$1 Billion in Contracts Yanked From Boeing
The Air Force slammed Boeing Co. on Thursday with some of the harshest penalties ever imposed on a defense contractor, taking away at least $1 billion worth of rocket contracts and suspending the aerospace giant from future rocket work.
The Air Force said it was punishing Boeing for its “serious violations of federal law” when it illicitly obtained thousands of pages of trade secrets from aerospace rival Lockheed Martin Corp.
Air Force Undersecretary Peter B. Teets called the number of Lockheed documents in Boeing’s possession -- more than 25,000 pages -- “extraordinary.”
Teets stopped short of saying that the documents had allowed Chicago-based Boeing to beat out Lockheed for the lion’s share of the rocket contracts in a 1998 competition. But he said the “quality of information was sufficient to provide great insight into Lockheed Martin’s proprietary cost and pricing.”
“Boeing is responsible and must be held accountable for the actions of its employees,” Teets said at a Pentagon news conference.
“We cannot tolerate anything less than complete honesty in our procurement process, and we believe this suspension and launch reallocation is necessary.”
Defense analysts and lawyers said the sanctions were the stiffest ever levied against a major defense contractor, and Teets himself said he couldn’t recall any company receiving such a severe punishment.
“This remedy basically denies Boeing the ability to become the industry leader in the launch business for the foreseeable future,” said Loren Thompson, a longtime defense analyst and professor at Georgetown University. “It’s quite a blow.”
The Air Force said it would take away seven rocket contracts worth about $1 billion from Boeing and give them to Lockheed, leaving Boeing with contracts for 12 rockets and giving Lockheed 14. In the initial competition, Lockheed won only seven contracts.
Additionally, the Air Force said it would indefinitely bar the three Boeing units -- one of them in Huntington Beach -- responsible for developing, building and servicing the Delta IV rockets from seeking future contracts. Teets told reporters the suspension could be lifted in as little as 60 to 90 days if the Air Force “determines that corrective actions are in place.”
The Air Force also said it would help Bethesda, Md.-based Lockheed build a West Coast launch facility for its Atlas V rocket at Vandenberg Air Force Base in northern Santa Barbara County at an estimated cost of $200 million.
Most of the rockets, which are used to boost military satellites into space, are launched from Cape Canaveral, Fla.
Boeing has insisted that the Lockheed documents gave it no edge in winning contracts.
“The pricing that we did in 1998 wasn’t influenced by these documents,” James Albaugh, head of Boeing’s space and defense business, said in an interview Wednesday, citing the conclusions of an outside law firm and a forensic accounting firm.
Even so, Boeing Chairman Philip Condit struck a conciliatory tone Thursday and said former Sen. Warren B. Rudman would help review the company’s ethics rules.
“We apologize for our action,” Condit said in a statement. “We are extremely disappointed by the circumstances that prompted our customer’s action, but we understand the U.S. Air Force’s position that unethical behavior will not be tolerated.”
The Air Force investigation found that the Lockheed documents had been brought to Boeing by Kenneth Branch, a former Lockheed engineer who worked on that company’s rocket proposal. Branch was hired in 1997 by McDonnell Douglas Corp., which later was acquired by Boeing.
According to federal investigators, Branch was hired by William Erskine at McDonnell Douglas specifically for his access to Lockheed secrets.
Boeing executives said they became aware of the documents in 1999, fired Branch and Erskine and alerted Lockheed and the Air Force to the pilfered documents.
Branch and Erskine then filed a wrongful-termination lawsuit. In the course of that case, Lockheed determined that the number of its documents in Boeing’s hands was far higher than Boeing had acknowledged.
In court filings, an Air Force official said some of the papers recovered from Boeing had a medium or high likelihood of affecting the outcome of the competition.
Teets said the violations were compounded by the fact that Boeing “was not forthcoming” with the military about the amount of Lockheed documents it possessed.
A Lockheed spokesman said that although it was “thankful for the thorough investigation,” the company would continue with a civil lawsuit it filed against Boeing last month.
In addition, the Justice Department has charged Branch and Erskine with stealing trade secrets and is investigating the role of two Boeing managers with oversight responsibilities.
Albaugh said the sanctions were unlikely to have an immediate effect on Boeing’s operations in Huntington Beach, where about 1,300 engineers oversee the rocket program, and in Decatur, Ala., where the rockets are built.
Boeing executives have raised the possibility that the company might have to drop out of the rocket business if the sanctions were excessive, but they made no comments along those lines Thursday.
“It is way too early to speculate on what the business impact of this announcement is,” Boeing spokesman Dan Beck said. “In the meantime, we’re going to work with the Air Force to resolve any lingering concerns or issues so we continue to be partners. For the time being we are in the rocket business to stay.”
The Defense Department on Thursday reiterated that it wanted to have two rocket contractors to ensure that its satellites can get launched.
Public watchdog groups, which have been closely watching the investigation, lauded the decision to punish Boeing but declined to say whether the sanctions were severe enough.
“It’s hard to tell because we don’t know all the facts,” said Eric Miller, spokesman for one of the groups, Project on Government Oversight. “It’s definitely a step in the right direction.”
Teets raised the possibility that the sanctions could have been far worse.
“We have found that the problem existed within these three Boeing units and that it was contained therein,” Teets said. “On the other hand, I do need to give all due recognition to the fact that there is a Department of Justice criminal investigation.”
*
(BEGIN TEXT OF INFOBOX)
Rocket Project Goes Off Course
Here is a chronology of key events leading up to Thursday’s sanctions.
October 1994: The Air Force opens competition to develop next-generation rockets to lift satellites into orbit.
January 1997: Kenneth Branch, an engineer working on Lockheed Martin’s rocket bid, is hired by McDonnell Douglas to work on its proposal. Boeing acquires McDonnell Douglas in August.
October 1998: Boeing wins a majority of rocket orders.
June 1999: Boeing begins an investigation and fires two employees, Branch and his supervisor, William Erskine, for having Lockheed documents. Boeing reports the investigation to the Air Force.
September 2000: Branch and Erskine file a wrongful-termination lawsuit, claiming that executives encouraged them to obtain the documents. The suit eventually is dismissed.
September 2002: The Justice Department and Pentagon open investigations.
July 24, 2003: The Air Force suspends Boeing from seeking military launch contracts and takes away about $1 billion in launch work after finding “serious violations of federal law.”
Los Angeles Times
