United States v. Aerodex, Inc.

• Decision Date: 26 February 1973
• Docket Number: No. 71-2801.,71-2801.
• Citation: 469 F.2d 1003
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. AERODEX, INC., et al., Defendants-Appellants, and Hermann Waker, Jr., Defendant.
• Court: U.S. Court of Appeals — Fifth Circuit

469 F.2d 1003 (1972)

UNITED STATES of America, Plaintiff-Appellee, v. AERODEX, INC., et al., Defendants-Appellants, and Hermann Waker, Jr., Defendant.

No. 71-2801.

United States Court of Appeals, Fifth Circuit.

November 2, 1972.

Rehearing Denied February 26, 1973.

COPYRIGHT MATERIAL OMITTED

Laurence A. Schroeder, Miami, Fla., for Aerodex & Tonks.

Walters, Moore & Costanzo, David W. Walters, Miami, Fla., for Crawford.

Robert W. Rust, U. S. Atty., Miami, Fla., L. Stanley Paige, Chief Frauds Section, Civil Div., Dept. of Justice, Walter H. Fleischer, Michael H. Stein, Attys., Dept. of Justice, Washington, D. C., for plaintiff-appellee.

Before PHILLIPS,^* THORNBERRY and RONEY, Circuit Judges.

RONEY, Circuit Judge:

This case is about aircraft engine bearings. In 1962 Aerodex, Inc. contracted to sell certain aircraft parts to the Navy Department. Three hundred master rod bearings for the Curtiss-Wright R1820 engine were included in the sale. The bearings delivered were not those specified in the contract. The district court, 327 F.Supp. 1027, held that the invoices submitted by Aerodex for payment for these bearings were "false claims for payment" within the meaning of the Federal False Claims Act, 31 U.S.C.A. § 231 (1970). The government was awarded $381,838.36 with interest. We reverse as to Defendant Tonks and remand with directions to modify the amount of the judgment against Aerodex and Crawford.

At the time pertinent to this lawsuit, the Commercial Division of Aerodex, Inc. was engaged in the purchase and sale of spare aircraft parts. Defendant Raymond Tonks was president and general manager of Aerodex, and defendant Frank J. Crawford was vice president in charge of the Commercial Division.

On September 18, 1962, Crawford submitted to the U.S. Navy Aviation Supply Office a bid by Aerodex to sell 300 master rod bearings, Curtiss-Wright part number 171815, at a price of $90.00 each. This bid was accepted and was incorporated as a part of a contract entered into between Aerodex and the Aviation Supply Office on October 6, 1962.

As several of the contract provisions are crucial to this appeal, we set them out in full:

SPECIFICATIONS

Articles furnished from stocks of surplus material are acceptable under this contract provided that the articles so furnished meet the following requirements:

1. All articles furnished must be identified by the applicable Curtiss Wright Corporation, Wright Aeronautical Division part numbers . . . and must conform to the requirements of the respective drawings for said articles.

* * * * * *

3. All articles furnished . . . must be in new, unused condition.

INSPECTION AND ACCEPTANCE

* * * * * *

At destination all delivered articles shall be subjected to 100% final inspection by the O & R shop for conformance to the applicable data, drawings and specifications required in the manufacture of said articles. Inspection shall include magnaflux or Zyglo or the equivalent thereof. Upon completion of inspection, and acceptance of satisfactory articles by the receiving activity, an inspection report shall be submitted by the consignee to the Aviation Supply Office, Philadelphia 11, Pennsylvania . . .

UNSATISFACTORY MATERIAL

Any articles delivered which have been determined by the receiving activity to have failed to conform to the applicable specifications and drawings or which are otherwise considered unsuitable for intended use shall be returned, at the Contractor\'s expense, for replacement. The necessary replacement articles shall then be shipped, all transportation charges paid, to the destinations specified herein. If any of the articles returned to the Contractor are not replaced, the total amount due to be paid under this contract shall be reduced by the contract value of the returned article or articles.

The bearings supplied by Aerodex to the Navy under this contract were not P/N part number 171815 bearings. They were P/N 117971 and 117971Y10 bearings which had been reworked by Aerodex employees. The rework consisted of replacing the metallic overlay on the inside diameter of each bearing. After reworking, each bearing was reidentified with P/N 171815. To the naked eye, the reworked bearings were indistinguishable from new, unused P/N 171815 bearings.

Aerodex' reworked bearings were received and accepted at the Jacksonville Naval Air Station without the "100% final inspection" required by the contract. A number of them were installed in aircraft engines. When the Navy subsequently discovered that the bearings were not the ones contracted for, it removed and replaced those which had been installed. This "retrofit" operation cost $160,919.18. That amount was added to the contract price of $27,000 and the total doubled as provided in the False Claims Act. This, together with the $2,000 statutory penalty for each of the three invoices, resulted in the $381,838.36 judgment for the government.

I. Liability Under the False Claims Act

The defendants make a two-pronged attack on the district court's finding of liability under the False Claims Act. They allege that the evidence was (1) legally insufficient in that it did not show the necessary element of scienter, and (2) factually insufficient in that it did not demonstrate the individual defendants' personal knowledge and participation in the alleged fraudulent performance of the contract.

The law is settled in this Circuit that to show a violation of the False Claims Act the evidence must demonstrate "guilty knowledge of a purpose on the part of the defendant to cheat the Government," United States v. Priola, 272 F.2d 589, 594 (5th Cir. 1959), or "knowledge or guilty intent," United States v. Ridglea State Bank, 357 F.2d 495, 498 (5th Cir. 1966). See also Henry v. United States, 424 F.2d 677 (5th Cir. 1970). This rule is in accordance with the position adopted by the Ninth Circuit, United States v. Mead, 426 F.2d 118 (9th Cir., 1970), the Sixth Circuit, United States v. Ueber, 299 F.2d 310 (6th Cir. 1962), and the Second Circuit, United States ex rel. Brensilber v. Bausch & Lomb Optical Co., 131 F.2d 545 (2nd Cir. 1942), aff'd by an equally divided court, 320 U.S. 711, 64 S.Ct. 187, 88 L.Ed. 417 (1943). The Tenth Circuit in Fleming v. United States, 336 F.2d 475 (10th Cir. 1964), cert. denied, 380 U.S. 907, 85 S.Ct. 889, 13 L.Ed.2d 795 (1965), has reached a contrary conclusion.

The test is easily stated but difficult to apply in the circumstances of this case.

(a) The Mislabeled Parts

A master rod bearing for the R1820 engine is a cylindrical sleeve approximately 3¼ inches in length and 3¼ inches in diameter. The bearing is composed of steel, with a silver plating material on both the inside and outside surfaces. The inside of the bearing is further coated with a microscopically thin metallic overlay. The inside diameter of the bearing performs the function of a bearing surface which permits the free rotation of the crankshaft within the master rod bearing. This permits the crankshaft to rotate, turning the propellor. Failure of the bearing causes complete engine failure.

The bearing denominated P/N 117971 is impossible to distinguish visually from bearing P/N 171815 but has two basic differences. One difference is hardness of the steel in the shell backing: the P/N 117971 is made of a low carbon steel, while P/N 171815 is made of a harder, high carbon steel. The other difference lies in the composition of the metallic overlay used to line the inside diameter of the bearings: bearing P/N 117971's overlay consists of a lead and indium composition, while the overlay used in P/N 171815 is a lead-tin composition. Aerodex replaced the lead-indium overlay with lead-tin prior to renumbering the P/N 117971 bearings. This reworking did not change the hardness or composition of the bearings' steel shell.

Defendants do not deny that the bearings they sold to the Navy were reworked and renumbered. They argue, nevertheless, that their actions constituted no violation of the False Claims Act. They allege that all military and factory publications available to them showed that both P/N 117971 and P/N 171815 were approved for use in the R1820 engine and that the entire aviation industry at that time considered the two bearings to be interchangeable. Defendants argue, therefore, that they could not have had the requisite intent to "cheat" the government.

We think this argument requires too restrictive a reading of the False Claims Act. The mere fact that the item supplied under contract is as good as the one contracted for does not relieve defendants of liability if it can be shown that they attempted to deceive the government agency. In United States v. National Wholesalers, 236 F.2d 944 (9th Cir. 1956), cert. denied, 353 U. S. 930, 77 S.Ct. 719, 1 L.Ed.2d 724 (1957), the defendant contracted to deliver to the Army a number of Delco-Remy generators. Unable to procure these generators, National Wholesalers had substitutes manufactured and attached spurious "Delco-Remy" labels to them. Although the substitute generators performed according to contract specifications, liability under the False Claims Act was held to attach because of the deliberate misbranding.

We think that the deliberate mislabeling in the case at bar, coupled with the fact that the parts delivered did not actually meet the specifications of the contract, compels a finding of liability under the Act. If defendants had, in fact, believed that the reworked P/N 117971 bearings were interchangeable with the P/N 171815 bearings that they had contracted to deliver, they could easily have requested permission from the Navy to deliver the substitute parts or, at least, could have disclosed to the Navy the manner in which they thought they could comply with the contract. The failure to do so indicates nothing less than an intention to deceive.

(b) Defendant Crawford

Defendant Crawford, who was in charge of the Aerodex division which actually performed the reworking...