United States ex rel. Patzer v. Sikorsky Aircraft Corp.

575 F.Supp.3d 1032

UNITED STATES of America, EX REL. Mary J. PATZER and Peter Cimma, Plaintiffs,

v.SIKORSKY AIRCRAFT CORPORATION, Sikorsky Support Services, Inc., and Derco Aerospace, Inc., Defendants.

Case No. 11-C-0560

United States District Court, E.D. Wisconsin.

Signed December 13, 2021

Alan S. Gale, Michael D. Granston, Gary J. Newkirk, Nelson Wagner, Alan E. Kleinburd, United States Department of Justice, Washington, DC, Lisa T. Warwick, Michael A. Carter, United States Department of Justice (ED-WI) Office of the US Attorney, Milwaukee, WI, for Plaintiffs.

Joseph W. Harper, Laurie A. Witek, Michael J. Bronson, Patrick M. Hagan, Lauren L. Weiner, Dinsmore & Shohl LLP, Cincinnati, OH, Michael Ferrara, Dinsmore & Scohl LLP, Columbus, OH, Steven M. Biskupic, Biskupic & Jacobs SC, Mequon, WI, for Defendants Sikorsky Aircraft Corporation, Sikorsky Support Services Inc., Derco Aerospace Inc.

DECISION AND ORDER

LYNN ADELMAN, District Judge

In the present case, the United States alleges that defendants Sikorsky Aircraft Corporation, Sikorsky Support Services, Inc. ("SSSI"), and Derco Aerospace, Inc. ("Derco") violated the False Claims Act, 31 U.S.C. §§ 3729 – 3733, by perpetrating a scheme in which SSSI and Derco agreed to an illegal cost-plus-a-percentage-of-cost system of government contracting and took steps to hide the illegal nature of their agreement from the government. The government and the defendants have filed motions to compel that relate to documents allegedly protected by the attorney-client privilege. (ECF Nos. 181 & 185.) I consider those motions in this order.¹

I. BACKGROUND

The government's claims arise out of a contract between SSSI and the United States Navy in which SSSI agreed to maintain trainer aircraft at Naval air stations in Texas and Florida. SSSI, in turn, entered into a subcontract with Derco under which Derco agreed to procure spare parts for the aircraft as needed by SSSI. SSSI agreed to compensate Derco for its services by allowing Derco to add a 32% markup to the cost of the parts it sold to SSSI. After paying Derco for parts, SSSI submitted requests for reimbursement to the Navy.

The government alleges that the agreement between SSSI and Derco to allow Derco to add a 32% markup to the cost of parts sold to SSSI resulted in a cost-plus-a-percentage-of-cost system of contracting, in violation of 10 U.S.C. § 2306(a). In a recent decision on the parties’ motions for partial summary judgment, I agreed with the government on this point and found that the subcontract violated § 2306(a). See United States v. Sikorsky Aircraft Corporation , 571 F.Supp.3d 979 (E.D. Wis. 2021). The government now seeks to prove that the defendants knew that the agreement between SSSI and Derco was illegal and took steps to conceal the illegal aspects of their agreement from the government, which resulted in violations of the False Claims Act. The government also brings claims for breach of contract and unjust enrichment.

Several of the defendants’ defenses are relevant to the present motions to compel. First, the defendants contend that the Navy was aware of Derco's 32% markup and therefore could not have been deceived. Second, the defendants assert an affirmative defense entitled "Waiver and Ratification" that is based on the Navy's knowledge of the markup. (ECF Nos. 134 & 135, First Affirmative Defense.) In this affirmative defense, the defendants allege that the Navy, with full knowledge that Derco was marking up parts by 32%, continued to allow the markup and even extended its contractual relationship with SSSI and Derco, and thereby either waived its claim that the markup was unlawful or ratified the defendants’ conduct. Third, the defendants assert an affirmative defense entitled "Laches" that is likewise based on the Navy's alleged knowledge of the markup. (ECF Nos. 134 & 135, Sixth Affirmative Defense.) In this affirmative defense, the defendants allege that the government failed to bring this suit promptly after learning about Derco's markup. According to the defendants, the government waited eight years to bring suit, during which time the defendants "rel[ied] in good faith on the Government's consent to the pricing methodology" by continuing to use that methodology. (Id. ¶ 5.) The defendants also allege that they were prejudiced by the government's delay because a crucial witness died during the period of delay. (Id. )

To support their defenses, the defendants wish to use as evidence a page of typewritten notes created by Noelle Reimers, who was the responsible Navy procurement officer for the contract. The notes consist of six bullet points, each of which states a question relating to an aspect of the Navy's contract with SSSI. One question asks, "Are you aware of the 32% mark-up of parts by Derco, for parts purchased from vendors, which was charged to [SSSI] ...?" (ECF No. 186-2.) Underneath this question, Reimers wrote, "Markups are transparent to us." (Id. ) According to the defendants, this answer shows that the Navy was aware of Derco's 32% markup.

The government produced Reimer's notes as part of its responses to the defendants’ written discovery requests. When they deposed her, the defendants asked Reimers a series of questions about the notes. During a break at the deposition, the government's lawyers checked the metadata associated with the electronic version of the notes and learned that Reimers had saved the notes under the filename "Todd September 2012." In September 2012, DCIS Special Agent John Todd worked under the direction of two government lawyers as part of the government's investigation into the facts underlying this litigation. Based on the filename, the government's lawyers concluded that Reimers likely made the notes to facilitate her communications with government attorneys, and that therefore the document is protected by the attorney-client privilege. The government thus exercised its right to "claw back" the document under the court's order under Federal Rule of Evidence 502(d). In their motion to compel, the defendants argue that the notes are not protected by the attorney-client privilege and that therefore they should be allowed to use the notes to support their defenses.

The government's motion to compel likewise involves the attorney-client privilege. The motion raises several issues. First, the government contends that the defendants waived the privilege as to certain documents by asserting affirmative defenses alleging good-faith reliance on the government's conduct. According to the government, the defendants, by asserting those defenses, placed the advice they received from counsel at issue in this litigation, which resulted in a waiver of the privilege.

Second, the government contends that certain of the defendants’ witnesses testified, either through declarations or at their depositions, about their understanding of the legality of Derco's 32% markup. The government contends that, by offering this testimony, the defendants have waived the privilege with respect to attorney-client communications concerning the legality of the markup.

Third, the government contends that the court should review in camera certain documents identified on the defendants’ privilege logs to determine whether the crime-fraud exception to the attorney-client privilege applies. Here, the government alleges that the crime-fraud exception potentially applies to two sets of attorney-client communications: (1) those involving a revision to the SSSI-Derco subcontract that, according to the government, concealed Derco's 32% markup; and (2) those involving a presentation the defendants made to government auditors regarding Derco's markup.

Finally, the government contends that the court should review in camera documents identified on the privilege logs as involving legal advice from Attorney Thomas Kister. The government contends that Kister has denied giving legal advice on the topics reflected on the privilege logs, and that therefore it is probable that the withheld documents are not protected by the attorney-client privilege.

II. DISCUSSION

A. Defendants’ Motion to Compel Withdrawal of Privilege Claim

In their motion to compel, the defendants ask me to find that Reimers’ notes are not protected by the attorney-client privilege. The privilege extends to confidential communications between client and attorney that are made to obtain legal assistance. United States v. Leonard-Allen , 739 F.3d 948, 952 (7th Cir. 2013). Its purpose is to encourage clients to make full disclosure to their attorneys, and its scope is informed by this purpose. Id. at 952–53. Because the privilege may operate in derogation of the search for truth, courts construe the privilege to apply only where necessary to achieve its purpose. Id. at 953. The Seventh Circuit has said that the privilege covers "only those communications which reflect the lawyer's thinking [or] are made for the purpose of eliciting the lawyer's professional advice or other legal assistance." Id. (quoting United States v. BDO Seidman, LLP , 492 F.3d 806, 815 (7th Cir. 2007) ).

Here, the defendants contend that Reimers’ notes are not privileged for several reasons. First, the defendants contend that the government has produced insufficient evidence to show that Reimers created the notes for the purpose of obtaining legal advice. The defendants note that, at her deposition, Reimers could not recall having prepared the notes or having used them to facilitate communications with the government's attorneys. However, the government has produced strong circumstantial evidence showing that Reimers in fact prepared the notes for this purpose. The government has submitted, for the court's in camera review, an email from Special Agent Todd to Reimers, dated September 14, 2012. (ECF No. 189-1.) Todd sent copies of the email to the government lawyers involved in this litigation. In the email, Todd thanks Reimers for agreeing to meet telephonically with him and the...