Military Contractors Challenging Whistle-Blower Law

Midway through the Civil War, somebody in Washington figured something was rotten on the battlefields of Virginia. The cavalry was being sold the same horses two and three times over. The Army tried to fire its gunpowder and found it had been blended with sawdust. Instead of “serviceable muskets and pistols,” recounted one journalist of the day, the government got “the experimental failures of sanguine inventors.”

An outraged Congress, declaring that “it takes a rogue to catch a rogue,” enlisted private citizens in the war on military contracting fraud, adopting a statute that would entice them to come forward by allowing them to file civil fraud lawsuits on behalf of the government and share in any fines or settlements collected. The 1863 statute was little used, however, in part because employees who filed lawsuits against their bosses often found themselves unemployed shortly thereafter.

But, more than a century later in 1986, Congress injected new life into the False Claims Act with a series of amendments that targeted modern-day rogues, provided job protections for private citizens who blew the whistle and increased the amount of money they could collect if they could prove their claims in court.

In the wake of the amendments--and with more than 140 whistle-blower lawsuits on the books alleging billions of dollars in overcharges on programs from the stealth bomber to the Apache helicopter--a federal judge in Los Angeles today will consider the first constitutional challenge to the updated statute.

Some of Southern California’s largest defense contractors, including Hughes Helicopters Inc., McDonnell Douglas Inc., Parker Hannifin Corp. and the Northrop Corp., have said Congress erred when it took the responsibility for prosecuting government fraud out of the hands of the Justice Department and gave it to private citizens.

The False Claims Act, they say, has forced major corporations to defend themselves against what may be frivolous claims by disgruntled employees. Some say the statute may actually prevent companies from clamping down on fraud within their subdivisions. Instead of going to their supervisors when they uncover evidence of wrongdoing, they say, employees are encouraged to keep quiet, hire a lawyer and sue the boss.

“The way it’s structured, it really pits employees against management, and I think it induces employees not to say anything when something goes wrong,” said Phillip Friedman, president of Genisco Technology Corp., which was ordered in November to pay $725,000 in a False Claims Act suit for falsifying test data on several key military components, including a Navy torpedo simulator. A former Genisco employee, Roland Gibeault, will get $131,250 of the settlement.

But defenders of the statute--including the U.S. Senate, which will argue on behalf of the act in court today--say the challenge threatens to disarm what has become one of the nation’s principal weapons against fraud on the federal Treasury.

“Fraud, especially in the defense industry, is really an out-of-control problem,” said John Phillips, a Los Angeles attorney who drafted the 1986 amendments to the act. “You’d hear daily reports about $500 toilet seats and $200 wrenches, but I had talked to a number of people who’d come into my office over the years and said, gee, they worked for defense contractors, they knew people who were deliberately gouging the government, and what should they do?”

Under the act, private citizens who have knowledge of government fraud can become what is known as qui tam plaintiffs. They are effectively deputized as agents for the government under an old doctrine of English law, qui tam pro domino rege quam pro seipso: “he who as much for the king as for himself.”

Such lawsuits are initially filed under seal, giving the Justice Department 60 days in which to investigate a plaintiff’s claims and decide whether to join the suit. Of 141 cases filed so far, the department has joined 20, declined to join 68 and has the rest under consideration. Only a handful of the cases have so far been settled.

Even if the government declines to take over as lead prosecutor, a private plaintiff can pursue the case and share up to 30% of whatever damages are collected. And even if the government does decide to intervene, the private plaintiff remains a party to the case and must agree on any settlement ultimately negotiated.

It is the act’s delegation of that prosecutorial authority to private citizens that has formed the basis of the two pending constitutional challenges. They allege that Congress violated the Constitution’s separation of powers doctrine when--unhappy with the Justice Department’s record on defense fraud--it effectively usurped the executive branch’s authority.

“The important point is that Congress reached its own conclusion as to the effectiveness of prosecutions by the executive branch, and then unconstitutionally usurped the executive function by creating citizen prosecutors with far more discretionary power than any other individual authorized to act on behalf of the United States,” attorney Robert F. Scoular said in his brief filed on behalf of McDonnell Douglas Helicopter Co.

McDonnell Douglas, as parent company of Hughes Helicopter Co., is defending a suit filed by a former Hughes employee, Roderick A. Stillwell, who claimed to have uncovered up to $175 million in overcharges to the Army on the Apache helicopter. The suit seeks total damages of up to $750 million.

The government tentatively intervened in the case in 1987, but later withdrew, saying it “lacked sufficient evidence to demonstrate it had been injured or damaged.”

Stillwell has pursued the case as a private plaintiff, however, prompting McDonnell Douglas to complain it should not have to defend itself against a private prosecution when the government itself has found insufficient evidence.

Although it is the McDonnell Douglas challenge that will be considered today by U.S. District Judge William D. Keller, Northrop Corp. has similar constitutional challenges on the court calendars in June.

B-2, MX Cases

In those cases, Northrop is accused of overcharging the government on the B-2 bomber and inadequately designing and testing a key component of the MX missile, allegedly rendering the weapon unreliable. The Justice Department has declined to join either lawsuit, though it has intervened in at least one other action against the company, seeking $63 million in damages for allegedly faulty testing on critical guidance components of the cruise missile.

Defense contractors, joined in the challenge by a wide variety of business and industry groups, including the U.S. Chamber of Commerce, argue that it is unfair for qui tam plaintiffs to be able to sue a company on behalf of the government when they may not have suffered any damages themselves--or indeed, where no specific dollar loss to the government can be proved.

“It takes 10 minutes to make an allegation, and 10 months to investigate it before you find out the allegations are often without merit,” said Northrop spokesman Tony Cantafio. “There’s a big difference between being vigilant and being a vigilante.”

But Phillips, co-founder of the now-defunct Center for Law and the Public Interest, and other supporters say that sometimes a private citizen is precisely what is needed to nudge a case along when the Justice Department may have been unable or unwilling to pursue it.

“The truth of the matter is, they haven’t done a good job. They’ve had pretty scant success with even the cases they’ve brought,” he said. “So now they have a new wave of lawyers coming in who are private attorney generals, putting intense pressure on them, and they don’t like it.”

Reluctant Support

The Justice Department reluctantly supported the legislative amendments to the act in 1986, expressing fears about giving up its prosecutorial authority to private citizens. Some department officials have complained privately since that the act has forced them to waste time and money investigating meritless claims.

But the department has delayed taking a position on the constitutionality issue, prompting the Senate on April 13 to direct its legal counsel to defend the statute in the Los Angeles challenge.

In response to the defense industry’s claims that the law is unconstitutional, supporters say the Supreme Court has repeatedly upheld similar qui tam and independent prosecutor statutes. For example, Congress over the years has authorized that informants share in fines imposed on slave traders and tax violators. As for the industry’s complaints that it encourages suits from disgruntled employees or others without legitimate claims, Phillips claims that the opposite is true.

“Before (the statute), you would tend to get a lot of people who would be less credible, people who for whatever reasons felt they had to go on a mission from God to expose this. A lot of people were paranoid,” he said.

“What I find here is the kind of people who come forward are very rational people who have looked at the facts and looked at their potential for recovery based upon those facts, because why bring a case that’s going to be a loser?” he said. “You’ll find people who are making a cold calculation of how good is my case, and how much do I get if I win?”

30 Years in Industry

Stillwell, the whistle blower in the case to be heard today, said he worked in the aerospace industry for nearly 30 years and saw instances of fraud and mischarges “many, many, many times.” But the only time he attempted to report it, he said, Defense Department investigators told him: “You have a pretty legitimate case here, but we really don’t know what to do with all that paper work.”

Now a Palmdale resident working for another company, Stillwell said he filed the suit in part out of fear that one day the government would learn about the purported fraud and his superiors would point the finger at him. This time, he decided, he’d take the initiative.

“That’s the way it always happens,” he says, “whoever the guy is on the desk, he becomes the sacrificial lamb. Well, I wasn’t about to become a sacrificial lamb.”

Judge Keller could decide the issue today or take it under submission and rule later.