United States v. United Techs. Corp.

• Decision Date: 06 April 2015
• Docket Number: No. 13–4057.,13–4057.
• Citation: United States v. United Techs. Corp., 782 F.3d 718 (6th Cir. 2015)
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. UNITED TECHNOLOGIES CORPORATION, Defendant–Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

782 F.3d 718

UNITED STATES of America, Plaintiff–Appellee

v.UNITED TECHNOLOGIES CORPORATION, Defendant–Appellant.

No. 13–4057.

United States Court of Appeals, Sixth Circuit.

Argued: Dec. 3, 2014.

Decided and Filed: April 6, 2015.

Rehearing En Banc Denied July 9, 2015.

ARGUED:Gregory G. Garre, Latham & Watkins LLP, Washington, D.C., for Appellant. Benjamin M. Shultz, United States Department of Justice, Washington, D.C., for Appellee. ON BRIEF:Gregory G. Garre, Latham & Watkins LLP, Washington, D.C., Jeffrey A. Hall, Bartlit Beck Herman Palenchar & Scott LLP, Chicago, Illinois, David Z. Bodenheimer, Crowell & Morning LLP, Washington, D.C., Lori Alvino McGill, Quinn Emanuel Urquhart & Sullivan LLP, Washington, D.C., for Appellant. Benjamin M. Shultz, Alan S. Gale, Michael S. Raab, United States Department of Justice, Washington, D.C., for Appellee.

BEFORE: SILER and SUTTON, Circuit Judges; CLELAND, District Judge.^*

OPINION

SUTTON, Circuit Judge.

In 1983, Pratt & Whitney, now owned by United Technologies, made false statements to the Air Force in the course of competing with GE Aircraft to supply the Air Force with engines for its F–15 and F–16 fighter jets. The effort failed in two respects: Pratt did not achieve its goal of obtaining more business in the first year of the contract, and the fraud did not go unnoticed.

After discovering the fraud, the government filed two actions against Pratt: (1) a 1998 action before the Armed Services Board of Contract Appeals seeking relief under the Truth in Negotiations Act, and (2) a 1999 action in federal court seeking relief under the False Claims Act and common law restitution. The government lost the administrative action. Even though Pratt's false statements had violated the truth-in-negotiation requirements of the Act, the Board refused to lower the price of the contracts retroactively—the remedy permitted by the Act—because the Air Force had relied on the competitive bids by Pratt and GE Aircraft, not the 1983 false statements, in determining a reasonable price for the jet engine contracts with each company. The Federal Circuit affirmed.

The federal court action is now on its second trip to this court. The first appeal established that Pratt violated the False Claims Act and that it owed the government $7 million in statutory penalties due to the false cost estimates it provided to the government in 1983. The first appeal also vacated the district court's holding that the government suffered no damages from the false statements and asked the court to address three discrete flaws that might (but might not) affect the damages calculation. On remand, the district court awarded $657 million in damages.

At stake in this sequel are two essential questions. Does issue preclusion bar the government from obtaining additional damages under the False Claims Act and common law restitution given the Board's finding in the first action about the role of competition in determining the prices that the government paid Pratt and GE Aircraft for the jet engines? And, even if issue preclusion does not apply, is the district court's $657 million damages award supported by the evidence given the government expert's refusal to account for the competition between GE Aircraft and Pratt in setting a fair market value for the engines that the government purchased from Pratt?

I.

Pratt & Whitney makes jet engines. For years, Pratt served as the exclusive supplier of engines for the Air Force's F–15 and F–16 fighter jets. That changed in the early 1980s, when the military decided that competition might improve the quality of the engines and lower their prices. In 1982, the Air Force invited aerospace manufacturers to submit competitive bids for making the next generation of engines. In addition to Pratt, GE Aircraft entered the competition. The Air Force touted the prospect of greater competition. As one officer told Congress, the bidding put Pratt and GE Aircraft “at each other's throats.” R. 441–2 at 7. One observer called the companies' high-stakes procurement battle the “Great Engine War.” See Editorial, The Lesson of the Great Engine War, N.Y. Times, Feb. 13, 1984, at A20, available at http://nyti. ms/1EO4T5h.

In trying to stave off its new competitor, Pratt misstated the projected costs in its 1983 bid in three ways—its bill of materials, its inflation forecasts, and its expected discounts from suppliers—in an effort to discourage the military from dividing the work between Pratt and GE Aircraft. After the Air Force identified the problem, Pratt assured the Air Force that it had fixed the problems in its initial proposal and falsely certified that its offer prices “reflect[ed its] best estimates and/or actual costs.” R. 334 at 7. The deception backfired in two ways. It did not work as a business strategy. The Air Force chose to divide the engine orders anyway, and in the first year of the new six-year contract it purchased three quarters of the engines from GE Aircraft and only a quarter of the engines from the once-dominant Pratt. The deception also was uncovered, though not until the end of the contract.

In the interim, the two jet engine manufacturers continued to compete. In each subsequent year, the Air Force issued a “call for improvement” that asked Pratt and GE Aircraft to provide more favorable terms than its prior “best and final offer”—a process that allowed each contractor to decrease its existing offer prices with the hope of selling more engines. The Air Force's goal was to create, and benefit from, “perpetual competition.” See United Techs. Corp., ASBCA No. 53349, 05–1 BCA ¶ 32,860, at 162,813, 2005 WL 147601 (Jan. 19, 2005) [hereinafter ASBCA II ]. Pratt took advantage by responding with lower prices, including by extending full-award volume discounts even for split-award contracts. In each year, the Air Force certified that Pratt's and GE Aircraft's prices were “fair and reasonable” based on the “market test between the competitors.” Id. And indeed, as a result of the role of competition in setting fair prices, the Air Force did not ask Pratt and GE Aircraft to submit cost and pricing data for each of the five outyears of the contract, as the regulations normally require. See 10 U.S.C. § 2306(f)(2) (1982) ; A.S.P.R. § 3–807.3(b)(ii) (1976). Pratt beat out GE Aircraft with lower prices in some years (and received additional business as a result), and in the fourth year of the “call for improvements” Pratt was the “clear winner” overall. R. 441–34 at 2. Air Force Secretary Edward Aldridge hailed the “intense competition” as “working to perfection.” Id. In response to Pratt's improvements, the Air Force awarded the company a steadily increasing share of engine production. In the final year of the contract, Pratt won nearly two-thirds of the work.

The government first became concerned that Pratt had overstated its 1983 cost projections in a 1989 audit by the Air Force. For reasons that the record does not fully disclose, the Air Force review board closed that investigation in 1995. In 1997, Dannie Zacharetti, an auditor with the Department of Justice and eventually the damages expert in this case, investigated the matter and determined that Pratt did not use its most accurate data in its 1983 best and final offer.

The Truth in Negotiation Act litigation. In 1998, the government filed an administrative action against Pratt with the Armed Services Board of Contact Appeals under the Truth in Negotiations Act. See 10 U.S.C. § 2306(f)(2) (1982). As permitted under the Act, it sought a retroactive decrease in the price it should have paid for the six years of jet engines due to the initial false cost estimates. The Board rejected the government's claim. It first determined that some of the alleged misstatements—that Pratt had corrected problems in its initial proposal and had used the latest and most accurate cost data to develop its 1983 best and final offer prices—did not amount to “cost or pricing data” covered by the Act. See United Techs. Corp., ASBCA No. 51410, 04–1 BCA ¶ 32,556, at 161,024–25, 2004 WL 483216 (Feb. 27, 2004) [hereinafter ASBCA I ]. The Act, the Board noted, covers only misrepresentations about “facts which reasonably can be expected to contribute to sound estimates of future costs.” Id. at 161,025 (quoting D.A.R. § 3–807.1(a)(1)). The Board held that the Truth in Negotiations Act covered some of Pratt's other statements—the inaccurate component-by-component breakdown of its expected costs, which is to say the underlying cost data itself. See 10 U.S.C. § 2306(f)(2) (1982). But the Board held that these statements did not cause any damages to the Air Force. Because the Air Force had relied on “competitive forces, rather than the defective ... cost or pricing data ... [,] to make the awards and to exercise the options for additional purchases,” it reasoned, the prices the Air Force paid for the jet engines were not increased by the fraud. ASBCA II, 05–1 BCA at 162,813. The government apparently did not appeal this aspect of the Board's decision. See Brief of Appellant, Wynne v. United Techs. Corp., No. 05–1393, 2005 WL 3338206 (Fed.Cir. Nov. 14, 2005). It instead argued that it had no obligation to show that the Air Force relied on the false cost estimates or that the false statements otherwise caused it damages. It claimed that the existence of the fraud allowed it to obtain a one-for-one price reduction for every dollar Pratt overstated its costs. The Federal Circuit rejected this argument and affirmed. See Wynne v. United Techs. Corp., 463 F.3d 1261, 1267 (Fed.Cir.2006).

The False Claims Act / Restitution litigation. In 1999, the United States separately filed this lawsuit in federal district court for violations of the False Claims Act and for common law restitution. The court found Pratt liable under the False Claims Act and awarded the government $7 million in statutory penalties. The government sought additional damages caused by the false statements under the False...