The United States of America et al v. Safeway, Inc.

Filing 67

OPINION entered by U.S. Magistrate Judge Tom Schanzle-Haskins: Defendants' Motion to Stay Discovery 57 is ALLOWED. Discovery is stayed until the District Court rules on Defendants' Motion to Dismiss Amended Complaint Pursuant to Rules 12(b)(3), 12(b)(4), 12(b)(5),12(b)(6) and 9(b) and to Strike Pursuant to Rule 12(f) 53 . (LB, ilcd)

E-FILED

Thursday, 14 July, 2016 01:49:27 PM
Clerk, U.S. District Court, ILCD

IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS, SPRINGFIELD DIVISION

UNITED STATES OF AMERICA,
et al., ex rel. THOMAS
PROCTOR,
Plaintiffs and Relator,
v.
SAFEWAY, INC.,
Defendant.

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No. 11-cv-3406

OPINION
TOM SCHANZLE-HASKINS, U.S. MAGISTRATE JUDGE:
This matter comes before the Court on Defendant Safeway, Inc.’s
(Safeway) Motion to Stay Discovery (d/e 57) (Motion). For the reasons set
forth below, the Motion is ALLOWED.
The Relator Thomas Proctor (Proctor) brings this qui tam action for
violation of the False Claims Act, 31 U.S.C. § 3729 et seq., and
supplemental claims for violation of state false claims statutes. Amended
Complaint (d/e 50). Safeway operates pharmacies. Proctor alleges that
the Safeway illegally overcharged federal and state government programs.
The alleged overcharging involved, among other things, fraudulently

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overstating Safeway’s Usual & Customary prices for prescription
medications. See Amended Complaint, ¶¶ 90-140.
Safeway has moved to dismiss the Amended Complaint for improper
venue, insufficient service of process, failure to state a claim and for failure
to plead fraud with particularity as required by Federal Rule of Civil
Procedure 9(b). Defendants’ Motion to Dismiss Amended Complaint
Pursuant to Rules 12(b)(3), 12(b)(4), 12(b)(5),12(b)(6) and 9(b) and to
Strike Pursuant to Rule 12(f) (d/e 53) (Motion to Dismiss). Safeway now
asks this Court to stay discovery until the Motion to Dismiss is resolved.
Safeway must show good cause exists for a stay. The Court must
consider whether the stay would prejudice Proctor; whether denying the
stay would prejudice Safeway; and whether the stay would reduce the
burden of litigation on the parties or the Court. See U.S. ex rel. Robinson
v. Indiana University Health, Inc., 2015 WL 3961221, at *1 (S.D. Ind. June
30, 2015). The Court has broad discretion in making this decision. See In
re Sulfuric Acid Antitrust Litigation, 231 F.R.D. 331, 336 (N.D. Ill. 2005).
The Court has determined in this case that a stay will reduce the
burden of litigation on this Court and the parties. The stay will support the
policies underlying the particularity requirements of Federal Rule of Civil
Procedure 9(b). The relator in a False Claims Act must allege fraudulent
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violations with the particularity required by Rule 9(b). U.S. ex rel. Gross v.
AIDS Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005). The
heightened pleading standard requires the relator to make a more
extensive investigation before bringing claims of fraud. That purpose would
be frustrated “by allowing a relator to make vague claims of fraud, and then
permitting him to engage in discovery in the hope of uncovering enough
specifics to adequately plead a case.” U.S. ex rel. Liotine, v. CDWGovernment, Inc., 2009 WL 72058, at *1 (S.D. Ill. March 18, 2009). The
Court is persuaded by the reasoned analysis in the Liotine opinion that
discovery should be stayed until the District Court determines whether the
Relator has alleged violations of the False Claims Act with sufficient
particularity.1 The stay will reduce the burden of litigation by ensuring that
Proctor has met his obligation to plead with particularity before the Court
and the parties commence the discovery process.
The resolution of the venue issue before discovery commences could
also reduce the burden of litigation. Venue is appropriate in any District
where a defendant resides, transacts business, or in which an act
proscribed by the False Claims Act occurred. 31 U.S.C. § 3732(a).
1

The Court recognized that the Court in Robinson distinguished the decision in Liotine because the
Liotine court could adjust the discovery schedule to accommodate the delay. The discovery schedule
had been fixed in Robinson and could not be extended. Robinson, 2015 WL 3961221, at *8. In this case,
the Rule 16 scheduling conference has not occurred. Thus, unlike the Robinson case, the discovery
schedule has not been set.

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Safeway operates no stores or other facilities in this District. The Relator
seeks to litigate nationwide fraud claims against the federal government
and numerous states in a District in which the Defendant has no
operations.
Proctor alleges that this District has venue because Safeway caused
the submission of false Medicaid claims to state government offices in
Springfield, Illinois. See Amended Complaint, ¶ 33. The claims at issue
were submitted by a Safeway subsidiary known as Dominick’s. See
Amended Complaint, ¶¶ 11-16; see Defendant Safeway’s Memorandum of
Law in Support of the Motion to Dismiss (d/e 54), at 4 n.9; Relator
Proctor’s Opposition to Defendant Safeway’s Motion to Dismiss (d/e 61)
(Proctor Response), at 2 n.2; Defendant Subway’s Reply in Support of its
Motion to Dismiss (d/e 65), at 4-5. Generally, the act of a subsidiary is not
the act of a parent corporation. See Central States, Southeast and
Southwest Areas Pension Fund v. Reimer Express World, Corp., 230 F.3d
934, 944 (7th Cir. 2000). Thus, the fact that Dominick’s submitted allegedly
false Medicaid claims in this District does not usually indicate that Safeway
committed a violation in this District.
To establish a parent corporation’s culpability for a subsidiary’s
actions, a “Relator must be able to demonstrate either that [the parent
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corporation] is liable under a veil piercing or alter ego theory, or that it is
directly liable for its own role in the submission of false claims.” U.S. ex rel.
Hockett v. Columbia/HCA Healthcare Corp., 498 F.Supp.2d 25, 60 (D. D.C.
2007). Proctor does not allege either an alter ego theory or grounds
piercing the corporate veil.
Proctor, further, does not allege that Safeway had a direct role in
Dominick’s alleged submissions of false Medicaid claims in Illinois. Proctor
alleges that Safeway staff directed and supervised the transition of
Dominick’s pharmacy to the program that used the alleged fraudulent billing
practices. Amended Complaint, ¶ 132. Proctor does not allege that
Safeway directly participated in Dominick’s billings to Illinois Medicaid
officials. The allegations here are markedly different from the
circumstances in the Hockett case cited by Proctor. In Hockett, the Court
found that the parent corporation could be liable because evidence showed
that its employees were directly involved in “finalizing the cost report and
billing the government” by instructing the subsidiary’s employee “to obscure
the true nature of the cost overstatements in the original cost report.”
Hockett, 498 F.Supp.2d at 62. Proctor does not allege any such direct
participation by Safeway employees in the preparation of Dominick’s
Medicaid billings. Under these circumstances, the District Court may
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determine that Proctor does not allege that Safeway committed any act
proscribed the False Claims Act in this District. If so, the District Court may
determine that venue is not proper. In light of these circumstances, this
Court believes that venue is a significant issue.
If the District Court determines that venue is not proper, the District
Court could dismiss the case or, if it would be in the interests of justice,
transfer the case to a District where the case could have been brought.
28 U.S.C. § 1406(a). If the case is transferred, the District Court with
venue should resolve discovery disputes, not this Court. Staying discovery
would avoid the risk of discovery decisions in a District Court that lacks
venue. Such rulings would place an unnecessary burden on the courts and
the parties. The Court, in its discretion, finds that the better course is
waiting for a resolution of the venue issue.
The Court finds that the burden on the Relator from any delay does
not outweigh the benefits of waiting for the District Court’s resolution of the
Motion to Dismiss. The Court can ameliorate any problems due to delay by
setting an appropriate discovery schedule after the District Court’s decision.
THEREFORE, Defendants’ Motion to Stay Discovery (d/e 57) is
ALLOWED. Discovery is stayed until the District Court rules on
Defendants’ Motion to Dismiss Amended Complaint Pursuant to Rules
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12(b)(3), 12(b)(4), 12(b)(5),12(b)(6) and 9(b) and to Strike Pursuant to Rule
12(f) (d/e 53).
ENTER: July 14, 2016

s/ Tom Schanzle-Haskins
UNITED STATES MAGISTRATE JUDGE

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