Settlement is the largest by defense contractor in a whistleblower case
April 2, 2009, LOS ANGELES, CALIFORNIA -- TRW Inc.'s efforts to stop a scientist from revealing his research findings about faulty electronic components the company sold to the government for military and intelligence-gathering satellites were the basis for a whistleblower lawsuit that Northrop Grumman Corp. (NYSE: NOC), which acquired TRW, settled today for $325 million.
Today's settlement is the largest one ever paid by a defense contractor in a "qui tam" (whistleblower) case and the second largest settlement ever paid involving defense contractor fraud.
The whistleblower, Robert Ferro, will be awarded $48.7 million for his work and the work of his attorneys on the case. The False Claims Act requires the government to reward whistleblowers 15 percent to 25 percent of the amount the government recovers as a result of a qui tam case.
The lawsuit -- joined by the government and made public today -- alleged that TRW, which Northrop Grumman acquired in 2002, sold to the government components known as "heterojunction bipolar transistors," or "HBTs," that TRW knew were likely to fail in government satellites.
The qui tam lawsuit says a government satellite "experienced critical failures" while in orbit in 2001, but at that time the government didn't know that TRW had long been aware that failures of its components were likely.
Research conducted in 1995 clearly demonstrated the parts would fail if placed in satellites, but TRW didn't inform the government of this before or after the problem occurred. Several government programs delayed launch of their satellites to determine the cause of the problems with the satellite in space. Those programs eventually replaced the HBTs in their satellites.
The whistleblower, Robert Ferro, is a scientific researcher who discovered in 1995 that the HBTs produced by TRW were likely to fail when operated under high electrical currents, such as when used in satellites. But TRW had insisted on a nondisclosure agreement before allowing Ferro to test its parts and refused to allow Ferro and his employer, Aerospace Corp., a private research company, to disclose the negative results to anyone.
The cover-up continued into 2002, when Ferro heard about the satellite's problems. The Air Force asked Ferro's employer, Aerospace, to provide an explanation of whether TRW should have known of the potential problem. Ferro attempted to include in that report the results of his 1995 research. But TRW sanitized the Aerospace report, making sure there was no mention of Ferro's 1995 testing and editing out references to other warnings that TRW had received over the years.
"TRW deliberately suppressed Robert Ferro's findings and sold the components to the government knowing that those parts were likely to fail," said Eric R. Havian, a San Francisco attorney whose firm, Phillips & Cohen LLP, represents Ferro. "Even after a satellite in space experienced serious anomalies, TRW still refused to reveal the problems found earlier with the components and had the gall to charge the government millions to investigate what went wrong with the satellite."
TRW also withheld from the government information about a massive recall of cell phone equipment because they contained similarly defective TRW HBTs just a month before the government began to experience its own HBT failures. Instead, TRW said the government problems were the result of a new defect that had never been seen before.
When the government directed TRW to issue an industry-wide alert (known as a GIDEP alert) about the HBT problem, TRW initially resisted, then issued an alert that made no mention of the failures. The alert merely stated, falsely, that some customers had improperly been using commercial-grade parts rather than flight-qualified parts.
Ferro then went directly to the government with his information and later filed a "qui tam" (whistleblower) lawsuit in federal district court in Los Angeles to make sure his disclosures were properly investigated. A company cannot shield itself from a whistleblower lawsuit brought under the False Claims Act by hiding behind nondisclosure agreements, according to attorney Havian.
As part of today's settlement, the U.S. has agreed to settle for $325 million an unrelated claim Northrop had made against the federal government.
Havian complimented the government for its work on the satellite case. Because of the classified nature of some of the evidence, the Justice Department constructed several high-tech, secure facilities, two on the East Coast and one on the West Coast, devoted solely to the case. Many of the issues could be discussed only in one of those facilities.
Havian said the Justice Department had many attorneys working long hours on the investigation, including some of the most senior members of the department.
"I have never heard of another case where such high-level government lawyers were directly involved in the details of an incredibly complex investigation," Havian said. "They achieved a fantastic result."
Ferro's qui tam lawsuit was brought under the False Claims Act, which allows individuals to sue companies that defraud the government and to recover funds on the government's behalf.
Phillips & Cohen LLP is the nation's largest and most successful law firm representing whistleblowers in qui tam cases and in cases involving major tax law violations. For more information about Phillips & Cohen's record, see P&C's Successful Whistleblower Cases.
United States ex rel. Ferro v. TRW Inc., case no. 02-9934-PA (C.D. Calif.).