Spat Over 1980s Jet Engines Still Has Fuel

CINCINNATI (CN) - Despite finding that 17 years in enough time litigating a 32-year-old fraud, the 6th Circuit ordered more proceedings on damages Uncle Sam wants from a duplicitous jet-engine supplier.

Though a federal judge in Dayton, Ohio, awarded the U.S. government more than $657 million, the appeals court reversed on Monday, questioning the methodology used to determined "reasonable and fair prices" for the engines.

The 17-year-old court battle with Pratt and Whitney - now owned by United Technologies Corp. - deals with jet engines manufactured for F-15 and F-16 fighter jets in the 1980s.

Pratt was the military's only supplier of jet engines until the early '80s, when GE Aircraft was offered the chance to bid on a new line of engines.

In an effort to prevent GE from winning any contracts, Pratt lied about the cost of its engines in 1983.

The plan failed, as GE was given three-quarters of the government contracts, and the government realized Pratt's deception at the end of the contract term.

After a series of audits, the government's 1999 complaint against Pratt led to a $7 million judgment that the 6th Circuit upheld in 2010.

In the same opinion, however, the appellate panel remanded an issue to the District Court, which proceeded to award an additional $657 million in damages for violations of the False Claims Act and restitution.

United Technologies claimed in the latest appeal that damages are not available to the government for False Claims Act violations because the Armed Services Board of Contract Appeals rejected identical claims in 1998.

In those administrative proceedings, the board determined that the Air Force had relied on competition between Pratt and GE - not Pratt's false cost statements - to determine fair and reasonable prices for the engines.

This week, the 6th Circuit ruled that the board's ruling did not preclude damages.

"It is not clear whether the board meant to say that competition together with the calls for improvement process exclusively drove prices or merely whether those competitive forces eliminated any damages caused only by the December 1983 false cost data," Judge Jeffrey Sutton wrote for a three-person panel. "In the first setting, issue preclusion would apply. In the second setting, it would not, for it would remain possible that other types of falsities at other times could have affected an assessment of reasonable prices even in the face of these competitive forces."

Erring on the side of a narrow construction of the issue, the panel affirmed on the issue preclusion.

Sutton did, however, take the lower court to task for crediting the government's determination of jet-engine prices, a methodology that entirely discounted competition.

Citing the 1981 6th Circuit case United States v. 103.38 Acres of Land, Sutton pointed out that "a 'comparable sales' analysis has long been and remains the preferred method of establishing ... 'fair market value.'"

"The premise of the 'head to head' competition was that the two companies' engines were similar," Sutton wrote. "That is why the Air Force directly compared the engine prices side-by-side, put on the table split-award bids and full-volume bids, and judged those prices 'fair and reasonable' based on the 'market test between the competitors.' And - as we noted the last time around, as the district court noted the last time around, and as we think remains highly relevant this time around-the Air Force never requested new cost and pricing data during the annual calls for improvements."

Uncle Sam failed to distinguish GE's engine sales from those of Pratt, the appeals court found, by saying Pratt's misrepresentations had "tainted" the prices.

"The taint argument works only if the evidence shows that Pratt's prices were inflated by fraud," Sutton wrote. "That of course is the question that, after two rounds of appeals and counting, we are still trying to figure out. The answer begins with comparable sales, if not potentially other indicators of value as well: the government's own price estimates at the time; prior sales by Pratt; and foreign resales of the engines. So far, the government has come up short with evidence that meets its burden of proof of showing that, after considering comparable sales (among other factors), it suffered any damages." (Parentheses in original.)

The 23-page opinion concludes on a somber note.

"What now?" Sutton asked. "We are tempted to say that, after seventeen years of litigation about a fraud that occurred thirty-two years ago, the time has come to end this dispute. The government proved its case under the False Claims Act and will be $7 million richer as a result, as we established in the last appeal."

Since the 6th Circuit is "a court of review, not first view," however, Sutton determined that the District Court "is in the best position to decide in the first instance whether the government should have another opportunity to prove that it suffered damages even after accounting for the role of competition in setting prices for Pratt's engines."

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