U.S. ex rel. Longhi v. U.S.

• Decision Date: 09 July 2009
• Docket Number: No. 08-20306.,No. 08-20194.,08-20194.,08-20306.
• Citation: 575 F.3d 458
• Parties: UNITED STATES of America, ex rel. Alfred J. LONGHI, Jr., Plaintiff-Appellee, v. UNITED STATES of America, Intervenor-Appellee, v. Lithium Power Technologies, Inc.; Mohammed Zafar A. Munshi, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

575 F.3d 458

UNITED STATES of America, ex rel. Alfred J. LONGHI, Jr., Plaintiff-Appellee, v. UNITED STATES of America, Intervenor-Appellee, v. Lithium Power Technologies, Inc.; Mohammed Zafar A. Munshi, Defendants-Appellants.

No. 08-20194.

No. 08-20306.

United States Court of Appeals, Fifth Circuit.

July 9, 2009.

Nicholas John Bagley (argued), U.S. Dept. of Justice, Civ. Div., Washington, DC, Andrew A. Bobb, Asst. U.S. Atty., Houston, TX, for U.S.

Mitchell Reed Kreindler, Kreindler & Associates, Houston, TX, for Longhi.

David Charles Holmes (argued), Solomon Law Firm, Houston, TX, for Lithium Power Technologies, Inc., Munshi.

Timothy J. Hatch, Douglas R. Cox, Amiri Cameron Tayrani, Gibson Dunn & Crutcher, LLP, Washington, DC, for Amicus Curiae.

Appeal from the United States District Court for the Southern District of Texas.

Before HIGGINBOTHAM, BENAVIDES and STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

In 2002, Alfred J. Longhi, Jr. ("Longhi"), a former employee of Lithium Power Technologies, Inc. ("Lithium Power"), filed a qui tam suit under the False Claims Act ("FCA"), 31 U.S.C. § 3729, against Lithium Power and its president, Mohammed Zafar A. Munshi (jointly, "the Defendants"). In 2005, the United States of America intervened in the suit. Longhi and the United States of America (jointly, "the Government") alleged that the Defendants engaged in an elaborate pattern of false statements to secure research grants from the federal government. Ultimately, the district court granted the Government's motions for summary judgment on liability and damages. The court awarded nearly $5 million in damages and penalties, and the parties voluntarily dismissed the remaining claims in the lawsuit. The Defendants moved for reconsideration, and the district court denied that motion and entered a final judgment. Longhi then filed a motion for statutory attorneys' fees, which the district court granted in full. The Defendants now appeal the district court's finding of liability, award of damages, and award of attorneys' fees to Longhi. We AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 1982, Congress established the Small Business Innovation Research ("SBIR") program. The goal of the SBIR program is to provide research assistance to small businesses in order to maintain and strengthen the competitive free enterprise system and the national economy. See 15 U.S.C. § 638(a). Congress directed each federal agency with a research and development budget exceeding $100 million to establish a SBIR program and to provide some fraction of its budget to small businesses. 15 U.S.C. § 638(f). Each federal agency with a SBIR program was charged with selecting awardees for its SBIR funding. 15 U.S.C. § 638(g).

The Department of Defense ("DoD") administers a SBIR program in which twelve military components participate. The DoD identifies specific research projects that it is interested in funding and allows small businesses to seek SBIR grants for these projects. DoD's program solicitations explicitly state that knowingly and willfully making any false, fictitious, or fraudulent statements or representations may be a felony under the Federal Criminal False Statements Act, 18 U.S.C. § 1001. After receiving proposals, the DoD selects those that they perceive offer the best value to the government and nation. The merits of a SBIR proposal are in part measured by an examination of the applicant's qualifications. The DoD specifically considers the: (1) key personnel available to perform the research, (2) facilities and equipment available to the applicant, and (3) scope of any previously funded work performed by the applicant that may be similar to that proposed. When the DoD selects a proposal for funding, the agency enters into a contract with the recipient that governs the terms under which the funds are disbursed. The DoD generally does not verify all of the information submitted in a proposal, and it depends heavily on the integrity of SBIR applicants.

Under the DoD's SBIR program, there are two types of SBIR grants. A Phase I research grant is intended for the recipient to determine the scientific, technical, and commercial merit and feasibility of ideas submitted under the SBIR program. These grants typically range from $60,000 to $100,000 and cover at most a nine-month period. If the DoD determines that the Phase I grant recipient demonstrates that future research may potentially yield a product or process of continuing importance to the DoD and the private sector, it can award a Phase II grant. Phase II grants are only available to applicants who previously received a Phase I award and are aimed at research or a research and development effort. A Phase II grant is expected to produce a well-defined, deliverable prototype and typically ranges from $500,000 to $750,000 over a two-year period. During Phase III of a research and development project, the applicant is expected to obtain funding from the private sector or non-SBIR government sources to develop the prototype into a viable product.

In 1998, Munshi founded a small business, Lithium Power. Lithium Power designs and manufactures specialized lithium-based batteries for commercial and government applications. Munshi is Lithium Power's majority shareholder, president, chief executive officer, and chairman of the board.

The Defendants submitted four proposals—two to the Ballistic Missile Defense Office ("BMDO") and two to the Air Force—to receive Phase I and II SBIR grants for research that could lead to the development of very thin rechargeable batteries. In connection with the four SBIR grants, the Defendants submitted more than fifty invoices to the BMDO and the Air Force for payment and received more than $1.6 million.

Lithium Power's four SBIR proposals contained the false claims at issue in this case. In 2000, the relator¹ in this action, Longhi, joined Lithium Power as Vice President for Sales and Marketing. During 2001 and 2002, Longhi began to suspect that the Defendants were defrauding the federal government. He began documenting what he believed was the Defendants' pattern of fraudulent conduct and investigating a means to stop the fraud. In August 2002, Longhi began working with counsel to prepare his FCA case, and he met with the Government on September 20, 2002. One month later, Munshi told Longhi that "due to tough economic times" Longhi would be placed on a three-day work week beginning November 2, 2002, and receive a 40 percent decrease in compensation. Longhi informed Munshi that he could not afford the extreme decrease in pay and needed to sell his Lithium Power stock to raise capital. On November 4, 2002, Munshi told Longhi that he would be laid off within two weeks and offered to buy Longhi's stock for between $80,000 and $90,000. On November 6, 2002, Munshi explained that the stock sale would be the subject of a more detailed agreement.

On November 18, 2002, Longhi filed a qui tam action against the Defendants to recover statutory damages and civil penalties under the FCA. On November 21, 2002, Munshi provided Longhi with a copy of the stock sale agreement. On November 25, 2002, Munshi laid off Longhi. The agreement for the sale of stock contained a provision stating that Longhi personally agreed to release the Defendants from pending claims or lawsuits and agreed not to sue the Defendants for the loss of Longhi's job. The original covenant also disallowed Longhi to sue "for any other reason," but Longhi objected to this language and it was changed to "for any other matter prior to execution of" the agreement to sell the stock. The agreement was executed by the parties on November 29, 2002, eleven days after Longhi filed suit against the Defendants. Munshi's wife paid Longhi $80,000 for the stock.

Longhi's qui tam action accused Lithium Power of double billing and of billing for work that was never completed in connection with twenty-one different contracts. The United States investigated and intervened in 2005 in connection with Longhi's allegations pertaining to fraudulent billing on the four SBIR grant proposals. The Defendants denied Longhi's allegations, and the Government failed to uncover evidence that supported Longhi's allegations.

On November 9, 2006, the Government filed a motion for partial summary judgment as to liability and argued that the undisputed record evidence demonstrated that the Defendants had, at a minimum, shown a reckless disregard for the truth regarding many of the representations in their four SBIR grant proposals. On December 22, 2006, the Defendants filed a cross-motion for partial summary judgment. The district court granted the Government's motion for partial summary judgment on March 23, 2007. The district court stated that fraudulently inducing the Government to provide funding for a project could give rise to FCA liability, even if the statements on particular invoices submitted in connection with the project were true. The district court explained that the Government needed only to demonstrate that the Defendants either were willfully blind to the falsity of the statements or acted with an extreme form of negligence in making those statements.

In determining the merits, the district court examined five separate categories of statements in the Defendants' SBIR proposals. First, the district court explained that the Defendants' BMDO Phase II proposal falsely stated that Lithium Power was incorporated in 1992. Second, the district court concluded that the Defendants misrepresented the key personnel who would be conducting the research work in three of the four proposals. The district court noted, however, that the misrepresentations as to key personnel resulted from mere negligence, and the court discounted this evidence. Third, the district court determined that Lithium Power knowingly falsified statements regarding its facilities and equipment. Fourth, the district court concluded that the...