Suppressed v. Suppressed
Filing
61
MEMORANDUM Opinion and Order Written by the Honorable Gary Feinerman on 11/4/2011.Mailed notice.(jlj)
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA ex rel. CATHY
WILDHIRT AND NANCY MCARDLE, and STATE
OF ILLINOIS ex rel. CATHY WILDHIRT AND
NANCY MCARDLE,
Plaintiffs,
vs.
AARS FOREVER, INC., and THH ACQUISITION
LLC I,
Defendants.
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09 C 1215
Judge Feinerman
MEMORANDUM OPINION AND ORDER
Plaintiffs-Relators Cathy Wildhirt and Nancy McArdle brought this qui tam action on
behalf of the United States and the State of Illinois, alleging that Defendants AARS Forever, Inc.
(“AARS”) and THH Acquisition LLC 1 (“Acquisition”) violated the False Claims Act, 31
U.S.C. § 3729 et seq. (“FCA”), and the Illinois Whistleblower Reward and Protection Act, 740
ILCS 175/1 et seq. (“IWRPA”).* The initial complaint also brought claims on behalf of Wildhirt
and McArdle individually, alleging retaliation in violation of both statutes. The court granted
*
The FCA was amended and re-codified effective May 20, 2009. See Pub. L.
111-21, 123 Stat. 1621. Because only the amendment to 31 U.S.C. § 3729(a)(2) (now
§ 3729(a)(1)(B)) is retroactive, because the parties do not contend that the amendment
has any substantive impact on this case, and because Defendants’ alleged misconduct
preceded the amendments, the pre-amendment version of the statute will be cited. See
United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 855 n.* (7th Cir. 2009);
United States ex rel. Walner v. Northshore Univ. Healthsystem, 660 F. Supp. 2d 891, 895
n.3 (N.D. Ill. 2009). The IWRPA was amended and re-codified effective July 27, 2010,
and now is known as the Illinois False Claims Act. See Ill. Pub. Act 96-1304, § 10.
Again, because the parties do not suggest that the amendment has any substantive impact
on the case, the pre-amendment version of the statute will be cited.
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Defendants’ motions to dismiss the initial complaint without prejudice, 2011 WL 1303390 (Apr.
6, 2011), and allowed Relators leave to file an amended complaint, which they have done. The
amended complaint attempts to replead the qui tam claims but not the retaliation claims, which
Wildhirt and McArdle confirm have been abandoned. Doc. 57 at 2 n.2. Defendants have moved
to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6). Their
motions are denied.
“To establish civil liability under the [FCA], a relator generally must prove (1) that the
defendant made a statement in order to receive money from the government; (2) that the
statement was false; and (3) that the defendant knew the statement was false.” United States ex
rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 822 (7th Cir. 2011). In briefing the initial
motion to dismiss, the parties disputed whether the initial complaint identified “specific false
claims for payment or specific false statements made in order to obtain payment.” United States
ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 376 (7th Cir. 2003). Alleging that the
defendant made a “statement” in connection with a specific presentation to the government of a
claim for payment is one way, perhaps the principal way, of pleading the first element of a qui
tam claim. See, e.g., United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 741-42
(7th Cir. 2007) (affirming dismissal of FCA claim because “Relators do not present any evidence
at an individualized transaction level to demonstrate that” the defendant engaged in the alleged
fraud), overruled in part on other grounds by Glaser v. Wound Care Consultants, Inc., 570 F.3d
907, 920 (7th Cir. 2009); United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301,
1312 (11th Cir. 2002) (“[the relator’s] failure to allege with any specificity if—or when—any
actual improper claims were submitted to the Government is indeed fatal to his complaints under
the particular circumstances of this case”).
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The parties did not discuss in connection with the first motion to dismiss an alternate
means—one rooted in the fraud-in-the-inducement theory of fraud—of pleading the “statement”
element of a qui tam claim. In United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849
(7th Cir. 2009), the relator alleged that Rolls-Royce defrauded the United States regarding the
quality of the T56 turboprop engine, which Rolls-Royce contracted to provide; that contracts
between Rolls-Royce and the United States specified certain requirements for engine parts; and
that Rolls-Royce knew that the parts were non-compliant. Id. at 853. Rolls-Royce argued, and
the district court agreed, that the relator’s complaint failed to state a claim because it did not
identify “specific request[s] for payment.” Id. at 854. In reversing, the Seventh Circuit held that
the relator need not “produce the invoices (and the accompanying representations) at the outset
of the suit” if she provides a plausible basis for believing that the defendant entered into a
government contract with the intent not to perform or with the knowledge that it could not
perform as promised. Ibid. The court explained: “Simple breach of contract is not fraud, but
making a promise while planning not to keep it is fraud, and this complaint alleges the promise,
the intent not to keep that promise, and the details of non-conformity. What else might be
required to narrate, with particularity, the circumstances that violate [the FCA]?” Ibid. (internal
citation omitted).
Other circuits have recognized that relators may plead an qui tam claim by plausibly
alleging fraud-in-the-inducement. In Harrison v. Westinghouse Savannah River Co., 176 F.3d
776 (4th Cir. 1999), the relator alleged that the defendant “made false and fraudulent statements
to the government in connection with claims for payment to a subcontractor hired by [the
defendant] for a Department of Energy (‘DOE’) contract”—specifically, that before the contract
was formed, the relator “misrepresented the cost and duration of the proposed subcontract in
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order to get DOE approval for the subcontract, and that [the defendant] falsely certified that
there was no conflict of interest with the subcontractor.” Id. at 780. The district court dismissed
the complaint under Rule 12(b)(6) “because the false statements and fraud ‘were not made in
connection with the presentation of a claim.’” Id. at 783. According to the Fourth Circuit: “The
district court reasoned that the False Claims Act does not reach false statements in submissions
to the Government to gain approval for subcontracting decisions. In the district court’s view, the
False Claims Act reaches only situations in which a ‘claim [i.e., the demand for payment from
the government] … is itself false or fraudulent.’” Ibid. (brackets in original); see also id. at 785
(“The district court would only find a false claim where a demand for payment is itself false or
fraudulent (presumably for services not performed or for an incorrect amount). The district court
flatly rejected the possibility that False Claims Act liability could rest on false statements
submitted to the government to gain approval for a subcontract.”).
The Fourth Circuit rejected the district court’s view, holding that the FCA recognizes a
fraud-in-the-inducement theory, under which liability attaches “for each claim submitted to the
government under a contract, when the contract or extension of government benefit was obtained
originally through false statements or fraudulent conduct.” Id. at 787 (citing United States ex
rel. Marcus v. Hess, 317 U.S. 537, 543-44 (1943)). That is, even where “the claims [for
payment] that were submitted were not in and of themselves false” and “the work contracted for
was actually performed to specifications at the price agreed,” FCA liability arises “because of
the fraud surrounding the efforts to obtain the contract or benefit status.” Ibid. Other circuits are
in accord. See United States ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 468
(5th Cir. 2009) (“Under a fraudulent inducement theory, although the Defendants’ subsequent
claims for payment made under the contract were not literally false, [because] they derived from
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the original fraudulent misrepresentation [in the grant proposals], they, too, became actionable
false claims.”) (brackets in original; internal quotation marks omitted); United States ex rel.
Bettis v. Odebrecht Contractors of Cal., Inc., 393 F.3d 1321, 1326 (D.C. Cir. 2005) (“Although
the focus of the FCA is on false ‘claims,’ courts have employed a ‘fraud-in-the-inducement’
theory to establish liability under the Act for each claim submitted to the Government under a
contract which was procured by fraud, even in the absence of evidence that the claims were
fraudulent in themselves.”); United States ex rel. Hagood v. Sonoma Cnty. Water Agency, 929
F.2d 1416, 1420-21 (9th Cir. 1991) (holding that “a contract based on false information is a
species of false claim,” and finding that an FCA claim was properly stated where the complaint
alleged that the defendant “played an active part in having presented for signature a contract that
the [defendant] knew was based on false information”).
As noted in the court’s initial opinion, the FCA’s pleading standards apply to IWRPA
claims. 2011 WL 1303390, at *2; see also State ex rel. Beeler Schad & Diamond, P.C. v. Ritz
Camera Ctrs., Inc., 878 N.E.2d 1152, 1157 (Ill. App. 2007); People ex rel. Levenstein v.
Salafsky, 789 N.E.2d 844, 849 (Ill. App. 2003). Because a relator may plead an FCA claim
under a fraud-in-the-inducement theory, the same holds under the IWRPA.
The amended complaint, whose well-pleaded allegations must be assumed true on a Rule
12(b)(6) motion, satisfactorily pleads a qui tam claim founded on a fraud-in-the-inducement
theory. Relators alleges that AARS “solicited and secured the VISN 12 Contract under false
pretenses, with no intention to provide appropriate care or fulfill its other contractual
requirements to the United States,” and that Acquisition “had full knowledge of [AARS]’s prior
false claims” when it took over contract from AARS and “adopted and ratified the substandard
care and numerous contractual violations” and “did not take corrective actions when Relators
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brought these problems to its attention.” Doc. 49 at ¶¶ 9, 11; see also id. at ¶ 71 “Relators soon
discovered that [AARS] had intentionally lowballed its VISN 12 contractual bid and that, in fact,
[AARS] had no intention of fulfilling the contract’s requirements”; id. at ¶ 72 (“[AARS] entered
into the VISN 12 Contract with the knowledge that it could not, and would not, be able to fulfill
its contractual obligations, including most of the requirements set forth above without sustaining
losses. [AARS], including its principals Alan Kirk, Manny Likou, Carolyn Likou, and Scott
Hughes, never intended to fulfill the VISN 12 Contract requirements.”); id. at ¶ 99 (“[AARS]
entered into the VISN 12 Contract with no intention of appropriately training its staff or its
drivers.”); id. at ¶¶ 151, 154 (although Acquisition “was on notice of the fraudulent activity
engaged in by [AARS] under the VISN 12 Contract,” Acquisition “not only did not improve the
patient care being provided under the VISN 12 Contract, … [but] ratified and continued th[at]
fraudulent activity”). That is, the amended complaint alleges that Defendants had their fingers
crossed at the very moment they entered into the contractual relationship with the
government—that they “ma[de] a promise” to perform under the contract “while planning not to
keep it.” Lusby, 570 F.3d at 854.
If this were all that the amended complaint alleged, it might not have been sufficient to
plead fraud-in-the-inducement. But the amended complaint does far more, alleging countless
instances of blatant nonperformance, some directly on the heels of AARS and Acquisition
entering into the contract, and thus raising a permissible inference that Defendants indeed
entered into the contract while planning not to perform. See Bettis, 393 F.3d at 1330
(“fraudulent intent may sometimes be inferred” where “there is no intervening change of
circumstances and where the repudiation comes quickly after the contract is signed”). The
contract required Defendants “to provide respiratory therapy equipment, supplies and services”
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to VA patients. Doc. 49 at ¶ 37. Specifically, Defendants were required, among other things, to
provide “specially trained respiratory therapists,” to conduct “frequent in-service education
programs for those employees tasked with oxygen delivery and equipment setup,” to perform
“[i]nitial equipment setups, as well as follow-up inspections,” and to retain “a sufficient number
of respiratory therapists on call to handle patient emergencies.” Id. at ¶¶ 40, 44, 46, 48.
Further, Defendants were “not permitted to alter in any way a patient’s RT-related prescriptions
(the Plan of Care ...) without the prior written approval from” the Veterans Administration
(“VA”). Id. at ¶ 53.
The amended complaint pleads numerous violations by AARS from the very beginning
of the contractual relationship. Although AARS was required at the outset “to perform an initial
visit by a licensed respiratory therapist, not a driver, of all 2,600+ patients,” AARS did not make
“many” of such visits and yet “bill[ed] for” them nonetheless. Id. at ¶ 77. Relators further allege
that AARS “did not provide its respiratory therapists with the appropriate equipment,” id. at ¶
79, and hired inadequately trained therapists who provided contractually insufficient services, id.
at ¶ 81, as exemplified by one instance in December 2007 in which basic health checks of a
patient were not performed, id. at ¶ 83, and another in which a therapist did not know how to
assess a ventilator and AARS responded by giving the therapist training by an unlicensed
supervisor “who himself had little idea how to use the equipment he was ostensibly teaching
others ... to use,” id. at ¶ 107. The amended complaint charges that “[b]y commencing its VISN
12 Contract performance by using a medical record system filled with inaccurate information,
[AARS] ensured that it would violate the terms of the VISN 12 Contract throughout its
duration.” Id. at ¶ 90. To buttress their claim that AARS “entered into the VISN 12 Contract
with no intention of appropriately training its staff or its drivers,” Relators allege that drivers
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transferred to AARS from the prior contractor “were terminated and replaced with individuals
with no knowledge of how to set up the specialized respiratory therapy equipment covered under
the VISN 12 Contract,” and yet that “no competencies or trainings were ever offered.” Id. at
¶¶ 99, 100. The amended complaint alleges that Wildhirt “regularly found” on her follow-up
visits to patients that the wrong equipment was delivered and other equipment was improperly
set up, id. at ¶ 102, and that Wildhirt was “criticized” by AARS “senior management” for “the
amount of time she spent correctly setting up the home oxygen equipment initially set up by
untrained drivers,” id. at ¶ 120. Similarly, despite the contract’s requirement that the VA be
notified when certain problems are discovered in a home visit, Wildhirt “was reprimanded for
reporting the problems to the VA,” id. at ¶¶ 112-13, and McArdle “was regularly instructed not
to communicate with the VA about ongoing problems,” id. at ¶ 145. Moreover, despite a
contractual requirement that only new equipment be provided to patients, an “upper level
official[]” of AARS told McArdle that the company had adopted a policy of providing used
machines to patients until it was shown that they had tolerated the therapy. Id. at ¶¶ 32, 136.
Relators allege a similar pattern of violations by Acquisition. The amended complaint
charges that Acquisition failed to correct the prescription and Plan of Care errors in the database
system when it assumed responsibility for the contract, id. at ¶ 174, and that there “were no
competencies or trainings ever offered to THH-Acquisition employees,” id. at ¶ 162. Relators
further allege that “inexperienced” drivers were instructed to set up respiratory therapy
equipment, with the result being that “in numerous instances, either the wrong equipment was
delivered ... or the equipment was set up improperly” and “patients were left to their own
devices.” Ibid. Wildhirt “regularly” found in her follow-up visits to patients that their
equipment was deficient, and Acquisition performed no follow-up visits to ensure that beds and
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lifts were correctly installed. Id. at ¶¶ 163-164. In 2008, one patient received a ventilator that
was not set up by Acquisition, “contrary to the prescriptions written for this veteran.” Id. at
¶ 175. And contrary to the contract’s requirements, Acquisition discouraged McArdle from
reporting these and other problems to the VA. Id. at ¶¶ 182-88.
The point of reciting these allegations of nonperformance is not to suggest that FCA
liability can be grounded on mere breaches of contract. It cannot. See Garst, 328 F.3d at 378
(“failing to keep one’s promise is just breach of contract, and cost overruns in government
procurement projects may occur without fraud”). The point, rather, is to show that the amended
complaint provides factual backup to support its allegation that Defendants entered into the
contract with their fingers crossed, thereby committing fraudulent inducement. And because that
theory of qui tam liability covers all of the claims for payment made under the contract at issue
here, see Harrison, 176 F.3d at 787, there is no need to address Relators’ alternative grounds for
avoiding dismissal.
For these reasons, Defendants’ motions to dismiss the amended complaint are denied.
The parties are reminded that “[t]o say that fraud has been pleaded with particularity is not to say
that it has been proved,” and also that the amended complaint’s allegations “may be wrong.”
Lusby, 570 F.3d at 855. And if the evidence proves Relators’ allegations to be not merely
wrong, but objectively baseless, Defendants may have remedies of their own. At this point,
however, it need only be said that the amended complaint survives Rule 12(b)(6) and therefore
that the case may proceed.
November 4, 2011
United States District Judge
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