Seventh Circuit affirms summary judgment against whistleblowers in declined DOD fraud case

by Ben Vernia | January 31st, 2016

On December 11, 2015, the Court of Appeals for the Seventh Circuit, in U.S. ex rel. Marshall, et al. v. Woodward, Inc., affirmed a grant of summary judgment against two whistleblowers who claimed that their former employer submitted false claims for a part used in Army helicopters, and fired them in retaliation for complaining about it.

One of the relators had been tasked with investigating a leak occurring within one weld of the part, a temperature sensor that the company supplies to General Electric for incorporation in fuel flow regulators in Apache and Blackhawk engines. She concluded, as a result of her investigation, that the part’s dimensions were incorrect,  that the company’s methods for welding the joint were faulty, and that it should be x-rayed but was not.

The company investigated her concerns, and dismissed them, instructing her and the other relators to continue working on the parts. The relators persisted in their objections, despite additional investigation by the company. When they continued to refuse to work on the parts, they were told to leave the company. One of the relators then called the company’s hotline number, which launched another engineer’s investigation of the concerns, but he, too, rejected their arguments. The company’s ethics committee then decided that the relators’ continued refusal to work warranted termination, which the company did, after their supervisor met with them one final time.

Now former employees, the relators called the a DOD special agent and contract management officials, and described their concerns. DOD launched its own investigation (under the pretext of a more general audit), but eventually sided with the company. Several months later, the relators filed their qui tam suit, in which the government declined to intervene.

The Court of Appeals affirmed the three holdings of the District Court:

  • First, the Court agreed that the relators had failed to show that the company acted with scienter in submitting allegedly false claims. Although company officials made comments dismissive of relators’ quality concerns, the Court noted, they nevertheless investigated them and concluded that they were meritless. The Court also rejected the relators’ argument that the engineer who had modified the shop procedures for the part to remove the x-ray examination step knew that it was necessary; he testified to just the opposite, in fact, and the relators’ experts’ testimony could not rebut the engineer’s belief that x-raying the part was unnecessary.
  • The Court also agreed with the District Judge that the misrepresentations were immaterial, in light of the government’s investigation of the concerns, its rejection of them, and its continued acceptance of the parts. Government conduct is relevant to establishing materiality, the Court reasoned. (The Court also rejected the relators’ challenge to the government’s investigation, noting that the investigator had known of a false statement by a company employee regarding the x-ray step, but that he had known the truth, and the false testimony had not affected his conclusions.
  • Finally, the Court held that the relators had failed to make out a case of retaliation, because under a “but for” standard, they were fired for insubordination, not for retaliation. The company terminated them, the Court concluded, only after investigating their allegations and finding them meritless. Because no reasonable jury could have found that the company had retaliated against them, summary judgment for the company was proper.

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