Court Opinion

ID: 67534
Source: CourtListenerOpinion
Date Created: 2010-04-26 06:22:42+00
Date Added: 2024-06-11T14:58:09.199211
License: Public Domain

REVISED July 15, 2009

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                           United States Court of Appeals
                                                                    Fifth Circuit

                                                                  FILED
                                                                  July 9, 2009
                                 No. 08-20194
                                 No. 08-20306             Charles R. Fulbruge III
                                                                  Clerk

United States of America, ex rel; ALFRED J LONGHI, JR

                                           Plaintiff - Appellee
v.

UNITED STATES OF AMERICA

                                           Intervenor - Appellee
v.

LITHIUM POWER TECHNOLOGIES INC; MOHAMMED ZAFAR A
MUNSHI

                                           Defendants - Appellants

                Appeal from the United States District Court
                     for the Southern District of Texas

Before HIGGINBOTHAM, BENAVIDES, and STEWART, Circuit Judges.
CARL E. STEWART, Circuit Judge:
      In 2002, Alfred J. Longhi, Jr. (“Longhi”), a former employee of Lithium
Power Technologies, Inc. (“Lithium Power”), filed a qui tam suit under the False
Claims Act (“FCA”), 31 U.S.C. § 3729, against Lithium Power and its president,
Mohammed Zafar A. Munshi (jointly, “the Defendants”). In 2005, the United
                                  No. 08-20194
                                  No. 08-20306

States of America intervened in the suit. Longhi and the United States of
America (jointly, “the Government”) alleged that the Defendants engaged in an
elaborate pattern of false statements to secure research grants from the federal
government. Ultimately, the district court granted the Government’s motions
for summary judgment on liability and damages. The court awarded nearly $5
million in damages and penalties, and the parties voluntarily dismissed the
remaining claims in the lawsuit. The Defendants moved for reconsideration, and
the district court denied that motion and entered a final judgment. Longhi then
filed a motion for statutory attorneys’ fees, which the district court granted in
full. The Defendants now appeal the district court’s finding of liability, award
of damages, and award of attorneys’ fees to Longhi. We AFFIRM.
              I. FACTUAL AND PROCEDURAL BACKGROUND
      In 1982, Congress established the Small Business Innovation Research
(“SBIR”) program.     The goal of the SBIR program is to provide research
assistance to small businesses in order to maintain and strengthen the
competitive free enterprise system and the national economy. See 15 U.S.C. §
638(a). Congress directed each federal agency with a research and development
budget exceeding $100 million to establish a SBIR program and to provide some
fraction of its budget to small businesses. 15 U.S.C. § 638(f). Each federal
agency with a SBIR program was charged with selecting awardees for its SBIR
funding. 15 U.S.C. § 638(g).
      The Department of Defense (“DoD”) administers a SBIR program in which
twelve military components participate. The DoD identifies specific research
projects that it is interested in funding and allows small businesses to seek SBIR
grants for these projects. DoD’s program solicitations explicitly state that
knowingly and willfully making any false, fictitious, or fraudulent statements
or representations may be a felony under the Federal Criminal False Statements

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Act, 18 U.S.C. § 1001. After receiving proposals, the DoD selects those that they
perceive offer the best value to the government and nation. The merits of a
SBIR proposal are in part measured by an examination of the applicant’s
qualifications. The DoD specifically considers the: (1) key personnel available
to perform the research, (2) facilities and equipment available to the applicant,
and (3) scope of any previously funded work performed by the applicant that may
be similar to that proposed. When the DoD selects a proposal for funding, the
agency enters into a contract with the recipient that governs the terms under
which the funds are disbursed. The DoD generally does not verify all of the
information submitted in a proposal, and it depends heavily on the integrity of
SBIR applicants.
      Under the DoD’s SBIR program, there are two types of SBIR grants. A
Phase I research grant is intended for the recipient to determine the scientific,
technical, and commercial merit and feasibility of ideas submitted under the
SBIR program. These grants typically range from $60,000 to $100,000 and cover
at most a nine-month period. If the DoD determines that the Phase I grant
recipient demonstrates that future research may potentially yield a product or
process of continuing importance to the DoD and the private sector, it can award
a Phase II grant. Phase II grants are only available to applicants who previously
received a Phase I award and are aimed at research or a research and
development effort. A Phase II grant is expected to produce a well-defined,
deliverable prototype and typically ranges from $500,000 to $750,000 over a
two-year period. During Phase III of a research and development project, the
applicant is expected to obtain funding from the private sector or non-SBIR
government sources to develop the prototype into a viable product.
      In 1998, Munshi founded a small business, Lithium Power. Lithium
Power designs and manufactures specialized lithium-based batteries for

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commercial and government applications. Munshi is Lithium Power’s majority
shareholder, president, chief executive officer, and chairman of the board.
       The Defendants submitted four proposals–two to the Ballistic Missile
Defense Office (“BMDO”) and two to the Air Force–to receive Phase I and II
SBIR grants for research that could lead to the development of very thin
rechargeable batteries. In connection with the four SBIR grants, the Defendants
submitted more than fifty invoices to the BMDO and the Air Force for payment
and received more than $1.6 million.
       Lithium Power’s four SBIR proposals contained the false claims at issue
in this case. In 2000, the relator1 in this action, Longhi, joined Lithium Power
as Vice President for Sales and Marketing. During 2001 and 2002, Longhi began
to suspect that the Defendants were defrauding the federal government. He
began documenting what he believed was the Defendants’ pattern of fraudulent
conduct and investigating a means to stop the fraud. In August 2002, Longhi
began working with counsel to prepare his FCA case, and he met with the
Government on September 20, 2002. One month later, Munshi told Longhi that
“due to tough economic times” Longhi would be placed on a three-day work week
beginning November 2, 2002, and receive a 40 percent decrease in compensation.
Longhi informed Munshi that he could not afford the extreme decrease in pay
and needed to sell his Lithium Power stock to raise capital. On November 4,
2002, Munshi told Longhi that he would be laid off within two weeks and offered
to buy Longhi’s stock for between $80,000 and $90,000. On November 6, 2002,
Munshi explained that the stock sale would be the subject of a more detailed
agreement.

       1
        Suits to collect statutory damages and civil penalties under the FCA may be brought
by the Attorney General or by a private person, known as a relator, in the name of the United
States. An action brought by a relator is commonly referred to as a qui tam action. See 31
U.S.C. §3730(a) and (b)(1).

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      On November 18, 2002, Longhi filed a qui tam action against the
Defendants to recover statutory damages and civil penalties under the FCA. On
November 21, 2002, Munshi provided Longhi with a copy of the stock sale
agreement. On November 25, 2002, Munshi laid off Longhi. The agreement for
the sale of stock contained a provision stating that Longhi personally agreed to
release the Defendants from pending claims or lawsuits and agreed not to sue
the Defendants for the loss of Longhi’s job.       The original covenant also
disallowed Longhi to sue “for any other reason,” but Longhi objected to this
language and it was changed to “for any other matter prior to execution of” the
agreement to sell the stock. The agreement was executed by the parties on
November 29, 2002, eleven days after Longhi filed suit against the Defendants.
Munshi’s wife paid Longhi $80,000 for the stock.
      Longhi’s qui tam action accused Lithium Power of double billing and of
billing for work that was never completed in connection with twenty-one
different contracts. The United States investigated and intervened in 2005 in
connection with Longhi’s allegations pertaining to fraudulent billing on the four
SBIR grant proposals. The Defendants denied Longhi’s allegations, and the
Government failed to uncover evidence that supported Longhi’s allegations.
      On November 9, 2006, the Government filed a motion for partial summary
judgment as to liability and argued that the undisputed record evidence
demonstrated that the Defendants had, at a minimum, shown a reckless
disregard for the truth regarding many of the representations in their four SBIR
grant proposals. On December 22, 2006, the Defendants filed a cross-motion for
partial summary judgment. The district court granted the Government’s motion
for partial summary judgment on March 23, 2007. The district court stated that
fraudulently inducing the Government to provide funding for a project could give
rise to FCA liability, even if the statements on particular invoices submitted in

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connection with the project were true. The district court explained that the
Government needed only to demonstrate that the Defendants either were
willfully blind to the falsity of the statements or acted with an extreme form of
negligence in making those statements.
      In determining the merits, the district court examined five separate
categories of statements in the Defendants’ SBIR proposals. First, the district
court explained that the Defendants’ BMDO Phase II proposal falsely stated that
Lithium Power was incorporated in 1992. Second, the district court concluded
that the Defendants misrepresented the key personnel who would be conducting
the research work in three of the four proposals. The district court noted,
however, that the misrepresentations as to key personnel resulted from mere
negligence, and the court discounted this evidence. Third, the district court
determined that Lithium Power knowingly falsified statements regarding its
facilities and equipment.     Fourth, the district court concluded that the
Defendants acted with reckless disregard to the falsity of statements by
representing that Lithium Power had cooperative arrangements with the
University of Houston and Polyhedron Laboratories. Fifth, the district court
noted that the Defendants failed to disclose in its Air Force SBIR grant
proposals that Lithium Power had previously undertaken related work in
connection with a BMDO SBIR grant.
       The district court then assessed whether these false statements,
omissions, and misrepresentations were “material.” The district court explained
that under the FCA materiality requires that the false statement in question
have a natural tendency to influence or be capable of influencing a
decisionmaker. The district court concluded that the Government offered ample
summary judgment evidence that the misrepresentations were actually
material.

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       The Government then moved for summary judgment on damages. The
district court held that the Government suffered damages in the amount of the
grants it paid out to the Defendants in connection with their deceptive
proposals–$1,657,455. The court tripled that amount, as required by the FCA,
and awarded $4,972,365 in damages. The district court rejected the Defendants’
contention that the damages should be reduced to reflect the benefit the United
States received from the battery research that Lithium Power performed.
       The parties stipulated to a voluntary dismissal of the Government’s
remaining claims and the Defendants’ counterclaims without prejudice.
Longhi’s claims regarding the other seventeen contracts, that the Government
did not intervene in, were among those dismissed. The district court entered
final judgment for the Government based on that stipulation. The Defendants
appeal the district court’s finding of liability and damages award.2
       On February 5, 2008, Longhi filed a motion for statutory attorneys’ fees
and final judgment. On February 25, 2008, the Defendants objected to Longhi’s
motion on a variety of grounds. Specifically, the Defendants stated that Longhi’s
motion for attorneys’ fees failed to segregate the hours worked by his attorney
on contracts and claims for which Longhi was not the prevailing party (i.e., the
seventeen claims that were dismissed). The district court did not require Longhi
to segregate the time his attorneys worked, and awarded Longhi the full amount
of fees and costs that he requested–$283,765. The Defendants now also appeal
the district court’s award of attorneys’ fees.3

       2
        The Defendants’ appeal regarding the district court’s finding of liability and damages
award is found in case No. 08-20194.
       3
        The Defendants’ appeal regarding the district court’s award of attorneys’ fees is found
in case No. 08-20306.

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                   II. LIABILITY & DAMAGES AWARD
      In appealing the district court’s judgment finding the Defendants liable
and awarding damages to the Government, the Defendants make four
arguments. First, they allege that the district court erred in granting the
Government’s motion for partial summary judgment on the merits and finding
that the Defendants violated the FCA. Second, the Defendants argue that the
district court erred in granting the Government’s motion for summary judgment
with respect to damages and finding that the United States was entitled to
recover the full amount of the grant awards paid out to the Defendants and to
receive treble damages. Third, the Defendants allege that the district court
erred in determining that their claims for release and indemnification from
Longhi were against public policy and the text of the FCA.           Finally, the
Defendants contend that the district court erred by denying their summary
judgment motions with respect to liability, damages, and the enforceability of
the release and indemnification agreement. We discuss each of the Defendants’
arguments in turn.
A. Standard of Review
      This Court reviews summary judgment orders de novo, applying the same
standards as the district court. Langhoff Props., LLC v. BP Prods. N. Am. Inc.,
519 F.3d 256, 260 (5th Cir. 2008). Summary judgment is proper when “the
pleadings, the discovery and disclosure materials on file, and any affidavits show
that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.” FED. R. CIV. P. 56(c). This Court
resolves any doubts and draws all reasonable inferences in favor of the
nonmoving party. Langhoff Props., 519 F.3d at 260.

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B. Violation of the False Claims Act
      The district court granted the Government’s motion for partial summary
judgment on the merits and found that the Defendants violated the FCA. The
Defendants argue that the district court erred because: (1) with regards to the
BMDO Phase I grant, the misstatement of Lithium Power’s date of incorporation
does not give rise to liability under the FCA because it was an error that
resulted from inadvertence or mere negligence and was not material; (2) with
regards to the BMDO Phase I grant, statements regarding Lithium Power’s
facilities did not give rise to liability under the FCA, because the facilities were
under construction when the Defendants made the statements and were
completed by the time the government funded the proposal; (3) with regards to
all four grant applications, the Defendants’ statements concerning “cooperative
arrangements,” as opposed to “cooperative research arrangements,” with the
University of Houston and with Polyhedron were true and did not give rise to
liability under the FCA, because they had a cooperative arrangement to use
laboratories and scientific equipment, different than a cooperative research
agreement to conduct certain research for a defined time period, and the
statement was not material; (4) with regards to the BMDO Phase I and II grants
and the Air Force Phase II grant, that statements regarding specific personnel
indicated an expectation and wish to hire those individuals, but did not put forth
that the individuals would necessarily accept an offer of employment; and (5)
with regards to the Air Force Phase I and II grants, the Defendants assert that
they properly disclosed the BMDO contracts to the Air Force when submitting
their proposals, because they informed individual Air Force personnel of the
BMDO SBIR grants. Thus, the Defendants request that we reverse and remand
the district court’s grant of the Government’s motion for summary judgment.

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      The Government contends that the district court properly granted
summary judgment in its favor after correctly concluding that the Defendants’
false statements affected the SBIR grant selection process. The Government
argues that the Defendants violated the FCA by submitting four SBIR proposals
replete with false statements that gave the DoD the mistaken impression that
Lithium Power was far more qualified than it actually was to engage in the
proposed research. The Government argues that taken individually, “any one
of the falsehoods would suffice to demonstrate a violation of” the FCA. At a
minimum, the Government argues that the Defendants acted with a reckless
disregard for the truth and presented false claims to the DoD, allowing Lithium
Power to secure more than $1.6 million in research grants. The Government
notes that the Defendants maintain that several of its misrepresentations were
made inadvertently. In response, the Government argues that while subjective
inadvertence is relevant to whether the Defendants had actual knowledge of the
falsity of their statements, it is not relevant to the objective inquiry into whether
the Defendants acted with reckless disregard of a statement’s truth or falsity.
The Government also argues that the Defendants’ repeated false statements
were material to the selection process. The Government explains that because
an applicant’s qualifications are a critical feature of the SBIR evaluation process,
the Defendants’ falsehoods had a natural tendency to influence and were capable
of influencing the extremely competitive process for selecting small businesses
to receive SBIR grants. The Government maintains that each false statement
contributed to the impression that Lithium Power was better suited to carry out
the proposed research than it actually was.
      1. Legal Standard for Finding a Violation of the False Claims Act
      An individual violates the FCA when he
      (1) knowingly presents, or causes to be presented, to an officer or
      employee of the United States Government or a member of the

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       Armed Forces of the United States a false or fraudulent claim for
       payment or approval;
       (2) knowingly makes, uses, or causes to be made or used, a false
       record or statement to get a false or fraudulent claim paid or
       approved by the Government; [or]
       (3) conspires to defraud the Government by getting a false or
       fraudulent claim allowed or paid.
31 U.S.C. § 3729(a). We note that while the underlying fraud that invokes the
FCA differs under § 3729(a), “the statute attaches liability, not to the underlying
fraudulent activity or to the government’s wrongful payment, but to the claim
for payment.” Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 785
(4th Cir. 1999) (quoting United States v. Rivera, 55 F.3d 703, 709 (1st Cir. 1995))
(internal quotation marks omitted).
       The FCA defines the terms “knowing” and “knowingly,” which mean
       that a person, with respect to information—
       (1) has actual knowledge of the information;
       (2) acts in deliberate ignorance of the truth or falsity of the
       information; or
       (3) acts in reckless disregard of the truth or falsity of the
       information.
31 U.S.C. § 3729(b). In addition to the requirements found in the text, our
jurisprudence holds that a false or fraudulent claim or statement violates the
FCA only if it is material. See United States ex rel. Thompson v. Columbia/HCA
Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997) (stating that the FCA
“interdicts material misrepresentations made to qualify for government
privileges or services”) (citation and quotation marks omitted)); see also Allison
Engine Co., Inc. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2126 (2008)4

       4
         The Defendants argue that Allison Engine Co. is inapplicable to the instant case
because false statements were made to a government contractor and not directly to the United
States. We see no reason why the FCA would require a materiality standard in cases involving
government contractors and not the United States.

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(explaining that “a plaintiff asserting a § 3729(a)(2) claim must prove that the
defendant intended that the false record or statement be material to the
Government’s decision to pay or approve the false claim”).
      We have consistently recognized the requirements discussed above, but we
have not yet delineated a succinct test recognizing each element. The Fourth
Circuit has concisely stated these various requirements in one test, which we
adopt today: (1) whether “there was a false statement or fraudulent course of
conduct; (2) made or carried out with the requisite scienter; (3) that was
material; and (4) that caused the government to pay out money or to forfeit
moneys due (i.e., that involved a claim).” United States ex rel. Wilson v. Kellogg
Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting Harrison, 176
F.3d at 788) (internal quotation marks omitted); see also United States ex rel.
Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1177-78 (9th Cir. 2006); Cf. United
States ex. rel. Mikes v. Straus, 274 F.3d 687, 695 (2d. Cir. 2001) (utilizing a five-
part test where a violation of the FCA is shown when an individual (1) makes a
claim, (2) to the United States government, (3) that is false or fraudulent, (4)
knowing its falsity, and (5) seeking payment from the federal treasury).
             a. False or Fraudulent Statement
      In the instant appeal, the Government alleges that the Defendants
engaged in a fraudulent course of conduct by submitting false statements in the
SBIR grant proposals. The Government does not allege that the Defendants
submitted false claims for payment for each SBIR grant proposal. In certain
cases, FCA liability may be imposed “when the contract under which payment
is made was procured by fraud.” United States ex rel. Willard v. Humana Health
Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir. 2003) (citing Harrison, 176 F.3d
at 787). This type of FCA claim is characterized as fraudulent inducement.
Under a fraudulent inducement theory, although the Defendants’ “subsequent

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claims for payment made under the contract were not literally false, [because]
they derived from the original fraudulent misrepresentation, they, too, became
actionable false claims.” United States ex rel. Laird v. Lockheed Martin Eng’g
& Science Servs. Co., 491 F.3d 254, 259 (5th Cir. 2007) (citing United States ex
rel. Marcus v. Hess, 317 U.S. 537, 543-44 (1943)).5
              b. Requisite Scienter
       The Government contends that the Defendants’ fraudulent conduct was
“made or carried out with the requisite scienter.” The scienter requirement
comes from § 3729(b)’s definition of the terms “knowing” and “knowingly.” We
have explained that “[t]hough the FCA is plain that ‘proof of specific intent to
defraud’ is not necessary, [the mens rea] requirement is not met by mere
negligence or even gross negligence.” United States ex rel. Farmer v. City of
Houston, 523 F.3d 333, 338 (5th Cir. 2008) (internal citation omitted). Thus, the
Government must demonstrate the Defendants had (1) actual knowledge of
falsity, (2) acted with deliberate ignorance of the truth or falsity of the
information provided, or (3) acted with reckless disregard of the truth or falsity
of the information provided when the Defendants fraudulently induced the
BMDO and Air Force to award them the SBIR grants. See id. at 339.

       5
          We note that Laird outlines a two part test “to succeed on a fraud-in-the-inducement
theory under the FCA.” Laird, 491 F.3d at 259. Under the Laird test the Government must
prove that the Defendants (1) had no intention to perform according to the terms of the SBIR,
and (2) obtained payments under the SBIR contract that it was not legitimately entitled. See
id. (citations omitted). The second portion of this statement could be construed as requiring
“outcome materiality,” which is discussed in detail below. Laird, however, expressly declines
to rule on the proper standard for assessing materiality. Id. at 261 (citation omitted).

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               c. Materiality
      The Government next argues that the false statements in the SBIR grant
proposals were material. “No majority decision of this circuit has addressed the
proper standard for assessing the materiality of a false statement under the
FCA’s civil-liability provisions.” Laird, 491 F.3d at 261. The parties and this
Court all recognize that “a false statement is material if it has a ‘natural
tendency to influence, or [is] capable of influencing, the decision of the
decisionmaking body to which it was addressed.’” Neder v. United States, 527
U.S. 1, 16 (1999) (quotation omitted) (insertion in original); see also United
States v. Southland Mgmt. Corp. (Southland II), 326 F.3d 669, 679 (5th Cir.
2003) (en banc) (Jones, J., concurring); United States v. Southland Mgmt. Corp.
(Southland I), 288 F.3d 665, 676 (5th Cir. 2002), vacated by grant of reh’g en
banc, 307 F.3d 352 (5th Cir. 2002) (quoting United States v. Wells, 519 U.S. 482,
489 (1997)).
      In Southland I, however, we noted two different interpretations of the
“natural tendency to influence or capable of influencing” standard. Southland
I, 288 F.3d at 676. Some courts have defined the standard to require “outcome
materiality” – “a falsehood or misrepresentations must affect the government’s
ultimate decision whether to remit funds to the claimant in order to be
‘material.’” Id. (citing United States ex rel. Berge v. Bd. of Trs. of the Univ. of
Ala., 104 F.3d 1453, 1459-60 (4th Cir. 1997); United States v. Intervest Corp., 67
F. Supp. 2d 637, 646-48 (S.D. Miss. 1999)). In contrast, another court required
what is termed “claim materiality” – “a falsehood or misrepresentation must be
material to the defendant’s claim of right in order to be considered ‘material’ for
the purposes of the FCA.” Id. (citing United States ex rel. Wilkins v. N. Am.
Constr. Corp., 173 F. Supp. 2d 601, 630 (S.D. Tex. 2001)). In Southland II, five
judges of this Court suggested that outcome materiality is the correct standard,

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explaining that a statement is material only if it actually affects the
government’s decision to pay. See Laird, 491 F.3d at 261 (citing Southland II,
326 F.3d 669 at 679 n.3).6
       The Government, however, contends that these definitions are incorrect.
It argues that the FCA requires proof only that the defendant’s false statements
“could have” influenced the government’s payment decision or had the
“potential” to influence the government’s decision, not that the false statements
actually did so. We agree. The outcome and claim materiality definitions
unnecessarily narrow the “natural tendency to influence or capable of
influencing” test, which is unambiguous and easily applied.7
       The lack of ambiguity in this test is clear when we examine the common
meaning of the words used. The Oxford English Dictionary (“OED”) defines
tendency as “a constant disposition to move or act in some direction or toward
some point, end, or purpose; leaning, inclination, bias, or bent toward some
object, effect, or result.” Oxford English Dictionary Online, www.oed.com (last
visited June 15, 2009) (defining “tendency”). The Merriam-Webster Dictionary
(“Merriam-Webster”) defines tendency as “a proneness to a particular kind of
thought or action.”          Merriam-Webster Dictionary Online, www.merriam-
webster.com (last visited June 15, 2009) (defining “tendency”). The OED has two

       6
          Judge Jones’s concurrence first explained that the accepted definition of materiality
for civil FCA claims “equates materiality with ‘having a natural tendency to influence, or
[being] capable of influencing, the decision of the decisionmaking body to which it was
addressed.’” Southland II, 326 F.3d at 679 (quotation omitted) (insertion in original).
However, read it is entirety the concurrence implicitly adopts and applies the outcome
materiality standard.
       7
         Adopting this test for materiality under the FCA aligns with our test for materiality
under 18 U.S.C. § 1001, the Federal Criminal False Statements Act. Our decisions state the
test for materiality under § 1001 as “‘tendency’ or ‘capacity to influence.’” See generally United
States v. McIntosh, 655 F.2d 80, 83 (5th Cir. 1981) (citing United States v. Krause, 507 F.2d
113, 118 (5th Cir. 1975); United States v. McGough, 510 F.2d 598, 602 (5th Cir. 1975)).

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definitions of “capable” that apply in this context: “able or fit to receive and be
affected by; open to, susceptible” and “able to be affected by; of a nature, or in a
condition, to allow or admit of; admitting; susceptible.”          Oxford English
Dictionary Online, www.oed.com           (last visited June 15, 2009) (defining
“capable”). Merriam-Webster defines capable as “susceptible .” Merriam-Webster Dictionary Online, www.merriam-
webster.com (last visited June 15, 2009) (defining “capable”). Finally, OED
defines influence as “ascendancy, sway, control, or authority, not formally or
overtly expressed” and as “[a] thing (or person) that exercises action or power of
a non-material or unexpressed kind.”          Oxford English Dictionary Online,
www.oed.com      (last visited June 15, 2009) (defining “influence”). Merriam-
Webster defines influence as “the act or power of producing an effect without
apparent exertion of force or direct exercise of command,” “corrupt interference
with authority for personal gain,” and “the power or capacity of causing an effect
in indirect or intangible ways.”          Merriam-Webster Dictionary Online,
www.merriam-webster.com (last visited June 15, 2009) (defining “influence”).
      Thus, the “natural tendency to influence or capable of influencing” test
requires only that the false or fraudulent statements either (1) make the
government prone to a particular impression, thereby producing some sort of
effect, or (2) have the ability to effect the government’s actions, even if this is a
result of indirect or intangible actions on the part of the Defendants. All that is
required under the test for materiality, therefore, is that the false or fraudulent
statements have the potential to influence the government’s decisions.
      Our conclusion is buttressed by cases from our sister circuits. The Ninth
Circuit recently recognized a circuit split to measure materiality under the FCA.
United States v. Bourseau, 531 F.3d 1159, 1171 (9th Cir. 2008). The court noted
that the Fourth and Sixth Circuits have adopted a “‘natural tendency test’ for

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materiality, which focuses on the potential effect of the false statement when it
is made rather than on the false statement’s actual effect after it is discovered.”
Id. (quoting United States ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Group,
Inc., 400 F.3d 428, 445 (6th Cir. 2005)); see also United States ex rel. Harrison
v. Westinghouse Savannah River Co., 352 F.3d 908, 913, 916-17 (4th Cir. 2003).
The court then explained that the Eighth Circuit has adopted the “more
restrictive ‘outcome materiality test.’” Bourseau, 531 F.3d at 1171 (citing Costner
v. URS Consultants, 153 F.3d 667, 677 (8th Cir. 1998)). The Ninth Circuit
adopted the Fourth and Sixth Circuits natural tendency test “for materiality
because it is more consistent with the plain meaning of the FCA.” Id. (citation
omitted).
      Moreover, Congress recently codified the definition of materiality when it
enacted the Fraud Enforcement and Recovery Act of 2009 (FERA), Pub. L. No.
111-21, § 4, 123 Stat. 1617 (2009) (to be codified at 31 U.S.C. § 3729). Congress
enacted § 4 of FERA to clarify the FCA and “to reflect the original intent of the
law.” Id. Congress’s enactment will add the following language to § 3729(b): “(4)
the term ‘material’ means having a natural tendency to influence, or be capable
of influencing, the payment or receipt of money or property.” If Congress
intended materiality to be defined under the more narrow outcome materiality
standard, it had ample opportunity to adopt the outcome materiality standard
in FERA. Instead, Congress embraced the test as stated by the Supreme Court
and several courts of appeals. While we decline to rule on whether this statute
applies retroactively or prospectively, we find this enactment to be relevant as
to Congress’s intent when it enacted the FCA. See NCNB Texas Nat’l Bank v.
Cowden, 895 F.2d 1488, 1500 (5th Cir. 1990) (“[A] legislative body may amend
statutory language to make what was intended all along even more

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unmistakably clear.”) (quoting United States v. Montgomery Count, Md., 761
F.2d 998, 1003 (4th Cir. 1985)).
            d. Payment of Money
      Finally, the Government argues that the Defendants’ knowing, material,
false statements caused the government to pay out money. Neither party
disputes that the government awarded approximately $1.6 million to Lithium
Power as a result of the four SBIR grant proposals. Thus, we are left with
determining whether the Government has successfully demonstrated factors
one, two, and three of the above test.
      2. Analysis
      The Government has met its burden with regards to factors one and
two–the Defendants knowingly provided false or fraudulent statements in the
SBIR grant proposals. Most egregiously, the Defendants lied in all four SBIR
grant proposals regarding a cooperative arrangement with the University of
Houston and Polyhedron Laboratories. The Defendants argued below that
because members of the public could use labs at the University of Houston and
Polyhedron Laboratories for a fee, Lithium Power, as a member of the public,
had an “arrangement” with both institutions. This argument is patently absurd.
The Defendants either purposefully, or with reckless disregard to the truth or
the falsity of their statements, misled the BMDO and the Air Force into
believing that Lithium Power had a formal partnership with these two
organizations. The ability of any member of the public to essentially “rent” the
facility is not synonymous with a cooperative arrangement of the type the
Defendants hoped the government would infer by their statements. These
misrepresentations alone would be sufficient to establish that the Defendants
had no intention to perform according to the terms of the SBIR, but these are not
the only false statements contained in the SBIR grant proposals.

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      The Defendants’ BMDO Phase I grant contained an incorrect incorporation
date for Lithium Power. This was not a mere typographical error, as Lithium
Power was not incorporated until five months after it submitted its Phase I
grant proposal to BMDO. In addition, the Defendants lied about the existence
of Lithium Power’s facilities, which were under construction at the time the
SBIR Phase I grant proposal was submitted. These false statements, especially
when considered in conjunction with the misrepresentation regarding a
cooperative arrangement with the University of Houston and Polyhedron
Laboratories, left the BMDO with the impression that Lithium Power was a
much more established and experienced company than it actually was. Thus,
the Defendants had no intention to perform according to the terms as outlined
in the BMDO SBIR grant proposals, because they did not portray Lithium Power
accurately in the proposals. Because the receipt of a Phase II grant was
predicated on the Phase I grant, any false or fraudulent statements made in the
BMDO Phase I grant equally taints the BMDO Phase II grant.
      We also find troubling Lithium Power’s failure to disclose receipt of the
BMDO grants when applying for an additional SBIR grant from the Air Force.
The SBIR application required applicants to describe “significant activities
directly related to the proposed effort” and “previous work not directly related
to the proposed effort but similar.” Lithium Power states that it told individual
members of the Air Force that it also received the BMDO grants, but that does
not negate the fact that it failed to account for the BMDO grants in its SBIR
grant proposals to the Air Force. This omission, again when coupled with the
misrepresentations regarding Lithium Power’s cooperative agreements,
establish that the Defendants had no intention to perform according to the terms
of the SBIR.

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      The Government has also successfully demonstrated factor three–Lithium
Power’s false statements were material. As we explained above, the test for
determining whether a false statement is material is whether it has a “natural
tendency to influence or is capable of influencing” the government’s decision-
making. We are convinced that Lithium Power’s false statements had the
potential to influence the BMDO and Air Force’s decisions to award Lithium
Power the SBIR grants. Lithium Power painted a picture of an established
company, that was so well-respected in the community that it had developed a
strong relationship with two notable research organizations. In reality, Lithium
Power was a company that was in its preliminary stages of development that
had yet to demonstrate any proven success.
      Moreover, in the instant case we also have evidence that the false
statements actually influenced the decision to award the Defendants the SBIR
grants.8 One of the BMDO Phase I evaluators recommended approving the
proposal because Lithium Power had adequate facilities to conduct the
project–in actuality Lithium Power had no such facilities. In addition, another
BMDO Phase I evaluator stated that his recommendation to fund Lithium
Power’s proposal was greatly influenced by the false statements. Finally, the
evaluator who approved the Air Force proposals stated that he would not have
approved funding the Air Force proposals if the Defendants had included
information regarding the BMDO SBIR grants in Lithium Power’s Air Force
SBIR grant proposal.
      Based on the foregoing analysis, we conclude that the Defendants violated
the FCA. The irony of this situation is not lost on the court. Lithium Power
blatantly deceived the BMDO and the Air Force and received funds that it was

      8
        Thus, even if we were to apply the “outcome” materiality standard, we would still
conclude that Lithium Power’s false statements were material.

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not entitled to. But it appears that the company then went on to successfully
design and manufacture lithium-based batteries that the BMDO and the Air
Force found to be satisfactory. The Defendants ability to deliver on the hoped
for “ends,” however, does not justify the means it employed to receive the SBIR
grants. We affirm the judgment of liability.
C. Damages Award9
      The district court held that the Government suffered damages in the
amount of the grants it paid out to the Defendants in connection with their
deceptive proposals–$1,657,455–and awarded treble damages in the amount of
$4,972,365. The Defendants argue that the Government is not entitled to
damages because it did not suffer an “injury.” The Defendants argue that the
district court erred in granting the damages award and state that no “court has
ever applied a fraudulent inducement/disgorgement theory in the absence of
some tangible injury to the government.” In response, the Government argues
that the Defendants’ false statements caused more than $1.6 million of DoD
SBIR funding to be siphoned off by a company with “dubious qualifications” and
that the funding should have gone to a better-qualified candidate.
      An individual who violates the FCA is liable to the United States for civil
penalties of “not less than $5,000 and not more than $10,000, plus 3 times the
amount of damages which the Government sustains because of the act of that
person.” See 31 U.S.C. § 3729(a). No circuit court has previously addressed the
proper method of calculating damages for a fraudulently induced research grant.
This Court has held, however, that damages are limited to the amount that was
paid out by reason of the false claim. United States v. Aerodex, Inc. 469 F.2d
1003, 1011 (5th Cir. 1972). Before the government may recover treble damages,

      9
        We review the damages award in this case de novo, because it was decided through
a motion for summary judgment.

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it must “demonstrate the element of causation between the false statements and
the loss.” See United States v. Miller, 645 F.2d 473, 475-76 (5th Cir. 1981).10 In
United States v. Bornstein, the Supreme Court explained that when deducting
the “bargain” received from a defendant, a court must begin with the already
doubled (and now tripled) amount. 423 U.S. 303, 314 (1976) (superceded on
different grounds); see also United States v. Thomas, 709 F.2d 968, 972 (5th Cir.
1983).11
       The contracts entered into between the government and the Defendants
did not produce a tangible benefit to the BMDO or the Air Force. These were
not, for example, standard procurement contracts where the government ordered
a specific product or good. The end product did not belong to the BMDO or the
Air Force. Instead, the purpose of the SBIR grant program was to enable small
businesses to reach Phase III where they could commercially market their
products. The Government’s benefit of the bargain was to award money to
eligible deserving small businesses. The BMDO and the Air Force’s intangible
benefit of providing an “eligible deserving” business with the grants was lost as
a result of the Defendants’ fraud. Finally, a direct causal relationship existed
between the funds received by the Defendants and their false statements.
       In a case such as this, where there is no tangible benefit to the government
and the intangible benefit is impossible to calculate, it is appropriate to value
damages in the amount the government actually paid to the Defendants. The

       10
        At the time Miller was decided, the Government could recover only double, not treble,
damages under the FCA.
       11
         The Career College Association filed as amicus curiae urging support of the district
court’s damages award. They also argue, however, that in calculating damages the court
should subtract the value of the benefit that the Defendants conferred on the Government from
the amount the Government paid to the Defendants and then treble this “actual-damages”
figure. The proposed method does not comport with the Supreme Court’s holding in Bornstein
or our holding in Thomas and we reject it.

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district court correctly determined that the proper amount of damages for the
four   SBIR     proposals     was    the    entire   amount     the    Defendants’
received–$1,657,455. The district court then correctly multiplied the amount of
damages by three, as required by statute, for a trebled damages award of
$4,972,365. We affirm the damages award.
D. Claims for Release and Indemnification
       The district court ruled that Longhi’s agreement to release and indemnify
the Defendants from suit related to any “matter prior to execution of” the
agreement to sell the stock was unenforceable because (1) federal public policy
bars the enforcement of releases in qui tam cases, and (2) the FCA prohibits a
qui tam plaintiff from dismissing a FCA claim. The Defendants argue that the
district court erred and rely on Ninth Circuit case law to support their assertion
that if a relator has already filed his claim at the time of signing the release, the
courts have enforced the releases. See United States ex rel. Hall v. Teledyne Wah
Chang Albany, 104 F.3d 230, 233 (9th Cir. 1997). In addition, the Defendants
argue that the FCA does not bar the release and indemnification agreement
because Longhi’s release did not prohibit the Government from pursuing any of
the claims in this lawsuit. With respect to the indemnification clause contained
on the stock sale agreement, the Defendants argue that the cases cited by the
district court address common law claims for indemnification not contractual
indemnification, which is governed by the Supreme Court’s decision in Town of
Newton v. Rumery, 480 U.S. 386 (1987). Longhi argues that the district court
correctly concluded that the release and indemnification were unenforceable as
they apply to Longhi’s FCA allegations because, inter alia, the text of the FCA
invalidates the release.
       The Defendants’ arguments are unavailing because the release and
indemnification clauses are invalid under the plain language of the FCA. When

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an individual brings a qui tam suit under the FCA, the action may be dismissed
only if the court and the Attorney General give written consent to the dismissal
and their reasons for consenting. See 31 U.S.C. § 3730(b)(1). Once filed by the
relator, the complaint must remain under seal for at least sixty days, and is not
served on the defendant until the court so orders. § 3730(b)(2). The Government
may choose to intervene and proceed with the action within the sixty days after
it receives the complaint, material evidence, and information, but the
Government may extend the sixty-day evaluation period with a showing of good
cause to the court. § 3730(b)(3). The district court correctly found that Longhi
signed the release eleven days after he filed the qui tam complaint and was
therefore unable to personally dismiss the case. In addition, the district court
correctly held that even if the release and indemnification were valid, Longhi
could not have entered into it at the time he did without the express knowledge
and consent of the United States, because the statutory sixty-day review window
still governed. This outcome comports with our decision in Searcy v. Phillips
Electronics North American Corp., where we held that the United States has
absolute power to veto any settlement between a relator and defendant
corporation. 117 F.3d 154, 160 (5th Cir. 1997).
      Furthermore, the interest in enforcing the release and indemnification
clauses are outweighed by public policy concerns. The Supreme Court’s decision
in Rumery establishes the framework for determining whether public policy
prevents enforcement of the release and indemnification in the limited context
of this qui tam case. Specifically, the Supreme Court held that “a promise is
unenforceable if the interest in its enforcement is outweighed in the
circumstances by a public policy harmed by the enforcement of the agreement.”
Rumery, 480 U.S. at 392 (citation omitted). The public policy interest implicated
in this case is the ability of the Government to obtain information from relators

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it could not otherwise obtain. It is in the Government’s best interest to gain full
information from the relator. To enforce the release and indemnification clauses
contained in the stock sale agreement against Longhi would ignore the public
policy objectives expressly spelled out by Congress in the FCA and would provide
disincentives to future relators.      In addition, enforcing the release and
indemnification clauses would encourage individuals guilty of defrauding the
United States to insulate themselves from the reach of the FCA by simply
forcing potential relators to sign general agreements invoking release and
indemnification from future suit. The district court correctly determined that
enforcing the release against Longhi is against public policy. We affirm.
E. Defendants’ Motion for Summary Judgment
         The Defendants argue that the district court should have granted their
motion for summary judgment. Because we have affirmed the district court’s
decision to grant the Government’s motion for summary judgment, we find no
error.
                            III. ATTORNEYS’ FEES
         The Defendants argue that we should reverse the award of attorneys’ fees
because Longhi failed to segregate the non-compensable work performed by his
counsel. In response, Longhi argues that under the FCA he is entitled to an
award of attorneys’ fees for all time reasonably expended on his behalf in pursuit
of the achieved result. Longhi asserts that it is legally irrelevant that he
expended a small, limited amount of time in connection with claims that were
not actively litigated in the case.
A. Standard of Review
         The parties dispute the applicable standard of review. Only two of our
cases, both unpublished, discuss the applicable standard for reviewing a district
court’s award of attorneys’ fees under the FCA. United States v. Medica Rents

                                        25
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Co. Ltd., No. 03-11297, 2008 U.S. App. LEXIS 17946, at *1 (5th Cir. 2008); U.S.
ex rel. Bain v. Georgia Gulf Corp., 208 F. App’x 280, 282 (5th Cir. 2006). In both
instances, we applied an abuse of discretion standard when reviewing a district
court’s award of attorneys’ fees.12        Thus, we apply an abuse of discretion
standard of review to the instant case. In Bain, we explained that the abuse of
discretion standard of review is consistent with our review of attorneys’ fees
under similar circumstances. 208 F. App’x at 282 (citing Skidmore Energy, Inc.
v. KPMG, 455 F.3d 564, 566 (5th Cir. 2006)). “Under the abuse of discretion
standard, a district court’s decision to award attorneys’ fees will not be disturbed
unless the award is based on (1) an erroneous view of the law or (2) a clearly
erroneous assessment of the evidence.” Id. See also Travelers Ins. Co. v. St. Jude
Hosp. of Kenner, Inc., 38 F.3d 1414, 1417 (5th Cir. 1994); Alizadeh v. Safeway
Stores, Inc., 910 F.2d 234, 237-38 (5th Cir. 1990); Cobb v. Miller, 818 F.2d 1227,
1231 (5th Cir. 1987) (stating that the ultimate award of attorney’s fees is
reviewed for abuse of discretion); EEOC v. First Ala. Bank, 595 F.2d 1050, 1056
(5th Cir. 1979).
B. Analysis
         Section 3730(d)(1) of the FCA states that a relator in a successful qui tam
action is entitled to “receive an amount for reasonable expenses which the court
finds to have been necessarily incurred, plus reasonable attorneys’ fees and
costs.        All such expenses, fees, and costs shall be awarded against the
defendant.” 31 U.S.C. §3730(d)(1). The question is whether Longhi’s attorneys’
fee award should be segregated because he was not “successful” in proving a
violation of the FCA with regards to all twenty-one contracts, as he initially

         12
         We note that Bain and Medica Rents involve § 3730(d)(4) of the FCA and the instant
case involves § 3730(d)(1) of the FCA. We find this to be a distinction without relevant
difference in determining the appropriate standard of review.

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alleged. We find the Supreme Court’s decision in Hensley v. Eckerhart, to be
instructive. 461 U.S. 424 (1983).
      In Hensley, the Supreme Court reviewed an award of attorneys’ fees
pursuant to the Civil Rights Attorney’s Fees Awards Act for fees incurred during
civil rights litigation where the plaintiffs did not prevail on all of their claims.
Id. at 426. The Court stated that “plaintiffs may be considered prevailing
parties for attorney’s fees purposes if they succeed on any significant issue in
litigation which achieves some of the benefit the parties sought in bringing suit.”
Id. at 433 (quotation and internal quotation marks omitted). The Supreme
Court explained that a plaintiff might bring distinctly different claims that are
based on different facts and legal theories, and in such an instance “work on an
unsuccessful claim cannot be deemed to have been ‘expended in pursuit of the
ultimate result achieved.’” Id. at 435 (quotation omitted). The Court also
explained, however, that there are sometimes instances where a “plaintiff’s
claims for relief will involve a common core of facts or will be based on related
legal theories.” Id. at 435. In those instances, where much of counsel’s time is
“devoted generally to the litigation as a whole, making it difficult to divide the
hours expended on a claim-by-claim basis . . . the district court should focus on
the significance of the overall relief obtained by the plaintiff in relation to the
hours reasonably expended on the litigation.” Id.
      The district court properly noted the standards set out by Hensley and
expressly determined that the claims regarding the performance on the contracts
and the claims alleging fraudulent inducement were not factually distinct. The
district court determined that the claims regarding the four SBIR contracts
arose from the same set of contracts, same actors, and the same illegal intent to
defraud the government of money in violation of the FCA. The district court also

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determined that the fees related to the four SBIR contracts should not be
segregated from the other claims.
      We hold that the district court did not abuse its discretion in finding that
the level of success on the four SBIR contract claims alone was sufficient enough
to merit entitlement to a full attorneys’ fees award. The district court reviewed
the billing records and found no duplicative efforts or unnecessary hours, and
thus found that Longhi’s counsel’s billing record to be reasonable. We affirm.
                             IV. CONCLUSION
      For the foregoing reasons, we AFFIRM the district court’s judgment on all
claims.

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