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L-3 Exec Testifies That Representative Agreement With Qatar Company “Was Cover For Any Kind Of Allegation That [L-3] Has Violated The FCPA”

Judicial Decision

This post concerns a judicial opinion recently released by the Southern District of New York in a bench trial concerning the claims of Capital Security Systems (a company located in Qatar) against L-3 Communications Security and Detection Systems.

The underlying claims were garden variety breach of contract and related causes of actions with Foreign Corrupt Practices Act issues sprinkled in.

In terms of relevant background information, the decision states in pertinent part:

“Capital claims that it is owed commissions for its relationship assistance to L-3 in connection with L-3’s attempt to sell baggage scanning equipment known as “eXaminers” for use in an airport in Doha, Qatar. Capital asserts claims against L-3 for breach of contract, unjust enrichment, and breach of the implied covenant of good faith and fair dealing.”

[…]

This dispute centers on Capital’s right to commissions on sales of eXaminers at Hamad International Airport (“New Doha Airport”). Capital facilitated approximately two meetings in support of the sale of seven eXaminers for use in the outbound terminal at New Doha Airport. L-3 does not dispute Capital’s right to a commission on outbound terminal sales and has already partially paid Capital for these services. But L-3 maintains that Capital had no role in and no foreknowledge of any of the other sales of eXaminers it made for use in other terminals of the New Doha Airport—an additional eight eXaminers—and is entitled to no commission on such sales.

Capital claims that even if it had no advance knowledge or participation in the subsequent, non-outbound sales of eXaminers at New Doha Airport, it is entitled to commissions on such sales for two primary reasons. First, Capital points to its prior role reselling and maintaining eXaminers for the airport operating in Doha prior to the construction of New Doha Airport (the “Old Doha Airport”) as something that helped establish and maintain L-3’s reputation in Qatar and among relevant Qatari authorities. Second, Capital claims the subsequent sales were follow-on sales necessarily secured once the outbound deal was secured.

The sale of equipment of this type to the airport authority in Qatar was heavily dependent upon relationships. For example, Smiths, one of L-3’s regional competitors, employed as its “representative” Abdullah Misnad, the brother-in-law of the Emir of Qatar. Smiths enjoyed an 80–85% market share in those countries that are members of the Gulf Cooperation Council.

Capital holds itself out as a Qatari engineering firm that produces and maintains security technology.  Capital also represents companies outside of Qatar that seek to gain business in the Qatari security sector.  In this relationship-driven market, Capital had a key asset: its close affiliation with Ghanim Al Houdeifi . At various points, Capital’s General Manager Georges Nakhle referred to Al Houdeifi as Capital’s “partner,” “major shareholder,” and “chairman.”

Al Houdeifi worked “around 30 years as [the] head of [the] Minister of Interior” in Qatar. At the time Al Houdeifi held the position, the head of the Minister of the Interior oversaw the “army, the police, and the immigration department” of Qatar. During all times relevant to this dispute, Al Houdeifi was retired from his position at the Minister of the Interior but continued to hold the title “Minister of State.” Nakhle candidly acknowledged that the “influence” of Minister of State Al Houdeifi was a reason that Capital was able to facilitate sales of L-3’s products at the Old Doha Airport. . Nakhle’s own training and experience were in accounting and financial planning.

Neither side offered evidence as to the meaning or import of Al Houdeifi’s status as “Minister of State” under the law of Qatar. Even if it is accepted that there is an honorific component to the title, it is not clear from the evidence that the position is devoid of any status within the government.

During the relevant time period, the CEO of the Old Doha Airport, the New Doha Airport, and Qatar Airways was a single individual, Akbar Al Baker. Nahkle described Al Baker as Capital’s “biggest client.”

[…]

In the mid-2000s, the government of Qatar began planning the construction of a new airport, again under the leadership of Al Baker. The construction of the New Doha Airport created opportunities for the sale of baggage scanning systems.

In or about July 2007, L-3 engaged Capital as its representative for the sales of its equipment at New Doha Airport on a commission basis, rather than as its direct reseller.

[…]

… L-3 sought influence or relationship assistance in support of its subsequent bids on New Doha Airport sales

On June 10, 2010, Capital and L-3 entered into a two-year International Representative Agreement (the “2010 Representative Agreement”)

[…]

The Representative Services also required Capital to provide L-3 with certain relationship services, such as:

• “maintain[ing] continuous liaison with customer decision makers;”
• “[a]dvis[ing] the customer concerning selection of Products and Services,” such as eXaminers.

According to the opinion, during the bench trial after being asked whether Al Houdeifi’s ownership stake in and relationship to Capital motivated L-3 to enter into the 2010 Representative Agreement, L-3’s William Frain testified as follows:

THE COURT: All right. If you had simply paid Capital, you and your company would have a Foreign Corrupt Practices Act problem in paying them, correct?

THE WITNESS: Prior to 2010?

THE COURT: Yes.

THE WITNESS: Yes.

THE COURT: So entering into this agreement gave your company cover for any kind of an allegation that you had violated the Foreign Corrupt Practices Act[?]

THE WITNESS: Yes.

The opinion states, under the heading “Conclusions of Law” in pertinent part:

“Frain testified that entering into the 2010 Representative Agreement helped rid L-3 of any suggestion that it was paying Capital merely for its connection to or influence with Qatari officials. It is not inherently a frustration of federal or New York policy to pay private individuals or entities for their assistance in procuring government contracts, though it may be. Nevertheless, L-3 did not want to create even the suggestion of improper payments or conduct. As noted, Al Houdeifi was a major shareholder of Capital and continued to hold the title of “Minister of State.” A payment to a foreign government official under certain circumstances could be a violation of the Foreign Corrupt Practices Act.”

As to the end result, the court rejected certain of Capital’s claims but did award it nearly $250,000 in commissions and projected commissions.

The reference to Smiths in the above opinion refers to U.K.-based Smiths Detection Ltd.

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