A rush to equip troop-carrying Humvees with protective armor during the bloodiest days of the Iraq war resulted in millions of dollars in overcharges to the federal government for which the armor provider is liable, an Indiana judge ruled this month.
Humvee maker AM General LLC of Mishawaka is owed more than $277 million by the company that supplied kits for troops to retrofit the vehicles with armor in the field dating to 2004, and for armor installed on Humvees in later years, St. Joseph Superior Judge Michael P. Scopelitis ruled in AM General LLC v. BAE Systems Inc., et al., 71D07-0907-PL00195.
In a series of rulings including a 194-page order issued April 2, Scopelitis ordered British defense contractor BAE Systems to pay judgments totaling $277,939,519 to AM General for breach of contract and violations of most-favored customer clauses.
“We intend to proceed. Post trial we have a couple of options, a motion to correct error or a notice of appeal,” said Bingham Greenebaum Doll LLP partner Karl Mulvaney, who has joined BAE’s appellate team. “We’re considering our options at this point and no decision has been made.”
Scopelitis’ April 2 order includes findings of fact that paint a picture of rampant overcharges from BAE and its predecessor companies that AM General passed on to the Army, even as AM General sought to determine true costs. Armor Holdings, which developed the retrofit armor kits, was purchased by BAE, and Armor Holdings’ executives received multi-million-dollar payments and retention bonuses, Scopelitis noted.
In April 2007, the Army required BAE to provide certified cost or pricing data to ensure that its profits were in line with those deemed reasonable for tank and vehicle purchases, generally between 5 and 15 percent. The Army’s insistence on accountability came during what would become the deadliest year of the war for American forces, when 899 service members died in Iraq.
“Because of the continuing conflict in Iraq, AMG and (the Army) faced a vital procurement obligation,” Scopelitis wrote. “To prevent Coalition forces from increasing risks due to (improvised explosive devices, the Army) needed to continue to provide armored vehicles to the Army without interruption.”
“BAE was concerned for months that disclosing its costs data would reveal excessive profits,” including markups on armor kits of 36 to more than 44 percent, according to Scopelitis’ findings. The government ultimately alleged gouging by BAE, including such allegations that windshield wiper extenders for Humvees were marked up as much as nine times more than the government would consider fair or reasonable.
BAE provided Army procurement officials with inaccurate, incomplete or defective cost estimates, the judge wrote. The company “modified its cost or pricing data to artificially inflate its cost and thereby reduce its apparent profit rate,” according to findings.
But BAE also was the supplier stipulated by the Pentagon. “This was a unique technology which we moved heaven and earth to put together, and we felt it was protected and don’t feel this was an issue,” Mulvaney said of armor pricing.
“BAE Systems strongly disagrees with the judge’s ruling in this extremely complex subcontract dispute, and will appeal the decision,” the company said in a statement. “BAE Systems is firmly committed to the principles of fair contracting and providing both value and performance in support of its many government and commercial customers.”
In 2008, the Army ordered AM General to seek an $84.5 million price reduction from BAE, according to the findings, but AM General continued to be denied access to BAE’s cost data. Scopelitis wrote that BAE declined to cut prices on its armor units sold to AM General and instead, “sought to trade the inevitable price reduction for contractual concessions from AMG.”
But AM General’s contract with BAE required BAE to supply AM General with certified cost or pricing data on request, and it required BAE to indemnify AM General, Scopelitis wrote.
By April 2012, the military informed AM General that the government had been overcharged more than $410 million due to BAE’s pricing for armored parts, according to the findings. A military review board later reduced that amount significantly, and AM General agreed to settle.
Under the settlement, the military would continue to withhold payment of more than $62 million from AM General due to BAE’s overcharges, and AM General would pay the government half of the net most-favored contractor judgment it might receive in its litigation against BAE. Scopelitis awarded $113,673,152 under that claim, so the government’s share is more than $56.8 million.
“Under Indiana law, BAE is required to indemnify AMG for the amounts that AMG reasonably agreed to give (the government) to settle its pricing claim,” Scopelitis wrote.
Meanwhile, BAE failed to persuade the court to find in its favor on claims that AM General misappropriated trade secrets when it decided to make the armored parts itself and used components from BAE and materials that the company claimed were trade secrets to reverse-engineer and manufacture the armor panels and kits.
Scopelitis ruled that the materials AM General used to develop its own armor were readily available and were not trade secrets. “Reverse engineering is lawful under trade secrets law so long as the product was obtained lawfully,” he wrote. “BAE has not established damages.”
Scopelitis ruled after a three-week trial in October in South Bend that attracted high-powered, connected legal firms on both sides.
AM General was represented by LaDue Curran Kuehn LLC of South Bend with backing from Washington powerhouse Williams & Connolly LLP. The Vault.com 2013 Law Firm Rankings based on nationwide associate surveys places Williams & Connolly as the nation’s No. 1 white-collar defense firm and No. 2 Washington, D.C., firm.
“All I’m authorized to say is the company has no comment beyond what is actually in the (court) papers,” said Paul E. Harold of LaDue Curran Keuhn, who with John LaDue represented AM General as local counsel. Williams & Connolly partner David Kendall said in an email, “We will let the decision speak for itself.”
BAE was represented by Taft Stettinius & Hollister LLP of Indianapolis and the Washington firm WilmerHale, rated the No. 3 Washington, D.C., firm in the Vault survey. William C. Wagner of Taft declined to comment. Juanita Crowley, the attorney of record for WilmerHale, has retired.
According to the Federal Contractor Misconduct Database maintained by the Project on Government Oversight at www.contractormisconduct.org, BAE is the ninth-largest U.S. government contractor with contracts worth more than $6.87 billion in fiscal year 2011. The database records 13 instances of misconduct by BAE since 1995 totaling more than $588 million.
BAE recorded international sales of more than $27 billion in 2012, according to company financial information.
An AM General spokesman said the company would not comment beyond the ruling.•