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Sunday, February 17, 2013

Abnormally low vs unreasonably low bid

I have read enough cases to know that it can be reasonably expected that bidders will bid below cost, in part at least, in an aggressive tactic to win an award. This does not appear to be a matter that too terribly concerns either the government or the courts. But underbidding comes with a risk of more than lost profits on a contract.

First, if a bid is "abnormally" low, it probably should be rejected out of hand. See my post The price is not always right for a short review of that issue.

Second, at least in the UK, it may give rise to a question of bribery, depending on the wording of relevant statute(s). See this post: When low bidding raises question of bribery.

And now, we see that an "unreasonably" low bid could form the basis of a false claim under the US False Claims Act and similar laws in other jurisdictions. It is not for nought that the typical procurement law requires that bid prices be "fair and reasonable". I have, as usual, selected, chopped and rearranged and messed with rendering the case below, so you should click the link and read it yourself. I only deal with one of the issues of the case.

Nyle J. HOOPER, Plaintiff-Appellant, v. LOCKHEED MARTIN CORPORATION, United States Court of Appeals, Ninth Circuit, 688 F.3d 1037 (2012)
In his Third Amended Complaint, Hooper alleges that Lockheed violated the FCA by: (1) knowingly underbidding the contract. Hooper brings a claim under the False Claims Act ( particularly 31 U.S.C. § 3730(h)), alleging that he was wrongfully discharged in retaliation for FCA-protected activity. The FCA protects "whistle blowers" from retaliation by their employers.

The FCA was enacted "during the Civil War in response to overcharges and other abuses by defense contractors." United States ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.1999). The purpose of the FCA was to "[combat] widespread fraud by government contractors who were submitting inflated invoices and shipping faulty goods to the government." United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1265-66 (9th Cir.1996). To this end, the FCA creates liability for any person who, inter alia, "(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1).

Hooper asserts that Lockheed violated the FCA by submitting a fraudulently low bid, based on knowing underestimates of its costs, to improve its chances of winning the Air Force RSA IIA contract. Lockheed asserts that allegedly "false" estimates cannot be the basis for liability under the FCA, because an estimate is a type of opinion or prediction, and thus cannot be said to be a "false statement" within the meaning of the FCA. Specifically, Lockheed argues that "estimates of what costs might be in the future are based on inherently judgmental information, and a piece of purely judgmental information is not actionable as a false statement."

The United States filed an amicus brief, urging this court to hold that a false estimate and/or fraudulently low bid may be actionable under the FCA.

Although the issue whether FCA liability may be premised on false estimates where those false estimates were knowingly made is a matter of first impression for this court, both the First and Fourth Circuits have held that FCA liability may attach in such a situation. Their decisions rest heavily on United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87 L.Ed. 443 (1943).

In Hess, the Supreme Court found contractors liable under the FCA for claims submitted by government contractors that the contractors obtained by collusive bidding. Id. at 542, 63 S.Ct. 379. Most courts have interpreted Hess to stand for the "fraud-in-the-inducement" theory of FCA liability. Accordingly, many courts, including this court, have applied the FCA to bid-rigging situations.

The Fourth Circuit held that, after the 1986 amendments to the FCA, according to Congress the FCA should be broadly construed. See id. at 786 (quoting S.Rep. No. 99-345, at 9 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5274 ("`each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim'") (emphasis added in case)). he Fourth Circuit reasoned that "an opinion or estimate carries with it `an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.'"

As a matter of first impression, we conclude that false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.

Construing the facts in the light most favorable to Hooper, there is a genuine issue of material fact whether Lockheed acted either knowingly, in deliberate ignorance of the truth, or in reckless disregard of the truth when it submitted its bid for the Air Force RSA IIA contract.

Hooper demonstrated that Lockheed employees were instructed to lower their bids without regard to actual cost. Mike Allen, an employee with Lockheed, testified that the Air Force did not accept Lockheed's initial bid because it was too high. Subsequently, Allen "was simply asked [by management] to change the cost" even though the change in cost was not based on any engineering judgment. Allen also testified that, in bidding on another contract, he was told to lower the cost. When Allen told his supervisors, "We can't. This is the real cost. This is what it's going to cost, if not more," he was dismissed from the bidding contract meeting. Allen later learned that Lockheed lowered the cost by almost half and was awarded the contract. He also testified that Lockheed was dishonest in the productivity rates that it used to determine the cost for a contract.

Further, in the Air Force memorandum analysis of Lockheed's bid, the Air Force noted that Lockheed was "optimistic about some of its inputs ..., resulting in an overstated potential for cost savings." Additionally, the Air Force stated that it found Lockheed's Risk Analysis to be "unrealistic..., so the total risk is understated."

On the other hand, the Air Force stated that "[o]verall, [Lockheed] was found `realistic' for this factor." The memorandum found that Lockheed's bid provided the best overall value, even if it was possible that there were risks which might "lead to cost growth beyond target cost."

Because there is a genuine issue as to whether Lockheed had actual knowledge, deliberately ignored the truth, or acted in reckless disregard of the truth when it submitted its allegedly false bid for the RSA IIA contract, we reverse and remand to the district court. See Balint v. Carson City, 180 F.3d 1047, 1054 (9th Cir.1999) (en banc) (when reviewing a district court's grant of summary judgment, this court must not weigh the evidence or determine the truth of the matter but only determine whether there is a genuine issue for trial).

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