Danielides v. Northrop Grumman Corporation
Filing
128
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 10/8/2015: Northrop Grumman's motions for summary judgment, 97 , and to exclude the opinion of plaintiff's expert, 101 , are granted. Enter judgment in favor of de fendant. Status hearing remains set for 10/13/15 at 9:30 a.m. Out of town counsel may email this court's courtroom deputy their contact information if they wish to appear at the status hearing by telephone. Notices mailed by Judicial Staff. (psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA, ex rel. LEO
DANIELIDES, and LEO DANIELIDES,
individually,
Plaintiffs,
No. 09 CV 7306
Judge Manish S. Shah
v.
NORTHROP GRUMMAN SYSTEMS
CORPORATION,
Defendant.
MEMORANDUM OPINION AND ORDER
The United States entered into a contract with Northrop Grumman Systems
Corporation to work on a project to protect civilian aircraft from missile attacks.
The agreement was styled as a “fixed price best efforts” contract, and Leo
Danielides, a former Northrop Grumman employee, alleges that Northrop
Grumman lied when it accepted and endorsed the term “fixed price best efforts” in
entering into the contract and in its requests for payment from the government.
According to Danielides, Northrop Grumman never intended to use, and never used,
its “best efforts” to perform on the contract, and “fixed price best efforts” had a
specific, objective meaning mutually understood by both the government and
Northrop Grumman. On behalf of the United States, Danielides sued Northrop
Grumman under the False Claims Act, alleging that Northrop Grumman’s lies and
omissions about best efforts amounted to false claims for payment. Defendant
moves for summary judgment and to exclude Danielides’s expert. For the reasons
discussed below, both motions are granted.
I.
Legal Standard
Summary judgment is appropriate if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law. Fed. R. Civ. P. 56(a); Spurling v. C & M Fine Pack, Inc., 739 F.3d
1055, 1060 (7th Cir. 2014); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). After
“a properly supported motion for summary judgment is made,” the nonmoving party
“must set forth specific facts showing that there is a genuine issue for trial.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); see also Celotex, 477 U.S.
at 322. A genuine dispute as to a material fact exists if “the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S.
at 248. In its analysis, the court must construe the facts and make reasonable
inferences in the light most favorable to the nonmoving party. CTL ex rel.
Trebatoski v. Ashland Sch. Dist., 743 F.3d 524, 528 (7th Cir. 2014).
II.
Background
In 2003, Congress directed the Department of Homeland Security to develop
a system for defending commercial aircraft against shoulder-launched missiles
known as man-portable air-defense systems (MANPADS). [114] ¶ 3.1 In response,
DHS carried out a missile-defense project called the Counter-MANPADS or C-
The bracketed numbers refer to docket numbers on the district court docket. [114] refers
to defendant’s statement of material facts with Danielides’s responses and [120] refers to
Danielides’s statement of additional material facts with defendant’s responses.
1
2
MANPADS program, which was implemented in three phases. [114] ¶ 4. Work was
awarded to contractors, including Northrop Grumman, through Other Transaction
Agreements, which are exempt from most regulations applicable to government
procurement contracts. [114] ¶¶ 6–12. The agreement for Phase I of the CMANPADS project was the first Other Transaction Agreement negotiated by the
Rolling Meadows, Illinois, campus of Northrop Grumman’s Electronic Systems
Sector. [114] ¶ 14. Subsequent agreements for Phases II and III were executed
through modifications to the Phase I agreement. The Phase II agreement was
executed in October 2004 as Modification P00002. [114] ¶ 9. The Phase III
agreement was executed primarily through two modifications: Modification P00007
executed in August 2006, and Modification P00008, executed in May 2007. [114]
¶ 11. The period of performance for Phase III was June 9, 2006, through March 31,
2008. [114] ¶ 15.
The Phase II and III agreements were “fixed price best efforts” agreements.
During negotiations for Phase II, DHS’s contracting consultant requested that
Northrop Grumman add the description “fixed price best efforts” into the Phase II
agreement. [114] ¶ 63; [120] ¶ 11. The Phase II agreement stated: “The Agreement
can be best described as a fixed price best efforts agreement with payments based
on the completion criteria outlined in Article IV [Payable Event Schedule and
Deliverables].” [99-3] at Art. VI ¶ 1. Later during Phase III negotiations, the term
“fixed price best efforts” dropped out of a government draft, but was reinstated after
Northrop Grumman’s contract administrator had a phone call with a DHS
3
contracting officer to discuss Northrop Grumman’s “unquantifiable risk” without
this term. [120] ¶ 33. The Phase III agreement stated: “The Agreement is a fixed
price best efforts agreement with payments based on milestone payments which will
be made only upon the completion of the acceptance criteria outlined in Attachment
3 as accepted by the Government.” [99-7] at Art. VI ¶ A.1. Neither the Phase II
agreement nor the Phase III agreement defines “fixed price best efforts” or “best
efforts.” [114] ¶ 64.
The C-MANPADS Phase II and III agreements were the first “fixed price best
efforts” Other Transaction Agreements ever used by Northrop Grumman’s CMANPADS team (including Danielides) and were the first “fixed price best efforts”
agreements used by DHS’s contracting consultant and Phase III contracting officer.
[114] ¶ 66; [120-1] ¶ 6; [120-2] ¶¶ 4, 7. Northrop Grumman never sought
clarification with DHS about the meaning of “fixed price best efforts,” but
understood that the term “fixed price best efforts” limited the financial risk of both
Northrop Grumman and DHS. [120] ¶ 15; [114] ¶ 67. In a traditional fixed price
contract, the contractor is obligated to complete the deliverables no matter what the
cost. [114] ¶ 71. In the Phase III agreement, if Northrop Grumman could not
complete the deliverables for the fixed price, it could declare “best efforts” and
renegotiate the scope of the work. [114] ¶ 74.
The general structure of the Phase III agreement, as relevant to this dispute,
was as follows:
4
Milestone Payments: The obligation and payment section provided that
Phase III payments were “based on milestone payments which will be made only
upon the completion of the acceptance criteria” attached to the agreement. [99-7] at
Art. VI ¶ A.1. The payable event and deliverables section provided that “Northrop
Grumman shall be paid for each Payable Milestone accomplished and delivered in
accordance with the Schedule of Payments, Accomplishment Criteria and Payable
Milestones set forth in Attachment 3, Payable Milestones.” [99-7] at Art. IV ¶ A.
The scope section also stated that Northrop Grumman would be paid for each
payable milestone that was accomplished and delivered. [99-7] at Art. I. The
payable milestones and their corresponding acceptable criteria and payment
amounts were listed in the Schedule of Phase III Payments and Payable Milestones
attached to the agreement. [99-11]; [114] ¶¶ 11, 24.
Statement of Work, Task Description Document, and Deliverables: Both the
Statement of Work (SOW) and Task Description Document (TDD) were attached to
the agreement. [114] ¶ 11. The Statement of Work provided a high-level summary of
the scope of work to be performed in different C-MANPADS program categories and
listed specific deliverables corresponding to these categories of work. [99-9]. The
entire list of deliverables was also included in the Phase III agreement itself. [99-7]
at Art. XIV; [114] ¶ 16. The Task Description Document charted the specific tasks
required to accomplish the work and deliverables described in the Statement of
Work. The payable event and deliverables section provided: “Northrop Grumman
shall perform the work as specified in the SOW (Attachment 1) and as outlined in
5
the TDD (Attachment 2).” [99-7] at Art. IV ¶ A. Similarly, the scope section stated
that Northrop Grumman shall perform the work required by the Statement of Work
and Task Description Document. [99-7] at Art. I.
Top-Level Performance Objectives: The scope section provided: “During
Phase III of the program, Northrop Grumman shall perform the operational test
and evaluation and shall continue engineering activities that focus on continuing to
advance the system’s design to address the Phase III Top-level Performance
Objectives as contained in Attachment 10.” [99-7] at Art. I. The attached Top-Level
Performance Objectives reflected DHS’s long-term vision of what was needed to
deploy the missile defense system on a commercial airline fleet. [114] ¶ 32. All three
phases of the C-MANPADS project included a broad set of Top-Level Performance
Objectives, and some of the same Top-Level Performance Objectives were included
in each of the three phases. [114] ¶ 30.
At the end of Phase III, Northrop Grumman reported to DHS on the progress
made toward each Top-Level Performance Objective, including listing each objective
that had not been satisfied and recommending further system improvements. [114]
¶ 34. Before making the final two milestone payments, DHS formally requested
that Northrop Grumman provide additional financial data. [114] ¶¶ 55–57.
Northrop Grumman responded that it was entitled to payment for completing the
milestone criteria attached to the Phase III agreement, without providing
additional financial data. [114] ¶¶ 58–60. After receiving Northrop Grumman’s
response, DHS paid Northrop Grumman for meeting the final two milestones. [114]
6
¶¶ 27, 61. DHS never invoked the Phase III agreement’s dispute resolution
procedure in connection with its request for additional financial data. [114] ¶ 62.
Northrop Grumman moved to dismiss Danielides’s FCA complaint, arguing
that he failed to allege an objective falsehood because “best efforts” was an
imprecise contractual term. The motion was denied because Danielides alleged that
“best efforts” had a fixed meaning to the parties and was an inherent representation
being made to the government in Northrop Grumman’s claims for payment. On the
pleadings, that was enough to survive a motion to dismiss. But in denying the
motion, I noted that Danielides would have to come forward with some evidence to
suggest that his interpretation of the contract was correct and shared by both
Northrop Grumman and DHS, such that one could find that there was a
meaningfully false statement or material omission in the parties’ course of dealing.
[73] at 13–14.
Discovery proceeded in stages, with the parties focused first on developing
evidence concerning “fixed price best efforts” and whether it amounted to an
objectively false representation. Defendant now moves for summary judgment on
that issue alone. In response to defendant’s motion, Danielides offers expert
testimony, and defendant in turn moves to exclude the expert.
III.
Analysis
A. Motion to Exclude Expert Opinions
Danielides offers Ronald Flom as an expert in government procurement.
Under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and Fed.
R. Evid. 702, “the district court is tasked with determining whether a given expert
7
is qualified to testify in the case in question and whether his testimony is
scientifically reliable.” Gayton v. McCoy, 593 F.3d 610, 616 (7th Cir. 2010) (citing
Daubert, 509 U.S. at 592–93). Before admitting expert testimony under Daubert
and Rule 702, a court must determine: 1) whether the witness is qualified; 2)
whether the expert’s methodology is scientifically reliable; and 3) whether the
testimony will assist the trier of fact to understand the evidence or to determine a
fact in issue. Myers v. Illinois Cent. R.R. Co., 629 F.3d 639, 644 (7th Cir. 2010).
“Whether a witness is qualified as an expert can only be determined by comparing
the area in which the witness has superior knowledge, skill, experience, or
education with the subject matter of the witness’s testimony.” Gayton, 593 F.3d at
616 (quoting Carroll v. Otis Elevator Co., 896 F.2d 210, 212 (7th Cir. 1990)).
Danielides bears the burden of demonstrating by a preponderance of the evidence
that Flom’s testimony would satisfy the Daubert standard. Lewis v. CITGO
Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009) (citing Fed. R. Evid. 104(a) and
Fed. R. Evid. 702, Advisory Comm. Note (2000 Am.)).
Flom is a retired U.S. Army Colonel, with twenty-nine years of experience in
procurement or acquisition-related duties. Flom has twelve years of experience in
performing contract administration services, including multiple assignments in the
Department of Defense’s Defense Contract Management Agency and senior
positions in that agency and in the Defense Contract Management Command. Flom
has monitored and provided oversight of Other Transaction Agreements as well as
contracts under the Federal Acquisition Regulation. [102-1] (Flom Report) at 1–3.
8
In his report, Flom offers the following opinions that fall into three general
categories ([102-1] at 5–13):
1) The industry meaning of “fixed price best efforts”:
A “fixed price best efforts” contract has an industry meaning, requiring
the expenditure of a specific number of labor hours or budgeted
funding during a stated period of time, for a fixed price, or
alternatively, the completion of all contracted tasks and objectives;
2) The tasks Northrop Grumman agreed to perform under the C-MANPADS
contract:
Northrop Grumman agreed to complete all of the tasks and objectives
identified in the contract or expend all budgeted funds;
The C-MANPADS contract required financial and cost data reporting;
3) The understanding and knowledge held by Northrop Grumman, DHS, and
a hypothetical DHS contracting officer:
Northrop Grumman understood the C-MANPADS contractual
requirements and made misrepresentations to DHS by deliberately
withholding financial data;
DHS understood the meaning of “fixed price best efforts” as used in the
C-MANPADS contract;
A reasonable government contracting officer would have understood
what was required under the C-MANPADS contract and would not
have paid Northrop Grumman had it known of Northrop Grumman’s
misrepresentations.
Flom’s opinions are addressed in turn below.
1.
Industry Meaning of “Fixed Price Best Efforts”
Northrop Grumman argues that Flom is not qualified to opine on the
meaning of “fixed price best efforts” because he has never negotiated an Other
Transaction Agreement and that Flom’s opinion is unreliable because he fails to
9
link his government contract experience to any industry guidelines or particular
experience with Other Transaction Agreements using the term “fixed price best
efforts.” Danielides argues that Flom’s years of experience in supervising
administration of Other Transaction Agreements qualifies him to opine on the
industry meaning of the term “fixed price best efforts” and that Flom need not have
negotiated a “fixed price best efforts” Other Transaction Agreement in order to have
expertise on the industry meaning of the term.
“Rule 702 allows a witness to be ‘qualified as an expert by knowledge, skill,
experience, training, or education.’” Metavante Corp. v. Emigrant Sav. Bank, 619
F.3d 748, 761 (7th Cir. 2010) (quoting in part Fed. R. Evid. 702). Indeed, “[i]n
certain fields, experience is the predominant, if not sole, basis for a great deal of
reliable expert testimony.” Fed. R. Evid. 702, Advisory Comm. Note (2000 Am.).
“Rule 702 does require, however, that the expert explain the ‘methodologies and
principles’ that support his opinion; he cannot simply assert a ‘bottom line.’”
Metavante Corp., 619 F.3d at 761 (quoting in part Minix v. Canarecci, 597 F.3d 824,
835 (7th Cir. 2010)). As an expert “relying solely or primarily on experience” for his
opinion, Flom must “explain how that experience leads to the conclusion reached,
why that experience is a sufficient basis for the opinion, and how that experience is
reliably applied to the facts.” Fed. R. Evid. 702, Advisory Comm. Note (2000 Am.).
To offer his expert opinion on a “fixed price best efforts” Other Transaction
Agreement, Flom must show how his experience gave him specialized knowledge of
industry use of the term “fixed price best efforts” in an Other Transaction
10
Agreement. Flom has not done so. When asked to identify his experience with Other
Transaction Agreements using the specific term “fixed price best efforts,” Flom
identified one Other Transaction Agreement that may have used the term “best
efforts” but admitted that he could not recall whether that agreement actually used
the phrase “fixed price best efforts” instead of some combination of “fixed price” and
“best efforts”—not necessarily consecutively. [102-2] (Flom Dep.) at 77–82. He also
pointed to his supervision of a Defense Contract Management center in Syracuse,
New York, that administered Other Transaction Agreements. [102-2] at 43–48.
Based on his interactions with the center, Flom believed that the center
administered a number of “fixed price best efforts” Other Transaction Agreements.
[102-2] at 95–98. But Flom did not actually review any of those Other Transaction
Agreements and did not personally know whether any of those Other Transaction
Agreements used the phrase “fixed price best efforts.” [102-2] at 97–99.
“The trial court’s gatekeeping function requires more than simply ‘taking the
expert’s word for it.’” Fed. R. Evid. 702, Advisory Comm. Note (2000 Am.); Zenith
Elecs. Corp. v. WH-TV Broad. Corp., 395 F.3d 416, 419–20 (7th Cir. 2005) (An
expert “may be the world’s leading student” on a particular topic, “but if he could or
would not explain how his conclusions met the Rule’s requirements, he was not
entitled to give expert testimony.”). Despite his years of experience with Other
Transaction Agreements in general, Flom has not established any experience with
the term “fixed price best efforts” in an Other Transaction Agreement to allow him
to reliably opine on its purported industry meaning. See, e.g., Clark v. Takata Corp.,
11
192 F.3d 750, 759 n. 5 (7th Cir. 1999) (Even “[a] supremely qualified expert cannot
waltz into the courtroom and render opinions unless those opinions . . . are reliable
and relevant under the test set forth by the Supreme Court in Daubert.”). His
opinion on the industry meaning of “fixed price best efforts” is inadmissible.2
2.
C-MANPADS Contractual Requirements
Danielides submits that Flom’s opinions about the overall requirements of
the C-MANPADS contract are the product of his experience, and therefore
admissible. Experts can offer interpretations of contract language based on industry
usage, see WH Smith Hotel Services, Inc. v. Wendy’s International, Inc., 25 F.3d 422,
429 (7th Cir. 1994), but “expert testimony as to legal conclusions that will
determine the outcome of the case is inadmissible.” Good Shepherd Manor Found.,
Inc. v. City of Momence, 323 F.3d 557, 564 (7th Cir. 2003). Flom’s opinion, based on
reading the contract with his experience in mind, strays from the helpful
explanation of unfamiliar jargon and enters the field of impermissible legal
conclusion. An expert witness may not testify simply regarding his reading of a
contract, and that is what Flom has done here. See RLJCS Enters., Inc. v. Prof’l
Flom also offers an opinion that in the industry, the term “best efforts” is interchangeable
with the term “level of effort,” but does not cite to any authority or describe how he
formulated this opinion based on his experience. Instead, Flom admitted that these are
“two different terms referring to two different types of contractual documents” but that he
has “seen them used interchangeably,” without explaining when or why those terms are
sometimes different and sometimes interchangeable. [102-2] at 99–100. See, e.g., United
States v. Noel, 581 F.3d 490, 497 (7th Cir. 2009) (rejecting testimony where expert “in
essence, told the jury nothing more than, ‘I am familiar with the definition of child
pornography, and this meets that definition because I said so’”). This opinion is
inadmissible.
2
12
Ben. Trust Multiple Emp’r Welfare Ben. Plan & Trust, 487 F.3d 494, 498 (7th Cir.
2007); Loeb v. Hammond, 407 F.2d 779, 781 (7th Cir. 1969).
Flom’s
opinions
on
the
C-MANPADS
contract
requirements
are
inadmissible.3
3.
Northrop Grumman’s, DHS’s, and a Reasonable
Government Contracting Officer’s Knowledge
An expert witness may testify as to “scientific, technical, or other specialized
knowledge” outside the experience or understanding of a layperson where such
testimony “will assist the trier of fact to understand the evidence or to determine a
fact in issue.” Fed. R. Evid. 702(a); Florek v. Village of Mundelein, Ill., 649 F.3d 594,
601–03 (7th Cir. 2011). However, “[a] court is expected to reject ‘any subjective
belief or speculation.’” Ammons v. Aramark Unif. Servs., Inc., 368 F.3d 809, 816 (7th
Cir. 2004) (quoting in part Chapman v. Maytag Corp., 297 F.3d 682, 687 (7th Cir.
2002)). Flom is not a fact witness and lacks direct knowledge of Northrop
Grumman’s or DHS’s state of mind. He came to his opinion about the contracting
parties’ mental states by evaluating various documents in the record, making
inferences, and assessing the experience and credibility of witnesses (such as DHS’s
contracting consultant). [102-1] at 8–12. Flom has provided no basis for why he can
better ascertain the state of Northrop Grumman’s or DHS’s knowledge, as
compared to any prospective juror interpreting their words and actions. Flom
speculates as to Northrop Grumman’s and DHS’s knowledge, offering no more than
As are Flom’s opinions on the state of mind of a hypothetical DHS contracting officer,
which are based on his overall interpretation of the contract.
3
13
the drawing of an inference from the record in the case. Permitting these expert
opinions would be merely substituting Flom’s judgment for a jury’s. See, e.g.,
DePaepe v. General Motors Corp., 141 F.3d 715, 720 (7th Cir. 1998) (error to permit
expert, who was not a fact witness, to testify that defendant had a particular
motive); compare Goldberg v. 401 N. Wabash Venture LLC, 755 F.3d 456, 461–62
(7th Cir. 2014) (expert permitted to testify on general state of knowledge prevalent
in an industry, but not defendant’s knowledge or state of mind). Therefore, Flom’s
opinions on these topics are inadmissible.
Defendant’s motion to exclude Flom’s testimony is granted.
B. Motion for Summary Judgment
1.
The False Claims Act
The FCA imposes civil liability on any person who “knowingly presents, or
causes to be presented” to the United States or its representatives “a false or
fraudulent claim for payment or approval,” or “who knowingly makes, uses, or
causes to be made or used, a false record or statement material to a false or
fraudulent claim.” 31 U.S.C. § 3729(a)(1).4
Danielides pleaded this action under §§ 3729(a)(1)–(2) of the pre-2009 version of the False
Claims Act. [28] ¶ 124. Amendments in 2009 changed § 3729(a)(1) to § 3729(a)(1)(A), which
applies to conduct on or after May 20, 2009. Pub. L. 111-21, § 4(f). The amendments also
changed § 3729(a)(2) to § 3729(a)(1)(B), which applies to cases pending on or after June 7,
2008. Id. § 4(f)(1); see United States v. Sanford-Brown, Ltd., 788 F.3d 696, 701 n.1 (7th Cir.
2015); United States ex rel. Yannacopoulos v. General Dynamics, 652 F.3d 818, 822 n. 2 (7th
Cir. 2011). The allegations in this case range from 2006 to approximately March 2008, and
the case was brought in November 2009. So the former § 3729(a)(1) and the current
§ 3729(a)(1)(B) apply to Danielides’s claim. These amendments, including the addition of
materiality to § 3729(a)(1)(B), do not change the applicable analysis. Prior to the
amendments, the Seventh Circuit already required materiality in the context of a claim
alleged to be false due to omissions, as is claimed here. See Luckey v. Baxter Healthcare
4
14
To succeed on an FCA claim, “a relator generally must prove (1) that the
defendant made a statement in order to receive money from the government; (2)
that the statement was false; and (3) that the defendant knew the statement was
false.” United States ex rel. Yannacopoulos v. General Dynamics, 652 F.3d 818, 822
(7th Cir. 2011). Danielides’s FCA claim alleges that Northrop Grumman
fraudulently induced the government to enter the Phase III agreement because it
promised during negotiations to exert its “best efforts” but never actually intended
to do so, and that every time Northrop Grumman asked for a milestone payment, it
omitted material information—namely, that it had not exerted its “best efforts” on
the project and was not performing its obligations. [28] ¶ 129. An FCA violation
cannot stand on “mere differences in interpretation growing out of a disputed legal
question involving the terms of a contract” but instead must be based on an
“objective falsehood.” Yannacopoulos, 652 F.3d at 836 (internal citation omitted). In
opposing Northrop Grumman’s motion for summary judgment, Danielides
acknowledges that to establish an objective falsehood by Northrop Grumman, he
must “show the existence of triable issues of fact regarding whether his
interpretation is the correct meaning of the contract and that both DHS and
Northrop Grumman shared in that knowledge.” [113] at 10.
Corp., 183 F.3d 730, 732–33 (7th Cir. 1999); United States v. Rogan, 517 F.3d 449, 452 (7th
Cir. 2008).
15
2.
Objective Falsehood
a. Phase III Profit
Danielides interpreted the Phase III “fixed price best efforts” agreement to
mean that Northrop Grumman must have either completed all of the Phase III
contract tasks and objectives or, alternatively, must have spent all of Northrop
Grumman’s budgeted funds—up to a guaranteed profit of 12%—in a legitimate
effort to do so. [113] at 2–4, 10–17; [99-19] (Danielides Dep.) at 150–52; [28] ¶¶ 5,
10, 38–40, 53–55. In his sur-reply, however, Danielides concedes that neither the
Northrop Grumman nor DHS witnesses understood the Phase III agreement to
require Northrop Grumman to expend its budgeted funds up to a guaranteed profit
of 12% if it did not meet the contractual objectives.5 [124] at 1–2. This significantly
alters Danielides’s interpretation and understanding of the Phase III agreement, its
financial underpinnings, and Danielides’s allegations that Northrop Grumman
unilaterally increased its profit margin more than its guaranteed profit of 12%. See,
e.g., [28] ¶¶ 5, 10, 38–40, 53–55; [99-19] at 150–52; [113] at 4, 8; [114] ¶ 76. More
importantly, this concession means that Danielides cannot show that his
interpretation of the contract (requiring completion of all Phase III contract tasks
and objectives or an expenditure of funds up to a 12% profit) was either correct or
shared by both DHS and Northrop Grumman. If neither DHS nor Northrop
Grumman understood that “best efforts” meant what Danielides says it meant, then
Northrop Grumman and DHS witnesses agreed that, under the C-MANPADS “fixed price
best efforts” agreements, Northrop Grumman was not guaranteed a 12% profit, or even any
profit. [99-14] at 38–39, 61–62; [99-16] at 130–31, 135–37, 149–50; [120-1] ¶ 10.
5
16
Northrop Grumman’s representation was not the objective falsehood he claims it
was. And, therefore, he cannot prove that a representation of “best efforts” was a
false claim in violation of the FCA.
b. Phase III Requirements
The 12% profit aside, Danielides argues that he can still show that “fixed
price best efforts” was an objective falsehood because DHS and Northrop Grumman
both understood that the term required Northrop Grumman to complete all of the
Phase III contractual objectives or spend all of the contract funds, and that
Northrop Grumman did neither. [124] at 2. Danielides has not marshaled evidence
that would allow a trier of fact to find this revised interpretation was shared by
Northrop Grumman and DHS.
Northrop Grumman agrees that it was required to complete certain
obligations under the Phase III agreement or spend the funds provided by the
government in an attempt to do so. The key point of disagreement between
Northrop Grumman and Danielides is the extent of Northrop Grumman’s
obligations under the Phase III agreement. Northrop Grumman argues that its
Phase III obligations were limited to completing the milestones plus the tasks and
deliverables described in the Statement of Work and Task Description Document
(attached to the Phase III agreement). Danielides argues that, in addition to those
obligations, Northrop Grumman was required to complete the Top-Level
Performance Objectives and additional tasks in the Technical Performance Metrics
and in the Phase III Final Report. [113] at 5–8, 14–17; [124] at 4–6; [99-47] at 6–7.
17
In support, Danielides cites to Northrop Grumman documents referencing
the “fixed price best efforts” agreement and recommending use of “all available
program resources” or reallocation of resources for accomplishing tasks described in
the Task Description Document and Statement of Work. [113] at 6–7. At best,
however, these documents are clarifications regarding activities in the Task
Description Document and Statement of Work (and entirely consistent with
Northrop Grumman’s position); they do not shed light on whether Northrop
Grumman believed it was required to achieve tasks outside the Task Description
Document or Statement or Work. Danielides also points out that DHS’s Phase III
Solicitation indicated that some of the Phase III deliverables were merely updates
to reports that had been deliverables in Phase II, and he argues that therefore it
would be unreasonable for DHS to pay Northrop Grumman millions of dollars for
merely updating old reports. But even if some of the Phase III deliverables were
updates to Phase II deliverables, that does not show that Northrop Grumman
understood that additional objectives or tasks were required under the contract.6
To infer Northrop Grumman’s belief that there were more objectives
requiring its “best efforts,” Danielides cites to the declarations of DHS’s contracting
consultant, John Ablard, and DHS’s Phase III contracting officer, Mark Robbins.
Robbins’s declaration identifies at least one Top-Level Performance Objective that
Northrop Grumman argues that Danielides improperly relied on extra-contractual
documents, including DHS’s Phase III Solicitation, to support his interpretation of “fixed
price best efforts.” But Danielides alleges fraud, so extra-contractual documents may be
considered even though the Phase III agreement contains a merger clause. Vigortone AG
Prods., Inc. v. PM AG Prods., Inc., 316 F.3d 641, 644 (7th Cir. 2002).
6
18
he believed Northrop Grumman was obligated to achieve or spend all funds under
the contract in an effort to achieve the objective. [115-6] ¶ 7. Ablard’s declaration
refers to Northrop Grumman’s obligation to achieve C-MANPADS Program
objectives generally, and this could reasonably be inferred to include Top-Level
Performance Objectives. [115-5] ¶ 4. Both Ablard and Robbins stated that they
recalled no discussion with Northrop Grumman showing that it was operating
under a different understanding of “fixed price best efforts.” [115-5] ¶ 5; [115-6] ¶ 5.
Based on this, Danielides infers that Northrop Grumman shared Ablard’s and
Robbins’s same understanding of the Phase III agreement. However, in
supplemental declarations, Ablard and Robbins clarified that they did not recall any
discussions with Northrop Grumman employees regarding the meaning of “fixed
price best efforts.” [120-1] ¶ 7; [120-2] ¶ 10. Northrop Grumman’s knowledge (and
the representations it intended to make within “best efforts”), therefore, cannot be
inferred from these DHS witnesses.
Danielides also infers Northrop Grumman’s shared understanding of the
Phase III agreement from Northrop Grumman’s experience and long involvement in
the government contracting industry. However, the C-MANPADS Phase II
agreement was the first Other Transaction Agreement negotiated by the Rolling
Meadows, Illinois, campus of Northrop Grumman’s Electronic Systems Sector, [114]
¶ 14, and was the first “fixed price best efforts” Other Transaction Agreement used
by the members of the Northrop Grumman C-MANPADS team, including
Danielides. [114] ¶ 66. Similarly, both DHS’s consultant Ablard and its contracting
19
officer Robbins also stated that the C-MANPADS agreements were their first
experience with a “fixed price best efforts” agreement. [120-1] ¶ 6; [120-2] ¶¶ 4, 7.
Given this lack of experience with “fixed price best efforts” agreements on the part
of both DHS and Northrop Grumman, Danielides cannot establish an inference of a
shared understanding of the Phase III agreement based on Northrop Grumman’s
experience in the government contracting industry.
In addition, Danielides argues that limiting “best efforts” to only certain
tasks and objectives is such an unreasonable interpretation of the contract that
Northrop Grumman must have truly believed the contrary—that all objectives were
required by “best efforts.” But this argument reveals that the debate here is a
dispute over the meaning of a term in a contract, not an issue of fraud.
There are multiple references in the contract to payment upon completion of
those milestones and deliverables described in the Statement of Work and Task
Description Document. See [99-7] at Art. IV ¶ A, Art. VI ¶¶ A.1, B.4. The “scope”
section does refer to Northrop Grumman advancing toward the Top-Level
Performance Objectives, [99-7] at Art. I, but this provision—notably, not found in
the payment or obligation section of the agreement—is ambiguous as to whether
completion of Top-Level Performance Objectives is required for payment under the
Phase III agreement, or whether the Phase III agreement is designed to advance
the objectives without necessarily conditioning payment on their achievement.
Given these contractual provisions, Northrop Grumman makes a reasonable
argument that DHS’s payment obligations were based on Northrop Grumman’s
20
completion of the specific milestones through performing the deliverables and the
tasks described in the Task Description Document and Statement of Work attached
to the Phase III agreement.
The court need not decide whose interpretation is correct because “mere
‘differences in interpretation growing out of a disputed legal question’ involving the
terms of a contract” do not establish an objective falsehood. Yannacopoulos, 652
F.3d at 836–37 (quoting in part U.S. ex rel. Lamers v. City of Green Bay, 168 F.3d
1013, 1018 (7th Cir. 1999)); Lamers, 168 F.3d at 1018 (“[I]mprecise statements or
differences in interpretation growing out of a disputed legal question are similarly
not false under the FCA.”).
In addition, it is undisputed that at the conclusion of Phase III, Northrop
Grumman reported to DHS on the progress made toward each Top-Level
Performance Objective, including listing each objective that had not been satisfied
and recommending further system improvements. [114] ¶ 34. DHS knew that at
least some of the Top-Level Performance Objectives had not been satisfied, yet
issued payment for Northrop Grumman meeting the milestone criteria. Under these
undisputed facts, Danielides cannot establish that representations based on
Northrop Grumman’s failure to complete Top-Level Performance Objectives were
material falsehoods to obtain payment. “If the government knows and approves of
the particulars of a claim for payment before that claim is presented, the presenter
cannot be said to have knowingly presented a fraudulent or false claim. In such a
case, the government’s knowledge effectively negates the fraud or falsity required
21
by the FCA.” U.S. ex rel. Durcholz v. FKW Inc., 189 F.3d 542, 545 (7th Cir. 1999);
U.S. ex rel. Owens v. First Kuwaiti Gen. Trading & Contracting Co., 612 F.3d 724,
729 (4th Cir. 2010).7
In sum, Danielides’s arguments regarding the contractual objectives required
in Phase III boil down to competing contractual interpretations, which do not
establish a knowing falsity by Northrop Grumman.8
c. Phase III Financial Reporting
Danielides also argues that Northrop Grumman knew that, under a “fixed
price best efforts” agreement, it was required to provide cost data to allow DHS to
monitor Northrop Grumman’s “best efforts” in accomplishing the requisite contract
objectives and that Northrop Grumman failed to provide this information, resulting
in material omissions in its claims for payment. Northrop Grumman argues that
because Phase III payments were based on completion of the milestones, it was not
obligated to report cost data to DHS in Phase III.
Danielides has also argued that under his interpretation of “fixed price best efforts,”
Northrop Grumman was obligated to complete additional objectives found in the Phase III
Final Report and Technical Performance Metrics. The only other tasks Danielides
specifically identifies are related to Failure Reporting and Corrective Action System
(FRACAS) methodology and analyzing remaining data, as described in Northrop
Grumman’s Phase III Final Report. [124] at 6. Even if these tasks were required under the
Phase III agreement, the alleged incompletions were disclosed to DHS in the report and
cannot be the basis for an objective falsehood under the FCA.
7
Even if Flom’s opinion on the industry meaning of “fixed price best efforts” were
admissible (specifically, that the term requires the expenditure of a specific number of labor
hours or budgeted funding during a stated period of time, for a fixed price, or alternatively,
the completion of all contracted tasks and objectives), for the reasons stated previously,
Flom cannot opine on the overall contractual requirements of the Phase III agreement.
Therefore he cannot opine on what were the specific “contracted tasks and objectives”
required by this agreement to show that Northrop Grumman’s contractual interpretation
is, in effect, a cover up for a lie about best efforts.
8
22
Northrop Grumman was contractually obligated to provide cost data as a
condition of payment, Danielides argues, because the milestone payment amounts
were based on estimates developed during negotiations and as part of a time-phased
spend plan designed to keep Northrop Grumman “cash positive” during Phase III.
In other words, the cost and profit estimations used to set the fixed price for Phase
III became tied to Northrop Grumman’s milestone payments, so that in order to
receive a milestone payment, Northrop Grumman was contractually required to
spend funds under its time-phase spend plan (up to Northrop Grumman’s
guaranteed 12% profit). Therefore, it needed to provide cost data during the life of
the contract to show to DHS that it had spent these funds.
Related to this general cost data argument, Danielides says that the Phase
III agreement required Monthly Management Reports to include program cost data
and earned value monitoring. Northrop Grumman’s practice of providing this
information in Phase II, Danielides argues, shows that it understood a “fixed price
best efforts” agreement to require cost data reporting, and that Northrop Grumman
hid this information from DHS.
As a specific example of Northrop Grumman’s approach to cost data
reporting, Danielides points to an email in April 2008. On the date of a DHS visit to
Northrop Grumman’s facilities, Northrop Grumman’s C-MANPADS program
director, David Denton, requested Northrop Grumman’s C-MANPADS finance
administrator, Donald Eisinger, to generate an up-to-date cost graph, stating “DHS
is here and crying.” [120] ¶ 21. Eisinger created the graph, but asked Denton why
23
he wanted to show it to DHS because it showed there was money left over. [120]
¶ 22. Assuming the updated graph was not provided to DHS, at the end of the day,
the undisputed facts demonstrate that financial data reporting was not understood
by DHS to be a requirement for payment (and was not a material omission of “best
efforts” by Northrop Grumman).
DHS knew that Northrop Grumman was not providing financial data, yet
went ahead and made the milestone payments. This precludes Danielides from
establishing an objective falsehood on the part of Northrop Grumman. It is
undisputed that at the conclusion of Phase III, DHS requested additional financial
data from Northrop Grumman before making the final milestone payments.
Northrop Grumman responded that financial data referenced in the Management
Plan was not a deliverable under the Phase III agreement, that the second
modification comprising the Phase III agreement (Modification P00008) changed
deliverable #19 from Monthly Management Reports to Program Management
Reports, and that Northrop Grumman was entitled to payment for meeting the
milestone acceptance criteria. After this exchange, DHS believed that Northrop
Grumman made a case that these financial data requests were not required under
the contract, and DHS issued payment to Northrop Grumman for meeting the final
milestones. [114] ¶¶ 27, 55–61; [99-28] ¶ 3; [120-2] ¶ 12. Because DHS knew that
financial data was outstanding and paid Northrop Grumman for meeting the
milestones anyway, withholding financial data could not have been a “best efforts”
lie based on an objective understanding of the Phase III agreement. See Durcholz,
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189 F.3d at 545. In addition, as previously addressed, neither Northrop Grumman
nor DHS shared Danielides’s view that the estimated costs and profits during
negotiations guaranteed Northrop Grumman a 12% profit, so Danielides cannot
establish that the failure to provide cost data was a false statement for payment
concealing Northrop Grumman’s true “best efforts” profit margin.
Ultimately, this dispute between DHS and Northrop Grumman over whether
the Phase III agreement required disclosure of financial data is another dispute of
competing contractual interpretation.9 See Yannacopoulos, 652 F.3d at 836; United
States v. Sanford-Brown, Ltd., 788 F.3d 696, 710 (7th Cir. 2015).
Finally, although this motion for summary judgment is directed to the
objective falsehood requirement (as identified in the opinion on the motion to
dismiss), and discovery was not completed on all issues, there appears to be another
problem with Danielides’s case. On this record, it also appears that Danielides’s
FCA action would fail for the reasons identified in Sanford-Brown, Ltd., 788 F.3d
In his sur-reply, Danielides argues that he can show that Northrop Grumman lied to the
government regarding costs. He refers to portions of his amended complaint alleging that at
Denton’s direction, in September 2007, Danielides created an inaccurate spend plan graph
for DHS, which represented Northrop Grumman’s costs as approximately $3 million higher
than they actually were and which was presented in a monthly report and design review
meeting with DHS. [124] at 7–8. Northrop Grumman admitted that Danielides’s spend plan
graph was inaccurate and was provided to the government in a monthly report, but denied
that Denton instructed Danielides to create an inaccurate graph or that it was presented in
a meeting to DHS. [85] ¶¶ 108–109. Danielides’s complaint is not sufficient to raise a
material issue concerning the graph. Danielides “could not ‘rest on the allegations in the
pleadings,’ but was required to present ‘evidentiary material which, if reduced to admissible
evidence, may allow him to carry his burden of proof.’” Yannacopoulos, 652 F.3d at 823
(quoting in part Reed v. AMAX Coal Co., 971 F.2d 1295, 1299 (7th Cir. 1992)). Danielides
waited until his sur-reply to bring up this argument and has not presented any evidentiary
material (e.g., affidavits, deposition testimony, or documents), that would allow him to show
that this inaccurate graph was a knowing falsity presented to DHS to secure payment.
9
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696. Absent a shared understanding of the contract, Danielides cannot establish
Northrop Grumman’s “mindset at the time of entry”—specifically, that it entered in
the Phase III agreement to defraud DHS and thereafter submit “poisoned” claims
for payment. Id. at 709. In addition, as described above, Danielides cannot show
that demonstrating “best efforts” through financial data was a “condition of
payment” under the contract. See id. at 709–12.
IV.
Conclusion
A jury could not find that Northrop Grumman made an objective falsehood
when it accepted and used the term “fixed price best efforts,” and therefore
Danielides cannot establish defendant’s liability under the FCA. Northrop
Grumman’s motions for summary judgment, [97], and to exclude the opinion of
plaintiff’s expert, [101], are granted. Enter judgment in favor of defendant.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: 10/8/15
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