Sikorsky Support Services Inc. and Derco Aerospace Inc. Agree to Pay $70M to Settle False Claims Act Allegations of Improper Markups on Spare Parts for Navy Trainer Aircraft

Sikorsky Support Services Inc. (SSSI), a Delaware corporation headquartered in Stratford, Connecticut, and Derco Aerospace Inc. (Derco), a Wisconsin corporation headquartered in Milwaukee, Wisconsin, have agreed to pay $70 million to resolve False Claims Act allegations that they overcharged the Navy for spare parts and materials needed to repair and maintain the primary aircraft used to train naval aviators.

In a lawsuit filed in the U.S. District Court for the Eastern District of Wisconsin, the Justice Department alleged that SSSI and Derco, which were both wholly-owned subsidiaries of the same parent company, knowingly entered into an improper cost-plus-percentage-of-cost (CPPC) subcontract. Under that contract, SSSI agreed to purchase parts from Derco at the cost that Derco paid other suppliers for those parts, plus a fixed 32% markup. SSSI, in turn, submitted cost vouchers to the Navy for reimbursement of the amounts it paid to Derco. The government alleged that, by failing to disclose that the costs claimed by SSSI were the product of an illegal CPPC subcontract between SSSI and Derco, SSSI and Derco knowingly presented false and fraudulent cost vouchers to the Navy. The district court ruled that Derco’s markup violated a federal statute barring CPPC contracting, which Congress prohibited because it gives suppliers incentive to drive up government costs, as well as the terms of the prime contracts between SSSI and the Navy. 

“Government contractors must ensure their subcontracting arrangements comply with the law and with their contractual obligations,” said Principal Deputy Assistant Attorney General Brian M. Boynton, head of the Justice Department’s Civil Division. “Today’s settlement demonstrates that the Justice Department will ensure that government contractors do not skirt the law and engage in self-dealing that may artificially inflate their charges at the expense of the American taxpayers.” 

“The U.S. Attorney’s Office is committed to preventing fraud and protecting taxpayer money,” said U.S. Attorney Gregory J. Haanstad for the Eastern District of Wisconsin. “Government contractors must put compliance with the law ahead of profits. This settlement makes the United States whole for the inflated costs arising from SSSI’s and Derco’s illegal subcontract deterring future violations of the law.”

“Today’s settlement agreement should serve as a strong deterrent for those who seek to exploit the Department of Defense's procurement process,” said Special Agent in Charge Darrin K. Jones of Department of Defense Office of Inspector General, Defense Criminal Investigative Service (DCIS), Southeast Field Office. “This investigation is part of an ongoing effort by the Defense Criminal Investigative Service and our partners to aggressively investigate defective pricing and cost mischarging schemes that put American taxpayer dollars at risk.”

“Overinflation of parts and material costs for the repair and maintenance of aircraft affected naval air training and is a disservice to the American taxpayer,” said Special Agent in Charge Greg Gross of the Naval Criminal Investigative Service (NCIS) Economic Crimes Field Office. “NCIS continues to safeguard the Department of the Navy’s warfighting efforts from economic crimes by upholding the integrity of the defense acquisition process.”

The settlement resolves a lawsuit filed under the qui tam or whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery. The Act permits the United States to intervene and take over responsibility for litigating these cases, as the United States did here. The qui tam case is captioned United States ex rel. Patzer v. Sikorsky Aircraft Corp., Sikorsky Support Services Inc., and Derco Aerospace Inc., Case No. 11-0560 (E.D. Wis.) and was brought by Mary Patzer, a former employee of Derco.

The resolution obtained in this matter was the result of a coordinated effort between the Justice Department’s Civil Division, Commercial Litigation Branch, Fraud Section and the U.S. Attorney’s Office for the Eastern District of Wisconsin, with assistance from DCIS.

Trial Attorneys Alan Gale, Nelson Wagner and Gary Newkirk of the Civil Division’s Commercial Litigation Branch, Fraud Section and Assistant U.S. Attorney Michael Carter for the Eastern District of Wisconsin handled the matter.

The claims resolved by the settlement are allegations only. There has been no determination of liability.