Qui tam lawsuit against technology company for government contract fraud settles for $1.9M

Oct. 4, 2004 -- Photon Research Associates and its chief executive officer have agreed to pay the federal government $1.9 million to settle a whistleblower (qui tam) lawsuit brought by Phillips & Cohen LLP that said the technology company had deliberately overcharged U.S. defense and intelligence agencies for labor costs on government contracts.

Photon Research Associates, based in San Diego, Calif., provides software for satellites and target detection as well as other services for government agencies, including an arm of the Central Intelligence Agency known as the National Reconnaissance Organization. For several of its multi-year contracts, Photon Research Associates set up a labor rate structure that took into account annual cost-of-living increases and pay raises.

Despite including pay increases in the basic labor rates it charged the government, Photon Research Associates added an escalation clause of approximately 5 percent annually to its contracts with the understanding that it was to cover pay increases. The government agreed to pay the annual increase, unaware that pay increases already were covered in Photon Research Associates’ basic labor rate costs. Labor costs made up the bulk of the costs incurred under PRA’s government contracts.

The whistleblower, Kenneth Segel, was a contract manager for Photon Research Associates in San Diego for four years. He filed his "qui tam" lawsuit in October 2003 in federal district court in San Diego against Photon Research Associates and James A. Myer, PRA’s founder, chief executive officer and largest shareholder. (United States ex rel. Segel v. Photon Research Associates, Inc., et al., Case No. 03CV2103-J.)

Photon Research Associates had fixed-price contracts with the government, meaning the government paid its costs as well as a negotiated percentage of profit. On many of the contracts at issue, PRA had negotiated an 8 percent profit with the government.  As a result of the fraud, the qui tam lawsuit said, PRA actually was making a 28 percent profit or greater at times.

Segel, the whistleblower, discovered the fraud in 2002 while investigating the disparity between Photon Research Associates negotiated profits and its actual profits. When he confronted a company officer about the scheme, the officer responded, "We get excellent profit margins [with] little to no risk," according to the lawsuit.

Segel’s lawsuit was filed under the False Claims Act, which allows private citizens to sue companies that are defrauding the government and recover funds on the government’s behalf. Whistleblowers, or "relators" as they are known, are rewarded with 15 percent to 25 percent of the recovery, when the government joins the case. Segel will be awarded 19 percent.

Phillips & Cohen is the nation’s most successful qui tam law firm. For more information about Phillips & Cohen's record, see P&C's Successful Whistleblower Cases.