Supreme Court Hands Hughes a Limited Victory on Fraud Suits

The Supreme Court handed Hughes Aircraft Co. a narrow but important victory Monday over a former executive who claimed that the aerospace firm had overcharged the Pentagon between 1982 and 1984 for its work on the B-2 bomber.

In a unanimous decision, the high court said a 1986 law that opened the way for more whistle-blower lawsuits did not apply generally to alleged frauds that took place earlier.

But the court’s ruling stopped well short of fulfilling the defense industry’s long-

sought goal of limiting the wave of whistle-blower suits that have hit the courts in the last decade.

Amid the military buildup during the Ronald Reagan administration, Congress sought to root out fraud and bill-padding by making it easier for whistle-blowers to bring private lawsuits against government contractors.

The amendments to the False Claims Act, a law enacted during the Civil War, allowed whistle-blowers to sue even if a federal auditor or a Pentagon official knew of the supposed overcharges. If the suits ultimately result in the government recovering money, the whistle-blower and his attorney are entitled to a percentage.

The suits were initially targeted at defense contractors, but in recent years many others have attacked alleged fraud by hospitals and health-care providers receiving government payments.

Since the 1986 amendments, these whistle-blower suits have led to $1.8 billion in recoveries for the government, according to Taxpayers Against Fraud, a Washington public interest group. But of that amount, only $26 million came from purely private lawsuits. In nearly all the others, the Justice Department joined the suit and won the recovery.

The Aerospace Industries Assn. has derided the wave of whistle-blower suits as an expensive nuisance. Most of the claims are “parasitic,” they say, because they are based on audits that were done for the government.

The Hughes case was the first challenge to the 1986 law to reach the high court.

It began in 1989 when William J. Schumer, formerly a contracts manager for Hughes’ B-2 division in El Segundo, filed a whistle-blower suit alleging that the company had juggled its books between 1982 and 1984 in a way that resulted in a $50-million overcharge to the government.

The company responded that the suit should be thrown out on the grounds that the government already had an audit report detailing how its costs were allocated during these years. The 1986 amendments were not retroactive to alleged frauds that took place earlier, the company said.

Hughes also made broad claims that the entire whistle-blower’s act was unconstitutional and that private suits could not proceed if publicity about the alleged overcharges already had reached the government.

Rejecting all of these claims, the U.S. 9th Circuit Court of Appeals cleared the way for Schumer’s case to be tried.

But Hughes, represented by former judge and Whitewater independent counsel Kenneth W. Starr, appealed to the Supreme Court, and the justices agreed that the provisions of the 1986 law did not apply retroactively to alleged frauds that took place earlier.

“This action should have been dismissed” at the start, wrote Justice Clarence Thomas in the case (Hughes Aircraft vs. United States and Schumer, 95-1340), because it disclosed information that was in the government’s files already.

Schumer, 62, said the decision has left him both frustrated and angry, particularly because of the court’s offhand comment that whistle-blowers “are motivated primarily by prospects of monetary reward rather than the public good.”

After he filed the suit, Schumer said, Hughes demoted him and put him in a windowless office with no duties. Schumer left Hughes in February 1993 on medical disability for stress. Schumer’s wife subsequently divorced him and he lost his Northridge home and most of his other assets.

“It is offensive, not just to me but to other whistle-blowers,” Schumer said. “There are honest, decent people that come forward because it is the right thing to do. I still have my dignity intact, even if the consequences were horrible for me. I would do it again.”

James Gallagher, a Los Angeles attorney for the Aerospace Industries Assn., said he expects Monday’s ruling to lead to the dismissal of five or six pending suits against defense contractors over alleged frauds in the early 1980s.

Phillip Benson, one of Schumer’s attorneys, said the Supreme Court’s ruling may permit his client to pursue allegations of fraud that occurred in the Hughes program after 1986. “It may not be over,” Benson said.