Griffith et al v. Conn et al
Filing
206
MEMORANDUM OPINION & ORDER, (1) The relators motion for leave to file a Third Amended Complaint, R. 190 , is GRANTED. (2) Clerk shall docket the Proposed Third Amended Complaint, R. 190 , as the relators Third Amended Complaint. (3) The Counts that the Court has already dismissed in its previous orderCounts 2, 3, 4, 5, 6 and all parts of Count 1 except those allegations related to Conns statements on Forms 1560 and 1696 regarding his resignation from the Veterans Court, see R. 176 at 42 are DISMISSED WITHOUT PREJUDICE. Signed by Judge Amul R. Thapar on 12/11/2015.(MJY)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
PIKEVILLE
UNITED STATES OF AMERICA, ex rel.
JENNIFER L. GRIFFITH and SARAH
CARVER,
Plaintiffs,
v.
ERIC C. CONN, et al.,
Defendants.
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Civil No. 11-157-ART
MEMORANDUM OPINION
AND ORDER
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In baseball, three strikes means you are out. In law, that is not always true, and the
plaintiffs certainly hope that it will not be true in this instance. Thus, they have filed a
motion to amend their complaint for the third time. For the reasons below, that motion is
granted.
(I)
Background
As the Court’s previous opinions include a full recitation of the facts, a summary here
suffices. See R. 153 at 2–5; R. 176 at 1–3. Relators Jennifer Griffith and Sarah Carver
allege that Social Security lawyer Eric Conn conspired with Administrative Law Judge
(“ALJ”) David Daugherty to manipulate the assignment of disability cases and grant
disability benefits to undeserving claimants. As part of their scheme, Conn would notify
Daugherty when his clients filed claims, R. 63 ¶¶ 52–54, and Daugherty would then assign
himself those cases, id. ¶¶ 62, 64. The relators list several examples of cases that Daugherty
allegedly misappropriated.
See id. ¶¶ 70, 71.
Daugherty would then conduct “sham
proceedings” or in some cases simply grant benefits without a hearing. Id. ¶¶ 73–83. After
his clients received benefits, Conn submitted Forms 1560 and 1696 to the Social Security
Administration (“SSA”) to receive his fees for his representation. Id. ¶ 72. Griffith and
Carver also allege that doctors David P. Herr, Bradley Adkins, and Srinivas Ammisetty
worked with Conn to create false medical records to support the disability claims. Id. ¶¶
103–05.
On October 11, 2011, Griffith and Carver filed a complaint under the False Claims
Act (“FCA”). R. 1; R. 2. The complaint was unsealed on February 19, 2013. R. 18. On
December 6, 2013, the relators filed a second amended complaint. R. 63. That complaint
contains eight counts, and those counts broadly fall into two categories of alleged FCA
liability: (1) Conn’s clients’ applications for Social Security benefits, which Daugherty
granted, were false or fraudulent, and (2) Conn’s requests for representative fees in those
matters were also false or fraudulent. Id. ¶¶ 138–42, 148–64.
Conn and the other defendants (taken together as “Conn”) first filed a motion to
dismiss for lack of subject-matter jurisdiction under the public-disclosure bar, arguing that
the relators did not voluntarily provide information to the government before filing suit as
required by the FCA. See, e.g., R. 137-1. The Court held that, for claims before March 23,
2010, the public-disclosure bar precluded only Carver’s claims because her disclosures while
an employee of the SSA were compelled by the agency’s employment policies. R. 153 at
12–15. Griffith’s claims could proceed, the Court held, because she voluntarily provided the
information after she resigned from the SSA. R. 153 at 16–20.
Conn then filed a motion to dismiss the second amended complaint, arguing that the
Court should dismiss for lack of subject-matter jurisdiction under the public-disclosure bar,
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and that the Court should dismiss for failure to state a claim under Rule 12(b)(6). R. 146;
R. 156; R. 158; R. 160; R. 162. The Court denied that motion to the extent that it was based
on public-disclosure grounds. See R. 176. The Court granted the motion in part, however,
on 12(b)(6) grounds. Id. The relators had failed to allege fraud with particularity, the Court
held, and thus most of their claims had to be dismissed. There were only two exceptions: the
allegations in Count 1 of the second amended complaint relating to Conn’s statements on
Forms 1560 and 1696 regarding his resignation from the Veterans Court; and the relators’
conspiracy claim in Count 7. See R. 176 at 42. The Court dismissed all the other claims in
the second amended complaint—Counts 2, 3, 4, 5, 6, 8 and part of Count 1—but did so
without prejudice. Id. The relators have now filed a motion asking the Court for leave to file
a Third Amended Complaint. R. 190.
(II)
Analysis
Under Rule 15, the Court “should freely give leave [to amend] when justice so
requires.” Fed. R. Civ. P. 15(a)(2). That said, the Court may deny leave to amend if the
amendment would cause “undue delay,” “undue prejudice to the defendants,” or if the
amendment would be “futile.” Riverview Health Inst. LLC v. Med. Mut. of Ohio, 601 F.3d
505, 520 (6th Cir. 2010). In the Third Amended Complaint, the relators seek to do three
things. First, they wish to replead the claims that the Court has already dismissed. See
R. 190-2 at 1–73. Second, they wish to add Counts VIII and IX, both of which allege that
Conn violated the FCA with respect to his requests for representation fees. See R. 190-2 at
74–77. Third, they wish to add Count X, which alleges that Conn bribed an ALJ. See
R. 190-2 at 78–79.
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a. Whether Conn would be prejudiced by allowing the relators to replead
counts that the Court has already dismissed.
Conn first argues that he will be prejudiced if the Court allows the relators file a Third
Amended Complaint.
Specifically, Conn points out that “all but one of the Counts
previously dismissed by the Court have been re-inserted into the Third Amended
Complaint.” R. 195 at 4. As a result, Conn says, he will again have to “devote time and
resources to demonstrating why those Counts cannot pass muster under the applicable rules.”
Id. Thus, Conn argues, allowing the relators to amend the complaint would prejudice him.
In response, the relators say that the proposed Complaint “repleads counts the Court has
dismissed not in order to revive them, as Conn asserts, but to preserve them for possible
appeal.” R. 199 at 2.
The relators are mistaken: they do not need to replead those counts to preserve them
for appeal—the Court’s previous dismissal preserved those counts for appeal. See Hayward
v. Cleveland Clinic Found., 759 F.3d 601, 618 (6th Cir. 2014).1 Nevertheless, in the event
that the relators do appeal, it will be helpful for the Court of Appeals to have the dismissed
counts and the retained counts together in a single document. Thus, there is some value in
allowing the relators to include the already dismissed counts in their amended complaint.
The relators argue that Clark v. Johnston undermines this rule. See Clark v. Johnson, 413
F. App’x 804, 811–12 (6th Cir. 2011). Specifically, they argue that, according to Clark, a
party must replead previously dismissed counts in a complaint to preserve those counts for
appeal. In Clark, the plaintiff “did not clearly indicate that he intended his amended pleading
to supplement, rather than supersede, his original pleading.” Thus, the circuit held, “it was
appropriate for the district court to rely solely on the amended pleading in making its
rulings.” Clark v. Johnston, 413 F. App’x 804, 812 (6th Cir. 2011). As far as the Court can
tell, however, that case did not involve the situation at issue here, where the Court previously
dismissed several counts in a complaint, and the plaintiffs then attempted to cure the defects
by filing an amended complaint. Clark is therefore distinguishable on its facts, and the usual
rule—the one described in Hayward—seems to apply.
1
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The solution seems to be as follows: The Court will allow the relators to include the
dismissed counts in the Third Amended Complaint. But the Court will then dismiss those
counts sua sponte at the end of this Order (for the same reasons previously given) since the
relators admit they have not changed those counts. In this way, the relators will not be
forbidden from amending their complaint simply because they included the dismissed counts.
And Conn will not have to do anything in response. Hence he will not be prejudiced.
b. Whether the Third Amended complaint will cause undue delay.
Second, Conn argues that the Third Amended Complaint will cause undue delay. In
support of that argument, he points out that “the parties have [already] entered into discovery
on the allegations remaining in the Second Amended Complaint,” that “discovery cannot
proceed with the Second Amended Complaint if the Counts [at] issue have not been
determined,” and that the information contained in the new counts “has been readily
available to [the] [r]elators for months.” R. 195 at 3–4.
Although it is true that discovery began in early September, the relators contend that
very little discovery has been taken thus far. The parties seemed to confirm that this was true
during the conference call on October 30 of this year, when both parties agreed that a
privilege ruling would be necessary before much discovery could be completed. 2 See R. 197
at 2 (minute entry order); R. 202 (motion in limine). Given that little discovery has occurred
thus far, allowing the relators to file a Third Amended Complaint would not cause “undue
delay.”
2
The Court has not yet ruled on the motion in limine, R. 202. The relators recently filed a response, R. 204, and the
Court is still awaiting Conn’s reply.
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c. Whether it would be “futile” for the relators to amend their complaint to
include Counts VIII and IX.
Third, Conn argues that it would be futile for the relators to amend their complaint to
include “Count VIII—Submission of false claims for fees” and “Count IX—Use of false
records for fees.” R. 190-2 at 74; id. at 76. An amendment is “futile” if “the proposed
amendment would not permit the complaint to survive a motion to dismiss.” Miller v.
Calhoun Cnty., 408 F.3d 803, 817 (6th Cir. 2005); Rose v. Hartford Underwriters Ins. Co.,
203 F.3d 417, 420 (6th Cir. 2000). “If a proposed amendment is not clearly futile,” however,
then the court should allow the amendment. Wright & Miller, 6 Fed. Prac. & Proc. Civ.
§ 1487 (3d ed.) (emphasis added). The proper vehicle to address an amendment that is
subject to dismissal—but not clearly so—is a standalone motion to dismiss, rather than a
motion for leave to amend a complaint. See id.
Conn argues that it would be clearly “futile” to allow the relators to amend their
complaint to include Counts VIII and IX because, in his view, the relators have not pled
fraud in those counts with sufficient particularity. Under Rule 9, a party “alleging fraud or
mistake . . . must state with particularity the circumstances constituting fraud or mistake.”
Fed. R. Civ. P. 9(b). In the context of the False Claims Act, that means a plaintiff must
allege four things: first, “the time, place and content of the alleged misrepresentation”;
second, “the fraudulent scheme”; third, the “defendant’s fraudulent intent”; and, finally, “the
resulting injury.” Chesbrough v. VPA, P.C., 655 F.3d 461, 467 (6th Cir. 2011). The plaintiff
must also “identify with specificity characteristic examples that are illustrative of the class of
all claims covered by the fraudulent scheme.” Id. at 470 (internal quotation marks omitted).
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The relators’ amended complaint alleges that, “between January 2007 and May
2011,” Conn submitted claims that were “false or fraudulent” because they included “bogus
RFC forms.” R. 190-2 at 48–50. The forms were “bogus,” the complaint goes on to say,
because “they were selected randomly (or by rotation) and, therefore, their diagnostic
information bore no relationship to the actual medical or psychological condition of the
clients.” Id. at 49. The complaint therefore alleges “the time, place and content of the
alleged misrepresentation” and adequately describes “the fraudulent scheme.” Chesbrough,
655 F.3d at 467. Conn does not dispute whether the relators have properly alleged “the
defendant’s fraudulent intent” or “resulting injury.” Id. And the complaint details two
“characteristic examples”—namely “Mrs. A” and “Mr. B”—whose cases “illustrat[e] the
class of all claims covered by the fraudulent scheme.” Id.; R. 190-2. As for Mrs. A, the
complaint says that Conn “submitted a bogus RFC form [on her behalf] but withheld her
actual medical records from [the] SSA.” R. 190-2 at 49–50. As for Mr. B, the complaint
says that Conn “submitted a bogus RFC to [the] SSA in his case.” Id. at 50. Thus, it seems
that the relators have alleged fraud with the particularity that Rule 9(b) requires.
Conn responds in four ways. First, he contends that the fraud allegations are not
specific enough. According to Conn, the relators “never explain how or why the RFC
form[s]” were “bogus.” R. 195 at 5. Nor do the relators explain, Conn goes on to say, “how
the alleged failure to turn over any medical records to the SSA could be considered a
violation of the False Claims Act.” Id. at 5–6. But the relators do explain how why the RFC
forms were “bogus.” They were “bogus,” the proposed Complaint alleges, because the
“diagnostic information [contained therein] bore no relationship to the actual medical or
psychological condition of the clients.” R. 190-2 at 49. And the “alleged failure to turn over
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any medical records” is simply not the fraud that the proposed Complaint alleges. Rather,
the alleged fraud is that Conn turned over fraudulent records in lieu of the genuine ones.
Thus, it is no surprise that the proposed Complaint nowhere explains why a mere failure to
turn over the medical records would be fraud: the proposed Complaint never says that it
would, in fact, be fraudulent to do so. In sum, Conn is raising the bar a bit too high here; he
demands more specificity than Rule 9(b) requires at the pleading stage. And he misstates the
nature of the fraud that the relators allege. As for the fraud that the relators do in fact allege,
they have pleaded fraud specifically enough.
Second, Conn quibbles with the factual basis underlying the fraud allegations. He
says that the relators have mischaracterized the notice that the SSA provided to the
claimants. In the proposed Complaint, the relators allege that “[t]he Agency notified Mrs. A
in 2015 that it had set her claim for redetermination for reasons of fraud after setting aside
Conn’s template form and determining that the remaining record evidence was insufficient to
establish her eligibility.” R. 190-2 at 5. Conn says that statement is untrue. In Conn’s view,
“[t]hat notice does not actually state that fraud was determined to have occurred in any of the
claimant’s cases. Instead it states: ‘[t]here was reason to believe fraud was involved in
certain cases[.]’” R. 195 at 6.
Conn further points out that many of the claimants have
argued in related cases that their claims were not fraudulent ones. See id. (“When the 1,787
claimants themselves have represented to this Court that there are no details of fraud
involving Conn, it is difficult to see how [r]elators can make a contrary argument in this
case.”). But that fact-based quibbling misunderstands the question before the Court, which is
only whether the relators have alleged fraud in their complaint with sufficient particularity.
If Conn wishes to dispute the facts that support that fraud claim, then he may file a motion
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for summary judgment. At this stage, however, the Court must take as true the allegations in
the amended complaint. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Third, Conn argues that the public-disclosure bar applies to these counts. Conn points
out that “the RFC forms allegedly at issue were submitted in 2009.” R. 195 at 10. Thus, he
argues, “the conduct complained of occurred before March 23, 2010,” which in his view
means that “the pre-[Affordable Care Act] public-disclosure bar applies to those claims.” Id.
But there is an exception to the usual public-disclosure bar. Indeed, as Conn himself admits,
a relator can bring a claim notwithstanding the bar if she is an “original source.” R. 195 at
11 (citing 31 U.S.C. § 3730(e)(4)(B)). The Court has already explained that, since Griffith
has “direct and independent knowledge of a substantial or essential portion of the underlying
fraud scheme,” she is an “original source” for these purposes. R. 176 at 12.
Indeed, Griffith’s contribution to the complaint is substantial. She had information
about how the scheme worked, including how Daugherty manipulated the SSA’s computer
system to take Conn’s cases from other ALJs and, in other situations, took the paper files of
Conn’s cases. R. 176 at 14 (citing R. 63 ¶¶ 64, 69). She has direct and independent
knowledge of Conn’s submission of fees forms, and she was employed through the final
disposition of each case. Id. (citing R. 63 ¶ 70). That Griffith does not have independent
knowledge of each instance of fraud is—as the Court has likewise explained—irrelevant to
whether she is an original source and hence to whether the public-disclosure bar applies here.
See id.; see also 31 U.S.C. § 3730(e)(4)(B); Rockwell Int'l Corp. v. United States, 549 U.S.
457, 472 (2007).
Fourth, Conn argues that these claims do not in fact allege a violation of the False
Claims Act. Specifically, Conn points out that “[r]epresentative fees in [social-security] and
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[disability] cases are paid from claimants’ past-due benefits.” R. 195 at 12. “Once an order
is entered awarding benefits,” Conn says, “legal ownership of those funds goes to the
claimants,” who then pay fees to their legal representatives. Id. Thus, Conn argues, the fees
at issue are not “government” funds and hence a person does not violate the False Claims Act
by falsely obtaining such fees. Id. As a result, Conn concludes, a plaintiff cannot state a
claim under the False Claims Act by asserting only that a defendant’s lawyer falsely obtained
representative fees. Hence it would be futile, in his view, to allow the relators to amend their
complaint to include Counts VIII and IX.
That is indeed a creative argument, and it might well prove to be a valid one. But a
court should forbid a plaintiff to amend a complaint—on futility grounds, at least—only if
the amendment is “clearly” futile. Thompson v. Poindexter, 798 F.2d 471, 1986 WL 17207,
at *1 (6th Cir. 1986); see also Wright & Miller, 6 Fed. Prac. & Proc. Civ. § 1487 (3d ed.) (“If
a proposed amendment is not clearly futile, then denial of leave to amend is improper.”).
Here, Conn has never before argued that the fees at issue are not “government” funds. And
he certainly had the opportunity to do so. After all, several of the counts in the Second
Amended Complaint alleged fraud-by-fee-seeking. See R. 63 (Second amended complaint);
R. 176 (discussing these counts when evaluating Conn’s motion to dismiss them). If it was
so “clear” that those counts did not state a claim under the FCA, one might ask, then why did
Conn not make that argument before? The Court therefore disagrees with Conn that it would
be “clearly futile” to allow the relators to include Counts VIII and IX.
That said, Conn is of course free to argue later—in a motion to dismiss, perhaps—that
the relators’ fraud-by-fee-seeking allegations do not state a valid claim under the False
Claims Act. But the Court would prefer to tackle that argument later and head-on (with full
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briefing by both sides) rather than slapping at it sideways now while addressing a motion for
leave to file an amended complaint. The relators therefore may amend their complaint to
include Counts VIII and IX.
d. Whether it would be futile to allow the relators to amend their complaint to
include Count X.
Finally, Conn argues that it would be futile to allow the relators to amend their
complaint to include “Count X—Submission of false claim—Bribery of an ALJ.” In this
count, the relators allege that Conn violated the False Claims Act by “knowingly present[ing]
or caus[ing] to be presented, false or fraudulent claims for representative fees for payment or
approval[.]” R. 190-2 at 78 (citing 31 U.S.C. § 3729(a)(1)(A)). Specifically, the relators say
that the claims for fees were false or fraudulent because Conn “paid bribes or kickbacks to
Daugherty,” thus violating a Social Security regulation that forbids such conduct. R. 190-2
at 78 (citing 20 C.F.R. §§ 404.1740(c)(6), 416.1540(c)(6)). The relators further allege that,
“[h]ad responsible officials of the SSA known the truth (i.e., that Conn had bribed Daugherty
as a component in the scheme to defraud the [a]gency), they would have disapproved the
claims.” R. 190-2 at 79.
Conn argues that it would be futile to allow the relators to include this Count.
Specifically, he argues that the complaint lacks the “information supporting this Count” and
“accordingly cannot meet the heightened pleading standard required by Rule 9(b).” R. 195
at 12.
That is not true.
Count X incorporates by reference many of the preceding
paragraphs, including paragraphs 114–15. R. 190-2 at 75. There, the relators allege that
“Conn made substantial monthly cash withdrawals” and then “periodically made cash
payments to Daugherty [an ALJ], who caused the money to be deposited in bank accounts
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controlled by himself, his wife, and his daughter.” R. 190-2 ¶¶ 114–15. It is hard to imagine
how the relators could have pled with greater specificity the claim of “Bribery of an ALJ.”
Conn also argues that the relators “do not purport to have any additional information
supporting this Count and accordingly cannot meet the heightened pleading standards
required by Rule 9(b).” At the pleading stage, however, the plaintiff need not come forward
with evidence or other “information” supporting a claim; instead the Court must accept the
facts alleged in the complaint as true. See generally Iqbal, 556 U.S. at 678. If it turns out
that the relators truly lack any evidence to back up their allegations, then Conn may file a
motion for summary judgment at the appropriate time. As it stands, though, the relators have
at least alleged the facts underlying this count with the particularity that Rule 9(b) requires.
Hence it would not be “futile” for them to amend their complaint to include Count X.
Accordingly, it is ORDERED as follows:
(1)
The relators’ motion for leave to file a Third Amended Complaint, R. 190, is
GRANTED.
(2)
The Clerk of the Court shall docket the Proposed Third Amended Complaint,
R. 190-2, as the relators’ Third Amended Complaint.
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(3)
The Counts that the Court has already dismissed in its previous order—Counts
2, 3, 4, 5, 6 and all parts of Count 1 except those allegations related to Conn’s
statements on Forms 1560 and 1696 regarding his resignation from the
Veterans Court, see R. 176 at 42—are DISMISSED WITHOUT
PREJUDICE.
This the 11th day of December, 2015.
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