Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-00604/USCOURTS-azd-2_05-cv-00604-1/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 31:3729 False Claims Act

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

United States of America ex rel. 

W. Austine Sallade, 

Plaintiff, 

vs.

Orbital Sciences Corporation, 

Defendant. 

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No. CV05-0604-PHX-NVW

The court has considered Defendant Orbital Sciences Corporation’s (“Orbital”)

Motion to Dismiss Counts V, VI, and VII of the First Amended Complaint for Failure to

Plead Fraud with Particularity pursuant to Federal Rules of Civil Procedure 9(b) and

12(b)(6) (Doc. # 45). 

I. Background

On February 23, 2005, Plaintiff W. Austin Sallade (“Sallade”) filed an action

against Orbital in the name of the United States Government under the False Claims Act

(FCA), 31 U.S.C. §§ 3729 et seq. Sallade’s original complaint alleged seven counts of

FCA and Truth in Negotiations Act (“TINA”), 10 U.S.C. § 2306a, violations committed

by Orbital, who moved to dismiss the Complaint for failure to plead fraud with

specificity. The court denied that motion with respect to Counts I through IV and granted

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it with respect to Counts V through VII. Sallade then submitted his First Amended

Complaint (Doc. # 44) and Orbital again moved to dismiss Counts V through VII. 

Sallade’s original Count V alleged that under the GMD subcontract Orbital

directly bills Boeing, and ultimately the U.S. Government, for “supplier management”

and “supplier quality” personnel, even though that personnel actually perform general,

multi-contract functions and therefore should be billed on an indirect cost basis. (Doc. #

1 at ¶¶ 155–63.) In his amended complaint, he adds an example of such improper billing

for quality personnel. Allegedly, during fiscal years 2003 through 2005, Orbital hired

“software management” and “procedural personnel” to work towards obtaining an

“International Software Quality” certification for the company. (Doc. # 44 at ¶ 172.) In

July of 2005, the director of Orbital’s software development department, Mr. Bill

Ludwig, purportedly told Sallade that the company had directly billed millions of dollars

in costs from this project to Boeing under the Ground Missile Defense (GMD) contract. 

(Id. ¶ 179.) Further, Sallade maintains that Mr. Charlie Whitmeyer, Vice President of

Quality, said that during the same period the company’s senior management had

instructed him to hire additional quality personnel and charge the cost directly to the

GMD contract. (Id. ¶ 185.) According to Sallade, the U.S. Government’s damages from

this improper direct billing of labor costs amount to at least $1 million. (Id. ¶ 186.) 

Count VI of Sallade’s amended complaint alleges that Orbital violated TINA by

failing to report certain “cost and pricing data” so that it could inflate its expected costs

on a Boeing subcontract, for which it was then negotiating a price. (Id. ¶¶ 187–202.) His

allegations are largely the same as they were in his original complaint, except that he

alleges that by virtue of the TINA violation “Orbital was able to obtain inflated cost

recovery from Boeing under the newly definitized contract . . . , obtained higher

negotiated Target Costs and Fees . . . [and] realized inflated cost recovery of no less than

$1,000,000 under its CE 1 Subcontracts with Boeing.” (Id. ¶¶ 200–201.)

In Count VII of the amended complaint Sallade again alleges that Orbital

improperly charges the U.S. Government for spare and excess materials before it needs

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the materials to perform its contracts. (Id. ¶ 204.) This time he adds that the charges

occurred between 2003 and 2005 and were billed to the GMD and Orbital Sub-Orbital

Program (OSP) contracts. He also adds that “Orbital’s senior managers, including Jim

Utter, and its Program Managers knew about the practice and encouraged it.” (Id. ¶ 212.) 

The standard for pleading an FCA violation under Rules 9(b) and 12(b)(6) of the

Federal Rules of Civil Procedure was explained in the court’s previous order, and for

brevity’s sake will not be repeated here. United States ex rel. Sallade v. Orbital Sciences

Corp., No. SC05-00604-PHX-NVW, 2008 U.S. Dist. LEXIS 4332 at *8–11, 2008 WL

114888 at *3–4 (D. Ariz. Jan. 4, 2008). 

II. Discussion

By including a specific example of a false claim submitted to the government,

Sallade has successfully met Rule 9(b)’s heightened pleading standard for Count V of the

amended complaint. The facts alleged identify a particular software quality certification

project for which Orbital hired new employees, and a particular software development

manager who stated that the costs were being directly billed to Boeing in July of 2005. 

That information will allow Orbital to identify the project and the allegedly false claim to

the government. Sallade cites this particular false claim as an example of a broader

fraudulent scheme wherein Orbital’s Vice President of Quality, Mr. Charlie Whitmeyer,

was ordered to hire additional quality personnel and directly bill the costs to the GMD

contract even though the personnel were to perform general, multi-contract functions. 

Sallade may therefore proceed to discovery on Orbital’s direct billing for additional

quality personnel authorized to be hired by Mr. Whitmeyer in fiscal years 2003 through

2005. However, Sallade may not proceed to discovery on direct billing for any other

personnel arguably referenced in Count V, because such fraudulent billing has not been

plead with particularity and is not represented by the specific example proffered by

Sallade. 

Counts VI and VII, on the other hand, still do not meet Rule 9(b)’s heightened

pleading requirements. Despite the explanation given in the order dismissing Sallade’s

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original complaint, Count VI again fails to plead with particularity that Orbital submitted

a false claim for payment knowing that it had negotiated the CE 1 contract price in

violation of TINA. Sallade’s bare allegation that Orbital “was able to obtain inflated cost

recovery” does not sufficiently identify a particular false claim for payment under the

contract. At oral argument, Sallade requested leave to again amend his complaint to

allege that Orbital did in fact submit invoices on the CE 1 contract. He contends that

every invoice Orbital submitted on the CE 1 contract reflected the inflated amount it was

able to negotiate by fraudulently withholding the “cost and pricing data.” Leave to

amend is granted liberally, and should be granted in this case. F.R.C.P. 15(a).

However, Sallade will not be able to successfully plead an FCA violation in Count

VI merely by alleging that every invoice Orbital submitted under the CE 1 contract was

fraudulent. This kind of general allegation assumes that Orbital actually submitted an

invoice and does not satisfy Rule 9(b). Sallade must plead the submission of a false claim

for payment with particularity. In other words, he must plead the “who, what, when,

where, and how” of the submission of at least one invoice containing the fraudulently

negotiated costs. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003)

(quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). This point bears

emphasis because Sallade has alleged virtually nothing specific about what Orbital did

after the contract was negotiated. Sallade does not appear to have first-hand knowledge

that Orbital billed at an inflated rate due to the TINA violation, but rather infers it from

the direction of Mr. Utter that the cost under-runs not be disclosed until after the CE 1

negotiations closed. The inference that Orbital succeeded in doing what Mr. Utter

allegedly planned to do cannot be stretched too far. Sallade must be careful to ensure that

his allegations about what happened after the close of the CE 1 contract negotiations

comport with the requirements of Federal Rule of Civil Procedure 11(b)(3). 

With respect to Count VII, merely adding the years 2003 through 2005 and stating

that Orbital billed certain unidentified materials to the OMD contract does not satisfy

Rule 9(b). As the previous order made clear, Sallade had to come forward with more

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specific information to identify some of the materials and when they were directly billed

to the government to proceed to discovery on this allegedly fraudulent scheme. This he

did not do, and when asked at oral argument whether he had anything more to add, he

stated that he did not. Granting leave to amend this count again would therefore be futile,

and it is dismissed with prejudice. See Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir.

1995) (“Futility of amendment can, by itself, justify the denial of a motion for leave to

amend.”); Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989)

(“The district court’s discretion to deny leave to amend is particularly broad where

plaintiff has previously amended the complaint.”).

After further consideration, the court concludes that it partially erred in its order of

January 4, 2008 by denying Orbital’s motion to dismiss Count IV of the original

complaint. United States ex rel. Sallade, 2008 U.S. Dist. LEXIS 4332 at *15, 2008 WL

114888 at *5. Count IV did allege a specific false claim to the government with

particularity. Specifically, it alleged that Orbital intentionally misinterpreted the OSP1

contract to allow it to bill the government directly for certain commonly used facilities

and equipment, which it reclassified as “Special Test Equipment” after a government

inquiry. (Doc. # 1 ¶¶ 139–146.) This is just another example of the same type of

fraudulent direct billing for common facilities and equipment that is alleged in Count III,

which was upheld in the court’s order. 

The courts’ error was in concluding that the false claim just described was

characteristic of the rest of the fraudulent scheme alleged in Count IV. That count further

alleged that Orbital competed for and won the OSP2 contract without having to include

the cost of the necessary facilities, equipment, and material in its bid because the

government had already paid for it. (Doc. # 1, ¶¶ 147–53.) In other words, Orbital’s bid

on the OSP2 was inappropriately low, and consequently, any subsequent invoices on the

OSP2 contract were for less than they should have been. That allegation does not state a

claim under the FCA. The FCA does not prohibit fraud in the negotiation of government

contracts as such; it prohibits the presentation of false claims for payment. It is not an

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FCA violation to charge the government less than an appropriate amount on a contract. 

That flaw in Count IV obviously cannot be cured by amendment, so Count IV is

dismissed with prejudice, except that the allegations in paragraphs 139 through 146 of the

original complaint can be re-alleged as part of Count III.

IT IS THEREFORE ORDERED that Defendant Orbital Sciences Corporation’s 

(“Orbital”) Motion to Dismiss for Failure to Plead Fraud with Particularity pursuant to

Federal Rules of Civil Procedure 9(b) and 12(b)(6) (Doc. # 45) is granted with respect to

Counts VI and VII and denied with respect to Count V. Count VI is dismissed with leave

to amend, and Count VII is dismissed with prejudice. 

IT IS FURTHER ORDERED that the court’s order of January 4, 2008 is vacated

with respect to Count IV, which is dismissed with prejudice, except that the allegations in

paragraphs 139 through 146 of the original complaint can be re-alleged as part of Count

III.

IT IS FURTHER ORDERED that Count VI will be dismissed with prejudice if an

amended complaint is not filed by March 24, 2008.

DATED this 14th day of March, 2008.

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