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.
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 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 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 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.
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 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.
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
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.
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.
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 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, --- U.S. ----, 128 S.Ct. 2123, 2126, 170 L.Ed.2d 1030 (2008)4 (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 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, 63 S.Ct. 379, 87 L.Ed. 443 (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.
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, 119 S.Ct. 1827, 144 L.Ed.2d 35 (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, 117 S.Ct. 921, 137 L.Ed.2d 107 (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, 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 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