Suppressed v. Suppressed
Filing
119
MEMORANDUM Opinion and Order:For the foregoing reasons, IBMs motion to dismiss, R. 58, is denied in itsentirety. JCIs motion to dismiss, R. 62, is granted and all counts are dismissed as to JCI without prejudice. Chins motion to dismiss, R. 66, is g ranted and all counts are dismissed as to Chin without prejudice. Plaintiff is granted leave to amend its complaint to rectify the deficiencies noted by the Court within 21 days of this Order. IBM is ordered to complete its Rule 26(a)(1) disclosures in that same time frame. Signed by the Honorable Thomas M. Durkin on 2/26/2015:Mailed notice(srn, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA, EX REL.
MICHAEL MCGEE,
Plaintiff,
No. 11 C 3482
v.
Judge Thomas M. Durkin
IBM CORPORATION; JOHNSON CONTROLS
INCORPORATED; WIRELESS INFORMATION
TECHNOLOGIES ENTERPRISE, LLC;
TECHNOLOGY ALTERNATIVES, INC.;
TECHALT, INC.; PUBLIC SAFETY
COMMUNICATIONS, INC.; SERVICES BY
DESGINWISE, LTD.; LT. SUITE INC.;
DUDLEY DONELSON; RAYMOND M CHIN;
Michael Shares; James Solomon; Peter
Lynch; Byron Artis; Clarence Brownlow;
Catherine Maras O’Leary, n/k/a
Catherine Mara; Daniel Coughlin; and
Antonio Hylton,
Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiff-Relator Michael McGee (“McGee”) brings this qui tam action on
behalf of the United States and the State of Illinois. R. 1. McGee alleges that IBM,
Johnson
Controls
Enterprise
Incorporated
(“WIT”),
Incorporated
Technology
(“TechAlt”),
Public
(“JCI”),
Wireless
Alternatives
Safety
Information
Incorporated
Communications
Technologies
(“TAI”),
(“PSC”),
TechAlt
MWOBE
Controls, Services By Design (“SBD”), I.T. Suite, Dudley Donelson (“Donelson”),
Raymond Chin (“Chin”), Michael Shares, James Solomon, Peter Lynch, Byron Artis,
Clarence Brownlow, Catherine Maras O’Leary, Daniel Coughlin, Juanita Masanek,
Paul Masanek, and Antonio Hylton violated the “Presentation of False Records”
(Count I), “False Records and Statements” (Count II), and “Conspiracy” (Count III)
provisions of the False Claims Act (“FCA”), 31 U.S.C. §§ 3729(a)(1)(A),
3729(a)(1)(B), and 3729(a)(1)(C), respectively, and the corresponding provisions of
the Illinois False Claims Act (“IFCA”), 740 ILCS 175/1, et seq. (Counts IV, V, and
VI). R. 1.1 Specifically, McGee alleges that the Defendants colluded to defraud Cook
County, the State of Illinois, and the Department of Homeland Security (“DHS”) out
of approximately $50 million dollars of grant funds in connection with a program
called “Project Shield” (“the Project”). R. 1. McGee filed his complaint under seal on
May 24, 2011. R. 1. On July 22, 2013, the United States and the State of Illinois
declined to intervene in the matter, R. 4, after which the complaint was unsealed.
Defendants IBM, JCI and Chin have filed separate motions to dismiss on various
grounds. R. 58; R. 62; R. 66. IBM moves to dismiss McGee’s complaint on the basis
While 31 U.S.C. § 3729 was amended in 2009, McGee’s complaint is not clear as to
which version of this statute his complaint relies upon. However, the amendment
did not materially alter the relevant portions of the statute on which this Opinion
relies and therefore, the Court’s analysis is unaffected regardless of which version
McGee intended to use. As such, for ease of reference, the Court will refer to the
statute throughout this Opinion as it is currently written and numbered.
Count VI is titled “Federal False Claims Act – Conspiracy,” but cites to the
conspiracy provision of the Illinois False Claims Act, 740 ILCS 175/3(a)(1)(C). R. 1
at 50. Because the complaint already contains a count for conspiracy under the
Federal False Claims Act, the Court assumes that the title for Count VI is a
typographical error and assumes that Count VI alleges a conspiracy under the
Illinois False Claims Act.
In addition, because the standards and resulting analysis for FCA claims are
the same as those for IFCA claims, they will be addressed simultaneously as the
“FCA” claims. United States ex rel. Kennedy v. Aventis Pharm., Inc., 512 F. Supp. 2d
1158, 1163 n.2 (N.D. Ill. 2007).
1
2
that it is improper under the public disclosure bar doctrine, that McGee fails to
adequately plead his stated causes of action under Federal Rule of Civil Procedure
9(b), and that the FCA statute of limitations bars all claims predating May 24,
2005. R. 58. JCI likewise moves to dismiss McGee’s complaint alleging that McGee
failed to adequately plead the asserted causes of action under Rule 9(b) and is
improper under the public disclosure bar doctrine. R. 62-1. Finally, Chin moves to
dismiss McGee’s complaint contending that McGee’s complaint fails to adequately
allege the stated causes of action under Federal Rules of Civil Procedure 8(a) and
9(b). R. 67. For the following reasons, the Court grants JCI’s motion to dismiss,
grants Chin’s motion to dismiss, and denies IBM’s motion to dismiss.
Background
In the aftermath of the terrorist attacks of September 11, 2001, DHS
initiated a grant program to provide municipal emergency responder vehicles with
interoperable video, voice, and data “mobile platform” systems. R. 1 ¶ 2. The
purpose of these mobile platform systems was to enable first responders to instantly
relay mission-critical information to a centralized database in the event of a
terrorist attack or natural disaster. R. 1 ¶ 2. TAI designed such a mobile platform
system and in early 2003 contacted Donelson—the Deputy Director of Wide Area
Networks/IT for Cook County—in an effort to convince him to have Cook County
apply for a DHS grant in the hopes that TAI’s mobile platform system would be
used. R. 1 ¶ 42. Donelson agreed to have Cook County apply for a DHS grant on the
condition that TAI include PSC, a company in which Donelson had a financial
3
interest, in any resulting contracts awarded to TAI from the grant. R. 1 ¶ 43. TAI
agreed to this condition despite knowing that neither PSC, nor any of its employees,
were qualified to do the work that would be required under the contracts, and
knowing that TAI and other companies would actually be the ones performing the
required work. R. 1 ¶¶ 43, 45.
TAI assisted Donelson in completing the grant application that provided for
the exclusive utilization of TAI’s equipment. R. 1 ¶ 48. In July of 2003, Cook County
was awarded the DHS grant. R. 1 ¶ 49. Thereafter, TAI and Donelson arranged a
“Homeland Security Summit,” whereby potential prime contractors would learn
more about the Project. R. 1 ¶ 50. IBM and several other potential prime
contractors were invited and attended the summit. R. 1 ¶ 51. Another purpose of
the summit was to convey to the potential contractors that including TAI and PSC
as subcontractors in their bids would increase their chance of being awarded a
contract. R. 1 ¶ 51. However, TAI, PSC, and Donelson were concerned that PSC’s
lack of technical expertise could result in a prime contractor’s proposal being
rejected by the County, so TAI and Donelson recruited WIT, a more established tech
company, to join their conspiracy and “front” for PSC in the proposal documents. R.
1 ¶ 53. McGee’s allegations do not clearly explain what it meant for WIT to “front”
for PSC beyond alleging that WIT agreed to list PSC officers as WIT personnel, and
that WIT agreed to subcontract its work to PSC in exchange for kickbacks from
PSC’s Project billings. R. 1 ¶¶ 53-54.
4
To memorialize their relationship, TAI, PSC, and WIT entered into a teaming
agreement in December of 2003. R. 1 ¶ 58. By its terms, TAI, PSC, and WIT agreed
to seek Project work as a team and not to submit competing bids. R. 1 ¶¶ 59-60. The
agreement further required the signatories to bid in accordance with the
recommendation of the County and to abide by the County’s recommendation as to
who would act as Project Leader. R. 1 ¶ 63. The agreement contained a
nondisclosure clause that required the consent of all signatories prior to the
contents of the teaming agreement being disclosed to outside parties. R. 1 ¶ 58.
McGee alleges that this agreement was in fact a bid-rigging agreement whereby
PSC, TAI, and WIT ensured their participation in the Project through Donelson’s
influence with the County, and despite PSC’s inability to actually perform the work.
R. 1 ¶ 61. The agreement was designed to ensure Donelson’s own personal
enrichment by allowing him to control how the bids would be submitted and who
would ultimately be awarded the work. R. 1 ¶ 64.
IBM submitted a bid for Phase I of the Project as a prime contractor. R. 1 ¶
52. It is unclear whether IBM’s proposal simply included TAI and PSC as
subcontractors, or whether the proposal listed TAI and WIT as subcontractors, and
listed PSC personnel as WIT personnel. Compare R. 1 ¶¶ 52, 53, 54, 67. In any case,
McGee alleges that IBM agreed to abide by the terms of the teaming agreement. R.
1 ¶ 66. In its proposal, IBM stated that TAI’s mobile platform was a “Proven
Solution,” despite knowing that this was not the case and that the platforms
required significant work prior to becoming operational. R. 1 ¶ 67.
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IBM was awarded the prime contract for Phase I of the Project. R. 1 ¶ 68. In
signing the contract, IBM warranted that it would supervise all work performed, act
consistently with the obligations included in the contract, that the subcontractors
used by IBM were competent to perform their respective duties, and that it did not
have any conflict of interest that could affect the performance of the work required
by the contract. R. 1 ¶¶ 71, 74. IBM made these representations even though it had
agreed to the terms of the teaming agreement, knew that PSC was not qualified to
do the work required by the contract, hid PSC’s involvement within its proposal,
and knew about the conflict of interest inherent in the teaming agreement and did
not disclose it. R. 1 ¶¶ 72, 75.
In furtherance of their agreement, in September 2004, IBM entered into a
subcontract agreement with TAI whereby TAI agreed to supply, install, and
maintain its mobile platform for Phase I of the Project. R. 1 ¶¶ 70, 78.2 Despite
knowing that the mobile platforms were not functioning properly, TAI installed 47
platforms into municipal vehicles. R. 1 ¶ 79. In September 2005, IBM conducted a
survey of 46 of the installed platforms. Only 17 were functional. R. 1 ¶ 80. Despite
its awareness of the functionality problems, and the fact that TAI had installed only
47 of the 80 platforms contracted for, IBM accepted TAI’s work and paid them 99%
of their total contract price. R. 1 ¶¶ 88-89. IBM was paying TAI for work that it had
not performed and for non-functional platforms. R. 1 ¶ 90. IBM passed these
The cited paragraph of the complaint refers to TechAlt, not TAI. R. 1 ¶ 70. For
ease of reference and because TechAlt and TAI are essentially the same entity for
purposes of this litigation, R. 1 ¶ 22, all references to TechAlt or TAI will be to
“TAI.”
2
6
fraudulent costs along to the County for repayment. R. 1 ¶ 91. IBM’s bills were
usually submitted to Donelson, who, knowing the bills to be false, would submit
them to the County for repayment, representing that the bills conformed to the
contract’s specifications. R. 1 ¶ 92.
Due to TAI’s inability to deliver functioning platforms, McGee’s company,
Responder Systems, LLC, (“Responder”) was asked to acquire TAI’s Project-related
assets and take over TAI’s role in the Project. R. 1 ¶ 100. Responder did so in the
Fall of 2005. R. 1 ¶ 101. Shortly thereafter, Donelson invited McGee to meet the
President of PSC. R. 1 ¶ 102. During this meeting, Donelson asked McGee to join
“the team,” which McGee alleges meant the bid-rigging team discussed above. R. 1 ¶
105. If McGee accepted Donelson’s invitation, Donelson would use his position with
the County to promote McGee’s company for other County projects. R. 1 ¶ 105.
McGee relayed these events to IBM manager Harold Stiffler (“Stiffler”). R. 1 ¶ 106.
Several months later, Donelson again attempted to convince McGee to join “the
team,” explaining that McGee’s refusal could result in his company not being
considered for future work on the Project. R. 1 ¶ 107. McGee declined to join with
Donelson and the other conspirators. R. 1 ¶ 108.
Despite these interactions, McGee’s company provided its services during the
tail-end of Phase I of the Project. Responder was able to fix the existing nonfunctioning units and install additional functioning units, leaving the County with
78 functioning platforms that met or exceeded the County’s requirements. R. 1 ¶
109. However, paying Responder for this work became difficult for IBM. The
7
contract contained specific line items, providing a specific amount of funds for a
specific type of work. R. 1 ¶¶ 117-18. IBM had already paid almost the entirety of
the contract funds to TAI for installation of the platforms despite TAI’s failure to
successfully complete this work. In order to pay Responder Systems for the same
work, IBM would have to submit a Project Change Request to the government to
increase the installation line item values. R. 1 ¶ 117. IBM was concerned that these
change requests would alert the government to the defectiveness of TAI’s prior
work. R. 1 ¶ 117. To obtain repayment from the government for Responder’s
installation work, IBM, with the consent of Donelson, submitted bills to the
government claiming reimbursement for work included in other line items such as
“maintenance.” This was done knowing that the funds would actually be used to pay
for installation work that was not properly covered by a maintenance line item. R. 1
¶ 118. Donelson verified the accuracy of these bills to the County in furtherance of
the fraud. R. 1 ¶¶ 119, 122.
McGee also alleges that IBM paid PSC in advance for work that IBM knew
PSC was not qualified to perform. R. 1 ¶ 124. As a result, IBM had to subcontract
with another entity to perform the same work that PSC had already been paid to
perform. R. 1 ¶ 125. IBM billed the government both for the money paid to PSC and
for the money paid to the second subcontractor despite the fact that it was for the
exact same work. R. 1 ¶¶ 124-25. At some point, IBM manager Stiffler began
diverting work away from PSC due to its demonstrated incompetence. IBM removed
Stiffler from the Project as a result. R. 1 ¶ 77.
8
McGee further alleges that PSC billed IBM for the installation of cameras
and other equipment outside of the Stroger Battered Women’s Shelter. R. 1 ¶ 130.
This work was not within the contract’s scope of work and IBM denied payment. R.
1 ¶ 130. However, Donelson intervened and ultimately caused IBM to pay PSC
$125,000 for this work, which IBM then charged to the government. R. 1 ¶ 130. In
addition to billing for defective, duplicative, and uncontracted for services, McGee
alleges that IBM fraudulently reported that work was being performed by minority
business or women business enterprises, as required by the contract, when the work
was being performed by TAI, before being replaced by Responder, or companies that
were not truly minority or women owned. R. 1 ¶¶ 144-51.
Despite Responder’s success in providing functional platforms in Phase I,
Donelson announced that for Phase II, the County was seeking a new design for the
mobile installations and a new video recording system. R. 1 ¶ 110. PSC submitted a
bid touting a new mobile platform design. R. 1 ¶ 111. IBM knew that any proposed
design by PSC was likely to be unusable. IBM employee Stiffler admitted to McGee
that PSC was not capable of getting their own stationary building cameras to work,
let alone developing a new mobile platform. R. 1 ¶ 112. Nevertheless, IBM signed a
letter of intent in November 2005, committing to subcontracting the Project’s Phase
II redesign and installation work to PSC. R. 1 ¶ 115. Knowing it to be false,
Donelson represented to the Cook County Board that IBM’s proposal, which was
based on PSC’s new design, met all system requirements, inducing the Board to
approve IBM’s Phase II contract. R. 1 ¶ 137.
9
PSC’s method for developing the Phase II platform was to attempt to reverse
engineer Responder’s Phase I platform. R. 1 ¶ 138. PSC was unsuccessful in doing
so. R. 1 ¶ 138. Ultimately, the Phase II platforms suffered from numerous problems
that rendered them non-functional. R. 1 ¶ 140. IBM asked Responder to fix the
platforms. R. 1 ¶ 142. Responder declined after surveying the equipment and
having determined that no amount of effort would render the Phase II design
functional. R. 1 ¶ 142.
The Phase III request for proposal was released in early 2008. R. 1 ¶ 155.
Despite the equipment failures in Phase II, Donelson directed that the same
hardware configuration be used for Phase III. R. 1 ¶ 156. Donelson did this to
ensure that the same personnel who worked on Phase II would work on Phase III.
R. 1 ¶ 156. However, the software utilized in Phase II was prohibited in the RFP,
which called for the development of new software. R. 1 ¶ 157. IBM did not bid on
Phase III of the Project and was not involved in any way with the Project after the
completion of Phase II. R. 1 ¶ 158.
Responder met with JCI in February of 2008 knowing that JCI planned to
bid on Phase III of the contract. R. 1 ¶ 161. At the meeting, JCI conveyed its
confidence that it would receive the Phase III contract due to its relationship with a
minority contractor, who McGee understood to mean PSC. R. 1 ¶ 161. McGee told
JCI of the problems during Phase I and II due to PSC’s involvement. R. 1 ¶ 161.
Ultimately, JCI won the award for the Phase III contract. R. 1 ¶ 162. Several
months later, McGee contacted JCI to ask whether it could be given work on the
10
Phase III contract. R. 1 ¶ 162. JCI told McGee that personnel who worked on Phase
I or II of the Project were prohibited from working on Phase III. R. 1 ¶ 162. McGee
responded that he was aware that PSC-associated personnel were working on Phase
III of the Project. R. 1 ¶ 162. The JCI employee with whom McGee was speaking
responded that JCI hired who the County told them to hire. R. 1 ¶ 162.
Originally, the purpose of Phase III was to expand the Project to provide
mobile platform systems to municipalities not included in Phases I and II. R. 1 ¶
163. However, the scope of Phase III was revised to include fixing the nonfunctional platforms from Phases I and II. R. 1 ¶ 165. Ultimately, JCI was unable to
fix the Phase I platforms due to its insistence on using incompetent personnel
designated by Donelson. R. 1 ¶ 165. JCI was also unable to render the platforms
from Phase II functional. R. 1 ¶ 165. Ultimately, Phase III was not completed as
contracted for. R. 1 ¶ 164. Regardless, JCI continually submitted invoices to the
government that falsely certified that the work being performed was in accordance
with the contract specifications and federal regulations. R. 1 ¶ 180.
McGee also generally alleges that throughout the Project the State of Illinois
and Cook County were required to submit Biannual Strategy Implementation
Reports that incorporated false information provided by the alleged conspirators. R.
1 ¶ 174. McGee alleges that the conspirators misrepresented the progress of the
Project on each of these reports. R. 1 ¶ 174. By virtue of these acts, and the acts
listed above, McGee alleges that all of the named Defendants conspired to, and did,
violate the FCA and the IWRPA. R. 1 ¶¶ 181-198.
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Legal Standard
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) challenges
the Court’s subject matter jurisdiction. “The standard of review for a Rule 12(b)(1)
motion to dismiss depends on the purpose of the motion.” Bolden v. Wells Fargo
Bank, N.A., 2014 WL 6461690, at *2 (N.D. Ill. Nov. 18, 2014) (citing Apex Digital,
Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009)). “If a defendant
challenges the sufficiency of the allegations regarding subject matter jurisdiction (a
facial challenge), the Court must accept all well-pleaded factual allegations as true
and draw all reasonable inferences in the plaintiff’s favor.” Bolden, 2014 WL
6461690, at *2 (citing United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942,
946 (7th Cir. 2003)). A factual challenge to the court’s subject matter jurisdiction, on
the other hand, is based on the assertion that “the complaint is formally sufficient
but . . . there is in fact no subject matter jurisdiction.” United Phosphorus, 322 F.3d
at 946 (emphasis in original). When considering a factual challenge to the court’s
jurisdiction, “[t]he district court may properly look beyond the jurisdictional
allegations of the complaint and view whatever evidence has been submitted on the
issue to determine whether in fact subject matter jurisdiction exists.” Evers v.
Astrue, 536 F.3d 651, 656-57 (7th Cir. 2008) (quoting St. John’s United Church of
Christ v. City of Chicago, 502 F.3d 616, 625 (7th Cir. 2007)). “Where jurisdiction is
in question, the party asserting a right to a federal forum has the burden of proof,
regardless of who raised the jurisdictional challenge.” Craig v. Ontario Corp., 543
F.3d 872, 876 (7th Cir. 2008).
12
A Rule 12(b)(6) motion challenges the sufficiency of the complaint. See, e.g.,
Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th
Cir. 2009). A complaint must provide “a short and plain statement of the claim
showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), sufficient to
provide defendant with “fair notice” of the claim and the basis for it. Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555 (2007). This “standard demands more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009). While “detailed factual allegations” are not required, “labels
and conclusions, and a formulaic recitation of the elements of a cause of action will
not do.” Twombly, 550 U.S. at 555. The complaint must “contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “‘A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.’”
Mann v. Vogel, 707 F.3d 872, 877 (7th Cir. 2013) (quoting Iqbal, 556 U.S. at 678). In
applying this standard, the Court accepts all well-pleaded facts as true and draws
all reasonable inferences in favor of the non-moving party. Id.
It is well-established that the FCA “is an anti-fraud statute and claims under
it are subject to the heightened pleading requirements of Rule 9(b).” Thulin v.
Shopko Stores Operating Co., LLC, 771 F.3d 994, 998 (7th Cir. 2014). Rule 9(b)
requires a “plaintiff to do more than the usual investigation before filing [a]
complaint. Greater precomplaint investigation is warranted in fraud cases because
13
public charges of fraud can do great harm to the reputation of a business firm or
other enterprise (or individual).” Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d 467,
469 (7th Cir. 1999) (citations omitted). A complaint generally “must provide the
who, what, when, where and how” of the alleged fraud. United States ex rel. Fowler
v. Caremark RX, LLC, 496 F.3d at 730, 740 (7th Cir. 2007) (quotations and citations
omitted).
Analysis
The FCA, and the equivalent sections of the IFCA, generally prohibit the
submission of false or fraudulent claims for payment to the government. See 31
U.S.C. § 3729(a); 740 ILCS 175/3(a(1)(A). Specifically, these statutes prohibit
knowingly presenting, or causing to be presented, a false or fraudulent claim for
payment, and knowingly making or using a false record or statement that is
material to a false or fraudulent claim paid by the government. See 31 U.S.C. §§
3729(a)(1)(A), 3729(a)(1)(B); 740 ILCS 175/3(a)(1)(A), 175/3(a)(1)(B). The statutes
also make it unlawful for persons to conspire to commit a substantive violation of
the FCA or the IFCA. See 31 U.S.C. § 3729(a)(1)(C); 175/3(a)(1)(C).
The FCA permits private citizens, or “relators,” to file a civil action on behalf
of the government to recover money that the government paid on account of the
false or fraudulent claims. 31 U.S.C. § 3730(b)(1). These actions are referred to as
qui tam actions. United States ex rel. Yannacopoulos v. General Dynamics, 652 F.3d
818, 822 (7th Cir. 2011). “To establish civil liability under the [FCA], a relator
generally must prove (1) that the defendant made a statement in order to receive
14
money from the government; (2) that the statement was false; and (3) that the
defendant knew the statement was false.” Id. (citing Gross, 415 F.3d at 604). As
previously stated, the standards and resulting analysis for FCA claims are the same
as those for IFCA claims. Kennedy, 512 F. Supp. 2d at 1163 n.2. Therefore, they will
be addressed simultaneously as the “FCA” claims.
I.
Statute of Limitations
The FCA provides that a civil action may not be brought:
(1) more than 6 years after the date on which the violation
of section 3729 is committed, or (2) more than 3 years
after the date when facts material to the right of action
are known or reasonably should have been known by the
official of the United States charged with responsibility to
act in the circumstances, but in no event more than 10
years after the date on which the violation is committed,
whichever occurs last.
31 U.S.C. § 3731(b). The IFCA contains an almost identical provision. See 740 ILCS
175/5(b). IBM argues that this statute precludes any claims prior to May 24, 2005.
McGee counters that (1) a statute of limitations defense is not properly brought as a
motion to dismiss, (2) the Wartime Suspension of Limitations Act tolls the FCA
statute of limitations, (3) he is subject to the 10-year statute of limitations as
opposed to the 6-year statute of limitations, and (4) allegations relating to conduct
that led to a false claim remain inchoate until a claim for payment is made, making
all of his allegations timely. R. 99-1 ¶¶ 50-53.
Under Federal Rule of Civil Procedure 8(c)(1), a statute of limitations
argument is an affirmative defense, not an attack against the sufficiency of the
pleadings. “Dismissing a claim as untimely at the pleading state is an ‘unusual step,
15
since a complaint need not anticipate and overcome affirmative defenses, such as
the statute of limitations.’” Goldberg v. Rush Univ. Med. Ctr., 929 F. Supp. 2d 807,
815 (N.D. Ill. 2013) (quoting Cancer Found., Inc. v. Ceberus Capital Mgmt., LP, 559
F.3d 671, 674 (7th Cir. 2009)). Because McGee alleges an ongoing fraudulent
scheme involving different theories of FCA liability that began prior to and
continued after May 24, 2005, the Court declines at this juncture to make a
determination as to whether any of McGee’s claims against IBM are barred by the
statute of limitations. See id. IBM’s motion to dismiss claims that predate May 24,
2005 is denied.
II.
Public Disclosure Bar
Both IBM and JCI argue that the public disclosure bar requires dismissal of
McGee’s qui tam suit. The parties dispute, however, whether the public disclosure
bar is a jurisdictional issue properly addressed under Rule 12(b)(1) or a substantive
issue properly addressed under Rule 12(b)(6). The question stems from a 2010
amendment to the FCA that changed the statute’s language from “no court shall
have jurisdiction” to “[t]he court shall dismiss an action or claim under this section.”
See United States ex rel. Cause of Action v. Chi. Transit Auth., 2014 WL 5333399, at
*2 (N.D. Ill. Oct. 20, 2014) (citing § 3730(e)(4)(A)). While the pre-amendment
language was clearly jurisdictional, the Seventh Circuit has questioned whether the
post-amendment language should be treated as jurisdictional. See U.S. ex rel.
Absher v. Momence Meadows Nursing Center, Inc., 764 F.3d 699, 706 (7th Cir.
2014). The 2010 amendment was not retroactive. Because the events giving rise to
16
the present cause of action occurred prior to 2010, the Court finds that the preamendment language applies to this case. See Cause of Action, 2014 WL 5333399, at
*2 n.2 (“Because the 2010 amendments are not retroactive, the applicable version of
§ 3730(e)(4) is the one that was ‘in force when the events underlying th[e] suit took
place.’” (quoting Leveski v. ITT Educ.. Servs., 719 F.3d 818, 828 (7th Cir. 2013)).
This is so even though McGee filed his complaint after the enactment of the 2010
amendment. See Cause of Action, 2014 WL 5333399, at *2. Therefore, the Court will
analyze IBM’s and JCI’s public-disclosure-bar argument pursuant to Rule 12(b)(1).3
Turning to the substance of the argument, the public disclosure bar requires
dismissal of a qui tam action under Rule 12(b)(1) “when the relator’s action is ‘based
upon the public disclosure of allegations or transactions in a criminal, civil, or
administrative hearing, in a congressional, administrative, or Government [sic]
Accounting Office report, hearing, audit, or investigation, or from the news media,
unless the action is brought by the Attorney General or the person bringing the
action is an original source of the information.’” Glaser, 570 F.3d at 913 (quoting 31
U.S.C. § 3730(e)(4)(A)); see also Rockwell Int’l Corp. v. United States, 549 U.S. 457,
473-74 (2007). Congress enacted the public disclosure bar to “deter parasitic qui tam
Even if the Court had concluded that the post-2010 FCA language applied, and
that this language rendered the public disclosure bar substantive rather than
jurisdictional, it would have mattered little. The Court would not have been
permitted to consider the allegations contained in McGee’s responsive brief and
declaration, and would therefore have likely found that the public disclosure bar
prohibited this action as to IBM. However, the Court would have dismissed the
action as to IBM without prejudice, and allowed McGee to amend his complaint to
either add the allegations contained in his declaration or simply attach the
declaration to the complaint, eliminating the deficiencies highlighted below. The
Court’s ruling as to JCI would not have changed.
3
17
actions,” United States ex rel. Gear v. Emergency Med. Assoc. of Ill., Inc., 436 F.3d
726, 728 (7th Cir. 2006), which are lawsuits filed by “self-serving opportunists, who
do not possess their own insider information, [who will try] to get in on the action . .
. when the allegations have already been publicly disclosed and the insiders have
nothing new to add,” Glaser, 570 F.3d at 915. Once a public disclosure is made, the
value of a qui tam action is lost as the government is aware of the potential of a
false claim and can take responsive action itself. See United States ex rel. Feingold
v. AdminaStar Fed., Inc., 324 F.3d 492, 495 (7th Cir. 2003). Under the public
disclosure bar, “once information becomes public, only the Attorney General and a
relator who is an ‘original source’ of the information may represent the United
States.” Glaser, 570 F.3d at 913. The plaintiff bears the burden of establishing the
inapplicability of the public disclosure bar doctrine. Id.
To determine whether the public disclosure bar strips the court of
jurisdiction, the court is required to engage in a three-step analysis. United States
ex rel. Heath v. Wis. Bell, 760 F.3d 688, 690 (7th Cir. 2014). First, the court must
determine whether the relator’s allegations were “publicly disclosed” before the
filing of the lawsuit. Glaser, 570 F.3d at 913. If the Court determines that they
were, the court must next decide “whether the [relator’s] lawsuit is ‘based upon’
those [previously] publicly disclosed allegations.” Id. If the Court determines that it
is, then the public disclosure bar prohibits the relator’s suit unless the relator can
establish that he “is an ‘original source’ of the information upon which his lawsuit is
based.” Id. To establish that he is an original source, a plaintiff must establish that
18
he “‘has direct and independent knowledge of the information on which the
allegations are based and has voluntarily provided the information to the
Government before filing an [FCA] action.’” Leveski, 719 F.3d at 828-29 (quoting §
3730(3)(4)(B)).4
A.
Whether McGee’s Allegations Have Been Publicly Disclosed
IBM and JCI assert that the allegations comprising McGee’s claims were
previously publicly disclosed through news media and through a federal audit. R. at
7; R. 62-1 at 13-15. McGee does not contest this assertion and thereby waives any
argument to the contrary. Bonte v. U.S. Bank, N.A., 624 F.3d 461, 466 (7th Cir.
2010). As such, the Court finds that the first prong of the public disclosure bar is
met.
B.
Whether McGee’s Complaint Is Based Upon Previously Publicly
Disclosed Allegations
If a qui tam complaint is based on previously publicly disclosed allegations, it
is generally barred unless the relator can establish that he is an original source.
The Seventh Circuit has “interpreted the phrase ‘based upon [a] public disclosure’ to
mean ‘substantially similar’ to publicly disclosed allegations [or transactions].’”
Heath, 760 F.3d at 691 (quoting Leveski, 719 F.3d at 828). However, “‘based upon’
does not mean ‘solely based upon,’ for a qui tam action even partly based upon
publicly disclosed allegations or transactions is nonetheless ‘based upon’ such
The 2010 amendment to § 3730(e)(4) of the FCA also altered the definition of
“original source.” However, as previously stated, the 2010 amendment to the FCA
was not retroactive. Therefore, because the allegations underlying this suit occurred
prior to the 2010 amendment, the Court relies upon the pre-2010 FCA definition of
“original source.” Leveski, 719 F.3d at 828.
4
19
allegations or transactions.” Heath, 760 F.3d at 691 (quoting Glaser, 570 F.3d at
920). To demonstrate that its claims are not based upon already publicly disclosed
allegations, a plaintiff must do more than “add[] extra details” or “additional
instances” of false claims. Heath, 760 F.3d at 691 (citing Glaser, 570 F.3d at 920-21).
To determine whether the plaintiff has met this burden, a court must engage in a
highly fact-specific comparison of the previously publicly disclosed allegations and
the plaintiff’s complaint. See Leveski, 719 F.3d at 829; Heath, 760 F.3d 691; Glaser,
570 F.3d at 920-21. Some of the factors used to determine whether a relator’s
allegations are substantially similar to those already publicly disclosed are: (1)
whether the time periods for the allegations or transactions overlap; (2) whether the
relator has first-hand knowledge of the allegations; (3) whether the allegations are
similar or involve different schemes such that independent investigation and
analysis was required; and (4) whether the relator presents genuinely new and
material information than that previously disclosed. Leveski, 719 F.3d at 829-33;
Heath, 760 F.3d at 691-92.
1.
IBM
IBM argues that the allegations comprising McGee’s present suit are
identical to those previously disclosed through news coverage of the Project. R. 58-1
at 8. McGee disagrees. R. 99-1 at 13-17. Because the Court ultimately finds that
McGee is an original source with regard to IBM, it declines to address the “based
upon” prong of the public disclosure bar doctrine as to IBM.
20
2.
JCI
Turning to JCI, the Court concludes that McGee has failed to offer competent
proof rebutting JCI’s assertion that McGee’s allegations are substantially similar to
those previously publicly disclosed. McGee generally alleges that JCI took over
IBM’s role as prime contractor in the scheme to defraud the County, and ultimately
DHS, by violating the FCA. R. 1. This allegation is substantially similar to
previously publicly disclosed allegations. The news articles appended to JCI’s
memorandum as Exhibits D, J, and K, discuss JCI taking over IBM’s prime contract
role and the continuing issues the County faced throughout the pendency of the
Project.5 R. 62-1. These articles discuss the same general scheme and the same
general issues experienced by the municipalities after JCI became the prime
contractor for the Project. See R. 62-5; R. 62-11; R. 62-12. For example, the articles
state that after JCI became prime contractor, many of the installed platforms were
nonfunctional. See R. 62-5; R. 62-11; R. 62-12. A 2010 article states that quality
assurance reports spanning August 2008 to 2010 indicated that only 60% of the
installed platforms were fully functional. See R. 62-12. The article goes on to
describe how the Project was behind schedule and over budget. See R. 62-12.
Ultimately, McGee’s general averment that JCI took over IBM’s role in the
fraudulent scheme does not exhibit any indicia of first-hand knowledge, nor does it
For the reasons discussed below, the Court concludes that JCI’s jurisdictional
challenge is factual rather than facial. As such, the Court may properly consider
evidence beyond the complaint. Apex, 572 F.3d at 443-44.
5
21
disclose any new material information. This allegation is substantially similar to
those that were previously publicly disclosed.
McGee specifically alleges that JCI bragged that it had a relationship with an
influential contractor and was likely to receive the award for the Phase III contract
as a result. R. 1 ¶ 161. McGee also alleges that JCI told him that they hired who the
County told them to hire. R. 1 ¶ 162. McGee alleges that these statements were
made directly to him, evidencing first-hand knowledge. However, these allegations
do not appear to be significant. On their face, they do not allege any unlawful
conduct. They do not substantiate an allegation of an FCA violation. They do not
add any material information to the allegations previously publicly disclosed. These
allegations are substantially similar to those previously publicly disclosed.
Finally, McGee alleges that JCI did not successfully complete Phase III of the
Project. R. 1 ¶ 164. However, there were numerous news articles published prior to
McGee’s complaint being filed that reported on the lack of success of the Project
after JCI became prime contractor. See R. 62-5; R. 62-11; R. 62-12. A 2010 article
stated that quality assurance reports spanning August 2008 to 2010 indicated that
only 60% of the installed platforms were fully functional. See R. 62-12. The article
stated that the Project was behind schedule and over budget. See R. 62-12.
Furthermore, the allegation that JCI did not successfully complete Phase III of the
Project does not substantiate an FCA violation, nor does it indicate any unlawful
activity. Ultimately, this allegation does not add anything that materially alters or
adds to the allegations that had previously been publicly disclosed. Since McGee’s
22
allegations against JCI are all based upon previously publicly disclosed information,
unless the Court determines that McGee is an original source with regard to the
allegations against JCI, the public disclosure bar will require dismissal of McGee’s
claims against JCI.
C.
Whether McGee Is An Original Source
“The original-source exception permits jurisdiction over an FCA action even if
the relator’s lawsuit is based upon publicly disclosed information provided that the
relator is ‘an original source of the information.’” Glaser, 570 F.3d at 916 (quoting
3730(e)(4)(A)) (emphasis in original). The pre-2010 FCA defined “original source” as
“an individual who has direct and independent knowledge of the information on
which the allegations are based and has voluntarily provided the information to the
Government before filing an [FCA] action.” Leveski, 719 F.3d at 828-29 (quoting §
3730(e)(4)(B)) (internal quotation marks omitted). Accordingly, relators have the
burden of showing that they have “(1) direct knowledge of fraudulent activity; (2)
independent knowledge of fraudulent activity; and (3) voluntarily provided their
information to the government before filing a qui tam action.” Glaser, 570 F.3d at
917.
“Direct” knowledge is that which is “based on [a relator’s] own investigative
efforts and not derived from the knowledge of others.” Id. (emphasis in original). For
a relator to establish that it has “independent” knowledge, the relator must be
“someone who would have learned of the allegation or transactions independently of
the public disclosure.” Id. at 921. However, “potential relators rarely will have
23
direct and independent knowledge of all essential elements in an FCA action.” U.S.
ex rel. Lamers v. City of Green Bay, 998 F. Supp. 971, 982 (E.D. Wis. 1998), aff’d,
168 F.3d 1013 (7th Cir. 1999). As such, while “[o]riginal sources should be
independently aware of some essential piece of information, [they] need not have
direct knowledge of all of the vital ingredients in a fraudulent transaction.” Id.
(emphasis in original).
McGee’s response brief asserts that he is an original source of the information
on which his complaint is based. R. 99-1 at 17. His complaint, however, is silent as
to his status as an original source. Indeed, his complaint is devoid of any allegations
pertaining to the public disclosure bar. However, this silence is not fatal as a
plaintiff is not required to preemptively plead against possible defenses. That being
said, because the Defendants have raised this jurisdictional argument, the burden
is now on McGee to provide competent proof establishing the Court’s subject matter
jurisdiction over this case. McGee attempts to do so through evidence attached to
his briefs.
1.
IBM
IBM does not contradict the factual assertions McGee makes to support his
conclusion that he is an original source. Rather, IBM argues that McGee improperly
uses his responsive pleadings to respond to Defendants’ argument. The Court
concludes that Defendants’ public disclosure bar argument is jurisdictional and
made pursuant to Rule 12(b)(1). The Court further concludes that Defendants’
jurisdictional attack is factual rather than facial. This is so because Defendants do
24
not attack McGee’s standing as a relator based on the insufficiency of the
allegations in McGee’s complaint. Rather, Defendants argue that external facts (the
prior public disclosures) strip the Court of jurisdiction. See Apex, 572 F.3d at 44344. As discussed previously, when analyzing a factual 12(b)(1) argument, the Court
may consider evidence beyond the pleadings in order to determine whether it has
subject matter jurisdiction. Id. The Court rejects IBM’s argument that McGee
improperly used his responsive pleadings to support his contention that he has
standing to bring this action, and considers the evidence offered through McGee’s
declaration.
The Court finds that McGee has offered competent proof through his
declaration that he has both direct and independent knowledge of the allegations
lodged against IBM, and that he disclosed this knowledge to government officials
prior to filing the instant suit. See R. 99-1 at 64-77. McGee states that he became
personally involved in the Project in September 2005 when his company was
solicited and ultimately hired as a subcontractor to fix the platform’s functionality
issues. R. 99-1 at 66-68 (¶¶ 4-5). Through Responder’s role as a subcontractor,
McGee personally participated in meetings with IBM, other subcontractors, and
County officials. R. 99-1 at 66-68 (¶¶ 4-5). McGee also personally participated in
fixing the previously installed platforms. R. 99-1 at 66-68 (¶ 5).
In late 2005,
Responder acquired TAI’s assets including Project-related documents, invoices,
internal memoranda, and correspondence among the Defendants. R. 99-1 at 68 (¶
6). McGee had access to these documents and reviewed them. McGee states that he
25
and his company remained involved in the Project through Phase II. R. 99-1 at 6869 (¶ 8). These assertions adequately demonstrate that McGee gained direct and
independent knowledge of the allegations contained in his complaint regarding
IBM. These assertions are in addition to the allegations contained in McGee’s
complaint that also indicate direct and independent knowledge of the information
contained therein, such as the allegations regarding IBM’s fraudulent invoicing and
the conversations McGee had with IBM employee Stiffler, among others. R. 1 ¶¶ 9091, 106, 111-12. Furthermore, McGee offers competent proof that he disclosed the
information he obtained through his work on the Project to government officials
prior to filing this action. R. 99-1 at 72-75 (¶¶ 12-20). Specifically, McGee provides
approximate dates when he met with government officials, the names of who he met
with, and the general information he disclosed during those meetings. R. 99-1 at
72-75 (¶¶ 12-20). Accordingly, the public disclosure bar is not a basis to dismiss
McGee’s claims against IBM.
2.
JCI
Turning to JCI, the Court finds that McGee has not offered competent proof
that he is an original source with regard to the allegations against JCI. McGee has
not offered proof that he disclosed any fraud on behalf of JCI to government officials
prior to filing this action. McGee’s declaration does not contain any statements to
this effect. JCI was not involved with the Project until the spring of 2008. McGee
generally asserts that he met with government officials through 2008 but does not
specifically state when any of those meetings took place. Most importantly, McGee
26
does not allege that JCI was the subject of any of these meetings. R. 99-1 at 23; R.
99-1 at 74 (¶ 19). As such, the Court concludes that McGee has not adequately
established his status as an original source with regard to JCI and as such, the
public disclosure bar removes this Court’s subject matter jurisdiction to hear this
matter with regard to JCI. For this reason, McGee’s claims against JCI are
dismissed.
III.
Rule 9(b)
A.
JCI
Alternatively, McGee’s claims against JCI are dismissed for failure to plead
the claims with the particularity required by Federal Rule of Civil Procedure 9(b).6
McGee argues that he has adequately alleged FCA violations under four theories:
(1) falsely inducing the government to enter into a contract; (2) participating in a
bid-rigging scheme; (3) submitting false documents; and (4) rendering worthless
services. R. 99-1 at 44. Each of these theories fails.
1.
False Inducement
Courts in this district have recognized false inducement as a basis for
alleging an FCA violation. U.S. ex rel. Danielides v. Northrop Grumman Sys. Corp.,
2014 WL 5420271, at *5 (N.D. Ill. Oct. 23, 2014). A cause of action exists if a
While the Court dismisses this action against JCI for failure to adequately
establish subject matter jurisdiction, the Court does so without prejudice. See
Frederiksen v. City of Lockport, 384 F.3d 437, 438-39 (7th Cir. 2004). In the
interests of judicial economy, should McGee file an amended complaint attempting
to cure the public disclosure bar deficiencies, the Court provides this substantive
analysis of JCI’s Rule 9(b) motion so that those deficiencies may be addressed in the
event an amended complaint is filed.
6
27
contractor makes a false statement to induce a government entity to award a grant
or contract to that contractor, and which is awarded based on this false statement.
All resulting requests for payment are then fraudulent because they are based on
the original false statement. Id. at *6 (citing United States ex rel. Main v. Oakland
City Univ., 426 F.3d 914, 916 (7th Cir. 2005)). The court in Danielides ultimately
found that the plaintiff had adequately alleged false inducement, citing various
allegations that supported its finding. Id. at *6 n.6. A few examples of these
allegations included promising the government “to do work that it never intended to
do” and “promising to do so, [but] never intend[ing] to provide its best efforts in
performing the contract and fraudulently inducing the government to enter into the
. . . contract.” Id.
The Court has reviewed McGee’s complaint and is unable to find any
allegations that JCI promised the government that it would do something that it
never intended to do, which in turn, induced the government to award JCI the
Phase III contract. Indeed, the complaint is devoid of any allegation that JCI ever
made any promise to the government. Perhaps JCI made promises, but they have
not been alleged.
Furthermore, McGee’s response to JCI’s motion to dismiss is noticeably bare
of argument in support of its false inducement claim. R. 99-1 at 44. McGee relies
solely on the following two allegations to support his fraudulent inducement theory:
(1) that someone from JCI anticipated obtaining the Phase III contract due to its
South Holland connections, which McGee argues must mean Donelson; and (2) that
28
after JCI was awarded the contract, someone from JCI told McGee that JCI only
hires the subcontractors that the County tells them to hire. R. 99-1 at 44. However,
these allegations simply do not allege anything that would allow the Court to infer
that JCI made any promise, fraudulent or otherwise, to the government in order to
induce an award. Specifically, to the extent that those statements even relate to a
fraudulent inducement FCA claim, McGee does not say who made them, what was
false or misleading about the statements, or how these statements induced the
government to award a contract to JCI. As such, McGee’s fraudulent inducement
FCA claim does not satisfy the pleading standards espoused in Rule 8(a), let alone
the heightened pleading standards required by Rule 9(b), including the “who, what,
when, where, and how of the alleged fraud.” Danielides, 2014 WL 5420271, at *7
(citing Cincinnati Life Ins. Co. v. Beyrer, 722 F.3d 939, 948 (7th Cir. 2013)).
Therefore, McGee has failed to state a claim under the FCA based on fraudulent
inducement.
2.
Bid-rigging
Likewise, the Seventh Circuit has recognized bid-rigging as a basis for an
FCA violation. See United States v. Azzarelli Const. Co., 647 F.2d 757 (7th Cir.
1981). To adequately plead a bid-rigging claim, a plaintiff must allege an agreement
between two or more people to restrain competition for a contract that is to be
awarded on the basis of competitive bidding. See id. McGee argues that the
following allegations are sufficient to maintain a bid-rigging FCA claim: that JCI
told McGee that it would only hire subcontractors designated by Donelson, R. 1 ¶
29
160, that it would “hire who the County tells us to hire,” R. 1 ¶ 162, and that “JCI
agreed to use the incompetent personnel designated by Donelson for all mobile
platform maintenance,” R. 1 ¶ 165. R. 99-1 at 44. The Court disagrees.
Again, the Court questions whether these statements in and of themselves
are necessarily indicative of fraud. Perhaps the County required control over which
subcontractors were hired to perform on the contract. By itself, that is not illegal.
But more importantly, what is noticeably lacking from McGee’s bid-rigging FCA
claim is any discussion of JCI’s knowing involvement in a bid-rigging scheme.
Specifically, McGee has not alleged that the subcontracts for Phase III were to be
competitively bid, or that the subcontracts were not in fact competitively bid.
McGee’s complaint does not make any allegation with regard to requests for
proposals, bids submitted, or subcontracts actually awarded for Phase III of the
contract. Where there is no bidding, there can be no bid-rigging. McGee attempts to
bootstrap its bid-rigging allegations that occurred prior to JCI’s involvement in the
Project and apply them with equal force to JCI. R. 99-1 at 48. However, arguing in a
response to a motion to dismiss that JCI engaged in the same bid-rigging activity as
its predecessors in the contract without specifically alleging this conduct in the
complaint is insufficient under Rule 9(b) and impermissible under Rule 12(b)(6). See
Wright v. Assoc. Ins. Comps. Inc., 29 F.3d 1244, 1248 (7th Cir. 1994) (Court’s review
is limited to the pleadings on a Rule 12(b)(6) motion). As such, McGee fails to
adequately plead a bid-rigging FCA cause of action under Rules 8(a) and 9(b).
30
3.
Submitting False Documents
McGee’s FCA claim alleging submission of false documents also fails under
the heightened pleadings standards of 9(b). Notably, McGee’s response to JCI’s
motion to dismiss does not argue that the complaint contains any allegations
regarding specific invoices submitted by JCI. See R. 99-1. Rather, McGee relies on
his fraudulent inducement and bid-rigging theories as to why every invoice
submitted by JCI must necessarily be false. The Court has found that McGee has
not adequately alleged a fraudulent inducement or bid-rigging FCA claim.
Therefore, to the extent McGee’s false documents FCA claim is based on his
fraudulent inducement and bid-rigging claims, he has failed to state a claim.
To the extent that McGee maintains that he has adequately pled a false
documents claim, see R. 99-1 at 27-28, he mistakenly relies on United States ex rel.
Lusby v. Rolls-Royce Corp, 570 F.3d 849 (7th Cir. 2009). In Lusby, the complaint
was devoid of references to specific fraudulent invoices. It did allege that the
contracts required that the engine parts contracted for “meet particular
specifications; that the parts did not do so (and the complaint describes tests said to
prove this deficiency); that Rolls-Royce knew that the parts were non-compliant (not
only because Lusby told his supervisors this but also because audits…confirmed
Lusby’s conclusions); and that Rolls-Royce nonetheless certified that the parts met
the contracts’ specifications.” Lusby, 570 F.3d at 853-54. “The complaint names
specific parts shipped on specific dates, and it relates the details of payment.” Id. at
854. The court in Lusby also referenced the specific certification required to
31
accompany each request for payment. Id. Based on these allegations, the court held
that Lusby had adequately pled an FCA claim even though he could not produce the
invoices themselves at that stage of the litigation. Id. The allegations in McGee’s
complaint fall far short of the specificity described in Lusby. McGee’s detailed
allegations regarding the IBM invoices highlight this inadequacy as to JCI.
Finally, the Court rejects McGee’s argument that he has adequately pled the
false documents claim in the form of the Biannual Strategy Implementation Reports
(‘BSIR”). R. 99-1 at 44. McGee’s complaint broadly alleges that “[i]n each BSIR . . .
the conspirators falsely reported the progress of the Project.” R. 1 ¶ 174. McGee’s
complaint lacks the specificity necessary when alleging fraud. Aside from the use of
the word “conspirators,” McGee does not specifically allege what role JCI had in
preparing the report. Aside from the conclusory statement that the BSIR’s “falsely
reported the progress of the [p]roject,” McGee does not specifically allege what was
contained in the progress report that was false, such as specific deadlines that were
missed. McGee does not allege that JCI specifically knew the content contained in
the reports to be false. McGee does not identify when the reports were submitted.
Put simply, McGee’s allegations regarding submission of fraudulent BSIRs with
regard to JCI falls short of satisfying the heightened pleading requirements of Rule
9(b).
4.
Rendering Worthless Services
The Seventh Circuit recently declined to opine as to the validity of “worthless
services” as a separate theory of liability under the FCA. Absher, 764 F.3d at 710.
32
Nevertheless, in Absher, the Seventh Circuit analyzed the claim on its merits and in
doing so, provided a framework for this Court to analyze McGee’s claim. To
establish a worthless services claim, “the performance of the service [must be] so
deficient that for all practical purposes it is the equivalent of no performance at all.”
Id. (quoting Mikes v. Straus, 274 F.3d 687, 703 (2d Cir. 2001)) (internal quotation
marks omitted). “It is not enough . . . that the defendant provided services that are
worth some amount less than the services paid for . . . [s]ervices that are ‘worth less’
are not ‘worthless.’” Id. Using this framework, the Seventh Circuit concluded that
no jury could have reasonably found that the defendant provided truly worthless
services since there was undisputed evidence that the defendant provided services
of some value to its patients. Id.
Without deciding whether the worthless services theory is a proper theory of
liability under the FCA, the Court finds that to the extent it is, McGee has failed to
plead that the services rendered by JCI were truly worthless, and his claim fails.
McGee alleges that with regard to the mobile platforms installed by JCI in Phase
III of the contract, they are either “non-functional or unreliable.” R. 1 ¶ 164. McGee
further alleges that some municipalities have requested that the equipment be
removed. R. 1 ¶ 164. McGee also alleges that JCI was unable to maintain the IBMinstalled Phase I mobile platform, and was unable to fix, or render functional, the
mobile platforms installed by IBM in Phase II of the contract. R. 1 ¶ 165. McGee
asserts that with regard to the Phase I mobile platforms, his company could have
maintained the functionality of that equipment had JCI given it the opportunity. R.
33
1 ¶ 165. Finally, McGee alleges that any value obtained from the successful
installation of the mobile platforms in Phase I has somehow been eliminated. R. 1 ¶
166.
Applying the analysis adopted in Absher, McGee has successfully alleged that
JCI rendered worthless services with regard to the repair of the Phase I mobile
platform equipment. McGee fails, however, to properly allege that JCI rendered
truly worthless services with regard to its work on the Phase II and III mobile
platform equipment. McGee does allege that JCI was unable to render the Phase II
equipment functional. R. 1 ¶ 165. However, unlike his allegations regarding the
Phase I equipment, McGee does not allege that JCI’s inability to fix the Phase II
equipment was somehow unique to JCI. Indeed, McGee alleges that he declined to
accept a subcontract to fix the Phase II platforms because “no commercially
reasonable amount of effort would result in rendering the Phase [II] design
functional.” R. 1 ¶ 142. McGee cannot then turn around and allege that JCI
provided worthless services for not being able to fix something McGee himself
claimed unfixable. The Court cannot reasonably infer that JCI rendered worthless
services with regard to the Phase II equipment.
McGee alleges that some of the Phase III equipment was non-functional, and
some of the equipment was unreliable. Unreliable is not the same as non-functional
or worthless. Unreliable necessarily means that there are occasions where the
equipment works, as well as occasions where it does not. However, by alleging that
some of the equipment was unreliable, McGee concedes that JCI provided
34
something of value, even if unreliable. Ultimately, JCI was awarded a contract to
complete multiple tasks. McGee certainly alleges that JCI did not perform all of
those tasks well, and that the services JCI provided were worth less than what was
contracted for. Nevertheless, McGee does not allege that all of the services
performed by JCI pursuant to the contract were entirely worthless. Therefore, the
Court finds that McGee failed to adequately plead a worthless services FCA claim,
to the extent it is even a viable claim.
5.
Conspiracy
McGee has also failed to state a claim for conspiracy against JCI. JCI is
correct that general civil conspiracy principles apply to FCA conspiracy claims.
United States ex rel. Durcholz v. FKW, Inc., 189 F.3d 542, 545 n.3 (7th Cir. 1999).
Accordingly, to adequately plead an FCA conspiracy claim, a plaintiff must allege
“1) that “the [d]efendants had an agreement . . . to defraud the government by
getting a false or fraudulent claim allowed or paid; and 2) that the [d]efendants did
so for the purpose of obtaining or aiding to obtain payment from the government or
approval of a claim against the government.” United States ex rel. Walner v.
NorthShore Univ. HealthSystems, 660 F. Supp. 2d 891, 895-96 (N.D. Ill. 2009).
McGee fails to allege who the agreement was with, “how they agreed, how they
decided to file a false claim, who made the alleged misrepresentation, who filed the
allegedly false claim, the method by which it was filed, and how much the payment
was for.” Id. at 898. In sum, McGee fails to allege anything that would allow the
Court to reasonably infer that JCI had an agreement with anyone, let alone what
35
the terms of that agreement were. As such, JCI’s motion to dismiss the conspiracy
causes of action is granted and those counts are dismissed without prejudice.
B.
Chin
Chin moves to dismiss the non-conspiracy FCA claims, asserting that they
were not pled with the particularity required by Rule 9(b). R. 67 at 7. Chin contends
that McGee has failed to allege any facts identifying Chin’s role in the presentment
of a false claim. R. 67 at 7. Rather, Chin asserts that McGee merely alleges that
Chin was WIT’s president, and then bootstraps the allegations of WIT’s wrongdoing
onto Chin.
R. 67 at 7.
McGee counters that Chin’s signing of the teaming
agreement, in combination with the remainder of the complaint’s allegations,
sufficiently allege the requisite elements of an FCA claim, including knowledge of
the submission of the false claims and the conspiracy. R. 99-1 at 36-37.
When analyzing a motion to dismiss made pursuant to Rule 12(b)(6), the
Court’s review is generally limited to the four corners of the complaint. Looking at
McGee’s complaint, the only allegations against Chin are he signed the teaming
agreement as President of WIT. McGee alleges the teaming agreement
memorialized the bid-rigging conspiracy, and that Chin “otherwise knowingly
directed, authorized and participated in the wrongful acts of WIT alleged herein.” R.
1 ¶ 28. These are the only allegations in McGee’s 198 paragraph complaint that
mention Chin. WIT, as a separately named Defendant, has numerous allegations
made against it throughout the complaint.
36
The allegation that Chin knowingly directed, authorized, and participated in
the wrongful acts of WIT alleged throughout the complaint is seemingly intended to
be a catch-all to tie Chin to all subsequent allegations involving WIT. But aside
from the allegation that Chin was WIT’s president, McGee’s complaint does not
make any allegation as to Chin’s role or conduct in directing or participating in the
wrongful acts of WIT. McGee’s complaint does not satisfy the “who, what, where,
when and how” of Chin’s involvement in WIT’s allegedly fraudulent conduct that is
required by Rule 9(b). Accordingly, this allegation fails to substantiate an FCA
claim.
The Court is thus left to determine whether McGee’s allegation that Chin
signed the teaming agreement is sufficient to plead a FCA violation against Chin.
The teaming agreement is not attached to the complaint. This is puzzling, given
Responder’s acquisition of TAI’s Project-related assets, and considering the length
and otherwise detailed nature of the complaint. McGee’s allegations about the
content of the teaming agreement are insufficient to demonstrate that the
agreement itself is illegal or fraudulent. Rather, with regard to IBM at least, it is
McGee’s allegations that incompetent contractors were hired, and poor work was
improperly compensated, which states a claim under the FCA. McGee, however,
does not allege that Chin, as opposed to WIT, was directly involved in the
fraudulent work and payments. McGee alleges that WIT knowingly engaged in a
bid-rigging scheme. But McGee does not allege that Chin had any knowledge of or
role in this scheme. The mere fact that Chin was WIT’s president and signed what
37
may have been a facially legal teaming agreement is not enough to allow the Court
to draw the inference that he knowingly agreed to participate in a bid-rigging
scheme.
McGee attempts to buttress his allegations against Chin by adding
allegations in his response to Chin’s motion to dismiss that are not contained in his
complaint. R. 99-1 at 37-38. In analyzing a Rule 12(b)(6) motion, the Court’s review
is limited to the complaint, and any attached documents. So the Court must
disregard “allegations” contained in McGee’s response briefs. McGee’s reliance on
Chin’s title with WIT and his signing of the teaming agreement are insufficient to
sustain an allegation that Chin violated the FCA.
The FCA conspiracy claims against Chin also fail. McGee fails to adequately
allege that Chin entered into an agreement for the purpose of violating subpart (A)
or (B) of 31 U.S.C. § 3729(a), as is required to allege a conspiracy under 31 U.S.C. §
3729(a)(1)(C).7 McGee’s sole allegation against Chin is that he signed the teaming
agreement. Because the Court has dismissed the substantive counts predicated on
this allegation, the Court also dismisses McGee’s conspiracy claim.
C.
IBM
IBM puts forth a number of reasons why McGee’s complaint fails to plead
fraud with particularity, as required by Rule 9(b). IBM asserts that it did not bid for
or participate in any way in Phase III of the Project. R. 58 at 13-14. IBM also
This argument applies equally to the corresponding provisions of the IFCA.
Kennedy, 512 F. Supp. 2d at 1163 n.2.
7
38
contends that because McGee was not involved in Phase II of the Project, McGee’s
allegations as to IBM’s fraudulent conduct with regard to Phase II are necessarily
based on hearsay, which is insufficient to satisfy the heightened pleading
requirements of 9(b). R. 58 at 13-14. IBM makes a similar argument with regard to
certain allegations in Phase I, as well as making the general argument that McGee
has failed to specifically allege IBM’s role in the alleged fraud. R. 58 at 14-15.
McGee argues that he has adequately pled IBM’s role in the fraudulent
scheme. R. 99-1 at 29-35. Specifically, McGee points to the allegations in his
complaint that IBM’s bid for Phase I contained knowingly false statements. R. 99-1
at 29. McGee contends that these allegations adequately plead a fraudulent
inducement FCA claim. R. 99-1 at 30-31. In addition, McGee refers to various
allegations in his complaint that specifically plead IBM’s submission of knowingly
false invoices. R. 99-1 at 31-32. According to McGee, these allegations satisfy the
heightened pleading standard of Rule 9(b).
As a preliminary matter, the Court disagrees with IBM’s assertions that an
FCA claim cannot be sufficiently pled on information and belief. IBM is correct that
the Seventh Circuit in Pirelli put forth a general rule that allegations based on
information and belief are insufficient to satisfy Rule 9(b). Pirelli Armstrong Tire
Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 442 (7th Cir. 2011).
IBM is also correct that a complaint need not explicitly say that it is filed on
information and belief to fall within this general rule. Id. However, there is an
exception to this general prohibition in cases where “(1) the facts constituting the
39
fraud are not accessible to the plaintiff and (2) the plaintiff provides the grounds for
his suspicions.” Id. at 443 (citing Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918,
924 (7th Cir. 1992)) (internal quotation marks omitted). This exception is designed
to balance the purpose of the heightened pleading requirements in cases of fraud,
preventing fishing expeditions and “privileged libel,” with the practical reality that
plaintiffs will likely have limited access to documentary evidence at the pleading
stage in a fraud case due to the inherent secretiveness of fraud. See Pirelli, 631 F.3d
at 441; Lusby, 570 F.3d at 853-54; see also Goldberg, 929 F. Supp. 2d at 817-18.
IBM urges the Court to conduct a paragraph-by-paragraph analysis of
McGee’s complaint to determine which allegations are properly substantiated and
which are not. That is not what is required of the Court when deciding a motion to
dismiss made pursuant to Rule 9(b). Rather, reading the complaint as a whole, and
drawing all reasonable inferences in favor of McGee, the Court must determine
whether McGee has sufficiently alleged at least one instance of a violation of
subparts (A), (B), and (C) of § 3729(a)(1).8 The Court acknowledges that all 198
paragraphs of McGee’s complaint may not contain relevant or properly
substantiated allegations. Nevertheless, the causes of action survive if McGee has
made allegations sufficient to allow the Court to draw the reasonable inference that
IBM violated the named provisions of the FCA. The Court finds that McGee has
done so, even under the more stringent pleading requirements of Rule 9(b).
This determination applies with equal force to the corresponding provisions of the
IFCA. Kennedy, 512 F. Supp. 2d at 1163 n.2.
8
40
With regard to the presentation of false claims under § 3729(a)(1)(A), McGee
alleges that IBM knowingly paid TAI for work that was not actually performed, and
then passed this cost along to the government. R. 1 ¶¶ 90-91. McGee references a
specific invoice number, the precise amount paid, the date on which it was paid, and
the description of the work that was to be encompassed by the invoice. R. 1 ¶ 90.
McGee adequately alleges that IBM knowingly paid a fraudulent bill as the invoice
itself was titled “Billing for services/Hardware/Software not provided.” Id.
(emphasis added). Despite Rule 9(b)’s heightened pleading requirements, plaintiffs
are still allowed to plead scienter generally. See Fed. R. Civ. P. 9(b); DiLeo v. Ernst
& Young, 901 F.2d 624, 627 (7th Cir. 1990). McGee alleges that IBM billed the
County for all of TAI’s charges. R. 1 ¶ 91. While McGee does not specifically allege
when IBM invoiced the County for reimbursement for this charge, that is precisely
the type of evidence that a relator is unlikely to have at the pleading stage of
litigation. It is reasonable to infer that IBM did in fact submit this invoice to the
County for reimbursement. TAI continued working on the Project, IBM paid TAI for
this work, and IBM submitted invoices for all of TAI’s work to the County. R. 1 ¶¶
90-91.
In addition, there are allegations that allow the Court to reasonably infer
that IBM knew that TAI was not adequately performing its subcontract work. A
2005 Incident Readiness Index Report showed that only 17 of 46 cars were
functioning. R. 1 ¶ 80. TAI revised the software 150 times, “but never succeeded in
deploying a functional platform.” R. 1 ¶ 81. The computer hard drives TAI installed
41
were only guaranteed to perform in temperatures greater than 41° Fahrenheit, but
TAI never installed a heating system to ensure such conditions. R. 1 ¶ 81. Based on
these allegations, McGee sufficiently alleges that IBM continued to accept TAI’s
work and pay TAI for its defective work, and then passed along those costs to the
County. R. 1 ¶¶ 88-89, 91. This adequately pleads a violation of § 3729(a)(1)(A).
Moreover,
McGee’s
allegations
that
IBM
knowingly
made
false
representations in its proposals and in its contracts adequately allege a fraudulent
inducement FCA claim under § 3729(a)(1)(B). R. 1 ¶¶ 72(c), 74. McGee cites the
specific language in both the proposal and the contract that it identifies as false. For
instance, McGee alleges that PSC submitted a bid to design a new mobile platform
for Phase II of the Project. R. 1 ¶ 111. McGee further alleges that IBM employee
Stiffler admitted to him that PSC “couldn’t get their building cameras to work,
never mind developing a mobile video platform that is functional.” R. 1 ¶ 112.
Nevertheless, IBM certified in its Phase II contract that each subcontractor was
“competent to perform [its] respective duties and obligations” and that “all services
that require the exercise of professional skills or judgment shall be accomplished by
professionals qualified and competent in the applicable discipline.” R. 1 ¶ 74. From
these allegations the Court can reasonably infer that IBM knew that PSC was not
qualified to perform the work designated to it by IBM’s contract, yet made
representations in the contract to the contrary. The Court can also reasonably infer
that the County relied on this representation in determining who to award the
42
Phase II contract to, and that as a result, it was falsely induced into awarding the
contract to IBM.
McGee has also sufficiently alleged IBM’s participation in a conspiracy to
violate the FCA. McGee has alleged that TAI installed nonfunctional mobile
platforms, that IBM accepted and approved this work, and that IBM paid for this
work, ultimately passing along those costs to the government. R. 1 ¶¶ 90-91. While
McGee has not alleged the specifics of the agreement between TAI and IBM, this is
the sort of information that would likely be unobtainable by McGee at the pleading
stage. Nevertheless, the allegations allow the Court to reasonably infer that IBM
and TAI had an agreement whereby IBM would accept TAI’s work, despite its
nonconformance with the contract specifications, and submit claims certifying the
correctness of this work to the government in order to receive repayment. The Court
can reasonably infer the existence of a conspiracy because there is no other
plausible reason why IBM would accept and pay for defective work, and then
submit claims to the government falsely certifying the adequacy of the work, were it
not to defraud the government in an effort to obtain payment and enrich both IBM
and TAI.
McGee’s allegations enable the Court to reasonably infer that IBM conspired
with PSC to violate the FCA. IBM was aware of PSC’s inability to perform the work
required by the Project prior to Phase II. R. 1 ¶¶ 111-112. Indeed, McGee alleges
that IBM manager O’Leary removed Stiffler from the Project because Stiffler was
taking work away from PSC due to PSC’s incompetence. R. 1 ¶ 77. And yet, IBM
43
awarded a Phase II subcontract to PSC for work that it knew PSC did not have the
expertise to perform. R. 1 ¶¶ 112, 115. From these allegations the Court can
reasonably infer that IBM and PSC conspired to violate the FCA. Again, there is no
plausible reason why IBM would subcontract with PSC were it not in furtherance of
a conspiracy to violate the FCA.
One of the primary purposes of Rule 9(b) is to provide notice to the adverse
party of the claims lodged against it. Vicom, Inc. v. Harbridge Merchant Servs., Inc.,
20 F.3d 771, 777 (7th Cir. 1994). McGee’s complaint, though lacking in some
respects, provides sufficient notice regarding the claims asserted against IBM to
allow them to answer. The Court finds that McGee has sufficiently alleged
violations of false claims, false records, and conspiracy provisions of the FCA and
the IFCA. As such, IBM’s motion to dismiss the complaint pursuant to Rule 9(b) is
denied.
44
Conclusion
For the foregoing reasons, IBM’s motion to dismiss, R. 58, is denied in its
entirety. JCI’s motion to dismiss, R. 62, is granted and all counts are dismissed as
to JCI without prejudice. Chin’s motion to dismiss, R. 66, is granted and all counts
are dismissed as to Chin without prejudice. Plaintiff is granted leave to amend its
complaint to rectify the deficiencies noted by the Court within 21 days of this Order.
IBM is ordered to complete its Rule 26(a)(1) disclosures in that same time frame.
ENTERED:
______________________________
Honorable Thomas M. Durkin
United States District Judge
Dated: February 26, 2015
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