U.S. ex rel. Longhi v. Lithium Power Technologies

Decision Date03 January 2008
Docket NumberCivil Action No. H-02-4329.
Citation530 F.Supp.2d 888
PartiesUNITED STATES of America, ex rel. Alfred J. LONGHI, Jr., Plaintiffs, v. LITHIUM POWER TECHNOLOGIES, INC., and Mohammed Zafar A. Munshi, Defendants.
CourtU.S. District Court — Southern District of Texas

Andrew A. Bobb, U.S. Attorney's Office, Mitchell R. Kreindler, Kreindler & Associates, P.C., Houston, TX, for Plaintiffs.

David C. Holmes, Solomon Law Firm, PC, Houston, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

GRAY H. MILLER, District Judge.

Pending before the court are the plaintiffs' motion for summary judgment on damages, and defendants' cross-motion for summary judgment on damages. Dkts. 110 & 112. On September 27, 2007, the court granted partial summary judgment for the plaintiffs on their claims against Lithium Power and Mohammed Zafar A. Munshi (collectively "LPT") for violations of the False Claims Act, 31 U.S.C. § 3729(a), on four contract proposals ("the Four Contracts")1 under the Department of Defense's Small Business Innovation Research Program. Dkt. 107. The parties have not moved for summary judgment on the merits of the plaintiffs' remaining claims. Therefore, the damages at issue in this order are limited to those stemming from the fraudulent inducement of the Four Contracts.

I. BACKGROUND

The court incorporates by reference its order granting partial summary judgment on the government's claims. Dkt. 107. At the conclusion of its order, the court wrote as follows:

The government has unquestionably carried its burden of proof, even under the movant's difficult summary judgment standard, on several false statements contained in the contracts. For example, LPT misrepresented its history and status on the Army Phase I proposal. Also on the Army Phase I proposal, LPT misrepresented the physical facilities that it had. On all four proposals, LPT continuously misrepresented the arrangements — or lack thereof — between itself and Polyhedron Laboratories, and itself and the University of Houston. On the Air Force Phase I and II, LPT misrepresented the amount of related work it had performed prior to the Air Force proposals when it did not disclose the prior Army contracts. At one point in its motion LPT argues that the U.S. has made a mountain out of a group of small molehills. But, that encapsulates exactly the overall misrepresentation that LPT made in its proposals. It embellished a whole series of molehills so it could present a mountain of experience, facilities, and novelty to attract the reviewers. All of this was done with at least reckless disregard for the truth of the statements, and in some cases actual knowledge. The court finds that the defendants made false claims in violation of sections 3729(a)(1) and (2) on the contracts designated as Army Phase I, Air Force Phase I, and Air Force Phase II.2 Therefore, the invoices based on all four contracts at issue here are "false claims" based on a fraudulent inducement theory.

Id. Having found liability on the Four Contracts, the court now moves to the question of the damages to be assessed against LPT.

ANALYSIS

This seemingly simple inquiry presents the court with a novel issue of law. The Fifth Circuit has not addressed the proper way to calculate damages for a fraudulently induced research grant — nor for that matter has any other Circuit court. In fact, there does not appear to be any one specific standard for damages under the FCA. See, e.g., United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 922 (4th Cir.2003). Instead, courts have used several different damage models — adapting them to the facts, of the case. See, e.g., Morse Diesel Int'l, Inc. v. United States, 79 Fed.Cl. 116 (2007) (pagination not available). A logical starting point seems to be to examine the language and underlying purpose of both the False Claims Act itself and the government program through which the funds were channeled — in this case the Small Business Innovation Research Program. Then, having established a frame of reference, the court can determine which model best suits the damages caused by LPT's misrepresentations.

I. False Claims Act

Sometimes called the Abraham Lincoln Act, the False Claims Act became law in 1863 in response to "widespread corruption and fraud in the sales of supplies and provisions to the union government during the Civil War." 132 CONG. REC. H9382-03 (daily ed. Oct. 7, 1986) (statement of Rep. Glickman). In 1986,3 finding that fraud had become an even more pervasive and costly problem — approximately $10 to $100 billion annually — Congress again turned to the FCA as its "primary litigative tool for combatting [sic] fraud." S. REP. No. 99-345 at *3 (1986) reprinted in 1986 U.S.C.C.A.N. 5266, 5266-67. As the Senate Report went on to point out, "[t]he cost of fraud cannot always be measured in dollars and cents ... fraud erodes public confidence in the Government's ability to efficiently and effectively manage its programs." Id. In order to make the FCA a more effective deterrent, the report concluded that the Act needed better incentives for relators combined with harsher penalties for violators. Id. And, based on the available statistics, the 1986 amendments have certainly achieved their goal.4

The court has previously addressed two of the three main areas Congress enhanced in the 1986 amendments: the incentive to the relator, and the level of knowledge required for liability. Dkts. 101 & 107. In this motion, the court must now address the third area enhanced by the 1986 amendments: the penalty scheme. The FCA clearly delineates two separate calculations, which comprise the amount of a violator's liability. 31 U.S.C. § 3729(a). First, the court must assess a civil penalty of not less than $5,500 and not more than $ 11,000 for each instance.5 Id. And second, the court must award "3 times the amount of damages which the government sustains because of the act of that person." Id. The Supreme Court has described the purpose of the treble damages plus civil penalty framework as making "sure that the government would be made completely whole." United States ex rel. Marcus v. Hess, 317 U.S. 537, 551-52, 63 S.Ct. 379, 87 L.Ed. 443 (1943). At base, the FCA is an aggressive Congressional plan to recover money defrauded from the government, including the costs to recover the defrauded money, in such a way as to be a deterrent to others.

II. Small Business Innovation Research Program

The Small Business Act came into being in 1953. Act of Jul. 30, 1953, ch. 282, 67 Stat. 232 (codified at 15 U.S.C. § 631 et seq.). Under the current law, Congress describes the policy underlying the Act as follows:

The essence of the American economic system of private enterprise is free competition. Only through full and free competition can free markets, free entry into business, and opportunities for the expression and growth of personal initiative and individual judgment be assured. The preservation and expansion of such competition is basic not only to the economic well-being but to the security of this Nation.

15 U.S.C. § 631(a).6 In 1958, Congress amended the Small Business Act and added what has come to be known as the Small Business Innovation Research Program. See Pub. L. No. 85-536, § 2[9], 72 Stat. 391 (codified at 15 U.S.C. § 638). Congress found that federal research projects went primarily to large firms which in turn led to large federal procurement contracts going to those same large firms who had developed products from those federal grants. S. REP. No. 85-1714 (1958), reprinted in 1958 U.S.C.C.A.N. 3071, 3076. The goal of the amendment was to help small businesses obtain government research contracts. Id. Congress reasoned that more government research and development contracts going to small businesses would in turn lead to more government procurement contracts and more opportunity in the market as a whole for small businesses. Id. The declaration of policy in the current version of the SBIR reflects these goals.

Research and development are major factors in the growth and progress of industry and the national economy. The expense of carrying on research and development programs is beyond the means of many small-business concerns, and such concerns are handicapped in obtaining the benefits of research and development programs conducted at Government expense. These small-business concerns are thereby placed at a competitive disadvantage. This weakens the competitive free enterprise system and prevents the orderly development of the national economy. It is the policy of the Congress that assistance be given to small-business concerns to enable them to undertake and to obtain the benefits of research and development in order to maintain and strengthen the competitive free enterprise system and the national economy.

15 U.S.C. § 638(a) (emphasis added).

Ironically, today's SBIR is big business.7 In the fiscal year 2007, the Department of Defense alone funded approximately $1.14 billion in SBIR programs. See Department of Defense, Small Business Innovation Research & Small Business Technology Transfer; Overview, http://www.acq.osd. mil/osbp/sbir/overview/index.htm (last visited Dec. 19, 2007). Considering the funds tunneled annually into research performed by small businesses, the SBIR has remained true to its stated purpose, allowing small businesses to compete on a level playing field with large research firms and universities.

III. Damages

As discussed above, the FCA does not specify how courts should calculate "the amount of damages which the government sustains because of the act of the person found liable. 31 U.S.C. § 3729(a). However, case law gives the basic conceptual starting point. The Fifth Circuit has held that damages are limited "to the amount that was paid out by reason of the false claim." United States v. Aerodex, Inc., 469 F.2d 1003, 1011 (5th Cir.1972). The D.C. Circuit has restated this proposition as ...

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