Northrop Grumman 2010 Annual Report Download - page 98

a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export
privileges for a company or a division or subdivision. Suspension or debarment could have a material adverse
effect on the company because of its reliance on government contracts.
In the second quarter of 2007, the U.S. Coast Guard issued a revocation of acceptance under the Deepwater
Modernization Program for eight converted 123-foot patrol boats (the vessels) based on alleged “hull buckling
and shaft alignment problems” and alleged “nonconforming topside equipment” on the vessels. The company
submitted a written response that argued that the revocation of acceptance was improper. The Coast Guard
advised Integrated Coast Guard Systems, LLC (ICGS), which was formed by the contractors (Lockheed Martin
Corporation and Northrop Grumman Shipbuilding, Inc.) to perform the Deepwater Modernization Program,
that it was seeking approximately $96 million from ICGS as a result of the revocation of acceptance. The
majority of the costs associated with the 123-foot conversion effort are associated with the alleged structural
deficiencies of the vessels, which were converted under contracts with the company and a subcontractor to the
company. In 2008, the Coast Guard advised ICGS that the Coast Guard would support an investigation by the
U.S. Department of Justice of ICGS and its subcontractors instead of pursuing its $96 million claim
independently. The Department of Justice conducted an investigation of ICGS under a sealed False Claims Act
complaint filed in the U.S. District Court for the Northern District of Texas and decided in early 2009 not to
intervene at that time. On February 12, 2009, the District Court unsealed the complaint filed by Michael J.
DeKort, a former Lockheed Martin employee, against ICGS, Lockheed Martin Corporation and the company
relating to the 123-foot conversion effort. Damages under the False Claims Act are subject to trebling. On
October 27, 2010, the District Court entered summary judgment for the company on the hull, mechanical and
electrical (“HM&E”) claims brought against the company. On November 10, 2010, DeKort acknowledged that
with the dismissal of the HM&E claims, no issues remained against the company for trial and the District Court
subsequently vacated the December 1, 2010 trial date. On November 12, 2010, DeKort filed a motion for
reconsideration regarding the District Court’s denial of his motion to amend the Fifth Amended Complaint. On
November 19, 2010, DeKort filed a second motion for reconsideration regarding the District Court’s order
granting summary judgment on the HM&E claims. Based upon the information available to the company to
date, the company believes that it has substantive defenses to any potential claims but can give no assurance that
the company will prevail in this litigation.
In August 2008, the company disclosed to the Antitrust Division of the Department of Justice possible violations
of federal antitrust laws in connection with the bidding process for certain maintenance contracts at a military
installation in California. In February 2009, the company and the Department of Justice signed an agreement
admitting the company into the Corporate Leniency Program. As a result of the company’s acceptance into the
Program, the company will be exempt from federal criminal prosecution and criminal fines relating to the
matters the company reported to the Department of Justice if the company complies with certain conditions,
including its continued cooperation with the government’s investigation and its agreement to make restitution if
the government was harmed by the violations.
Based upon the available information regarding matters listed above that are subject to U.S. Government
investigations, the company believes that the outcome of any such matters would not have a material adverse
effect on its consolidated financial position, results of operations or cash flows.
Litigation – Various claims and legal proceedings arise in the ordinary course of business and are pending against
the company and its properties.
The company is one of several defendants in litigation brought by the Orange County Water District in Orange
County Superior Court in California on December 17, 2004, for alleged contribution to volatile organic
chemical contamination of the County’s shallow groundwater. The lawsuit includes counts against the defendants
for violation of the Orange County Water District Act, the California Super Fund Act, negligence, nuisance,
trespass and declaratory relief. Among other things, the lawsuit seeks unspecified damages for the cost of
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NORTHROP GRUMMAN CORPORATION