Lockheed, Whistle-Blowers Settle : Defense: Firm has reportedly paid three ex-employees about $7 million, instead of $45 million jury verdict.

Lockheed Corp. has paid about $7 million to quietly settle a civil lawsuit brought by three defense whistle-blowers, sharply paring a record $45.3-million jury verdict reached in 1990, according to confidential sources.

Even with the reduction, the Lockheed payment ranks among the largest ever to individuals who claimed they were fired for alleging improper conduct by a defense contractor.

Sources said Lockheed officials are torn by the deal, satisfied by the settlement reduction but adamant that the three former employees who sued the firm never raised a valid issue.

Keith Mordoff, a Lockheed spokesman, declined to comment on the amount of the settlement except to say that it is “not material” financially. A federal government source, however, said details of the settlement have become widely known. Phillip Benson and Herbert Hafif, lawyers for the former Lockheed employees, also declined to comment.

The settlement could have important ramifications. Such large awards tend to embolden other whistle-blowers, drive up business costs for California contractors and undermine employee morale at a time of devastating defense industry layoffs, legal experts say.

Lockheed continues to face a parallel federal case brought under the federal False Claims Act that charges that the Calabasas-based aerospace firm’s C-5B cargo jet had defective main frames in its fuselage.

But that case is not likely to go forward, since Justice Department attorneys earlier declined to join in the prosecution of the case, said Victoria Strapman of O’Melveny & Myers, the law firm representing Lockheed.

Since the $7-million award on wrongful-termination charges came in state court, the federal government will not share in the award, as it would have under the False Claims Act. And because the award is not subject to federal taxes, the whistle-blowers will be made millionaires.

The Los Angeles Superior Court case was brought by Terrence F. Schielke, Clyde W. Jones Jr. and Thomas R. Benecke, former Lockheed internal auditors who claimed they were fired when they attempted to alert former Lockheed Chairman Lawrence O. Kitchen of the alleged problems with the C-5B.

They claimed that the aluminum main frames--which form the airplane’s fuselage and bear enormous loads in flight--were improperly heat-treated, leaving them cracked, warped and twisted.

Witnesses in the 1990 trial alleged that an oven at Lockheed’s Burbank plant overheated the main frames, resulting in “eutectic melting,” in which certain metals inside the aluminum alloys melted, causing voids and cracks.

“Lockheed’s position has been adamant that there is no way anything is wrong with the C-5B,” Strapman said. “There have been government tests to certify that.”

During their efforts to expose the alleged problem, the three employees hired an independent metallurgist at their own expense to test the main frames and then took the results to Kitchen.

But Kitchen testified that the three had “lied” about the problem. He said he personally fired two of them because they acted unprofessionally, failed to properly investigate their own allegations and removed company property by taking the aluminum samples to the outside metallurgist for testing.

Of the original $45.3-million award, $45 million was for punitive damages and $300,000 was for compensatory damages. Jurors said after the trial that they were attempting to send a message that the public will not tolerate shoddy weapons.

But within weeks of the verdict, the judge set it aside because a juror had failed to disclose on a routine form that he had a felony conviction in Mississippi. Even without that technicality, the award would probably have been reduced, experts said.

“That verdict was destined to be overturned or radically reduced,” said Frank Cronin, a Los Angeles attorney. “No company can afford to do business with the risk of those kind of damages for firing three employees.”

The efficacy of the C-5B had dogged Lockheed since 1986, when Rep. John Dingell (D-Mich.) called hearings to look into the program.

Lawrence Skantze, a retired four-star Air Force general, testified then that the C-5B did not have any structural defects, but he agreed to perform a special inspection of the planes. The inspection exonerated the aircraft, but four years later a former Air Force colonel came forward to say that the inspection cited by Skantze was not fully performed.

Skantze was not personally implicated in any wrongdoing.

A second inspection was ordered that again vindicated the aircraft, although the Dingell committee again took exception. A Lockheed official said no structural failures are known to have occurred in the C-5Bs.

More than 500 federal whistle-blower cases have been filed nationwide against defense firms. Other cases, such as Lockheed’s, have been filed under state laws.

Major corporations have sought to keep the amounts of wrongful-termination settlements confidential, fearing that large awards will entice others to file claims without merit, said Cronin, who was not involved in the Lockheed case.

Cronin also noted that a RAND Corp. study found that the cost of wrongful-termination cases brought in California has resulted in a 2% reduction in state employment in the last 10 years. He noted that the legal cost of defending even successful cases amounts to at least $100,000.