1st Trial of Whistle-Blower Defense Fraud Suit to Open

For the first time, a whistle-blower lawsuit charging fraud on a major weapons program will go to trial this morning in Los Angeles federal court, offering a potentially important barometer of public attitudes about defense fraud allegations.

Opening arguments are expected today in a case charging that McDonnell Douglas covered up serious defects in its AH-64 Apache attack helicopter during the 1980s, costing the government more than $60 million.

The high-stakes case is being carefully watched by the lawyers representing both defense contractors and a growing body of defense whistle-blowers.

Although more than 400 whistle-blower cases have been filed in the last seven years, little is known about how a jury will react to charges about defective weapons, phony testing and inflated charges. So far, two minor civil fraud cases have gone to trial, one involving a military housing contract and another involving a dispute over a ship hull-cleaning award.

Attorneys representing whistle-blowers in major cases have long complained that the Justice Department settles such fraud cases for pennies on the dollar rather than litigate them.

Congress strengthened the hand of whistle-blowers in 1986 when it amended the federal False Claims Act, essentially setting up a bounty hunter system. Under the law, individuals can sue contractors on behalf of the government and share up to 35% of any damages.

Until now, the only jury verdict on any defense-related scandal was in a 1991 Los Angeles Superior Court case. Three employees sued Lockheed for wrongfully firing them when they tried to disclose defects in the C-5B cargo jet.

A jury returned a whopping $45-million verdict, but a judge threw out the award on a technicality and the case remains unresolved.

The award, however, sounded alarm bells within the defense industry over the potential for massive punitive damage awards by juries.

The McDonnell case that starts today was filed by Jerome Butler, a former engineer at the firm’s helicopter unit in Arizona. Butler alleges that the Apache suffers from a defective two-way radio that prevents pilots from communicating with each other or with commanders on the ground.

In addition, Butler alleges that five other cockpit electronics systems are defective or were improperly tested, including a navigation system, an altimeter and a targeting system.

Butler, a retired Air Force fighter pilot, laid out his charges on the television show “60 Minutes” in November, 1990, and to this day claims, “I get mad every time I think about it.”

Herbert Hafif, Butler’s attorney, said he has invested $350,000 in direct costs and about $2 million in legal time in preparing for the trial. The Justice Department declined to join in prosecuting the case.

“This case should set a standard as to how easy or difficult these cases are going to be,” Hafif said. “In this case, you have all the subtleties that a multimillion (dollar) defense can create.”

Frank Meredith, the attorney representing McDonnell, said Butler’s charges that the firm failed to comply with its Apache contract are untrue.

He added that the General Accounting Office investigated the charges in 1991 and “didn’t agree with Mr. Butler.”

Meredith said he has qualms about whether a jury verdict is the correct way to resolve complex business disputes in the defense industry, a view shared by a number of industry attorneys critical of the False Claims Act.

Tim Hatch, an attorney at Gibson, Dunn & Crutcher, said few fraud cases have gone to trial in part because the government has great leverage to settle the cases out of court, but also partly because of “the natural fear of defense contractors to put cases like this before a jury.”

The presumption that a jury, acting as proxy for the American public, is ready to pounce on the defense industry by imposing huge punitive awards may no longer be true, however.

“The recession in Southern California has changed that bias,” said Brad Brian, an attorney who represents several major contractors. “There may well be different attitudes in 1993 than there were six or seven years ago. The intangibles of a trial may be different.”