A federal appeals court has ruled that a whistleblower can pursue allegations under the U.S. False Claims Act that his former employer, Lockheed Martin Corp., underbid on a $900 million contract.

The ruling by the U.S. Court of Appeals for the Ninth Circuit represents the first time a federal appeals court has considered whether underbidding constitutes a possible violation under the qui tam provisions of the False Claims Act, said Mark Labaton, a member at Motley Rice in Los Angeles who represents former Lockheed senior project engineer Nyle Hooper.

“Our most substantial claim in this case — and we’ve been litigating for years — is the underbidding claim,” said Labaton, whose co-counsel in the case is Joseph Black of The Cullen Law Firm in Washington.

“We always felt a false statement about an under-bidded bid is a basis for liability, and this is the first time we’ve seen a circuit court make such a finding,” Labaton said. “We think it could be very, very significant, because our understanding is that underbidding to get contracts occurs quite often, particularly in the defense contracting industry. The implications of this decision beyond our case could be very significant.”

In the past, the focus for most whistleblower cases, particularly those involving the defense industry, has been on overbilling the government, he said.

Lockheed spokesman Chris Williams issued a statement regarding the ruling: “We’re disappointed in the court’s decision to partially reinstate this claim. We believe the case lacks merit and we will vigorously defend ourselves against this frivolous lawsuit.”

The Justice Department, which took no position in the case, had filed an amicus brief with the Ninth Circuit arguing that “there is no reason to insulate from FCA liability a contractor who provides a deliberately understated cost estimate in order to win a contract, but who has no intention of actually fulfilling the contract at that estimated cost.”

Hooper, who was fired on July 19, 2002, after threatening to report contract fraud to the government, filed suit on July 18, 2005, alleging that Loral Systems Co., which Lockheed later purchased, had defrauded the government by knowingly providing false information to the U.S. Air Force about the cost estimates on a contract to replace software and hardware used in space and missile launches. The government had found its initial bid of $432.7 million to be the “best overall value.”

“We alleged that both Loral, the original folks that got the contract, and Lockheed Martin, who took it over afterwards, in getting re-bids in the case of Lockheed, provided false information as to how much it would cost to do the work,” Labaton said.

The Ninth Circuit on August 2 reversed a ruling by U.S. District Judge Dale Fischer, who had dismissed the case on January 18, 2011, on a summary judgment motion. She concluded that Hooper had failed to provide enough evidence of a False Claims Act violation but did not address whether underbidding on a contract constituted a violation.

The Ninth Circuit found that underbidding did constitute a violation and that Hooper had provided enough evidence to pursue his claim.

“As a matter of first impression, we conclude that false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met,” Circuit Judge Harry Pregerson wrote.

The panel said that Fischer had applied the wrong legal standard in determining that Lockheed provided false information with “the intent to deceive,” as opposed to “knowingly.”

In addition to the False Claims Act allegations, the Ninth Circuit found that Hooper could assert a wrongful termination claim under Maryland’s statute of limitations, which allows three years to sue, rather than California’s two years. The case was brought in federal court in Greenbelt, Md., but was transferred to Los Angeles. Fischer had dismissed Hooper’s retaliation claim on August 12, 2008, under California’s rules.

The panel ruled for Lockheed on two of Hooper’s claims: That its engineers had violated the False Claims Act by both conducting improper testing and by failing to disclose all the licensing rights involved with its software. Mark Troy, a partner in the Los Angeles office of Crowell & Moring, represented Lockheed.

Contact Amanda Bronstad at abronstad@alm.com.