Rossi probably withheld the Quark X from IH, so on that possibility I agree with you. The question will boil down to who breached first. If Rossi can show that IH did, then he would be justified in withholding any future performance of his own.
and remember that Rossi filed before the payment was due. That will likely come back to haunt him. (time from "ERV report submission to IH)