United States District Court, D. Alaska
UNITED STATES OF AMERICA, EX REL, THOMAS A. BERG, TIMOTHY A. BERG, RYNE J. LINEHAN, NAYER M. MAHMOUD, and STANLEY E. SMITH, Plaintiffs,
v.
HONEYWELL INTERNATIONAL, INC., and HONEYWELL, INC., Defendants.
ORDER RE CROSS MOTIONS FOR SUMMARY JUDGMENT
Sharon
L. Gleason United States District Judge
Order
Before the Court are Defendants' Motion for Summary
Judgment at Docket 220 and Relators' Motion for Partial
Summary Judgment at Docket 225. The motions have been fully
briefed;[1] oral argument was held on October 17,
2016.[2]
This is
the third time the Court has addressed dispositive motions in
this case. The Ninth Circuit has twice sent this case back to
the district court following orders granting motions to
dismiss based solely on the allegations pled by
Relators.[3] In contrast to the prior motions to
dismiss, the motions before the Court at this juncture are
motions for summary judgment; the Court's disposition of
these motions is based on its review of the extensive
submissions of the parties regarding these motions, which
consists of thousands of pages of documentary evidence and
excerpts from over a dozen depositions.
BACKGROUND
In the
late 1990s the Army sought to privatize the utilities at U.S.
Army installations.[4] Simultaneously, but as a separate
initiative, the Army endeavored to increase the energy
efficiency of its buildings and facilities.[5] In 1986, Congress
authorized government agencies to enter into Energy Savings
Performance Contracts (“ESPC”), whereby the
agency could use the savings from an efficiency upgrade to
pay for that upgrade.[6] Pursuant to this law, a private contractor
would install and maintain Energy Cost Savings Measures
(“ECSM”), finance their installation, and receive
compensation from the government for years into the future
based on verified savings from the measures it had
installed.[7] By statute, payments to a contractor in a
given year cannot exceed “the amount that the agency
would have paid for utilities without an [ESPC]” during
that year.[8] Federal law also requires that the
contract “provide for a guarantee of savings to the
agency.”[9] It is these types of contracts that
underlie this case.
As part
of the privatization initiative, beginning in 1999 the Fort
Richardson Army base in Anchorage, Alaska (“FRA”)
contemplated shutting down its central heating and power
plant (“CHPP”) and instead buying its electricity
from a commercial provider.[10] At around the same time, FRA
reached out to Honeywell, Inc. to explore options for
improving its buildings' energy efficiency.[11] Honeywell had
previously entered a contract with the U.S. Army making it
the contractor for ESPCs for an extendable five year
term.[12] Under that “umbrella”
Indefinite-Delivery Indefinite-Quantity contract
(“IDIQ”), Honeywell could propose ESPCs that the
government could accept by issuing a “Task Order”
under the IDIQ.[13] In 2000, Honeywell proposed two
ESPCs-referred to as Proposal #3 and Proposal #4-to improve
FRA's energy efficiency.[14] It developed these proposals
with the understanding that FRA planned to cease generating
its own electricity and would instead buy its electricity
from a third-party provider.[15] Honeywell's proposals
included estimates of the costs of installation, the current
costs of electricity and heating for the base, and the
projected costs of electricity and heating after the
efficiency measures had been installed and the CHPP
shuttered. Honeywell prepared detailed calculations setting
out how it arrived at its estimates, which it shared with
both FRA personnel and Army Corps of Engineers staff in
Huntsville, Alabama.[16]
As the
proposals were developed, there were extensive discussions
between Honeywell's engineers and the engineers at
Huntsville about the basis and reasonableness of certain
calculations. Over time, these issues were resolved in
multilateral meetings and exchanges. Honeywell submitted
several revised drafts containing certain amended
calculations during the course of these
discussions.[17]Ultimately, the Army accepted
Honeywell's proposals for FRA in late 2000; Proposal #3
became formalized as Task Order 8 and Proposal #4 became
formalized as Task Order 9.[18]
Over
the next few years, questions arose as to whether FRA could
pay the contract amounts because its actual savings were less
than projected.[19] Because the statute authorizing ESPCs
limits payments to actual savings, Army lawyers were
concerned that making the payments would violate the
Anti-Deficiency Act.[20]Honeywell and the government renegotiated
and combined the two task orders in 2003.[21] Honeywell
received its first payments thereafter, pursuant to the
renegotiated contract.[22] After unsuccessfully pursuing
internal channels, [23] Relators initiated this action in 2007,
alleging that in 2000 Honeywell fraudulently obtained Task
Orders 8 and 9. According to Relators, this initial fraud
also induced the government to enter the 2003 modification
and thus, Relators allege, the government's payments
pursuant to that modification were fraudulently induced in
violation of the FCA.[24]
DISCUSSION
I.
Jurisdiction
The
Court has jurisdiction pursuant to 28 U.S.C. § 1331
because Plaintiffs' claims arise under the False Claims
Act, 31 U.S.C. § 3729 et seq.
II.
Standard for Summary Judgment
Federal
Rule of Civil Procedure 56(a) directs a court to “grant
summary judgment 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.” The burden of showing the
absence of a genuine dispute of material fact initially lies
with the moving party.[25] If the moving party meets this
burden, the non-moving party must present specific factual
evidence demonstrating the existence of a genuine issue of
fact.[26] The non-moving party may not rely on
mere allegations or denials. Rather, that party must
demonstrate that enough evidence supports the alleged factual
dispute to require a finder of fact to make a determination
at trial between the parties' differing versions of the
truth.[27]
When
considering a motion for summary judgment, a court views the
facts in the light most favorable to the non-moving party and
draws “all justifiable inferences” in the
non-moving party's favor.[28] When faced with cross-motions
for summary judgment, the court “review[s] each
separately, giving the non-movant for each motion the benefit
of all reasonable inferences.”[29] To reach the level of a
genuine dispute, the evidence must be such “that a
reasonable jury could return a verdict for the non-moving
party.”[30] If the evidence provided by the
non-moving party is “merely colorable” or
“not significantly probative, ” summary judgment
is appropriate.[31]
To
prevail on summary judgment, Relators must show that there is
no genuine dispute of material fact as to each element of
their claim and that they are entitled to judgment as a
matter of law based on those undisputed facts.[32] But for
Honeywell to prevail, it must show only that there is no
genuine dispute as to any material fact with regard to any
one element of each of Relators' claims, and that it is
entitled to judgment as a matter of law on that element. And
because Relators bear the burden of proof at trial, Honeywell
may prevail at summary judgment if it shows that “there
is an absence of evidence to support [Relators']
case.”[33] If Honeywell meets that burden, the
burden then shifts to Relators “to designate specific
facts demonstrating the existence of genuine issues for
trial.”[34] For that reason, the Court will first
address Honeywell's motion; for if Honeywell can show
that Relators lack evidence to prove any one element of each
of their claims even when adopting all justifiable inferences
in favor of Relators, then Relators' motion necessarily
fails.
III.
Summary of Claims
This
case arises in the context of a complex statutory,
regulatory, and contractual framework. For clarity, the Court
will summarize Relators' theories before addressing the
pending motions.
Relators
seek to impose FCA liability based on a
fraud-in-the-inducement theory.[35] Such a claim requires a
showing that (1) Honeywell made a promise to the government
that was false when made; (2) Honeywell knew the promise was
false when made; (3) Honeywell's promise was material to
the government's decision to award Honeywell the ESPCs at
FRA in 2000, and the subsequent modification in 2003; and (4)
there was a request for the government to pay out money or
forfeit money due.[36] Relators' basic claim is that in
2000 Honeywell promised the Army that it would produce
certain savings through the ESPCs, that these savings
promises were false, and that Honeywell knew they were false
at the time the promises were made.[37]Relators then contend that
Honeywell knew that once the promised savings failed to
materialize the government would renegotiate the contracts
rather than pay the roughly $50 million termination fee, and
that thus the payments under the renegotiated contract were
induced by the original fraud.[38]
As
Relators themselves explain, the “savings
guarantee” is derived from an equation.[39] The task
orders disclose that the equation, calculations, and data
underlying the “savings” guarantee are provided
in the “back-up data.”[40] In essence, the
“savings guarantee, ” as reported in the task
orders, was the difference between the “baseline”
and the projected future costs: the “A” in A = B
- C. Relators' argument is that the baseline
“B” was false, and that the projected costs
“C” was false, and that Honeywell knew this to be
so. Relators have alleged four different falsehoods in
support of their claim that Honeywell artificially inflated
the baseline costs and artificially deflated post-project
costs.[41]
First,
Relators assert that Honeywell “added future non-actual
costs of electricity to the baseline”[42] and that
Honeywell “improperly use[d] the future commercial cost
of purchasing electricity as the pre-contract/pre-project
cost of electricity energy baseline.”[43] As discussed
at greater length below, Honeywell calculated the baseline as
if FRA had already begun purchasing electricity commercially,
even though the CHPP had not yet shut down when the proposals
were drafted and the task orders issued in 2000.
Second,
Relators now claim in their summary judgment briefing
(although so far as the Court can discern, this allegation
does not appear in their Second Amended Complaint
(“SAC”)), that the “cost of energy savings
guarantee [in the task orders] is demonstrably false as it
excludes, for the post-project heat costs, the
post-project/post-contract condition heat load costs for
process loads and domestic hot water.”[44]
Third,
Relators contend that Honeywell's “proposal
documents knowingly and fraudulently and falsely represented
that normal Department of Energy infiltration factors had
been used, ” but Honeywell had instead used an
infiltration value that was “only two thirds of the
‘tight' construction value.” Relators
maintain that the use of the wrong infiltration value
resulted in “a significant understatement of
defendants' post-project infiltration heat load
requirement and grossly inflated energy
savings.”[45]
Fourth,
Relators claim that Honeywell “failed to allow for
adjustment of the baseline for buildings that were to be
demolished” and that this resulted in an improper
allocation of savings between Phase 1 and Phase 2 of the
project.[46]
Defendants
argue that Relators have not and cannot produce any evidence
that Honeywell “knowingly” made any false
statements to the government, and that therefore Honeywell is
entitled to summary judgment.[47] With regard to the particular
assertions of allegedly false statements, Honeywell contends
that Relators' claims fail for the independent reason
that Honeywell fully disclosed all of the relevant facts and
assumptions in its proposals to the government. The Court
will address each of Relator's four specific allegations
in turn, but will first address the legal significance of the
government's knowledge of Honeywell's calculations
and data inputs in this False Claims Act proceeding.
IV.
The Government Knowledge
“Defense”[48]
Honeywell
contends that one reason Relators cannot prevail in this
action is because Honeywell indisputably made extensive
disclosures to the government about its underlying
calculations and data inputs. Honeywell argues that because
of these disclosures, Relators cannot show that Honeywell
made knowingly false statements to the
government.[49] According to Honeywell, the
government's “knowledge of the facts underlying the
alleged fraud negates the elements of knowledge and
falsity.”[50] Relators first counter that government
knowledge “is irrelevant because Honeywell has admitted
that it actually knew there would be no savings before it
submitted the two false task order savings
guarantees.”[51] Relators also argue that
“Honeywell failed to make full disclosure of the
relevant information to the relevant government
officials.”[52]
The
Court rejects the premise underlying Relators' first
argument as unsupported by the record. There is no evidence
in the record to support Relators' assertion that
Honeywell knew there would be no savings from its proposed
ECSMs. That assertion rests on the deposition testimony of
Suzanne Wunsch, a Honeywell employee involved in the contract
negotiations with the government in 2000.[53] Although Ms.
Wunsch did testify that “everyone knew” that
“it would cost the government more for heat and
electricity after the plant was closed than it was before,
”[54] she also said that that was exactly what
Honeywell told the government: “[T]hese slides show the
government that although there will be savings generated,
they will be paying more when they close the
plant.”[55] This second statement underscores the
fact that Ms. Wunsch understood Honeywell's
“savings guarantee” to be based on assumed
parameters-one of which was that as a result of the CHPP
closure FRA was going to pay more for electricity whether or
not it accepted Honeywell's proposed ESPCs. Accordingly,
Ms. Wunsch testified that Honeywell was
“directed” to show the Army “what will it
look like when the plant is closed.”[56] These
statements reflect Ms. Wunsch's belief that both
Honeywell and the government were well aware that the
privatization of FRA's electricity supply would have a
negative impact on FRA's electricity costs. Ms.
Wunsch's comment reflects her understanding that
Honeywell's proposals were distinct from, and yet
incorporated, FRA's plans to privatize its electricity
supply. Honeywell's calculations of savings was
determined within the context of FRA's independent plan
to buy electricity from a commercial source.[57] No reasonable
jury could conclude that her statements reflect an admission
that Honeywell knew that its baseline, its projected costs,
or its “savings guarantee” were
“false” within the meaning of the FCA.
Plaintiffs
correctly observe that the Ninth Circuit has held that the
fact that the “relevant government officials know of [a
statement's] falsity is not in itself a
defense.”[58]But the Ninth Circuit has also repeatedly
recognized that “knowledge possessed by officials of
the United States may be highly relevant” at trial or
at the summary judgment stage.[59] Government knowledge may be
“highly relevant” to two elements of an FCA
claim.
First,
government knowledge may be used to rebut the necessary
scienter: If the contractor “so completely cooperated
and shared all information” with the government, then
the contractor “did not ‘knowingly' submit
false claims.”[60] In United States ex rel. Butler v.
Hughes Helicopters, the relator alleged that the
contractor selling helicopters to the Army had falsely
certified compliance with agreed-upon testing parameters. The
contract called for certain testing procedures, but prior to
testing the contractor “prepared Test Plans for the
Army's approval” that “did not include all of
the testing referred to in the contract
documents.”[61] The Army's technical representatives
nonetheless recommended approval of the test plans, and the
contracting officers signed off on them, apparently in
recognition that less extensive testing was warranted
“because of [the Army's] decision to speed up
production.”[62] When the contractor delivered the
helicopters, it signed forms “which stated that the
helicopters conformed to contract.”[63] In affirming
a directed verdict for the defendant-contractor on the
relator's FCA claims, the Ninth Circuit assumed that the
contractor's statements were “false,
”[64]but nonetheless concluded that the extent
of the government's knowledge negated a finding that
there had been a “knowing” submission of a false
claim. As one example in that case, the contractor had
represented that “pattern tests of the pilot's
radio were done at 10 to 12 nautical miles, ” but they
had actually been done at closer distances. As to that
example, the Ninth Circuit held that because “the Army
knew that the summary statement of the distances at which the
pattern tests were conducted was not strictly accurate as to
all the tests, ” and because “this discrepancy
was the subject of dialogue between the Army and MDHC”
the “only reasonable conclusion is that this was not a
‘knowingly' false statement, as the noncomplying
tests were known to and approved by the
Army.”[65]
Similarly,
in Hooper v. Lockheed Martin Corp., the relator
alleged that the contractor had used “defective testing
procedures.”[66] The district court granted summary
judgment to the contractor after concluding “that there
was no evidence of fraud in the testing because the Air Force
was aware of and approved Lockheed's testing methods,
even if the tests were not done in the order specified in the
contracts.”[67] The Ninth Circuit affirmed, holding that
“where Lockheed submitted overwhelming evidence that it
. . . disclosed to the Air Force its testing procedures,
” the FCA claim necessarily fails because the relator
could not show that “Lockheed ‘knowingly'
submitted a false claim.”[68] Thus, Ninth Circuit
authority establishes that the fact that a contractor has
been open and candid with the government about the facts
underlying its statements to the government can be used to
show that the contractor did not have the requisite scienter.
Second,
government knowledge may “show that the contract has
been modified or that its intent has been clarified, and
therefore that the claim submitted by the contractor was not
‘false.'”[69] As the Seventh Circuit has
stated, “[i]f the government knows and approves of the
particulars of a claim for payment before that claim is
presented, the presenter cannot be said to have knowingly
presented a fraudulent or false claim. In such a case, the
government's knowledge effectively negates the fraud or
falsity required by the FCA.”[70] In this context,
government knowledge is used not to rebut an inference of
scienter, but rather to define the scope of the statement
which is alleged to be false.
Several
district courts have taken the same view, recognizing that
the context of a statement can negate its apparent falsity.
Thus, the district court in Butler found that the
relator “did not provide legally sufficient evidence
that, given the nature of the relationship between [the
contractor] and the Army, any statements or claims made by
[the contractor] were ‘false or
fraudulent.'”[71] And in Boisjoly v. Morton
Thiokol, Inc., the district court examined the
“close interplay” between the contractor and the
government, and concluded that, given the government's
detailed knowledge of the very defects that the relator
alleged gave rise to an FCA claim, the relator could not
prove “the element of falsity or fraud
required.”[72]
In
affirming the district court's directed verdict in
Butler, the Ninth Circuit applied this same logic.
In that case, the contractor had submitted a report that
concluded that the helicopter radios “have been
successfully demonstrated and are ready for
production.” But in fact the radios had failed to meet
certain contractual specifications. The Ninth Circuit held
that because “the failure to meet specifications was
detailed elsewhere in the report, ” the
“generalized statement with added details was not the
type of [false] representation required by the
statute.”[73] Thus, the additional details provided in
the report warranted the directed verdict for the contractor
despite the conclusion's guarantees because no reasonable
jury could conclude that a false statement had been made.
Honeywell
maintains that the government's knowledge in this case is
relevant for both of the reasons discussed above. It contends
that its open and collaborative discussions with government
officials and the wide-ranging disclosures prior to the
finalizing of the task orders defeat any claim that Honeywell
knowingly made any false statement. And Honeywell claims that
its wide-ranging disclosures negate any claim that its
statements were false.[74] The Court will address the
applicability of the government's knowledge in each of
these two contexts for each of the Relators' specific
claims as necessary.
V.
Specific Claims
A.
Baseline Inclusion of Future Non-Actual Costs of
Electricity
Both
the parties principally focus on Relators' first claim:
that Honeywell misrepresented projected savings by assessing
the baseline as though FRA were already purchasing
electricity on the commercial market.[75] The timing of
the knowledge is critical: an FCA claim requires a false
statement that is known to be false at the time the statement
is made.[76] Thus, for the asserted savings to be an
actionable claim that survives summary judgment, there must
be some evidence that Honeywell knew in 2000 that the savings
it was projecting were inaccurate.[77]
But
Relators have not presented any evidence that Honeywell
possessed such knowledge at the time of the initial
contracting in 2000. As discussed above, Ms. Wunsch's
statement that “everyone knew” that shutting down
the CHPP would increase electricity costs does not establish
that Honeywell knew its baseline was improper.[78]And Honeywell
executive Steve Craig's statement in 2006 that Honeywell
knew “from the very beginning” that the project
would not save energy[79] was wholly unrelated to the accuracy
of the baseline.[80] As discussed in greater detail below,
Mr. Craig's statement, in its full context and drawing
all reasonable inferences in Relators' favor,
was not that Honeywell knew there would not be any savings as
a result of its energy savings measures, but rather that
Honeywell knew there would not be any savings if certain
actions were not taken to improve infiltration
rates.[81] Finally, Relators suggest that
Honeywell's expertise in ESPC contracts warrants an
inference that it “knew” its baseline was
“improper.”[82] But Honeywell's expertise is not
sufficient evidence to establish knowing fraud under the
False Claims Act.[83]
Moreover,
in this case Honeywell did not simply present a conclusory
savings number to the government. Rather, Honeywell provided
extensive calculations to the government supporting its
projected savings; and the government, after substantial
discussion with Honeywell, approved those calculations. The
Court has reconstructed the following approximation of these
calculations from the proposal documents:
First,
Honeywell assessed FRA's energy usage based on fiscal
years 1998 and 1999.[84] At that time, most of FRA's heat and
electricity was being provided by the CHPP. The CHPP was a
cogeneration plant, meaning that it burned fuel to produce
steam; the steam first turned turbines to generate
electricity and was then routed throughout the base to heat
the buildings. Honeywell then calculated the total cost of
fuel to produce all of the steam.[85] In consultation with Army
personnel, Honeywell allocated the cost of generating the
steam between electricity generation and heat
production.[86] This provided a cost for heat and a
separate cost for electricity.[87]
Honeywell's
proposals for Task Orders 8 and 9 each contained two proposed
Energy Cost Savings Measures (ECSMs). First, Honeywell would
install high-efficiency natural gas furnaces in each building
and eliminate reliance on the CHPP for heating.[88]Honeywell
estimated the cost of heating the buildings using the new
furnaces, and presented the energy savings from that ECSM as
the difference between that cost and the portion of steam
costs that Honeywell had allocated to heating the buildings
using the CHPP.[89] Second, Honeywell proposed installing
“building management and control systems” that
accounted for building occupancy by reducing heat supply
during off-peak hours and optimized hot water
systems.[90] For these measures, Honeywell used
computer modeling software to project the energy consumption
for each building with and without the control
measures.[91] The reported energy savings was the
difference between those two numbers. Combined, these two
ECSMs were expected to produce $464, 239 in annual heat
energy savings for Task Order 8 and $580, 689 for Task Order
9.[92]
Thus,
the savings that Honeywell presented were the results of the
underlying calculations it disclosed: the difference between
the cost associated with heating the buildings using the CHPP
and the cost to heat the buildings after the CHPP was shut
down. Honeywell was transparent about how it reached its
numbers.
Of
course, there was an additional consequence to shutting down
the CHPP. Once the CHPP was shut down, FRA would need to
purchase electricity from another source. Relators' claim
is that Honeywell's projected savings number was
“false” because Honeywell “improperly
us[ed] the future commercial cost of purchasing electricity
as the pre-contract/pre-project cost of electricity energy
baseline.”[93] Relators point to Honeywell's
“Fuel Sensitivity Analysis, ” a spreadsheet that
shows the dollar value of the heat savings projected
for Task Order 8, which is identical to the dollar value of
the total savings projected in Task Order
8.[94] According to Relators, this
“conclusively proves that for the cost of energy
savings in Task Order 8 . . . Honeywell only conducted a cost
of energy savings regarding heat.”[95] In essence,
Relators argue that Honeywell should have deducted the
increased costs of purchasing electricity from any energy
savings number. Honeywell does not dispute the contention
that Task Order 8 contained only heat savings, but instead
counters that it was transparent not only with regard to how
it calculated savings, which looked only at heat costs, but
also with regard to the fact that it was not including the
increased costs of electricity.[96]
As
Honeywell disclosed during a presentation with Army staff in
February 2000 (several months before the task orders were
issued), purchasing electricity commercially would cost more
money than producing it at the CHPP. In that presentation,
Honeywell indicated that the then-current costs associated
with generating electricity at the CHPP were $3, 652, 591 per
year, and that the cost to buy the same amount of electricity
commercially would be $4, 544, 027 per year. In bold letters
at the bottom of that slide, Honeywell indicated “Net
Electric Cost Increase $891, 437.”[97] And on the
next slide, Honeywell showed how it intended to calculate the
“Baseline Energy Costs.” The baseline would
include the total energy costs associated with running the
CHPP in the past, the projected increase in costs when
electricity was purchased, and the additional costs of the
electricity that FRA was already purchasing. This gave the
“Total Annual Baseline Energy Costs” of $8, 378,
738.[98] Thus, in February 2000, over six months
before the first contract was formalized, Honeywell was
clearly including the increased electrical costs of
purchasing electricity in its electricity baseline, thereby
indicating to the government that its energy savings
calculations would not account for those increased
costs.[99]
When
Honeywell submitted its formal proposals in July 2000
(Proposal #3) and November 2000 (Proposal #4), it again
indicated that the electricity baseline would be
“adjusted” to account for the increased costs of
purchasing electricity. Honeywell first calculated,
“per the monthly plant operating reports, ” the
CHPP's electrical production in megawatt-hours per year.
It then added the electricity that FRA was currently
purchasing to estimate CHPP's total electricity
requirement. Then, under the bolded subtitle
“Electrical Baseline Adjustment, ” Honeywell
calculated how much it would cost to purchase the same amount
of electricity commercially.[100]
The
record also demonstrates that Honeywell knew that the
government also knew about the electrical baseline
adjustment. As part of the ESPC process, Honeywell submitted
its calculations to the Army Corps of Engineers for review
and approval. Tim Brown, one of the Army engineers reviewing
the proposal documents, specifically commented to Honeywell
with regard to the Electrical Baseline Adjustment that
“[t]he analysis should include supportive information
to demonstrate the actual electrical charges after the
CH&PP is shut down.”[101]
Relators
argue that other parts of Honeywell's savings
calculations show that it was misleading the government with
regard to how it calculated the electricity costs. They note
that one component of the savings guarantee for Task Order 9
was the “electrical savings” from shutting down
the CHPP: The CHPP itself required electricity to power
lights and various mechanical components in the CHPP
building, and shutting it down would eliminate those
requirements, reducing FRA's total electricity
demand.[102]In evaluating these savings, Honeywell
used the then-current costs to provide that electricity-the
cost of generating the electricity using the CHPP-instead of
the projected commercial rate. Relators argue that this fact
demonstrates that the government believed baseline costs
would be calculated using the CHPP's cost-to- generate,
rather than the commercial cost-to-buy.[103] But the
parties do not dispute that this specific component of the
proposal was added at the behest of Paul Knauff, an FRA
employee.[104] Thus, whichever rate should have been
used for this calculation, the fact that the Army personnel
requested use of the CHPP's cost-to-generate rate negates
Relators' assertion that Honeywell made a knowingly false
statement to the government when it incorporated this
request.
The
Court agrees with Honeywell that, as a matter of law, its
extensive disclosures to the government prior to the task
orders' finalization preclude Relators' FCA
claim.[105] First, the stated energy savings were
clearly calculated and identified as heat energy savings
only. Those numbers did not become “false” merely
because they excluded electricity costs.[106] The
savings estimates were the result of clearly disclosed
mathematical equations that did not even purport to include
electricity costs. Because Honeywell disclosed the
assumptions and math underlying its estimates, its statements
in that regard were not “false” within the
meaning of the False Claims Act.[107]
Moreover,
Honeywell's repeated disclosures to the government about
the “Electrical Baseline Adjustment” preclude a
finding that any statement in that regard was known to be
false by Honeywell when made.[108] Honeywell informed the
government that it would cost more to buy electricity than to
produce it. It disclosed the basis for its energy savings
calculations which clearly did not account for the increased
electricity costs. It communicated the electrical baseline
adjustment to the government in both its formal proposals and
in its less formal presentations. It received comments from
government employees about its adjustment calculations.
Honeywell “completely cooperated and shared all
information” with the government, and thus “the
Army knew” that the increased electrical costs were not
accounted for and this fact “was the subject of
dialogue between the Army and [Honeywell].” Therefore,
the “only reasonable conclusion is that this was not a
‘knowingly' false statement, as the [calculations]
were known to and approved by the Army.”[109]
In
light of the lack of evidence that Honeywell had any
knowledge that the baseline was improper, and in light of the
overwhelming evidence that Honeywell fully disclosed the
baseline adjustment and the fact that its energy savings
calculations did not account for the increased costs of
electricity, the Court finds that there is no genuine dispute
as to any material fact with regard to either the
“falsity” of Honeywell's savings estimates or
Honeywell's knowledge of any alleged falsity.
Accordingly, Honeywell is entitled to judgment as a matter of
law on this claim. FCA liability cannot be premised on
Honeywell's electrical baseline adjustment.
B.
Heat Costs
Relators
assert that Honeywell “improperly omitted the process
loads and domestic hot water loads from the post-project heat
costs.”[110] Honeywell responds that the omission
of process loads “was fully disclosed to the Government
in the proposal documents.”[111] But whether or not
Honeywell fully disclosed this omission, Relators have not
answered Honeywell's assertion that there is no evidence
that the omission was made “knowingly.” While
Relators present evidence to demonstrate that these numbers
were omitted, [112] Relators offer only a bare unsupported
assertion that this omission was intentional.[113]
Relators
suggest that Honeywell can be charged with
“knowingly” submitting false claims because it
failed to use due diligence to verify its submissions. But
this argument fails for two reasons. First, Relators have not
proffered any evidence that Honeywell did not use due
diligence; they do not discuss at all what processes
Honeywell used (or did not use) to verify the submissions.
They only repeatedly state what they view as mistakes in
Honeywell's calculations. But if the fact of a mistake
was sufficient to charge a sophisticated contractor with
knowledge of that mistake, then the “knowingly”
element of the False Claims Act would be vitiated entirely:
every mistake that a contractor made in submitting claims
would be transformed into a lie. This is plainly not the law,
as “the common failings of engineers and other
scientists are not culpable under the
Act.”[114]
Second,
and more fundamentally, Relators' argument rests on an
apparent misreading of United States v. United Health
Insurance Company.[115] In that case, health
insurers participated in a government program that paid the
insurers a certain amount for each insured, based on the
assessed “risk” associated with that patient.
Because that risk-and accordingly the amount paid-was based
on the number and types of diagnoses for each patient, an
insurer received more money from the government for
“sicker” patients than for healthier ones. The
insurers allegedly implemented an internal program whereby
they verified the diagnosis codes entered for each patient,
but only corrected the codes when they had understated the
diagnosis, and ignored diagnosing errors that overstated a
patient's diagnosis. Over time, the insurers'
patients appeared much sicker than they actually were,
because only underdiagnoses were being
corrected.[116]
In
reversing a district court's grant of the health
insurers' motion to dismiss, the Ninth Circuit concluded
that the alleged “one-sided retrospective review”
was not a good faith attempt to verify the accuracy of the
diagnosis codes, and thus, if the allegations were true, the
insurers had falsely certified to the government that its
submissions were “accurate, complete and
truthful” based on the “best knowledge,
information, and belief” of the insurers.[117] But the
relevant regulations did not require the insurers to
implement a retrospective review at all; they merely required
that, if the insurers did implement a retrospective review,
it be carried out in good faith.[118] And so the only
requirement that United Health Insurance imposes is
that if a contractor implements a submittal review process,
it may not review their submittals in bad faith.
Here,
Relators have not produced any evidence from which a jury
could reasonably infer that Honeywell had implemented a
one-sided review that was designed to correct only certain
errors. Even assuming that the omission of the process and
hot-water loads was an error, the fact that an error
occurred, standing alone, does not establish that Honeywell
“knowingly” committed the error, even under a
“reckless disregard” standard. Honeywell has met
its burden of “showing . . . that there is an absence
of evidence to support [Relators'] case, ” and it
is accordingly entitled to judgment as a matter of law on
this claim.[119]
C.
Infiltration Rates[120]
Relators
alleged in their SAC that Honeywell “deliberately
overwrote” software distributed by the Department of
Energy (“DOE”) for calculating a structure's
passive heating loss.[121] After this Court granted
Honeywell's second motion to dismiss, [122] the Ninth
Circuit reversed and remanded, finding that Relators'
proposed SAC properly pled a fraud-in-the-inducement FCA
claim. The Ninth Circuit specifically noted Relators'
allegation that Honeywell had “falsified its estimates
. . . by overwriting Department of Energy software to include
non-standard values for heat
infiltration.”[123] In their motion for summary
judgment, however, Relators present no evidence to support
this allegation. While there is evidence suggesting that
Honeywell did in fact use infiltration rates lower than those
recommended by DOE, [124] Relators have produced no evidence
that Honeywell “overwrote” the software. Instead,
Relators now assert that Honeywell used artificially low
projected infiltration rates for FRA's buildings, and
that “Honeywell knew that the true infiltration rates
for the buildings would result in a larger post-installation
consumption of gas than the erroneous infiltration rates it
had used for its guarantee of savings.”[125]
As part
of its contract proposals, Honeywell estimated the
infiltration rates that would exist during the period of
contract performance. These infiltration rates were used to
project the costs of providing gas heat to each
building.[126] In its proposals, Honeywell used
values between 0.15 and 0.3 ACH as the projected infiltration
rates.[127]Honeywell later characterized these
projections as “aggressive, ”[128] and some
of them do seem lower than DOE suggests should be
used.[129] But an FCA claim requires not only a
false statement, but also a showing that the defendant knew
the statement to be false when it was made. Whether a
projection-even an aggressive projection-of future
infiltration rates could be “false” when made
presents a conceptual conundrum. Relators cite to no evidence
in the record upon which a reasonable jury could find that
Honeywell knew its infiltration rate projections were false
statements when it made them.
Relators
also alleged in their SAC that Honeywell had misrepresented
an infiltration rate of 0.15 as a “normal”
rate.[130] At his deposition, Timothy Berg, one
of the relators and an FRA employee, explained that he based
this assertion on surveying forms completed by Honeywell
personnel that were submitted with the contract
proposals.[131] Those forms indicated that the
buildings had “normal” infiltration
rates.[132]But as Mr. Berg testified, that
assessment reflected “the surveyor's interpretation
of how they would rate this building” at the time of
the survey, before the project had begun.[133]Thus, the
forms did not indicate that the projected 0.15 ACH
infiltration rates were “normal, ” but that the
buildings' preexisting infiltration rates were normal. In
any event, in their summary judgment briefing, Relators no
longer press the assertion that Honeywell misrepresented a
0.15 ACH infiltration rate as “normal.”
Relators
instead now argue that Honeywell knew that the 0.15 ACH
infiltration rates were impossible to achieve. They base this
claim on comments that Steve Craig, a Honeywell executive,
made during a July 25, 2006 conference call, six years after
the task orders were issued. According to Relator Berg's
recollection in 2010, during that 2006 conference call Mr.
Craig “told everyone present that Honeywell knew the
project would never save energy and was not viable from the
very beginning.”[134] Mr. Berg's declaration, and the
Relators in their briefing, also point to a memorandum
written by Randy Tyler, a government employee, two weeks
after the July 2006 call. But that contemporaneous memorandum
is at odds with Mr. Berg's later recollection. In Mr.
Tyler's memorandum, he posits that Mr. Craig
“stated that the reason the energy saving for the
project could not be realized was because of the infiltration
and that this was due to the building heating system controls
and the occupants opening windows and doors in the
buildings.”[135] According to Mr. Tyler, Mr. Craig
contended that the government had agreed to take certain
measures to improve the infiltration rates, and that
“without this work, this project was not a
viable project.”[136]
Relators
also cite to Mr. Smith's declaration to support this
claim.[137] But Mr. Smith's recollection does
not offer additional support for Relators' assertion as
to Honeywell's knowledge and beliefs in 2000. For Mr.
Smith's declaration states only that in 2006 Mr. Craig
“admitted that the project would not save energy or
money”; it does not suggest that Mr. Craig said
anything regarding what Honeywell knew or believed in
2000.[138]
Although
the Court views the evidence in the light most favorable to
Relators and draws all reasonable inferences in their favor,
those “inferences are limited to those upon which a
reasonable jury might return a verdict.”[139] Mr.
Craig's full statement does not support Relators'
supposition that Honeywell knew the infiltration rates were
“false” in 2000. At most, the evidence suggests
that attaining the infiltration rates Honeywell projected was
essential to achieving savings, and those infiltration rate
projections were not realized. It may be that Honeywell later
blamed this failure on the government, but whether
responsibility for attaining the infiltration rates belonged
to Honeywell or to the government is simply irrelevant to
whether the projection of low infiltration rates was
knowingly false when it was made in 2000. Optimism, even
ill-founded optimism, does not render a statement
false.[140]
Mr.
Berg's 2010 declaration is at odds with the extensive
contemporaneous documentary evidence and is unsupported by
any other evidence. It omits the essential context of Mr.
Craig's 2006 statement-that the projected savings were
conditioned on actions Honeywell believed the government
would take-context that the Tyler memorandum provides. The
Court finds that the declaration is insufficient to permit
“a fair-minded jury [to] return a verdict for the
plaintiff” on this claim, and that Honeywell is
therefore entitled to judgment as a matter of law with regard
to the infiltration claim.[141]
Honeywell
also argues that it is entitled to summary judgment on this
claim because it disclosed the infiltration rates it
projected to the government.[142] But because the Court
concludes that there is insufficient evidence to permit a
reasonable jury to find the infiltration rates were knowingly
false, it need not address whether any disclosure to the
government of these rates also obviates any assertion that
they were knowingly false.
D.
Adjustment for Destruction of Buildings
Relators
assert that “Honeywell failed to allow for adjustment
of the baseline for buildings that were to be
demolished.”[143] Whether or not this is true, Relators
do not allege, much less present evidence to support, that
Honeywell did this “knowingly.”[144]That is,
although Relators allege that Honeywell made an error in
calculating the baseline, they have not presented any
evidence to demonstrate that any such error was intentional
or “knowing.” The FCA does not impose liability
for “innocent mistakes” or “mere ...