## Facts

- Russell Hayes, a former project manager, brought a qui tam action under the False Claims Act (FCA) against CMC Electronics Inc. (CMC), a defense contractor that designed and manufactured secure radio systems for the U.S. Department of Defense.
- CMC manufactured the AN/GRC‑103(V) radio set; surplus military radio equipment was available on the market during the relevant period.
- The United States contracted to sell radio sets to Saudi Arabia through the Foreign Military Sales (FMS) program under the Arms Export Control Act (AECA), with terms reflected in Letters of Offer and Acceptance (LOAs).
- The Army contracted with AEC Electronics to procure 97 radio sets for resale to Saudi Arabia; AEC subcontracted with CMC to supply the radio sets.
- The subcontract required that all equipment be “newly manufactured” and prohibited used, reconditioned, or overhauled equipment.
- The complaint alleged CMC supplied used or surplus radios and components while representing them as new and charging new-equipment prices, causing false claims to be presented to the United States through the contracting and billing chain.
- CMC argued the FCA should not apply, and damages could not be recovered, because AECA FMS procurement requires the foreign purchaser to cover the “entire cost” of the procurement.

## Issues

1. Whether alleged misrepresentation of used equipment as “newly manufactured” on an AECA FMS procurement contract states a claim under the FCA, even though the foreign purchaser funds the transaction.
2. Whether the United States is legally barred from recovering FCA damages (beyond statutory penalties) on the theory that it cannot suffer loss when the foreign purchaser pays the full procurement cost under 22 U.S.C. § 2762.

## Decision

- The court denied CMC’s partial motion to dismiss under Rule 12(b)(6).
- The court denied CMC’s alternative motion for partial summary judgment under Rule 56 seeking to limit recovery to statutory penalties.
- The court held the alleged false claims were potentially covered by the FCA notwithstanding the FMS funding structure.
- The court held the existence and measure of any government damages presented factual questions not resolvable on dismissal or early partial summary judgment.

## Legal Principles

- FCA coverage turns on whether false or fraudulent claims are made or caused to be made in connection with a U.S. government procurement or payment process; foreign reimbursement under FMS does not categorically remove the claims from the FCA.
- In AECA FMS procurements, the United States remains the contracting party even if the foreign purchaser is obligated to fund the “entire cost”; that funding obligation does not, by itself, defeat FCA liability.
- Misrepresenting used or surplus goods as contractually required “newly manufactured” equipment, and billing accordingly, can constitute a false claim when submitted through government contracting channels.
- Whether the government sustained compensable damages in an FMS transaction may be fact-dependent; courts should not foreclose damages or cap recovery at penalties as a matter of law where the record does not resolve government loss.

## Conclusion

The court allowed the FCA action to proceed, rejecting the argument that FMS funding automatically bars FCA liability or damages, and finding that potential government damages in the procurement were a factual question requiring further development.


United States ex rel. Hayes v. CMC Elecs., Inc., 297 F. Supp. 2d 734 (D.N.J. 2003)