United States v. Aerodex, Inc.

Aerodex, Inc. (defendant) entered into a contract with the United States Navy (plaintiff) to provide aircraft parts, including 300 new Curtis-Wright part number (PN) 171815 master rod-bearings. The contract contained both (1) an inspection clause, which stated that the government would conduct a 100-percent final inspection on the delivered bearings; and (2) a warranty clause, which expressly warranted that Aerodex would deliver new PN-171815 bearings. However, instead of providing the correct bearings, Aerodex delivered used bearings that it had reworked and reidentified as PN-171815 bearings. The reworked bearings were visually indistinguishable from PN-171815 but contained different metals. The Navy did not inspect the delivered bearings and only discovered Aerodex’s fraud after installing the bearings on Navy aircraft. The Navy paid Aerodex $27,000 for the mislabeled, reworked bearings and incurred $160,000 in retrofitting costs to remove and replace the mislabeled bearings in affected aircraft. The Navy sued Aerodex under the False Claims Act. The district court awarded the Navy approximately $380,000 in damages, calculated as follows: (a) double the $27,000 the Navy paid Aerodex for the mislabeled bearings; (b) double the $160,000 retrofitting cost; and (c) statutory damages. The district court also held that Aerodex breached the warranty clause. Aerodex appealed, arguing that (i) the mislabeled bearings were functionally interchangeable with PN-171815 bearings; and (ii) the Navy’s failure to inspect the bearings insulated Aerodex from liability for fraud or breach-of-warranty.