Judgement against Lockheed could chill industry.

Judgment against Lockheed could chill industry

The $45.3 million judgment against Lockheed Corp. - the largest ever against a defense contractor - could have a chilling affect on the whole industry by forcing management to act more cautiously in disciplining workers, industry representatives said.

In addition, the judgment sends a message to defense contractors that the public has tired of "screw-ups and cover-ups" in the industry and is not afraid of assessing huge penalties, said the attorney for two of the three plaintiffs in the case.

In Los Angeles County, there are at least five pending lawsuits similar to the Lockheed case, which was brought by three former employees who charged they were "wrongfully terminated" for warning management about defects in the company's C-5B aircraft manufacturing program.

McDonnell Douglas Corp., Northrop Corp., Hughes Aircraft Co. and TRW Inc., defense and aerospace companies with large facilities in Los Angeles County, are among the defendants in the pending cases, said the companies and Herbert Hafif, the plaintiffs' attorney in the Lockheed lawsuit.

In those cases, former or current employees are seeking millions of dollars in damages from the companies.

Other similar cases in Los Angeles County have been dropped recently before they went to trial or a settlement was reached. In one of those cases, which was dropped because the government decided not to join the plaintiff's action, a former Hughes employee sued the company for $9.6 billion, said Hughes spokesman Richard Dore.

"The basic message here is that you have to be very careful when you let an employee go. I don't think you can tie this just to Lockheed or the defense industry because we are a lawsuit happy society and juries are awarding very large judgments," said Dore.

The Aerospace Industries Association, a Washington D.C.-based trade organization, said the Lockheed judgment is the largest of its kind against a defense contractor.

"I can't comment on the specifics of the case but generally I am concerned it is going to have a chilling affect on management. It could send a message that management judgments are being questioned and challenged and the result could be a substantial penalty," said Leroy Haugh, vice president for procurement and finance at the AIA. "With awards of this magnitude, companies could be severely impacted. I'm afraid that smaller companies could be driven out of the business because they just wouldn't want to take the risk."

Since 1986, when the government started joining employee-initiated lawsuits against defense contractors, there has been an increase in so-called whistleblower cases, said Haugh. The government has not always joined the suits, after determining there was insufficient evidence of wrongdoing, said Haugh. But he also noted that in some cities, the Inspector General's office has taken out newspaper ads asking defense-industry employees to report waste and fraud.

The Lockheed case was not a traditional whistleblower suit because the plaintiffs sued over wrongful termination and did not ask the government to join the action.

In the Lockheed suit, a former quality control assurance representative and two auditors claimed they were fired after warning about mainframe defects in the cargo plane.

The three workers, Clyde Jones, Terrence Schielke and Thomas Benecke, said they told then Lockheed Chairman Lawrence Kitchen about the defects. Kitchen, who is no longer chairman of the company, testified he personally fired two of the workers and said the employees had "lied" about the defects and charges of a management cover-up.

The jury, after deliberating seven days, awarded $45.3 million in punitive damages to the plaintiffs and $240,014 in compensatory damages on Nov. 15.

Lockheed has called the judgment "outrageous" and is planning an appeal.

If the award stands, the $45.3 million judgment could cost Lockheed stockholders more than 70 cents a share, based on 63 million shares outstanding.

Industry analysts have mixed reactions to the impact of the settlement on the company. Some have said that if the award is upheld, Lockheed may have to borrow the money, which would increase the company's $2 billion debt. But others have said the penalty could be paid out of $100 million in cash reserves.

Lockheed, based in Calabasas, is currently the subject of a takeover attempt by Texas billionaire Harold Simmons. (See story on page 4.) So far, the judgment has not affected Simmons' $2 billion bid for Lockheed, which is currently manufacturing the C-130 transport aircraft and is developing a ballistic missile system for the U.S. Navy.

Hafif, the Claremont-based attorney who specializes in employee-initiated lawsuits against defense contractors, said, "The significance of this is first of all that it is a big mistake for defense firms to think that these cases will be automatically set aside because of the large amounts of money involved. When there are huge contracts involved and the jury decides the company produced a flawed product they are willing to making the company pay. Some defense companies make a genuine effort to make a good product and I would almost say that Lockheed fit into that category," he said.

"But in this case the company screwed up five of the first 19 mainframes and then didn't admit their mistake," Hafif continued. "They just should have bitten the bullet and admitted the mistake and fixed it and maybe this wouldn't have happened."