Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-00604/USCOURTS-azd-2_05-cv-00604-0/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. SC05-00604-PHX-NVW

The court has considered 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. # 38). 

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. The FCA permits whistleblowers, known as qui tam

relators, to file suits alleging that a defendant committed fraud on the government by

“knowingly” presenting to the government a “false or fraudulent claim for payment or

approval,” § 3729(a)(1), or “knowingly” making or using a false record or statement to

get such a claim paid or approved, § 3729(a)(2). Sallade’s Complaint alleges seven

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

committed by Orbital. 

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Sallade was an Orbital employee at the time he submitted the Complaint. After

Sallade filed his Complaint, the government reviewed and investigated the matter for

more than two years. During that time, the matter remained under seal; the government

obtained four extensions of the seal to continue its investigation. On June 29, 2007,

counsel for the United States notified the court that the United States was continuing its

investigation but not intervening at that time to take over the prosecution of this action. 

See 31 U.S.C. §§ 3730(b)(1), 3730(b)(4)(B). On July 9, 2007, the Court unsealed the

case and directed Sallade to effect service. Orbital waived service on July 30, 2007. This

motion followed.

In Count I Sallade asserts that in 2001 Orbital won a contract to execute a satellite

launch for the Taiwanese Government (“the ROCSAT2” contract), but had underbid for

the contract by about $10 million due to necessary research and development expenses. 

(Compl. ¶¶ 107, 109.) Therefore, he alleges, Orbital initiated several “Independent

Research & Development” (IR&D) projects that it could bill on an indirect cost basis to

other contracts that it had with the U.S. Government. (Id. ¶¶ 18–23, 112–15.) Sallade

asserts that he warned Orbital’s senior finance management about the impropriety of this

practice in the fourth quarter of 2003 (id. ¶ 34), and that Orbital’s Senior Vice President,

Mr. Jim Utter, acknowledged to him that the money spent on the IR&D projects was

actually attributable to the ROCSAT2 contract (id. ¶ 35). Orbital purportedly assigned its

Deputy Program Manager for the ROCSAT2 contract to manage the IR&D contracts,

though such contracts are usually assigned to Orbital’s functional engineers. (Id. ¶ 36.) 

Sallade alleges that Orbital wrongfully billed the U.S. Government for about $5 million

worth of costs directly attributable to the ROCSAT2 contract. (Id. ¶ 116).

Count II regards Orbital’s Ground Missile Defense (“GMD”) subcontract with

Boeing, Inc. (“Boeing”), under which it acquires rocket motors that Boeing needs to

fulfill its primary contract with the U.S. Government Missile Defense Agency. Orbital

acquires those engines from ATK Aerospace Company, Inc. (“ATK”). (Id. ¶¶ 38–41.) 

Sallade alleges that on or around June, 2003, Orbital financed additional production

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capacity for ATK and then charged it as a direct cost to Boeing, and ultimately to the U.S.

Government. He asserts that Orbital did so without determining whether ATK had used

the finances to acquire plant, equipment, or other facilities that could only be charged as

indirect costs. (Id. ¶¶ 120–30.) The invoices submitted by ATK to Orbital apparently

contained no such detail. (Id. ¶ 125.) According to Sallade, Orbital wrongfully billed the

U.S. Government for at least $1 million in this manner. (Id. ¶ 131.)

In Count III Sallade alleges that under Orbital’s GMD subcontract with Boeing,

and also under its contracts with the Air Force, Orbital charges the U.S. Government for

common hardware and test equipment as direct costs when it should charge those

expenses as indirect costs. (Id. ¶¶ 56, 133.) As an example, Sallade alleges that Orbital

had charged four items of test equipment as indirect costs at the commencement of the

GMD subcontract. (Id. ¶ 135) According to Sallade, Orbital’s Senior Vice President, Mr.

Utter, later stated that “we will convince the government that the items are ‘special test

equipment’ to be directly charged to the GMD subcontract” because “Orbital can’t be

expected to afford capital investments without any guarantee of future contracts.” (Id. ¶

136.) Orbital thereafter allegedly billed similar items of test equipment as direct costs to

the GMD subcontract. (Id. ¶ 135.) Sallade also asserts that similar items of test

equipment had previously been billed as indirect costs on the ROCSAT2 contract. (Id. ¶

133.) The improper switch to direct billing has purportedly resulted in no less than $1

million in improper charges to the U.S. Government. (Id. ¶ 136–38.) 

Count IV concerns Orbital’s acquisition of facilities, equipment, and material

under its contract with the Air Force for the Orbital Sub-Orbital Program (“OSP 1”). 

Sallade alleges that Orbital improperly billed the U.S. Government on a direct costs basis,

but kept no records of how it used the property acquired, which lawfully belonged to the

government. (Id. ¶¶ 62–66, 140–42.) After the government approached Orbital about

this practice in response to Sallade’s accusations, Sallade asserts that Orbital reclassified

the equipment as “Special Test Equipment,” which it can bill on a direct cost basis, even

though the law requires Orbital to treat the facilities, equipment, and material as indirect

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costs. (Id. ¶¶ 67–70, 143–46.) Allegedly, Mr. Utter has stated that this practice allowed

Orbital to compete for and win a follow-on contract (“OSP 2”) without having to include

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

government had already paid for it. (Id. ¶ 148.) Sallade further asserts that Orbital has

pervasively applied such billing schemes under other contracts with federal agencies and

prime contractors, causing the U.S. Government to subsidize its contract performance,

and resulting in no less than $10 million in damages. (Id. ¶¶ 150–53.)

In Count V Sallade alleges that under the GMD subcontract Orbital directly bills

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

quality” personnel. According to Sallade, that personnel actually perform general, multicontract functions and therefore should be billed on an indirect cost basis. (Id. ¶ 155–63.) 

He asserts that Orbital in fact charges its other customers for similar personnel on an

indirect cost basis, but that it has intentionally and unlawfully charged the U.S.

Government on a direct cost basis for at least $1 million of such labor costs. (Id. ¶¶ 156,

158, 163, 164.) 

In Count VI Sallade alleges that in the spring of 2004, Mr. Utter directed that

Orbital delay reporting expected cost under-runs it was experiencing on certain Boeing

subcontracts so that it could inflate its expected costs on the Capability Enhancement I

(“CH I”) subcontract with Boeing, for which it was then negotiating a price. (Id. ¶

171–76.) Sallade asserts that he did so despite Sallade’s warning that Orbital had to

disclose the under-runs (Id. ¶ 174.), and that intentionally concealing such “cost and

pricing data” violates TINA. (Id. ¶ 177.) He further asserts that the improper billing

practices described in Counts I through IV also violate TINA. (Id. ¶¶ 178–81.) The

alleged damages to the U.S. Government are in excess of $10 million. (Id. ¶ 182.)

In Count VII Sallade alleges that Orbital improperly charges the U.S. Government

for spare and excess materials before it needs the materials to perform its contracts. (Id.

¶¶ 184–85.) He asserts that Orbital improperly transfers the material for use on other

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contracts (id. ¶ 186), resulting in at least $500,000 worth of damages to the U.S.

Government (id. ¶ 189). 

II. Standard for Pleading an FCA Violation Under Rules 9(b) and 12(b)(6)

Federal Rule of Civil Procedure 9(b) requires that “[i]n alleging fraud or mistake, a

party must state with particularity the circumstances constituting fraud or mistake.” The

requirement to plead fraud with particularity ensures that defendants have sufficient

notice of the specific misconduct that is allegedly fraudulent “so that they can defend

against the charge and not just deny that they have done anything wrong.” Bly-Magee v.

California, 236 F.3d 1014, 1019 (9th Cir. 2001). It also protects defendants’ reputations

from harm and minimizes costly fishing expeditions. Id. at 1018. Complaints brought

under the FCA must satisfy Rule 9(b). Id. at 1015. 

A motion to dismiss for failure to plead with particularity is the functional

equivalent of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Vess,

317 F.3d at 1107. Accordingly, Sallade must allege “enough facts to state a claim to

relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1974

(2007). Liability under the FCA attaches not to the underlying fraudulent scheme, but to

the submission of the false claim itself. United States ex rel. Aflatooni v. Kitsap

Physicians Serv., 314 F.3d 995, 1002 (9th Cir. 2002). Therefore, to state a claim for

relief under section 3729(a)(1) of the FCA, Sallade must allege facts that plausibly prove

that: “(1) [Orbital] made a claim against the United States (2) that was false or fraudulent

(3) with knowledge of the falsity or fraud.” Id. at 1000. Under section 3729(a)(2),

Sallade must allege facts showing that Orbital used a false record or statement to get a

false claim paid. United States ex rel. Harris v. Alan Ritchey, Inc., 2006 U.S. Dist.

LEXIS 91921 at *5–6 (W.D. Wash. Dec. 20, 2006) (citing United States v. Southland

Mgmt. Corp., 326 F.3d 669, 675 (5th Cir. 2003)). To use a TINA violation as the basis

for an FCA claim, Sallade must show that Orbital presented claims for payment under a

government contract knowing that it had failed to disclose pertinent “cost and pricing

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data” during negotiations for the contract. See United States ex rel. Sanders v. Allison

Engine Co., 471 F.3d 610, 623 (6th Cir. 2006). 

The heightened pleading requirement of Rule 9(b) applies to each element

described above, except that “[m]alice, intent, knowledge, and other conditions of a

person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). Sallade’s Complaint must

include the “‘the who, what, when, where, and how’ of the misconduct charged.” 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)). 

However, Sallade need not “allege, in detail, all facts supporting each and every

instance of [fraud] over a multi-year period.” United States ex rel. Lee v. Smithkline

Beecham, Inc., 245 F.3d 1048, 1051 (9th Cir. 2001) (citing Cooper v. Pickett, 137 F.3d

616, 627 (9th Cir. 1998)). “Where a relator pleads a complex and far-reaching fraudulent

scheme with particularity, and provides examples of specific false claims submitted to the

government pursuant to that scheme, a relator may proceed to discovery on the entire

fraudulent scheme.” United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d

493, 510 (6th Cir. 2007). Accord Lee, 245 F.3d at 1051; United States ex rel. McCarthy

v. Straub Clinic & Hosp., Inc., 140 F. Supp. 2d 1062, 1068 (D. Haw. 2001). In such an

instance, “the claims that are pled with specificity must be characteristic examples that

are illustrative of the class of all claims covered by the fraudulent scheme.” Id. at 510–11

(citation and internal quotations marks omitted). 

III. Discussion

All of the Complaint’s counts meet the heightened pleading requirements for an

FCA violation except Counts V, VI, and VII. Count I alleges that after winning the

ROCSAT2 contract in 2001, Orbital used IR&D projects to fraudulently bill the U.S.

Government for $5 million in costs, despite Sallade’s warning to Orbital’s senior finance

management in the fourth quarter of 2003 that such billing was improper. He asserts that

Orbital’s Deputy Program Manager for the ROCSAT2 contract managed the IR&D

projects, and that Sr. Vice President Utter admitted to him that the charges were properly

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allocable to the ROCSAT2 contract. Sallade has therefore alleged the “who, what, when,

where, and how” of Orbital’s knowing submission of a false claim to the U.S.

Government. 

He has done so with sufficient circumstantial detail so that Orbital can identify the

specific transaction in question and defend against the charge. He need not identify by

name the IR&D projects used or specify the exact dates that Orbital submitted the

charges. See United States ex rel. Lincoln v. Med-Data, Inc., 2006 U.S. Dist. LEXIS

64288 at *7–8 (W.D. Wash. Sept. 8, 2006) (holding that the qui tam relator need not

supply the level detail that the defendant sought where the information supplied was

“adequate for [the defendant] to both identify the transaction in question and to challenge

the basis for Plaintiff’s allegation that claims were fraudulently submitted”; McCarthy,

140 F. Supp. 2d at 1068 (holding that a complaint that did not include “specific dates or

people” nevertheless “spell[ed] out with sufficient clarity for what actions Defendants are

expected to answer”).

Similarly, Count II does more than allege a potentially fraudulent scheme. It

alleges that Orbital invoiced the U.S. Government, through Boeing, for costs incurred by

ATK to acquire additional production capacity. Sallade need not specify the exact

equipment that ATK purchased, the exact date that Orbital allegedly passed ATK’s costs

to Boeing, the exact person that sent the invoices to Boeing, or the exact date that Boeing

passed the costs to the U.S. Government. Rule 9(b) does not demand that relators always

include such minute details in their complaints. Lincoln, 2006 U.S. Dist. LEXIS 64288 at

*7 (noting that details concerning dates, identification numbers, amounts charged,

particular goods or services included, and individuals involved in preparing bills are

“types of information that may help . . . [but] do not constitute a checklist of mandatory

requirements” to state a claim with particularity). 

Sallade included sufficient circumstantial detail for Orbital to defend against the

charge. He asserts that after an increased demand for motors in June 2003, ATK

submitted invoices to Orbital for costs it incurred in acquiring additional production

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capacity. The invoices allegedly did not contain detail on the material or equipment

purchased. Orbital invoiced Boeing for at least $1 million of those costs knowing that it

was improper to do so on a direct cost basis, and Boeing ultimately invoiced the U.S.

Government for those costs. This is enough detail for Orbital to identify the transactions

in question and defend against the charges. 

 With respect to Count III, Orbital again complains that it does not identify the

exact test equipment or common hardware that Orbital allegedly billed to the U.S.

Government on a direct cost basis, and that it does not state the exact dates that such

billing occurred. It does, however, assert that Orbital billed as indirect costs four pieces

of test equipment that it acquired at the commencement of the GMD subcontract

(“when”). Sallade quotes Mr. Utter (“who”) directing Orbital to switch to billing such

items as direct costs because he felt Orbital should not have to invest its resources without

a guarantee of future production orders from the government. He alleges that Orbital

followed this directive and later did bill similar items (“what”) as direct costs to the GMD

subcontract (“how”). Given this circumstantial information, Orbital should not have

trouble identifying the equipment in question. Furthermore, Sallade uses this transaction

as an example of the improper billing practices that Orbital has used under the GMD

subcontract and its contracts with the Air Force. Therefore, with respect to those

contracts, Sallade may proceed to discovery on Orbital’s improper direct billing for

common hardware and test equipment. 

Similarly, given the circumstantial information in Count IV, the mere fact that

Sallade did not put a name to the equipment that Orbital allegedly billed to the U.S.

Government or specify the exact date that it charged the government does not mean that

the count fails the Rule 9(b) standard. Count IV states that Orbital acquired the facilities

and non-deliverable support equipment under the OSP1 contract, that the government

approached Orbital about the items in response to his allegations, and that Orbital then

reclassified the items as “Special Test Equipment.” Mr. Utter allegedly referred to this

very equipment in a statement about how Orbital won the OSP2 contract. Sallade

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proffers this transaction as an example of how Orbital unlawfully bills the acquisition of

facilities and non-deliverable support equipment to the government on a direct cost basis

under one contract and then uses it to perform other contracts, thereby gaining an

improper advantage when competing for government contracts. He may proceed to

discovery on the alleged fraudulent scheme that is typified by these billing practices 

under the OSP1 transaction. 

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

requirements. Count V does not mention the identities or specific job tasks of the

employees that Orbital allegedly directly billed to the U.S. Government. Nor does it

specify when they were hired or to what contract their services were billed. Though it

alleges that Orbital charged for similar employees on an indirect cost basis under other

contracts, again the Complaint does not provide any information about who those

employees were, what their jobs were, when they were hired, or to what contracts their

services were charged. Count VII similarly does not link the spare or excess material to

any specific contract, person, or time frame. This is not to say that all of such information

must be alleged to state a claim. The important difference between these counts and the

counts that do satisfy Rule 9(b) is that Counts V and VII contain no circumstantial

information that would allow Orbital to identify the specific fraudulent claims in question

or defend against the charges.

Count VI asserts that Orbital has violated TINA in various ways. Sallade brings

this action as a qui tam relator under the FCA. A relator can plead that an individual

violated the FCA by submitting a claim for payment knowing that it had failed to disclose

“cost and pricing data” when it negotiated the government contract. See Sanders, 471

F.3d at 623. Sallade alleges that Mr. Utter directed that Orbital delay reporting expected

cost under-runs in violation of TINA so that it could inflate its expected costs on the CH I

subcontract. Though this pleading might be sufficient to state a TINA violation, it does

not sufficiently allege a cause of action under the FCA. To do so, the Complaint must

also plead with particularity that Orbital submitted a claim for payment under the CH I

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contract despite knowing that it had failed to disclose the required information during

negotiations. 

Count VI also alleges that the actions detailed in Counts I through V constitute

TINA violations. The pleadings do not clearly state how Orbital’s actions allegedly

violate TINA, as opposed to the FCA. For example, they do not adequately identify the

contracts that Orbital negotiated with the government without disclosing the required

information. Furthermore, these pleadings do not specify in detail how or when Orbital

submitted claims for payment under those contracts, knowing that it had failed to disclose

“cost and pricing data” during negotiations. Count VI therefore does not fulfill Rule

9(b)’s heightened pleading requirement for fraud. 

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. # 38) is granted in part and

denied in part. The motion is denied with respect to Counts I, II, III, and IV. 

IT IS FURTHER ORDERED that Counts V, VI, and VII are dismissed for failure

to plead fraud with specificity, with leave to amend by January 18, 2008. Counts V, VI,

and VII will be dismissed with prejudice if an amended complaint is not filed by January

18, 2008.

DATED this 4th day of January 2008.

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