United States Ex Rel. Smith v. Boeing Co. , 825 F.3d 1138 ( 2016 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS June 13, 2016
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
UNITED STATES OF AMERICA, ex rel.
TAYLOR SMITH; JEANNINE
PREWITT; JAMES AILES,
Plaintiffs - Appellants,
v. No. 14-3247
THE BOEING COMPANY;
DUCOMMUN, INC., f/k/a AHF -
Ducommun,
Defendants - Appellees.
_________________________________
Appeal from the United States District Court
for the District of Kansas
(D.C. No. 6:05-CV-01073-MLB-KMH)
_________________________________
Don R. Sampen, Clausen Miller, P.C., Chicago, Illinois (Edward M. Kay, Michael R.
Grimm, Dean S. Rauchwerger, and Joseph J. Ferrini, Clausen Miller, P.C., Chicago,
Illinois, Corlin J. Pratt and Terry L. Unruh, Sherwood, Harper, Dakan, Unruh & Pratt,
LC, Wichita, Kansas, and William J. Skepnek, The Skepnek Law Firm, P.A., Lawrence,
Kansas, with him on the briefs), for Plaintiffs-Appellants.
Eric B. Wolff, Perkins Coie LLP, Seattle, Washington (Steve Y. Koh and Paul Graves,
Perkins Coie LLP, Seattle, Washington, Lyndon W. Vix, Stephen E. Robison, Ron
Campbell, Fleeson, Gooing, Coulson & Kitch, LLC, Wichita, Kansas, and James M.
Armstrong and Jeffery A. Jordan, Foulston Siefkin, LLP, Wichita, Kansas, with him on
the brief), for Defendant-Appellee.
_________________________________
Before GORSUCH, MURPHY, and MORITZ, Circuit Judges.
_________________________________
MORITZ, Circuit Judge.
_________________________________
Three former employees of The Boeing Company, referred to as relators in this
qui tam action, brought suit under the False Claims Act (FCA) against Boeing and
one of its suppliers, Ducommun, Inc. The relators claimed Boeing falsely certified
that several aircraft it sold to the government complied with all applicable Federal
Aviation Administration (FAA) regulations, even though it knew parts manufactured
by Ducommun and incorporated into the aircraft didn’t conform to FAA-approved
designs.
The district court granted Boeing’s and Ducommun’s respective motions for
summary judgment on the relators’ FCA claims, finding no genuine dispute of
material fact as to the falsity, scienter, and materiality elements of those claims. The
district court also denied the relators’ motion to strike two FAA investigative reports,
which the court then relied on in granting the motions for summary judgment. The
relators appeal.
We conclude the district court properly admitted the FAA reports under the
Federal Rules of Evidence and the relators failed to establish the scienter element of
their FCA claims. Accordingly, we affirm.
BACKGROUND
At the heart of this appeal are Boeing’s alleged violations of FAA regulations
arising from aircraft Boeing sold or leased to the government. So to provide context,
we first briefly review the FAA regulatory scheme governing the aircraft at issue.
2
Through the Federal Aviation Act of 1958, Congress directed the Secretary of
Transportation to establish minimum standards for aircraft design, materials,
workmanship, construction, and performance in order to promote the safety of air
transportation in the United States. United States v. S.A. Empresa de Viacao Aerea
Rio Grandense (Varig Airlines), 467 U.S. 797, 804 (1984). The Act established a
multi-step certification process for new aircraft, and granted FAA authority to
implement the process. Id. at 804-05.
The certification process requires a manufacturer to first obtain a type
certificate before it commences full-scale production of a new design. Id. at 805. The
type certificate signifies FAA’s approval of the basic design of the aircraft, referred
to as the type design.1 Id. at 806. The manufacturer must submit to FAA aircraft
drawings, test reports, and other computations necessary to show the type design
comports with all FAA regulations. Id. at 805. The manufacturer also must produce a
prototype aircraft and conduct ground and flight tests on the prototype. Id. at 805-06.
Once FAA is satisfied the type design meets all applicable regulations and the
prototype is airworthy, FAA issues a type certificate for the proposed design. Id.
1
FAA’s regulations in force at all relevant times defined type design as
consisting of, in part,
(a) The drawings and specifications, and a listing of those drawings and
specifications, necessary to define the configuration and the design features
of the product shown to comply with the requirements of that part of this
subchapter applicable to the product; [and]
(b) Information on dimensions, materials, and processes necessary to define
the structural strength of the product.
14 C.F.R. § 21.31 (2008).
3
The manufacturer must then obtain a production certificate before it can begin
duplicating the prototype for sale. Id. at 806. This requires the manufacturer
demonstrate that it has established and can maintain quality control systems that
assure each aircraft it produces complies with FAA-approved type design. Id. A
production certificate thus signifies the manufacturer has shown it can reliably
duplicate the prototype so that each aircraft complies with the approved type design.
See id.
Finally, each individual aircraft receives final approval from FAA in the form
of an airworthiness certificate before it’s placed into service. Id. The airworthiness
certificate is FAA’s designation that the aircraft in question conforms to the type
design and is otherwise in condition for safe operation. Id. This final approval is
performed by either an FAA employee or, more often, an FAA-designated
representative. Id. at 807. That representative—typically an employee of the
manufacturer with detailed knowledge of the aircraft design—acts as a surrogate of
FAA. Id.
Boeing is a manufacturer of commercial aircraft. In accordance with FAA’s
certification process, Boeing first obtained a type certificate in 1967 for a model 737
jet, designated as a 737-100 series jet. Boeing has since updated the 737 model and
has received a type certificate for each derivative, spanning from 1967 (the 737-100
series) to 2007 (a series designated as 737-900ER).
Beginning with a model designated as the 737-600 series, Boeing referred to
the 737 aircraft as a “Next Generation” aircraft, or “737NG.” The 737NG differed
4
from its “737 Classic” predecessor by virtue of the methods Boeing used in the
design, manufacture, and quality control of the aircraft. Whereas Boeing created the
737 Classic aircraft using traditional design and manufacturing methods, including
labor-intensive, hand-directed machine tools and manual measurement and inspection
of parts for purposes of quality control, Boeing used newer computer-aided
technologies and advanced assembly techniques in designing and manufacturing the
737NG aircraft.
Between 1997 and 2002, Boeing entered into contracts with the federal
government for the manufacture and sale or lease of several 737NG aircraft. In
relevant part, the contracts required Boeing to obtain for each aircraft a type
certificate and an airworthiness certificate or, for some of the contracts, the military
equivalent of an airworthiness certificate, called a conformity certificate. The
contracts also required Boeing to maintain a production certificate for each of its
production facilities.
Boeing in turn contracted with Ducommun to supply more than 200 parts for
the 737NG aircraft, most for the fuselage. The contracts required Ducommun to
implement a manufacturing process known as Advanced Technology Assembly
(ATA). ATA typically uses a Computer Numerical Control (CNC) machine to
precisely locate and drill mating holes at various locations on parts of the aircraft.
During assembly, these mating holes are aligned with one another and the various
parts are affixed via temporary fasteners until they can be permanently joined. ATA
5
thus results in a quicker, more accurate assembly by reducing or eliminating the need
to rely on bulky, labor-intensive locating tools.
Ducommun initially produced ATA parts using computerized machinery to
achieve first article inspection—a first production run that allowed Boeing to verify
that Ducommun was complying with ATA production methods. At some point after
receiving first article inspection clearance, however, Ducommun reverted to using
traditional manufacturing processes. For example, Ducommun began drilling ATA
holes on fuselage components using manual drill jigs.
In light of suspected irregularities with Ducommun-supplied parts, Boeing
conducted a tooling audit of Ducommun in 1999. The audit revealed anomalies with
Ducommun’s manufacturing processes and tooling procurement procedures,
potentially entitling Boeing to several million dollars in restitution. The audit team
found that Ducommun was using tools that didn’t conform to Boeing specifications,
using tools designed for use with CNC machinery as fixtures for manual tools, and
implementing labor-intensive, hand-directed processes rather than CNC processes.
These hand-directed processes included the use of ball-peen steel hammers, scribes,
and hand-driven belt sanders, even though the contracts between Boeing and
Ducommun required the use of CNC machines and other computerized processes.
Boeing and Ducommun entered into a settlement agreement to resolve disputes
arising from the tooling audit. Under the terms of the agreement, Ducommun
implemented several changes to address the manufacturing irregularities, and Boeing
agreed to accept parts that Ducommun produced using manual manufacturing
6
techniques rather than CNC machines in return for a three-percent price reduction.
Accordingly, Ducommun continued to supply parts for the 737NG aircraft that it
manufactured using drill jigs and other hand-operated tools. Boeing in turn sold or
leased the 737NG aircraft that incorporated these Ducommun parts to the
government.
Several members of the Boeing audit team—relators Taylor Smith, Jeannine
Prewitt, and James Ailes—believed that Ducommun’s manufacturing processes
violated FAA regulations, particularly the 737NG’s type design. Accordingly, these
members brought a qui tam action against Boeing and Ducommun under the FCA in
2002.2 In pertinent part, the FCA provides that a party can be held liable for treble
damages if it “knowingly presents, or causes to be presented, a false or fraudulent
claim for payment or approval” to the government, or “knowingly makes, uses, or
causes to be made or used, a false record or statement material to a false or fraudulent
claim.” 31 U.S.C. § 3729(a)(1)(A)-(B). Because Boeing submitted claims for
payment even though it knew the aircraft didn’t comply with the 737NG type
certificate, the relators argued, Boeing violated the FCA.
2
The FCA allows a private person, referred to as a relator, to bring an FCA
suit on behalf of the government in what is known as a qui tam action. 31 U.S.C.
§ 3730(b)(1); see United States ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d
1163, 1167 (10th Cir. 2010). The relator serves the government with a copy of the
complaint, and the government has 60 days to intervene and proceed with the action
once served; otherwise, the relator conducts the action. 31 U.S.C. § 3730(b)(4). If the
relator conducts the action and is ultimately successful, she receives between 25 and
30 percent of the proceeds of the action or settlement. Id. § 3730(d)(2).
7
After the relators served their 2002 complaint on the government, FAA opened
a Suspected Unapproved Parts (SUP) investigation into the Ducommun parts. FAA
explained that it was investigating Ducommun because the relators suspected
thousands of structural parts it manufactured for Boeing aircraft didn’t conform to
type design. Over a period of two years, FAA investigated the relators’ claims by
conducting a surprise inspection of Ducommun’s manufacturing facilities and
inspecting the allegedly unapproved parts. Because FAA found no type-design
violations, it closed its investigation in 2004 and the government declined to
intervene. In turn, the relators voluntarily dismissed their initial FCA action.
The relators then filed another FCA action in 2005, which is the subject of this
appeal. At the heart of the 2005 FCA action—and this appeal—is the relators’
allegation that Ducommun was required to manufacture ATA parts using
computerized technologies, including tooling capable of collecting statistical process
control (SPC) data. Because Ducommun manually drilled ATA holes using drill jigs
incapable of collecting SPC data, the relators contended the Ducommun parts didn’t
conform to type design.
To support this allegation, the relators relied in part on two experts’ opinions
that an engineering note on the 737NG drawings, flag note S3, required the use of
SPC in order to conform to type design. That flag note appears on most of the
737NG’s drawings for ATA parts and states,
FEATURES IDENTIFIED AS STATISTICALLY TOLERANCED
SHALL BE PRODUCED WITH STATISTICAL PROCESS CONTROLS.
THE DRAWING TOLERANCE APPLIES ONLY WHEN PROCESS
8
MEASUREMENTS MEET THE FOLLOWING REQUIREMENTS:
1) THE PROCESS CONTROL CHARTS SHOW THAT THE
ASSOCIATED MANUFACTURING PROCESS IS IN CONTROL.
2) THE MEAN DEVIATES FROM NOMINAL NO MORE THAN 10
PERCENT OF THE SPECIFIED TOLERANCE. 3) THE MINIMUM CPK
IS 1.0, WITH 90 PERCENT CONFIDENCE. WHEN THESE
REQUIREMENTS ARE NOT MET, INDIVIDUAL PRODUCT
MEASUREMENTS MUST FALL WITHIN +/- THIRTY PERCENT OF
THE SPECIFIED TOLERANCE, CENTERED ON NOMINAL.
Aplee. App. vol. 2, 346.
The relators’ experts focused on the first sentence of flag note S3
(“FEATURES IDENTIFIED AS STATISTICALLY TOLERANCED SHALL BE
PRODUCED WITH STATISTICAL PROCESS CONTROLS,” id. (emphasis added))
and claimed that Ducommun violated the 737NG’s type design by using hand tools—
which are incapable of collecting SPC data—to drill ATA holes. And when Boeing
sold or leased nearly a billion dollars’ worth of aircraft to the government with
knowledge of these nonconformities, the relators contended, it submitted a false
claim for payment to the government in violation of the FCA. The relators thus
sought trebled damages on behalf of the government.
But Boeing’s design engineers insisted the relators’ interpretation of flag note
S3 was incorrect. The design engineers explained that, as with all manufacturing
processes, the drilling of ATA holes—even if performed by a CNC machine—results
in random variations that can’t always be controlled. The design engineers thus
accounted for acceptable tolerances in the aircraft design, allowing ATA holes to
vary from their nominal location by a specified distance while still conforming to
engineering requirements. To meet engineering requirements and thus type design,
9
the engineers explained, each ATA hole must be located within the specified
tolerance from its nominal location.
The design engineers further explained that newer, computerized tooling is
capable of collecting detailed data regarding the precise location of each drilled hole
and its corresponding variance from the nominal location. If the collected data is
normally distributed—that is, if the variances resemble a bell curve centered near the
nominal location—then the process is said to be “in SPC” and there is a high
probability that any variances for a given assembly will be randomly distributed
around the nominal location. Accordingly, the design engineers allowed for larger
tolerances if a manufacturer used sophisticated machinery capable of showing its
manufacturing process was in SPC. The engineers explained that the first portion of
flag note S3 was thus intended to mean that if a manufacturer chose to use the
tolerances appearing on the face of the drawings, it had to demonstrate its
manufacturing process was in SPC.
The design engineers also indicated, however, that they understood
manufacturers wouldn’t always manufacture parts using sophisticated machinery
capable of collecting SPC data. So the design engineers included the second part of
flag note S3, beginning with “WHEN THESE REQUIREMENTS ARE NOT MET,”
id., to note that if a manufacturer didn’t utilize tooling capable of collecting SPC
data, its parts had to meet tighter tolerances.
The 2005 action prompted another FAA SUP investigation. Once again, FAA
found no indications of nonconforming parts. The report indicated that FAA
10
interpreted flag note S3 as allowing Ducommun to use SPC for product acceptance if
the process control chart showed that the process was in control, but alternatively
allowed Ducommun to deviate from SPC requirements, albeit at tighter tolerances.
Noting that Ducommun had sufficient controls in place resulting in parts complying
with these tighter tolerances, and that none of the investigating agencies discovered
any evidence supporting the relators’ allegations that the Ducommun parts violated
FAA regulations, FAA recommended closing the case. The government again
declined to intervene.
This time the relators maintained their FCA action notwithstanding FAA’s
failure to find any violations in its SUP investigation. The district court ultimately
granted summary judgment for Boeing and Ducommun on the FCA claims. In doing
so, the court acknowledged that the relators’ interpretation of flag note S3 was
reasonable, but found the flag note could alternatively and reasonably be interpreted
as allowing the use of noncomputerized machinery (such as a drill jig) at tighter
tolerances. The district court concluded the conflicting indications of whether SPC
was required undermined the relators’ assertion that Boeing acted with the requisite
scienter necessary to sustain an FCA claim.3 Accordingly, the district court granted
Boeing’s and Ducommun’s respective motions for summary judgment.
3
The district court also concluded that even if Boeing acted with the requisite
scienter (that is, if it knowingly submitted a false claim for payment), the relators
failed to establish any false representations were material to the government’s
purchasing decision.
11
The relators appeal. They contend the district court erred by admitting the SUP
reports and, in turn, by deferring to FAA’s determinations that the Ducommun parts
complied with type design. They also contend the district court erroneously found a
lack of falsity, scienter, and materiality with respect to the FCA claims, and thus
erred in granting summary judgment.4
DISCUSSION
We review the district court’s grant of summary judgment dismissing the
relators’ claims de novo. United States ex rel. Burlbaw v. Orenduff, 548 F.3d 931,
944 (10th Cir. 2008). Summary judgment is appropriate “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). When considering a defendant’s
motion for summary judgment on FCA claims, we accept as true the relators’
evidence and draw all reasonable inferences in their favor. Burlbaw, 548 F.3d at 944.
We review a district court’s decision to admit evidence under the Federal
Rules of Evidence for an abuse of discretion. United States v. Rodella, 804 F.3d
1317, 1329 (10th Cir. 2015). “Under this standard, we will not reverse unless the
district court’s decision exceeded the bounds of permissible choice in the
circumstances or was arbitrary, capricious or whimsical.” Id.
4
The district court also granted Boeing’s motion for summary judgment on
retaliation claims brought by one of the relators, Prewitt, under an FCA retaliation
provision and Kansas state law, and granted the relators’ motion to strike Robert
Eastin’s deposition testimony. But the relators appeal only the rulings relating to
FCA liability and denial of their motion to strike the SUP reports, and Boeing hasn’t
cross-appealed the court’s ruling striking Eastin’s deposition testimony. We thus
limit our discussion to the rulings concerning FCA liability and the SUP reports.
12
I. The district court neither abused its discretion in admitting the SUP
reports nor abdicated its judicial function in considering those reports.
A. The district court properly admitted the reports.
The district court admitted both the 2004 and 2005 SUP reports under Federal
Rule of Evidence 803(8)(A)(iii), an exception to the rule against hearsay that permits
admission of a public record that sets out, “in a civil case or against the government
in a criminal case, factual findings from a legally authorized investigation.” The
relators argue the district court abused its discretion in admitting the SUP reports
because they are untrustworthy. See Fed. R. Evid. 803(8)(B) (explaining public
records are inadmissible if opponent demonstrates “a lack of trustworthiness”).
We’ve previously provided a framework for considering the trustworthiness of
public reports, explaining that the court should consider “the timeliness of the
investigation; the special skill or experience of the investigator; whether a hearing
was held and the level at which it was conducted; and any possible motivation
problems in the preparation of the report.” Perrin v. Anderson, 784 F.2d 1040, 1047
(10th Cir. 1986). After considering these factors, the district court concluded the SUP
reports were trustworthy because they weren’t untimely; the relators failed to show
FAA was unqualified to make the findings; FAA considered the statements of the
relators during its investigation; and FAA prepared the SUP reports in accordance
with its legal obligation to investigate upon receiving notice of suspected unapproved
parts, rather than for purposes of litigation. The relators nonetheless argue on appeal
13
that one or both of the reports are untrustworthy for several reasons, none of which
we find persuasive.
First, the relators argue the 2004 report is untrustworthy because
approximately six of the 34 lines on page 3 are redacted. But the relators cite no
authority suggesting partial redaction of a public record is a sign of
untrustworthiness, and we decline to find so here.
Next, the relators argue the reports are untrustworthy because they are based
on multiple layers of hearsay. The reports reference the findings of other
investigative agencies, including the Defense Criminal Investigative Service (DCIS)
and FAA’s Manufacturing Inspection District Office (MIDO). But we have
previously explained, in examining Rule 803(8)’s predecessor, that the rule
necessarily covers “findings . . . based in part on matters outside the personal
knowledge of the preparers of those reports.” Denny v. Hutchinson Sales Corp., 649
F.2d 816, 821 (10th Cir. 1981). We see no reason why FAA’s efforts to consider all
relevant material in its investigation, including the reports of other investigative
agencies, diminishes the trustworthiness of its findings.
The relators also argue the reports are untrustworthy because FAA didn’t
conduct a hearing when preparing them. But FAA did consider the relators’ claims
and statements during its investigation. And although the lack of a hearing may tend
to suggest untrustworthiness in certain cases, it’s just one of several factors a district
court should consider in evaluating trustworthiness. See Perrin, 784 F.2d at 1047. We
can’t say the lack of a hearing decisively tipped the scales in favor of
14
untrustworthiness here, particularly because FAA considered the relators’ input in
preparing its reports.
The relators next argue the reports are untrustworthy because the investigators
lacked skill and expertise. They argue the investigators violated FAA’s own
investigatory guidelines by failing to take photographs, secure evidence, and record
witness statements. But even though the reports don’t contain photographs or other
physical evidence, the record indicates that the investigators conducted a thorough
investigation that included performing a surprise inspection of Ducommun’s facilities
and physically inspecting suspect parts. We find no basis for questioning the
investigators’ skill and experience in view of this thorough investigation.
The relators also advance several arguments attacking the content of the
reports. Specifically, the relators argue the reports are untrustworthy because (1) the
reports don’t focus on the processes in place at the time of the alleged type design
violations; (2) the reports don’t address the quality acceptance processes in place at
Boeing or Ducommun; and (3) Boeing’s audit report contradicts the reports’ findings.
But we fail to see how these arguments, which each go to the reports’ alleged lack of
credibility, demonstrate the reports’ lack of trustworthiness for purposes of admission
under Rule 803(8)(A)(iii). See Moss v. Ole S. Real Estate, Inc., 933 F.2d 1300, 1307
(5th Cir. 1991) (explaining that a report’s trustworthiness—which is a question of the
report’s reliability—is the test for admission under the rule, not its credibility—
15
which is a question of what weight the factfinder should give the report once
admitted).5
Accordingly, we agree the relators have not met their burden in “show[ing]
that the source of information or other circumstances indicate a lack of
trustworthiness.” Fed. R. Evid. 803(8)(B). The district court thus didn’t abuse its
discretion in admitting the reports under Rule 803(8)(A)(iii). See Rodella, 804 F.3d at
1329.
B. The district court didn’t abdicate its judicial function when it
considered the reports in ruling on FCA liability.
The relators next argue that the district court abdicated its judicial function by
deferring to FAA’s position in the SUP reports. First, they contend the court erred in
concluding that FAA had primary jurisdiction over the matter and that this allegedly
erroneous finding “colored its entire summary judgment analysis.” Aplt. Br. 24.
Second, they argue the district court erroneously found FAA’s regulatory authority
over Boeing insulated Boeing from FCA liability. And third, the relators contend the
district court erroneously gave FAA’s findings preclusive weight.
5
In any event, we find these additional arguments meritless. Although the
2005 Report limits some of its findings to current manufacturing processes, it also
states that investigators reviewed historical shop orders and records, suggesting the
investigators reviewed the manufacturing processes in place at the time of the alleged
violations. The reports also concluded that Boeing’s Material Review Board (MRB)
recorded and approved any deviation from type design, and that flag note S3 provides
an exception to using SPC for product acceptance, indicating the investigators did
consider quality acceptance processes. And the audit report, which was directed to
tooling irregularities, didn’t address flag note S3 and whether Ducommun’s tooling
violates FAA regulations, and thus didn’t contradict the SUP reports’ findings.
16
But we see nothing in the district court’s opinion indicating the court believed
Boeing was somehow insulated from judicial review. And even assuming the district
court erred in concluding FAA had primary jurisdiction, we see nothing that suggests
it erroneously deferred to the agency’s SUP report findings on that basis or applied
the reports in a preclusive manner. Indeed, the opposite is true. If the district court
had concluded that FAA’s regulation insulated Boeing from liability or that FAA’s
prior conclusions controlled the matter, these conclusions likely would’ve ended the
district court’s inquiry. But the district court expressly declined to decide whether
FAA’s finding of regulatory compliance precluded the relators’ claims. Instead, the
district court discussed and applied each element of the FCA claims at length,
including a 13-page discussion of the scienter element. Thus, the relators’ contention
that the district court treated FAA as “running interference” for Boeing, see Aplt. Br.
27, lacks merit.
In short, the district court neither abused its discretion in admitting the SUP
reports under Rule 803(8)(A)(iii), nor abdicated its judicial function by considering
the reports when evaluating FCA liability.
II. The district court didn’t err in granting summary judgment on the
relators’ FCA claims because there is no evidence Boeing knowingly
presented a false claim to the government for payment.
In pertinent part, the FCA makes any person liable who (1) “knowingly
presents, or causes to be presented, a false or fraudulent claim for payment or
approval” to the government, or (2) “knowingly makes, uses, or causes to be made or
used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C.
17
§ 3729(a)(1)(A)-(B). Thus, it is not enough to simply submit a false claim. To give
rise to liability under the FCA, the submitted claim must be both knowingly and
materially false. Id. § 3729(a)(1)(A)-(B), (b)(1); see Burlbaw, 548 F.3d at 952-53
(explaining that “[t]he proper focus of the scienter inquiry under § 3729(a) must
always rest on the defendant’s ‘knowledge’ of whether the claim is false”); United
States ex rel. Thomas v. Black & Veatch Special Projects Corp., --- F.3d ----, ----,
2016 WL 1612857, at *7 (10th Cir. Apr. 22, 2016) (explaining “an FCA plaintiff may
establish materiality by demonstrating that the defendant violated a contractual or
regulatory provision that ‘undercut the purpose of the contract[],’” or, “where a
defendant violates only a tangential or minor contractual provision, . . . by coming
forward with evidence indicating that, despite the tangential nature of the violation, it
may have persuaded the government not to pay the defendant” (first alteration in
original) (quoting Lemmon, 614 F.3d at 1169)).
A claim is false for purposes of the FCA if it’s either factually or legally false.
United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217
(10th Cir. 2008). A payee makes a factually false claim by either (1) submitting an
incorrect description of the goods or services provided; or (2) requesting
reimbursement for goods or services never provided. Id. And a payee makes a legally
false claim by certifying compliance with a statute or regulation as a condition to
government payment but knowingly failing to comply with that statute or regulation.
Id.
18
Moreover, there are two forms of legally false certification—express and
implied. Lemmon, 614 F.3d at 1168. Express false certification occurs when a
government contractor falsely certifies compliance with a particular statute,
regulation, or contract term and compliance is a prerequisite to payment. Id. Implied
false certification occurs when a government contractor doesn’t expressly certify
compliance, but knowingly and falsely implies that it is entitled to payment when it
submits a claim. Id. at 1169.
In this case, the relators allege both express and implied false certification.6
Generally, the relators assert Boeing submitted an express legally false claim by
certifying the aircraft complied with FAA regulations despite its knowledge that
Ducommun’s processes didn’t conform to type design. And they assert Boeing
submitted an implied legally false claim by knowingly failing to comply with FAA
regulations including the 737NG type design even though it knew compliance with
the regulations was a prerequisite to government payment.7
6
On April 19, 2016, the Supreme Court heard argument in Universal Health
Services, Inc. v. United States ex rel. Escobar, No. 15-7. At issue there is whether
implied false certification is a viable theory under the FCA. Because we conclude the
relators haven’t established a triable issue with respect to implied false
certification—whether viable or not—the Court’s ultimate resolution in Escobar
won’t affect our holding.
7
The relators also assert Boeing made a factually false claim because Boeing
allegedly knew before executing its first government contract that Ducommun was
unable to meet the computerized requirements of type design, and thus knew
Ducommun couldn’t satisfy the contracts’ requirements. But an FCA violation
requires presenting a false claim for payment. See 31 U.S.C. § 3729(a)(1)(A)-(B);
Conner, 543 F.3d at 1217. The relators haven’t established that Boeing’s mere
knowledge—prior to entering into any contracts with the government—is actionable
under the FCA.
19
But the relators haven’t shown the requisite scienter necessary to establish
FCA liability. The relators must show more than a falsehood—they must show that
Boeing knowingly presented a false claim for payment. 31 U.S.C. § 3729(a)(1)(A)-
(B); Burlbaw, 548 F.3d at 945. Although “no proof of specific intent to defraud” is
required, the relators must at least show that Boeing acted with “reckless disregard of
the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1) (defining “knowingly”
as acting with “actual knowledge of the information,” or with “deliberate
ignorance . . . or . . . reckless disregard of the truth or falsity of the information”); see
also Burlbaw, 548 F.3d at 945. Here, the relators present no evidence that anyone at
Boeing knew the Ducommun parts didn’t comply with FAA regulations—or,
alternatively, was deliberately ignorant of, or acted with reckless disregard to, FAA
violations—yet submitted a claim to the government for payment anyway. The
relators’ naked assertions, devoid of any evidence of scienter, can’t survive summary
judgment.
Indeed, the relators’ claims are analogous to those brought in Burlbaw. There,
we held the relators’ accusations that a university knowingly misrepresented that it
was a minority institution in order to receive Department of Defense (DOD) set-aside
contracts couldn’t survive summary judgment because the relators hadn’t put forth
any evidence showing anyone from the university knowingly provided a false
certification. Burlbaw, 548 F.3d at 948-51. We accepted as true the premise that the
university didn’t meet the DOD criteria and thus any certification to the contrary was
false. Id. at 937. But we nonetheless concluded summary judgment was appropriate
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because, among other reasons, the relators failed to show anyone from the university
knew the university didn’t satisfy the DOD criteria. Id. at 949-51.
As in Burlbaw, we are “struck” here “by what is not in the record.” Id. at 949.
Even if we assume that the 737NG aircraft Boeing sold to the government didn’t
comply with FAA regulations, there are simply no facts in the record supporting the
relators’ contention that Boeing knew about the nonconformities when submitting the
claims for payment.
The relators appear to recognize this deficiency, but they argue the 737NG’s
type design so clearly required Ducommun to manufacture the 737NG parts using
CNC machines and SPC that Boeing’s submission of the aircraft for payment was
“knowingly false as a matter of law.” Aplt. Br. 54. For example, the relators suggest
that type design so clearly required computerized processes that Boeing must have
known the aircraft didn’t conform to the type certificate when it incorporated
Ducommun’s hand-fabricated parts into the 737NG aircraft.
In support, the relators principally rely on flag note S3. Flag note S3 provides
that parts identified as statistically toleranced, which include the ATA parts
Ducommun produced, “SHALL BE PRODUCED WITH STATISTICAL PROCESS
CONTROLS.” Aplee. App. vol. 2, 346 (emphasis added). The relators contend use of
the word “shall” required Ducommun to use CNC machines capable of SPC in order
to comply with type design, and Boeing thus must have known its claims were false
when submitted for payment.
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The relators proffer the opinion of their expert, Dr. Michael Dreikorn, who
testified that because the “first sentence of flag note S3 contains the term ‘shall,’
which denotes a nondiscretionary requirement,” the flag note “specifically requires
the application of [SPC] to verify product conformity.” Aplt. App. vol. 17, 3628-29.
The relators also point to the opinion of another expert, Pat Duggins, who similarly
concluded that flag note S3’s use of the word “shall” required suppliers to produce
the part using SPC. Id. at 3853.
Although their interpretation of flag note S3 is at the heart of their scienter
argument, the relators also offer other evidence that they insist shows Boeing’s
knowledge. For example, the relators point to the tooling audit report, which suggests
Ducommun’s manufacturing processes violated its contracts with Boeing, and to the
declarations of each relator rehashing these findings. The relators also point to
testimony of various witnesses who believed it was mandatory for Ducommun to
implement computerized manufacturing and quality control processes. And they
argue that, by definition, the “Next Generation” designation signified the 737NG
aircraft differed from its 737 Classic counterpart and required the use of
computerized technologies during manufacture.
The problem with these arguments is that FAA and the design engineers who
wrote flag note S3 disagree with this interpretation of the note. For example, the
authors of flag note S3 explained that they included the additional condition, “WHEN
THESE REQUIREMENTS ARE NOT MET, INDIVIDUAL PRODUCT
MEASUREMENTS MUST FALL WITHIN +/- THIRTY PERCENT OF THE
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SPECIFIED TOLERANCE, CENTERED ON NOMINAL,” see Aplee. App. vol. 2,
346, to explain that different methods of manufacture would result in different
tolerances. One of the authors, Michael Kuss, stated that using drill jigs was and
remains common in the airline industry, but because drill jigs are not conducive to
data collection for SPC purposes, flag note S3 required tighter tolerances when using
these jigs rather than sophisticated machinery. Kuss explained:
We included the provision (“When these requirements are not met . . .”) in
the text of the flag note to explain that different methods of manufacture,
depending on whether SPC data was generated, would result in different
tolerances. Flag note S3 was not meant to require SPC in every instance,
and in my view, the text states that fact clearly.
Aplt. App. vol. 3, 603 (omission in original). A co-author of the flag note, Robert
Atkinson, similarly explained:
I am told that certain experts in this case have asserted that flag note S3
mandates automated hole drilling using [a CNC] machine and the collection
and use of statistical data. That is incorrect. As the note itself explains,
there are three requirements for suppliers to take advantage of the wider
tolerances offered by [SPC]. But “[w]hen these requirements are not met,”
the product must measure within the thirty percent tighter tolerance. As one
of the authors of flag note S3, it is simply wrong to claim that automated
drilling and statistical processes were required.
Id. at 607 (third alteration in original).
Likewise, FAA concluded that the latter portion of flag note S3 allows for a
deviation from the SPC requirements if the parts meet tighter tolerances than those
shown on the face of the drawing.
Contemporaneous Boeing design documents also support this interpretation of
flag note S3. For example, the ATA design guide in effect at the relevant time
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explained the purpose of the “S” series flag notes (including flag note S3) was to
provide different tolerances depending on the manufacturing process elected:
When statistical tolerancing is used on an engineering drawing, the
corresponding arithmetic tolerances may also be shown. The statistical
tolerances will be identified with an “S” series Flag Note. If Manufacturing
elects to build to statistical tolerances rather than arithmetic tolerances,
the part features must be fabricated using statistical process controls; and
Quality Assurance shall accept/reject parts based on statistical acceptance
methods.
Aplt. App. vol. 9, 2101-02 (emphasis added).
Thus, at best, the evidence shows conflicting opinions regarding whether
Ducommun was required to use computerized manufacturing and quality control
processes when manufacturing parts for the 737NG aircraft. In light of these
conflicting opinions, we reject the relators’ contention that their interpretation is so
indisputably correct as to render Boeing’s certifications “knowingly false as a matter
of law.” See Aplt. Br. 54. And because the relators offer no other evidence that
anyone at Boeing knowingly made a false certification, we conclude no genuine
dispute of material fact exists as to whether Boeing acted with the requisite scienter
to trigger FCA liability. Because this conclusion is fatal to the relators’ claims, we
need not address the remaining elements of falsity and materiality.
CONCLUSION
The district court didn’t abuse its discretion in admitting the two FAA SUP
reports. Nor did the court abdicate its judicial responsibility by considering those
reports at the summary judgment stage. And because we find no evidence that Boeing
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knowingly submitted a false claim to the government for payment, we conclude the
district court properly granted summary judgment to Boeing and Ducommun.
Affirmed.
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