Defense contractor case could test False Claims Act

A federal judge has allowed a multi-billion dollar civil fraud case against a defense contractor to move forward.

A former cybersecurity director with Rocketjet Aerodyne Holdings Inc. claims the company fraudulently obtained government contracts while lying about the strength of its computer security. The case could provide a key test case of the use of the federal False Claims Act following a 2016 U.S. Supreme Court ruling relating to the law. Markus v. Aerojet RocketDyne Holdings, Inc., 2:15-cv-02245-WBS-AC (E.D. Cal., filed Oct. 29, 2015).

The ruling also comes as defense giant Lockheed Martin Corp. is attempting to acquire Rocketjet for $4.4 billion over the objections of the Federal Trade Commission. The agency announced the antitrust case last week, one of several filed under new director Lina M. Khan, saying Aerojet is the "last independent supplier of missile propulsion systems."

In his ruling Tuesday, U.S. Senior District Judge William B. Shubb granted Aerojet's motion for summary judgment on a false certification claim brought by plaintiff Brian Markus, who was the senior director for Cyber Security, Compliance & Controls at the company from June 2014 to September 2015. But he allowed Markus to move forward with claims of promissory fraud under the federal False Claims Act. Shubb also denied Markus summary judgment motions.

Kirkland & Ellis LLP partners Tammy A. Tsoumas and Mark C. Holscher represent Aerojet. Tsoumas declined to comment on the record when reached Wednesday.

Shubb wrote that even after years of litigation, there are several "genuine dispute[s] of material fact" in the case. Several of these relate to "materiality" under the False Claims Act, as understood through Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). This is an important ruling relating to how a court determines whether a company made specific false claims to the government that materially affected the decision to grant the contract.

Sacramento-based employment attorney Gregory A. Thyberg represents Markus. He said Escobar has rarely been invoked in cases involving lucrative defense contracts. This is important, he said, because under the False Claims Act, a company can be liable for damages equal to triple the amount of the contracts. In his summary judgment claim, Markus moved for damages of $19 billion.

"I think the defense industry is watching it very closely," Thyberg said. "It's a bellwether case."

He added, "I can't believe Lockheed is still trying to acquire them. The way I read the contracts, Lockheed is acquiring all of their liability."

Shubb's ruling noted the Department of Defense modified its cybersecurity rules for contractors between 2013 and 2017. This period overlapped with several of the contracts. Shubb's ruling repeated an earlier order excluding six contracts "awarded after relator commenced this action," though Thyberg said he would move to bring these back into the case.

In his amended complaint filed in 2017, Markus claimed the company defrauded the federal government when it failed to meet minimum security standards under its Federal Acquisition Regulations, then lied when signing federal contracts. Two formal audits by Emagined Security backed up his assessment of the company's poor security, Markus claimed, including one that found Aerojet under 28% complaint on three required metrics.

"The violations arise out of defendants fraudulently inducing the federal government to grant them contracts to provide goods and services to the federal government, including the National Aeronautics and Space Administration (NASA) and the Department of Defense (DOD), when they knew they were not complying with federal acquisition regulations that were required as a material terms of those contracts," Thyberg wrote in the complaint.

Markus claimed the company promised him a budget of $10 million to $15 million and an internal staff of five to ten employees "to improve the security of defendants' computer systems," but was given only $3.8 million and two internal staff. Besides fraud, he also claimed wrongful termination, retaliation and labor code violations, saying the company terminated him after he made "complaints to management" over the violations.