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UNITED STATES v. FOSTER WHEELER CORP.

July 31, 1970

UNITED STATES of America, Plaintiff,
v.
FOSTER WHEELER CORPORATION, Defendant


Croake, District Judge.


The opinion of the court was delivered by: CROAKE

CROAKE, District Judge.

MEMORANDUM PRELIMINARY STATEMENT

 This is an action brought by the United States of America (the Government) to recover damages from defendant Foster Wheeler Corporation (Foster Wheeler) for fraud under the False Claims Act (31 U.S.C. § 231 et seq.) and under common law. The alleged fraud arises out of the negotiations which preceded a contract between the Government and Foster Wheeler dated December 12, 1958, pursuant to which Foster Wheeler manufactured and installed ship boilers for the United States Navy. Jurisdiction of this Court is predicated upon 28 U.S.C. § 1345 and 31 U.S.C. § 232(A).

 The complaint, filed on November 10, 1964, alleges three claims, two of which are based upon the False Claims Act and the third upon common law principles. The Government alleges that it suffered damages of $141,242 by reason of Foster Wheeler's alleged misrepresentations and, pursuant to the provisions of the False Claims Act, seeks double damages in the amount of $282,484, plus certain forfeitures. In its pretrial memorandum and the subsequent pretrial order of this Court, the Government's claim for actual damages was amended to $132,200 and its total claim to $264,400 plus the previously mentioned penalties.

 Foster Wheeler's answer, filed on April 1, 1965, denied the material allegations of the Government's complaint.

 FINDINGS OF FACT

 In September of 1958, the defendant, Foster Wheeler, learned that the Navy was having difficulty with the boilers on its DL2 and DL3 vessels, which had been designed by a competitor of the defendant. (Jankowski 382.) Foster Wheeler also learned that the Navy was interested in replacing these boilers with either of two models manufactured by their company -- the DD-936 or the DDG type boiler. (Ibid.)

 On September 19, 1958, the Marine Department of Foster Wheeler received a memorandum from Hugh E. Carleton, the company's Washington representative, advising that the Navy decided to use a DD 936 type boiler, twenty of which Foster Wheeler had previously built under a Bethlehem Steel Company (Bethlehem) subcontract for the Navy in 1954 to 1956. (Jankowski 382-383, 441; Mitchell 557.) By this time Foster Wheeler knew that the Navy was interested in procuring the boilers on a non-competitive basis and also knew that it was going to be a "rush job." (Carleton 335, 350.)

 On October 1, 1958, the Bureau of Ships of the Navy Department issued a Request for Proposal (Negotiated Fixed Price Contract) which, in effect, invited Foster Wheeler to make an offer to the United States to sell replacement boilers and related spare parts and services for two U.S. Navy frigates at a proposed price to be determined by Foster Wheeler. (Govt. Exh. 1; Vigotsky 6-9, 11-14; Oberblatt 265; Memorandum 7.)

 On October 13, 1958, Foster Wheeler, through its Marine Department, submitted to the Navy the completed Request for Proposal in which it offered to manufacture the eight boilers in question for a total price of $1,825,136.00. Govt. Exh. 1.) Submitted with the proposal was a "Cost and Price Analysis" form denominated "D633" which contained an itemized breakdown of the estimated costs totaling $1,548,341, a 10% profit of $154,835, a 5% escalation of $85,160 and $36,800 estimated charge for field services included in the proposed price of $1,825,136. (Govt. Exh. 3; Vigotsky 14; Carleton 336-39; Haase 356-57, 367-68; Memoranda 11-16.) The major items on the Form DD 633 containing Foster Wheeler's proposal were as follows: Direct Material -$ 491,715.00 Purchased Parts - 270,192.00 Direct Manufacturing Labor - 226,610.00 Manufacturing Burden - 407,900.00

 Form DD 633 contained the following printed certification which appears above the signature of the Foster Wheeler representative, Hugh E. Carleton, who signed the proposal under date of October 13, 1958:

 
"This is to certify that the information contained in this proposal has been based upon or compiled from the books and records of this company and is accurate to the best of my knowledge and belief." (Govt. Exh. 3.)

 The Navy was unwilling to accept the proposal as made because its negotiator, Solomon Vigotsky, thought the price of $1,825,136 was too high. Negotiations ensued between the Navy, represented primarily by Vigotsky, and representatives of Foster Wheeler, Henry Jankowski, Robert W. Haase and Carleton. (Vigotsky -- 14-22, 50-2, 85-6.)

 In connection with its review of Foster Wheeler's proposal, the Navy requested a breakdown of the lump sum estimated cost figures for "Direct Material" and "Purchased Parts" contained in the Cost and Price Analysis (DD 633) that had been submitted by Foster Wheeler with its proposal. (Deft. Exh. G; Vigotsky 14-18; Memorandum 18.)

 Such a breakdown was furnished by Foster Wheeler in a letter to the Navy, dated October 22, 1958, which appeared to substantiate the lump sum estimated cost figures for "Direct Material" and "Purchased Parts" contained in the Cost and Price Analysis (DD 633). (Govt. Exh. 4; Govt. Exh. 17 A9; Vigotsky 15-18; Memorandum 18.)

 During the negotiations, in an effort to justify the proposed price and the estimated costs shown on the Cost and Price Analysis (DD 633) and October 22, 1958 letter, Foster Wheeler submitted a schedule purporting to show a comparison of

 (i) the costs for "Direct Material," "Purchased Parts," and "Direct Labor" it had actually incurred in manufacturing identical boilers on another contract a few years before,

 (ii) the actual costs on the earlier contract revised to date, i.e., adjusted for increased cost of labor material, etc., and

 (iii) the estimated costs included in the proposed price as per the Cost and Price Analysis (DD 633). (Govt. Exh. 5; Govt. Exh. 17 A9; Govt. Exh. 27; Govt. Exh. 21; Vigotsky 27-32, 49, 62-69, 77-85; Govt. Exh. 6; Govt. Exh. 8; Jankowski 514-17; Carleton 325-26; Haase, 357-58, 369-70; Memoranda 50, 51.)

 The first column of the Schedule of Comparative Costs prorated the defendant's "actual costs" for direct material, purchased material and direct labor under the 20 boiler 1954 Bethlehem subcontract to the proposed Navy contract for eight boilers. The second column of said exhibit entitled "Price revised to date" purportedly applied a 33% escalation factor to the figures contained in the first column as a result of increased cost of materials and labor. The third column of the exhibit reflected the bid price for the items in question as shown on the "DD 633."

 On November 17, 1958, representatives of Foster Wheeler again met with Navy representatives to conduct further negotiations with respect to the contract price. There is conflicting testimony, however, as to what representations were made at that conference to the Government concerning whether the defendant had sustained an 11% loss on an earlier contract with Bethlehem involving identical boilers or whether the company had failed to realize by 11% the gross profit of 17% it anticipated it would make under the contract.

 On December 12, 1958, a contract (NObs 76301) was entered into between Foster Wheeler and the Government under which Foster Wheeler agreed to furnish the eight boilers in question at a total price of $1,817,404.00. (Govt. Exhs. 9, 10.)

 Payments under the contract by the Government commenced in June 1959 and the final payment was made in May 1961. Because of various amendments and changes made after the contract was entered into the final price was $1,866,200. (Govt. Exh. 23.)

 In early 1962 the General Accounting Office ("GAO") assigned an auditor, Mrs. Rose Oberblatt, to make a routine review of Foster Wheeler's government contracts. (Oberblatt -- 137-39.)

 In reviewing contract NObs-76301, Mrs. Oberblatt discovered that Foster Wheeler had only incurred costs of $1,261,300 against the final price of $1,866,200. The fact that Foster Wheeler had realized a profit of approximately $605,000, or 31% of the final price, and 48% of cost (as compared to their estimated profit on the DD 633 of 10% of cost), caused Mrs. Oberblatt to make an intensive review of the contract and the negotiations that preceded it. (Govt. Exh. 16 A-1; Oberblatt 139-40, 156-60; Memoranda 2, 5.)

 Mrs. Oberblatt's review revealed that certain statements and information made and provided by Foster Wheeler during the contract negotiations and relied on by the Government were apparently false and misleading in the following respects:

 a. The estimated costs contained in the Cost and Price Analysis (DD 633) were not based on Foster Wheeler's books and records and were not accurate as certified in that the company's Cost Estimating Section had prepared an estimate of costs which was based on its books and records and which would have resulted in a contract price of $1,556,900. These figures were increased in the amount of $182,400. to $1,739,336. by Foster Wheeler (Memorandum -- Point II, 18, et seq.)

 b. The breakdown of the lump sum cost figures shown on the Cost and Price Analysis (DD 633) for "Direct Material" and "Purchased Parts" set forth in Foster Wheeler's letter to the Government, dated October 22, 1958, was artificial and designed to hide the fact that the estimated cost figures on the Cost and Price Analysis (DD 633) had been increased. (Memoranda 18, 25, 26, 27, 28, 31-43.)

 c. The schedule submitted by Foster Wheeler comparing estimated costs with actual costs on the prior contract involving identical boilers was likewise false and misleading. (Memorandum -- Point III, 50, et seq.)

 d. The oral statements allegedly made by representatives of Foster Wheeler at the November 17, 1958 negotiating conference that an 11% loss had been sustained on the earlier contract involving identical boilers were not substantiated by the company's records which revealed that Foster Wheeler had ...


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