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July 5, 1990

JANET C. COOK, et al., Defendants

Harold H. Greene, United States District Judge.

The opinion of the court was delivered by: GREENE


 Plaintiff, the former president and chief executive officer of Dale Electronics, Inc. (Dale), brought this action to enjoin his debarment from government contracting. The Defense Logistics Agency (DLA) *fn1" ordered such debarment in August 1989 for a period of three years, upon its conclusion that plaintiff had reason to know that his company was defrauding the Department of Defense by, among other things, submitting fabricated test results and false quality control reports. *fn2" Before the Court are cross-motions for summary judgment presenting the single issue whether the agency's decision was arbitrary or capricious.


 From 1981 to 1989, Novicki was president of Dale, a manufacturer of wirebound and metal film resistors and other electronic components used in military weapons and navigation systems. Dale also supplied fixed film resistors to the military, the contracts for such resistors constituting a significant part of the company's business. *fn3"

 Because the resistors were used in nuclear missiles, advanced fighter aircraft, Trident submarines, and other sensitive weapons systems, the contract required that they be proved to be extremely reliable, and the Department of Defense paid a premium price for this reliability. Under the contract, Dale was required to perform regular quality control tests and to report the results of these tests to the Department. No more than one failure per 53.2 million hours of life testing was permitted. Dale was also required to inform the Department whenever its customers reported field failures of resistors. Failure to report test or field failures could have cost the company the contract.

 From 1982 to 1986, Dale executives intentionally and systematically underreported the number of instances in which resistors failed. In all, the company made forty-two false statements by deleting from reports submitted to the Defense Electronics Agency fifteen instances of resistor failure in quality control tests. The director of Dale's test laboratory subsequently told investigators that he had been pressured by three senior Dale executives not to report test failures and had been warned that his department would be blamed for any failures that were reported. *fn4"

 During the same period, Dale received thirty-five reports from customers of 1,350 instances of resistor failure. As indicated, under the contract, Dale was required to report these failures too, to the Department of Defense. However, Dale executives again made a decision not to do so. Instead, when customers told Dale of the failures, the company blamed them on the customers' inept handling. Dale personnel also knew, but failed to report, that between twenty and twenty-seven percent of the Dale resistors in the MX nuclear missile and certain other critical weapons systems had failed. Losses from resistor failures now total $ 2.5 million, and failures in the future are expected to result in the destruction of two orbiting satellites at a cost of $ 176 million.

 For purposes of this case, it is undisputed that four of Dale's executives, including the company's vice president, participated in, knew of, or had reason to know of the scheme, and that all of them have been debarred. The Defense Department further found that Novicki had reason to know of the fraud, and it debarred him under Federal Acquisition Regulation (FAR) 9.406-5(b), which authorizes such action of executives who had "reason to know" of the misconduct involving other employees of a company. *fn5" Novicki instituted the instant action challenging the DLA decision to debar him and the underlying conclusion that he had reason to know of the fraud.


 Before discussing whether the evidence supports the DLA's conclusion, it is useful to set out basic principles. To debar plaintiff, the agency was required to demonstrate by a preponderance of the evidence that he had reason to know of the fraud. 48 C.F.R. 9.403. The agency's decision to that effect is subject to judicial review under an arbitrary and capricious standard. 5 U.S.C. § 706(2)(A). See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971); Robinson v. Cheney, 876 F.2d 152, 155 (D.C. Cir. 1989). The arbitrary and capricious standard is highly deferential in these circumstances, and it presumes the agency's action to be valid. Overton Park, 401 U.S. at 416, 419; Motor Vehicle Manufacturers Association v. State Farm Automobile Insurance Co., 463 U.S. 29, 43, 77 L. Ed. 2d 443, 103 S. Ct. 2856 (1985).

 While the concept is not defined in the regulations, "reason to know" is generally understood to mean that a reasonable person in the same position as the actor would infer the facts at issue from facts already known to him, or that he would conclude that there was such a substantial chance of their existence that he would predicate his actions upon an assumption of their possible existence. Restatement (Second) of Agency § 9.

 The issue before the agency, then, and now before the Court, is whether Novicki had information from which a reasonable person would have inferred what was occurring at the company with respect to the resistors. The DLA's conclusion that plaintiff had reason to know of the fraud his company was perpetrating on the government is plainly supported by the evidence.

 The problem with faulty resistors and with complaints from dissatisfied customers extended over a number of years. During that period, there were 1,350 performance failures and thirty-five separate complaints from numerous customers. Nor were the failures and complaints associated with a routine product of minor importance to the company such that the company's president would have had no reason to know of their occurrence. To the contrary, the contract at issue was of cardinal importance to Dale, and any failure was of great significance in view of the premium price that was paid to Dale for perfection and the highly sensitive use that was to be made of the resistors. Moreover, Novicki's direct and his second-tier subordinates were deeply implicated in the fraud. In view of these facts, Novicki conceded, as he could hardly avoid doing, that at least as of 1986 he was "generally aware" of customer complaints. Novicki ...

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