USA. v. Lockheed Missiles & Space Co.

Decision Date10 September 1999
Docket NumberNos. 97-16704,98-15111,s. 97-16704
Citation190 F.3d 963
Parties(9th Cir. 1999) UNITED STATES OF AMERICA, EX EL., Plaintiff, MARGARET A. NEWSHAM; and MARTIN OVERBEEK BLOEM, Plaintiffs-Counter-Defendants-Appellants-Cross-Appellees, v. LOCKHEED MISSILES & SPACE COMPANY, INC., Defendant-Counter-Claimant Appellee-Cross-Appellant
CourtU.S. Court of Appeals — Ninth Circuit

Guy T. Saperstein, Morris J. Baller, Susan Guberman-Garcia, Jeremy Friedman, Christopher J. Keller, Law Offices of Saperstein, Goldstein, Demchak & Baller, Oakland, California, for the plaintiffs-counter-defendants-appellants-cross appellees.

James J. Gallagher, Martin H. Kresse, Robert S. Brewer, Jr., Barbara J. Bacon, Law Offices of McKenna & Cuneo, Los Angeles, California, for the defendant-counter-claimant appellee-cross-appellant.

Appeals from the United States District Court for the Northern District of California. James Ware, District Judge, Presiding, D.C. No. CV-88-20009-JW.

Before: Betty B. Fletcher and A. Wallace Tashima, Circuit Judges, and Robert J. Bryan,1 District Judge.

OPINION

BRYAN, District Judge:

OVERVIEW

The appellants, Margaret A. Newsham and Martin Overbeek Bloem ("relators"), are qui tam plaintiffs under the False Claim Act ("FCA"), 31 U.S.C. SS 3729-3733. The relators alleged that Appellee Lockheed Missiles and Space Company, Inc. ("LMSC") submitted millions of dollars of false claims for excessive nonproductive labor hours on government projects. The relators appeal two of the district court's rulings: 1) dismissal of their claims because the court concluded that it lacked subject matter jurisdiction under the pre-1986 FCA, and 2) refusal to award attorneys' fees under California's Anti-SLAPP2 statute, Cal. Civ. Proc. Code S 425.16, for the dismissal of LMSC's counterclaims. LMSC appeals the district court's application of Fed. R. Civ. P. 54(d)(1) and equitable considerations to deny LMSC's cost bill for a part of the case that was dismissed.

We have jurisdiction under 28 U.S.C. S 1291, and we affirm the district court in part and reverse in part.

OVERVIEW OF QUI TAM ACTIONS

The FCA has two primary purposes: "to alert the government as early as possible to fraud that is being committed against it and to encourage insiders to come forward with such information where they would otherwise have little incentive to do so." United States ex rel. Biddle v. Board of Trustees of Stanford Univ., 161 F.3d 533, 538-39 (9th Cir. 1998) (citations omitted). The FCA established penalties for the commission of fraudulent acts, recoverable in a civil action known as a "qui tam" action. Id. at 535. The qui tam action is brought by a private individual known as a "relator" on behalf of both himself and the government. 31 U.S.C. S 3730(b). Once notified of the action, the government has the option to intervene, or declining intervention and to allow the relator to proceed on its behalf. S 3730(b)(2) and (c)(3). If the qui tam action is successful, the relator divides the civil penalties with the government according to S 3730(d). See Biddle, 161 F.3d at 538-39.

In the 1930s and 1940s, Congress became concerned about the number of

parasitic lawsuits copied from preexisting indictments or based upon congressional investigations. Such ill-motivated suits not only diminished the government's ultimate recovery without contributing any new information, but the rush to the courthouse put pressure on the government to make hasty decisions regarding whether to prosecute civil actions.

United States ex rel. Findley v. FPC-Boron Employees' Club, 105 F.3d 675, 679-80 (D.C. Cir. 1997). To address this problem, Congress placed limitations on the district court's jurisdiction, first in 1943, then in 1982, in 31 U.S.C.S 3730(b)(4) (1983), which stated: "Unless the Government proceeds with the action, the Court shall dismiss the action brought by the person on discovering the action is based on evidence or information the Government had when the action was brought."

Over time, Congress learned that this restriction essentially eliminated the financial incentive for private citizens to bring fraudulent conduct to the attention of the government, and the use of qui tam suits to fight fraud on behalf of the government dramatically declined. Findley, 105 F.3d at 680. On October 27, 1986, Congress again amended S 3730(b)(4) and re-codified it at 31 U.S.C. S 3730(e)(4)(A) (1998). This section provided that "no court shall have jurisdiction over a [qui tam] action . . . based upon the public disclosure of allegations in . . . [an] investigation . . . unless the action is brought by the Attorney General or the person bringing the action is an original source of the information." 31 U.S.C. S 3730(e)(4)(A).3 The effect of this amendment was to "create[ ] a new cause of action" by eliminating the bar to actions based on information the government already knew, and to allow the original informant to litigate the action. Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 117 S.Ct. 1871, 1878 (1997); United States ex rel. Lujan v. Hughes Aircraft Co., 162 F.3d 1027, 1031 (9th Cir. 1998).

FACTUAL AND PROCEDURAL BACKGROUND4

Between 1979 and 1988, LMSC had several "cost reimbursable"5 contracts with various defense and intelligence agencies of the United States government. Newsham worked for LMSC as an analyst in its Sunnyvale, California plant from 1981 until she was discharged in 1984. Bloem worked at the same facility as a technician from 1979 until his voluntary termination in 1988. The relators here allege that LMSC filed millions of dollars in false claims for excessive nonproductive labor costs, including claims for employees' personal and unrelated business activities and time attributed to "icebox" employees.6 The relators allege that LMSC billed this time to the government as contract labor hours. For example, the relators allege that one manager supervised the construction, by LMSC employees, of a complete airplane for his personal use at government expense.

In March 1984, Ms. Newsham and her attorney contacted agents of the Defense Contract Audit Agency ("DCAA"), which had responsibility for monitoring contract compliance of defense contractors, including LMSC. Ms. Newsham reported her observations, but she was not able to provide details of how time was billed or invoiced by LMSC, or what instructions LMSC employees had regarding the billing of their time. Mr. Bloem did not participate in that meeting, but the parties have agreed that his claims were indistinguishable from Ms. Newsham's allegations.

After receiving Ms. Newsham's report, the DCAA, in 1984, conducted several "operations" audits, including an icebox audit and a "non-touch" or non-manufacturing audit. The auditors did not investigate LMSC's time-keeping practices, its accounting for time charges, or the practice of charging for non-productive activities. The auditors found some discrepancies in billings and recommended adjustments, including a recommendation that LMSC reduce non productivity.

On January 8, 1988, the relators filed a qui tam action against LMSC under seal pursuant to the FCA, 31 U.S.C. S 3730(b)(2).7 The relators alleged that LMSC knowingly charged labor hours to government contracts for employees engaged in nonproductive or personal activities, and sought damages, penalties, and other relief authorized by the FCA. The complaint was unsealed and served on LMSC in July 1988. In February 1989, the government filed a Notice of Declination to intervene in the case, and left the prosecution of the case to the relators as a private action on behalf of the United States.

Thereafter, LMSC moved to dismiss portions of the complaint for lack of subject matter jurisdiction based on the pre1986 version of the FCA, 31 U.S.C. S 3730(b)(4) (1983). The issue presented in the motion was whether the 1986 amendment to the FCA should be retroactively applied to a case filed after the amendment, but based on pre-1986 conduct. The district court denied the motion. On June 17, 1991, LMSC filed an answer and counterclaims wherein it denied the relators' claims and brought four California state law counterclaims. LMSC alleged that the relators had breached duties imposed by fiduciary obligations and loyalty, as well as contract and statute, and breached the implied covenant of good faith. The district court referred all pretrial matters to a Special Master pursuant to Fed. R. Civ. P. 53. The district court, on the Recommendation of the Special Master, granted the relators' motion to dismiss LMSC's counterclaims on August 2, 1995 and denied the relators' companion motion to strike and for attorneys' fees based on California's AntiSLAPP statute, Cal. Civ. Proc. Code S 425.16 (1992), discussed below.

The question of the retroactive or prospective application of the FCA's 1986 amendment -31 U.S.C. S 3730(e)(4)(A) -was settled in Schumer, 117 S.Ct. 1871(1997). There, the Supreme Court held that the statute does not apply retroactively. Based on Schumer, LMSC filed a motion for reconsideration, requesting that the relators' claims be dismissed pursuant to the pre-1986 FCA. One week before the hearing on this motion for reconsideration, the relators filed a motion for leave to file an amended complaint. In the proposed amended complaint, the relators brought new FCA claims, alleging that LMSC continued to submit bills for excessive labor costs after October 1986 and gave false information to the auditors which prevented the auditors from uncovering LMSC's alleged fraudulent activities.

On July 31, 1997, the district court issued its Order Dismissing Case after finding that the government had the information on which the case was based when the action was filed. The complaint was dismissed with prejudice as to the relators, and without prejudice as to the United...

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