In the Courts

Seventh Circuit: Military Government Contractor's FCA Summary Judgment Upheld for Lack of Materiality, Knowledge

On Dec. 11, 2015, the U.S. Court of Appeals for the Seventh Circuit announced its decision in United States ex rel. Debra Marshall v. Woodward, Inc., No. 15-1866, 2015 WL 5895976 (7th Cir. Dec. 11, 2015), in which Woodward, a designer, manufacturer and service provider of control systems in the aerospace and energy markets, was accused of violating the False Claims Act (FCA) based both on its sale of certified helicopter engine parts and the termination of two employees (also the whistleblowers in the lawsuit). The District Court for the Northern District of Illinois granted the defendant's motion for summary judgment in March 2015, and found that Woodward's actions did not violate the FCA (or Illinois law).

The engine part at issue ' the T2 sensor, which helps regulate fuel flow in aircraft based on air temperature ' was sold by Woodward to General Electric and the Department of Defense. Proper function of the T2 sensor is dependent on the proper amount of alcohol being present, allowing the sensor to expand or contract, controlling the flow of fuel to the engine. The alcohol is contained by eight “sealing joints,” one of which, the plaintiffs alleged, was improperly joined and not in compliance with the strict set of quality requirements.

The plaintiffs further suggested that they were wrongfully terminated in 2005 after long careers with Woodward, based on their construction of the T2 sensor. When Woodward experienced a high incidence of leakage of the sensor, one plaintiff volunteered to investigate the issue in conjunction with another employee, the second plaintiff in the suit. After inspection, both plaintiffs reported what they viewed as the issue to supervisors, and refused to continue work on the sensors until their concerns were addressed. Woodward engineers, however, did not view the plaintiffs' findings as an issue, and sold the T2 sensors anyway, at which point the plaintiffs threatened to contact the Department of Justice (DOJ). After being suspended, the plaintiffs returned to Woodward's facility late at night and gathered scrap T2 sensor parts. Both were later terminated, and one called Woodward's hotline to report the quality concerns. Reviews conducted by Woodward in response to the telephone alert found the plaintiffs' allegations regarding the T2 sensor to be unfounded.

First, to state a claim under the FCA, plaintiffs must demonstrate: 1) the defendant made a statement in order to receive money from the government; 2) the statement was false; 3) the defendant knew that the statement was false; and 4) the false statement was material to the government's decision to pay or approve the false claim. Of these elements, the lower court ' and later the Seventh Circuit ' held both that the defendants lacked the requisite state of mind, and that the statements were not material to the government's decision to pay.

With respect to the knowledge requirement, the FCA requires that a defendant must have actual know- ledge, deliberate ignorance, or reckless disregard for the truth, and does not cover instances of mistakes or negligence. While the plaintiffs argued that Woodward's disregard for their concerns amounted to knowledge, the Seventh Circuit disagreed and stated that there was no evidence “that anyone at Woodward believed that the plaintiffs' concerns were valid.” Moreover, engineers at Woodward reviewed the allegations and disagreed with the conclusions of the plaintiffs. Therefore, because the plaintiffs were unable to “point to any evidence that a decision-maker at Woodward agreed with their concerns at the time Woodward made the statements to the government,” the knowledge requirement pursuant to the FCA was not satisfied.

Concerning the materiality element, the false statement must have a natural tendency to influence, or be capable of influencing, payment. The plaintiffs contended that, because the government would not have paid Woodward without the requisite Certificate of Conformance, and because Woodward would not have knowingly submitted a false certificate, the false statement on the certificate is material. The Seventh Circuit disagreed with this logic, as it would mean that “any false statement contained on a certificate, no matter how inconsequential, would be material. This would nullify the materiality requirement and make even minor technical violations material.” This, however, is contrary to established jurisprudence from the Seventh Circuit. Additionally, the court held that the avenue of inquiry is not whether a certificate or document contains a false statement, but whether the false statement itself would influence the government's decision to purchase the product. Because the government became aware of the plaintiffs' concerns, dismissed them and continued with the sale, the representations were not material.

Second, the plaintiffs asserted claims for retaliatory discharge under the FCA. However, the Seventh Circuit held that the plaintiffs failed to demonstrate that they were terminated based on their protected conduct, and the plaintiffs were properly discharged based on insubordination when they refused to continue work on the T2 sensor.

In the Courts and Business Crimes Hotline were written by Mayer Brown associate Colleen Snow.