-price
contract.”).
10
The inherent variability in the research contract’s structure
was reflected by Lockheed and NASA’s joint behavior. On the one
hand, Lockheed’s low projected labor costs were quickly outstripped
by the actual skill mixes required to perform research contract
tasks; on the other, NASA’s tinkering with the Space-Station Option
and other tasks requiring highly skilled workers exacerbated
Lockheed’s cost overruns. Indeed, NASA admitted in a Cost
Performance Evaluation that 40% of the initial cost overruns were
“government directed.” Mayfield’s argument is essentially the
erroneous proposition that a contractor’s FCA liability can arise
as a result of the government’s behavior during the performance of
a CPAF-type contract. This assertion is antithetical to fraud and
not surprisingly lacks support in the caselaw.
Neither can Mayfield demonstrate that Lockheed used the
research contract to dupe NASA out of payments that it could not
have obtained absent the contract. This case is unlike United
States ex rel. Mayman v. Martin Marietta Corp.,21 where an
intentional underbid allowed the contractor to recoup the shortfall
on the contract value via a separate R&D agreement with the
government unrelated to the original contract. This “intent to
21
894 F. Supp. 218 (D.Md. 1995).
11
recover additional monies above the contract price” was the key to
the court’s finding of FCA liability.22
Here, in contrast, there are no analogous extra-contractual
payments Mayfield can point to indicating that Lockheed finagled
fees it had no right to under the research contract. The payments
Lockheed received were exclusively research contract-based, a
product of the contract’s Award-Fee Plan.
III
Nor are the 533 cost projections actionable. Mayfield argues
that even if Lockheed's RFP bid was not a knowing misrepresentation
of its intent to perform, Lockheed still fraudulently manipulated
the data reported in the 533 forms so that the research contract
cost projections would meet NASA's targeted cost at completion.
This argument fails because there is no nexus between the 533s and
Lockheed's award fees, as the 533s were only cost projections that
did not independently entitle Lockheed to award payments under the
research contract's fee-award system. In short, the 533s were
immaterial.
The civil False Claims Act “interdicts material
misrepresentations made to qualify for government privileges or
22
Bettis, 297 F. Supp.2d at 282 n.17; see also Schwedt, 59 F.3d at 199
(fraudulent progress reports induced government to purchase programs it
otherwise would have declined).
12
services.”23 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, although at least five
judges of this court suggested that false statements, in order to
be material, must “actually affect” the government’s decision to
pay.24 The United States as amicus urges a different standard,
suggesting that a material statement need only have “potentially
affected” the decision to pay.
Under either standard, the 533 cost projections are immaterial
here. The 533 projections were not submitted nor used for the
purpose of calculating Lockheed’s award fee payment, rather, by
their terms they were for planning purposes only. The NASA
contracting officers testified accordingly, explaining that the
award fee is based only on Lockheed’s meeting contractual
requirements, which is determined solely by NASA, looking only to
Lockheed’s past performance, not to their cost projections.
Indeed, the research contract itself provides that the 533
projections are non-binding.
23
United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125
F.3d 899, 902 (5th Cir.1997) (emphasis added); see also United States v.
Southland Management Corp., 326 F.3d 669, 679 n.3 (5th Cir. 2003) (Jones, J.,
concurring); United States ex rel. Wilkins v. N. Am. Constr. Corp., 173
F.Supp.2d 601, 618-30 (S.D.Tex.2001) (Rosenthal, J.); United States v. Data
Translation, Inc., 984 F.2d 1256, 1267 (1st Cir. 1992) (Breyer, C.J.).
24
United States v. Southland Management Corp., 326 F.3d 669, 679 n.3 (5th
Cir. 2003) (Jones, J., concurring).
13
Mayfield insists that the 533 projections were material to
Lockheed’s award. He directs us to the deposition of Gail Skowron,
who, he says, testified that incorrect 533 projections would affect
Lockheed’s award fee “to some degree.” This overstates Skowron’s
testimony. Skowron did not testify that the 533 projections were
material to the award fee. Rather, she merely acknowledged that
Lockheed had a contractual duty to provide these 533 projections,
and that Lockheed’s failure to provide accurate projections might
be characterized as non-compliance with a contract term. Such non-
compliance, Mayfield argues, was material to the award fee.
Mayfield has lost sight of his target. There is no allegation
before us that Lockheed lied about whether it was in compliance
with the contract, a lie that would have been material to the fee
award, or so its seems. Instead, Mayfield alleges that Lockheed
lied in its 533 cost projections. It is undisputed that these cost
projections could not have affected (or potentially affected)
Lockheed’s award fee. NASA independently reviewed Lockheed’s
progress and unilaterally determined the fee Lockheed earned during
a given period independent from the cost projections Lockheed
submitted on the 533s. The 533s were planning tools that predicted
future performance. They reflected cost overruns that were built
into the research contract from the start. Viewed in the best
light for Mayfield, the evidence suggests that the 533 reports were
negligent miscalculations of the true labor requirements demanded
by the research contract. Unreasonable or incorrect cost
14
projections, however, cannot fend off summary judgment.25 Neither
the original bid nor the 533s were actionable false claims.
IV
Mayfield’s remaining theory is that for nine months Lockheed
billed NASA for an office building, LP4, that was not contemplated
by the research contract, concealing from NASA the fact that LP4
was actually excess capacity. The alleged overpayments total
$10,902,978.
LP4 was a building leased by Lockheed under the old
engineering contract. The government terminated the engineering
contract before its expiration date as it was a level-of-effort
contract that had exhausted the allocated hours before the contract
period ended. With this early ending Lockheed was stuck with the
building because it had leased LP4 for the entire term of the
contract. At that point, since this was a termination of
convenience, Lockheed could have claimed reimbursement for the
remaining lease period as well as other charges. Instead, as
Mayfield himself testified, the Lockheed chairman struck a deal
with the Deputy Director of the Johnson Space Center. The Deputy
Director agreed that NASA would reimburse Lockheed for the LP4
lease under the research contract if it was awarded to Lockheed.
25
See United States ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d
321, 326 (9th Cir. 1995) (later modifications in derogation of original
contract demands might allow a breach-of-contract claim, but do not give rise
to FCA liability); United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1267
(9th Cir. 1996) (negligent misrepresentations or systems errors are not
actionable false statements under the FCA).
15
Indeed, in its very first bill, Lockheed pointed out the LP4 deal,
noting that “pursuant to oral guidance during the negotiation,” we
are billing in excess of costs.
Under these unchallenged facts, Lockheed did not “knowingly”
present a “false” claim.26 Most of our sister circuits have
recognized that “[w]here the government and a contractor have been
working together, albeit outside the written provisions of the
contract, to reach a common solution to a problem, no claim
arises.”27 Or, stated more broadly, “[i]f the government knows and
approves of the particulars of a claim for payment before that
claim is presented, the presenter cannot be said to have knowingly
presented a fraudulent or false claim.”28
Nor is Mayfield alleging collusion between a government agency
and a contractor.29 According to his own testimony, Mayfield’s
claim is based on a separate agreement negotiated between the
chairman of Lockheed and a high-ranking government official, an
agreement not made to enrich Lockheed at the expense of the
taxpayer, but, in essence, for the satisfaction of a debt. Any
26
31 U.S.C. § 3729(a)(1); 31 U.S.C. § 3729(b).
27
Southland Management Corp., 326 F.3d at 682; United States ex rel.
Becker v. Westinghouse Savannah River Co., 305 F.3d 284, 288-89 (4th
Cir.2002); United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013,
1019–20 (7th Cir.1999); United States ex rel. Butler v. Hughes Helicopters,
Inc., 71 F.3d 321, 326-27 (9th Cir.1995).
28
United States ex rel. Durcholz v. FKW, Inc., 189 F.3d 542, 545 (7th
Cir.1999).
29
See Southland Management Corp., 326 F.3d at 682 n.8; Lamers, 168 F.3d
1013 at 1019–20.
16
fallout from this agreement is a matter caught by contract law, not
the punitive provisions of the FCA. Mayfield has not created a
genuine fact issue on the question of whether Lockheed’s claims for
the LP4 lease were knowing or false. Nor has he done so for the
bid and 533s. The judgment of the district court is
AFFIRMED.
17