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United States ex rel. Patzer v. Sikorsky Aircraft Corp.

United States District Court, E.D. Wisconsin

July 20, 2018




         Mary Patzer and Peter Cimma separately commenced qui tam actions under the False Claims Act (“FCA”) against Sikorsky Aircraft Corporation and two of its subsidiaries, Sikorsky Support Services, Inc. (“SSSI”) and Derco Aerospace, Inc. After the United States intervened and filed its own complaints in each case, I entered an order consolidating them. Before me now are two motions to dismiss filed by the defendants. One motion seeks dismissal, under Federal Rule of Civil Procedure 12(b)(6), of certain parts of the government's complaints. The other motion seeks dismissal of the complaint filed by relator Peter Cimma pursuant the False Claims Act's “first to file” rule.

         I. BACKGROUND

         The background facts stated below are derived from four of the complaints that the relators and the United States have filed in these two cases: (1) Relator Mary Patzer's complaint; (2) relator Peter Cimma's complaint; (3) the United States's intervenor complaint in the Cimma case; and (4) the United States's second amended complaint in the Patzer case. For purposes of the present motions, I accept the facts alleged in these complaints as true. I begin by discussing the government's allegations in its complaints in the two cases to the extent that they are relevant to the defendants' motion to dismiss certain parts of those complaints. I then discuss the procedural history of this case, the allegations of the relators' complaints, and some additional allegations from the government's complaint in the Cimma case, all of which are relevant to the defendants' motion to dismiss relator Cimma's complaint.

         A. The Government's Allegations

         On June 1, 2006, defendant SSSI-a wholly owned subsidiary of defendant Sikorsky Aircraft Corporation-became the prime contractor on a government contract for maintenance of the Navy's T-34, T-44, and T-6 “trainer” aircraft. The prime contract required SSSI to provide on-site maintenance services for the aircraft at Naval bases located in Pensacola, Florida; Whiting Field, Florida; Corpus Christi, Texas; and at certain satellite locations. The prime contract also required SSSI to supply the parts needed to repair or maintain the aircraft.

         The prime contract stated that SSSI would provide the on-site maintenance services at monthly “firm-fixed prices, ” which means that the Navy agreed to pay SSSI a single, fixed monthly price for its on-site services regardless of the amount of time or resources that SSSI expended in completing the work. The prime contract further provided that SSSI would supply parts on a “cost-reimbursable basis, ” which means that the government agreed to reimburse SSSI for the actual cost of the parts it supplied but prohibited SSSI from adding a profit margin of its own to the actual cost. The prime contract further provided that if SSSI procured parts from third-party subcontractors, SSSI could only be reimbursed at the third party's catalog or market price. The prime contract also incorporated the text of the Federal Acquisition Regulation that prohibits a government contractor from procuring parts from subcontractors on a “cost plus a percentage of cost” basis.[1] See 48 C.F.R. 52.244-2(g) (OCT 2010).

         The government alleges that, shortly before SSSI entered into the prime contract with the Navy, certain high-ranking officials within the Sikorsky organization hatched a scheme to illegally inflate the prices that the Navy would pay for parts. The scheme involved SSSI's selecting Derco, another of Sikorsky's wholly owned subsidiaries, as a subcontractor to provide SSSI with the parts needed to service the Navy's aircraft. SSSI and Derco then agreed that SSSI would order the parts from third parties, but that Derco would pay for them. Although Derco would pay the third-parties' catalog prices for the parts, it would send an invoice to SSSI for the cost of the parts plus 32%. SSSI would then seek reimbursement from the government for the price it paid to Derco, namely, Derco's cost plus 32%. The government alleges that this scheme allowed the Sikorsky family of companies to profit from the sale of parts to the government, even though the prime contract between the government and SSSI provided that no profit could be earned on the sale of parts, and even though both federal procurement law and the text of the prime contract prohibited cost-plus-a-percentage-of-cost purchasing. See 10 U.S.C. § 2306(a); 41 U.S.C. § 3905(a); 48 C.F.R. § 52.244-2(g).

         The government alleges that the scheme described above resulted in SSSI's breaching its contracts with the Navy and caused both SSSI and Derco to become unjustly enriched through their violations of federal procurement law. Moreover, the government alleges that each time SSSI submitted a request for reimbursement relating to one of Derco's invoices, it violated the False Claims Act by knowingly presenting a false or fraudulent claim for payment or approval. See 31 U.S.C. § 3729(a)(1)(A).[2] The government alleges that Derco and Sikorsky also made false claims or statements in connection with this scheme and therefore are also liable under the False Claims Act.

         The defendants do not move to dismiss the government's claims for breach of contract or unjust enrichment. Nor do they dispute that the government has stated claims for relief under the False Claims Act based on SSSI's submitting claims for payment of Derco's cost-plus-a-percentage-of-cost invoices. However, the defendants move to dismiss the government's complaints to the extent they seek relief under the Anti-Kickback Act, 41 U.S.C. §§ 8701-07, and to the extent they assert that the defendants made “reverse” false claims, see 31 U.S.C. § 3729(a)(1)(G). I describe the facts relating to these claims below.

         1. Anti-Kickback Act

         The government's allegations under the Anti-Kickback Act pertain to a series of “chargebacks” between SSSI and Derco. In the subcontract between SSSI and Derco, Derco agreed to send some of its own personnel to the Naval air stations to assist SSSI with logistics services. However, despite this agreement, Derco never sent its own personnel to the air stations; instead, SSSI directly hired and paid all the on-site personnel. But SSSI could not bill the government for the cost of these employees, because under its contract with the Navy, SSSI agreed that it would receive only a firm-fixed price for providing logistics services.

         Five months into the performance of the contract, SSSI and Derco agreed that, because Derco was not providing on-site services, SSSI could take monthly chargebacks against the amount of Derco's invoices for parts to reflect the cost of the personnel that SSSI had hired. SSSI had hired six people to perform the work that Derco was supposed to perform, and the initial amount of the chargeback was based on the cost of these six employees.

         The government does not allege that this initial chargeback arrangement resulted in a kickback. However, it does allege that, for two reasons, it resulted in SSSI receiving illegal payments. First, the government alleges that the chargeback had the effect of reducing the price that SSSI paid to Derco for parts, and that therefore SSSI had an obligation to pass those savings on to the government. The government contends that, by failing to reimburse the government for the costs of the parts that were effectively refunded to SSSI in the form of the chargebacks, SSSI submitted a “reverse” false claim. (I discuss the government's allegations concerning reverse false claims in more detail below.) Second, the government alleges that the chargeback arrangement allowed SSSI to inflate its overhead charges. Under SSSI's contract with the Navy, SSSI was allowed to add its own overhead rate of about 3% to Derco's invoices. Thus, the greater Derco's invoices, the more overhead SSSI could charge the Navy. By submitting Derco's invoices to the government before removing the cost of the six employees that Derco never provided, and then later taking a chargeback against Derco, SSSI earned an additional 3% on the cost of those employees that it would not have earned had Derco simply removed the cost of the employees from its invoices before sending them to SSSI.

         Although the government does not allege that this initial chargeback arrangement was a kickback, it alleges that SSSI and Derco later modified the arrangement and, in so doing, violated the Anti-Kickback Act. About two years into the contract, SSSI's chief financial officer emailed one of Derco's vice presidents and told him that SSSI was not breaking even on labor revenue-a reference to the monthly firm-fixed price that SSSI charged the Navy for logistics services. He also noted that Derco was making substantial profits on the sale of parts, and that SSSI benefited from adding its overhead rates to Derco's invoices. He then asked Derco to allow SSSI to increase its monthly chargeback amount from the cost of six employees to the cost of between 10 and 25 employees. Derco agreed, and starting in June 2008 the chargebacks were calculated based on the cost of 24 employees. However, neither party supplied the 18 additional workers reflected in this chargeback. The government alleges that Derco's agreeing to increase the chargeback amount from six to 24 employees when it had no legal obligation to do so amounted to a kickback that both rewarded SSSI for entering into the illegal cost-plus-a-percentage-of-cost subcontract and induced SSSI to continue it.

         2. Reverse False Claims

         The False Claims Act provides remedies-treble damages and civil penalties- for fraud affecting the federal government. In the present case, the government seeks relief under three of the FCA's liability provisions. The first two provisions target “direct” false claims, which occur when a person makes false or fraudulent claims or statements designed to obtain government money. See 31 U.S.C. §§ 3729(a)(1)(A) & (a)(1)(B). In this case, the government alleges that every time SSSI submitted a “voucher” seeking payment of one of Derco's invoices-which contained prices calculated on a cost-plus-a-percentage-of-cost basis-it submitted a false claim for payment to the government. The third provision of the FCA relied on by the government creates liability for “reverse” false claims. Under this provision, a person is liable for treble damages and civil penalties for making false statements that are intended to prevent the government from collecting money owed to the government. See 31 U.S.C. § 3729(a)(1)(G).

         The government's reverse FCA allegations are directed at defendant SSSI only. They are organized into three counts.[3] The first count (Patzer Count IV) is based on an email that an SSSI employee named Robert Shulman sent to a government procurement officer on August 5, 2009. Shulman's email was responding to a request by the procurement officer to explain how Derco arrived at the price it charged for certain parts. The officer specifically asked whether the price represented only the amount that Derco paid to a third party for parts or whether the price was what Derco paid plus some markup. Shulman responded by stating that Derco sold parts to SSSI at firm-fixed prices and that SSSI did not know how Derco “built up” its firm-fixed prices. (Second Am. Compl. ¶ 57.) The government alleges that this statement was a lie because, at the time Shulman sent the email, he knew that Derco did not sell to SSSI at firm-fixed prices but instead added a 32% markup to each part.

         In the government's view, Shulman's email was both a direct false claim and a reverse false claim. The government alleges that the email was designed to prevent the Navy from learning about the defendants' illegal cost-plus-a-percentage-of-cost scheme. If the Navy discovered the scheme, then SSSI would be unable to continue to submit claims for payment based on Derco's illegally inflated invoices. Thus, argues the government, the Shulman email was a false statement made to obtain future payments from the government and was therefore a direct FCA violation. Moreover, if the Navy discovered the scheme, it would demand that SSSI reimburse the government for the prior payments it made to SSSI that were based on Derco's illegally inflated invoices. Thus, argues the government, the Shulman email was also a false statement made to avoid repaying money that SSSI had already received and therefore was also a reverse FCA violation.

         The government's second reverse FCA count (Patzer Count V) is based on “certificates of final indirect costs” that SSSI submitted to the government each year from 2006 to 2012. In these certificates, SSSI essentially certified to the government that any requests for payment it had previously submitted to the government were based only on costs that were allowable under federal procurement law. The government alleges that each of these certificates was false because SSSI's costs were based on the two illegal schemes involved in this case: Derco's cost-plus-a-percentage-of-cost pricing and the chargeback arrangement. The government contends that because the prior payments were based on the illegal pricing scheme and the illegal chargeback arrangement, SSSI had an obligation to return those payments to the government. Thus, when SSSI falsely certified, in its certificates of final indirect costs, that the prior payments were based only on costs allowable under federal procurement law, it made false statements that were designed to avoid its obligation to repay the government for those illegal costs.

         The government's final reverse FCA count (Patzer Count VI & Cimma Count VIII) is based on the chargeback arrangement. The government alleges that after it paid SSSI for costs SSSI claimed it incurred from Derco, Derco gave SSSI monthly credits against those costs in the form of the chargebacks. (Second Am. Compl. ¶ 105.) The government contends that once SSSI received a chargeback, it had an obligation to repay the government the costs related to the chargeback. The government alleges that SSSI's failure to do so amounted to a reverse false claim.

         B. Procedural History of the ...

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