Boeing 2006 Annual Report Download - page 76

74 The Boeing Company and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 – Legal Proceedings
Various legal proceedings, claims and investigations related
to products, contracts and other matters are pending against
us. Many potentially significant legal proceedings are related
to matters covered by our insurance. Potential material
contingencies are discussed below.
We are subject to various U.S. Government investigations,
from which civil, criminal or administrative proceedings could
result or have resulted. Such proceedings involve, or could
involve claims by the Government for fines, penalties,
compensatory and treble damages, restitution and/or forfeitures.
Under government regulations, a company, or one or more of
its operating divisions or subdivisions, can also be suspended
or debarred from government contracts, or lose its export
privileges, based on the results of investigations. We believe,
based upon current information, that the outcome of any such
government disputes and investigations will not have a
material adverse effect on our financial position, except as
set forth below.
A-12 Litigation
In 1991, the U.S. Navy notified McDonnell Douglas Corporation
(now one of our subsidiaries) and General Dynamics Corporation
(together, the Team) that it was terminating for default the
Team’s contract for development and initial production of the
A-12 aircraft. The Team filed a legal action to contest the
Navy’s default termination, to assert its rights to convert the
termination to one for “the convenience of the Government,”
and to obtain payment for work done and costs incurred on the
A-12 contract but not paid to date. As of December 31, 2006,
inventories included approximately $584 of recorded costs
on the A-12 contract, against which we have established a
loss provision of $350. The amount of the provision, which
was established in 1990, was based on McDonnell Douglas
Corporation’s belief, supported by an opinion of outside
counsel, that the termination for default would be converted to
a termination for convenience, and that the best estimate of
possible loss on termination for convenience was $350.
On August 31, 2001, the U.S. Court of Federal Claims issued
a decision after trial upholding the Government’s default termi-
nation of the A-12 contract. The court did not, however, enter
a money judgment for the U.S. Government on its claim for
unliquidated progress payments. In 2003, the Court of Appeals
for the Federal Circuit, finding that the trial court had applied
the wrong legal standard, vacated the trial court’s 2001 decision
and ordered the case sent back to that court for further
proceedings. This follows an earlier trial court decision in favor
of the Team and reversal of that initial decision on appeal.
If, after all judicial proceedings have ended, the courts
determine, contrary to our belief, that a termination for default
was appropriate, we would incur an additional loss of approxi-
mately $275, consisting principally of remaining inventory costs
and adjustments, and, if the courts further hold that a money
judgment should be entered against the Team, we would be
required to pay the U.S. Government one-half of the unliqui-
dated progress payments of $1,350 plus statutory interest from
February 1991 (currently totaling approximately $1,270). In that
event, our loss would total approximately $1,585 in pre-tax
charges. Should, however, the March 31, 1998 judgment of the
U.S. Court of Federal Claims in favor of the Team be reinstated,
we would be entitled to receive payment of approximately
$1,056, including interest.
We believe that the termination for default is contrary to
law and fact and that the loss provision established by
McDonnell Douglas Corporation in 1990, which was supported
by an opinion from outside counsel, continues to provide
adequately for the reasonably possible reduction in value of
A-12 net contracts in process as of December 31, 2006.
Final resolution of the A-12 litigation will depend upon the
outcome of further proceedings or possible negotiations with
the U.S. Government.
Global Settlement of the Evolved Expendable Launch
Vehicle (EELV) and Druyun Matters
On June 30, 2006, we entered into a global settlement
through two separate agreements disposing of potential
criminal charges and civil claims with the Civil Division of the
U.S. Justice Department and U.S. Attorneys in Los Angeles,
CA and Alexandria, VA relating to two separate procurement
integrity incidents. The first incident in 1999, involved posses-
sion by four Boeing employees of Lockheed Martin competitor
information related to the EELV program. The second incident
related to conflict of interest charges in hiring former govern-
ment official Darleen Druyun. In the agreement with the U.S.
Attorneys in Los Angeles and Alexandria, we agreed to pay a
$50 penalty, committed to maintaining our strengthened ethics
and compliance program for the two-year term of the agree-
ment (through June 2008) and agreed to provide both U.S.
Attorneys offices with certain compliance reports. Concurrent
with entering into the U.S. Attorney agreement, we entered into
a Civil Agreement with the Civil Division of the U.S. Department
of Justice under which we agreed to pay $565 in settlement of
all potential civil claims. We are also subject to an Administrative
Agreement with the U.S. Air Force through March 2008 which
requires certain compliance activities and reports.
As a result of the global settlement, we have recorded an
additional expense of $571, which represents the cumulative
payment of $615 under the two separate agreements, net of
$44 previously accrued in connection with program and
contracts issues relating to the EELV investigation.
One additional proceeding that relates to the subject matter of
the global settlement is Lockheed’s June 2003 lawsuit against
us in the U.S. District Court for the Middle District of Florida
based upon the EELV incident wherein Lockheed sought
injunctive relief, compensatory damages in excess of $2,000,
and treble damages and punitive damages, and we filed
counterclaims against Lockheed similarly seeking compensatory
and punitive damages. Proceedings in that lawsuit had been