United States of America, ex rel. Joseph M Hedley and Fred A. Rauch, III v. ABHE & Svoboda, Inc.
Filing
102
MEMORANDUM OPINION; directing Clerk in footnote to re-caption case as "United States of America, ex rel. Joesph M. Hedley and Fred A. Ranch, III". Signed by Judge Richard D. Bennett on 7/29/2016. (dass, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
UNITED STATES OF AMERICA, ex rel. *
JOSEPH M. HEDLEY and FRED A.
RAUCH, III,
*
Plaintiffs,
*
v.
*
ABHE & SVOBODA, INC.,
*
Defendant.
*
*
*
Civil Action No. RDB-14-2935
*
*
*
*
*
*
*
*
*
*
*
MEMORANDUM OPINION
This False Claims Act action was initially filed by Relators Joseph M. Hedley and
Fred A. Rauch, III (“Relators”)1 against Defendant ABHE & Svoboda, Inc. (“Defendant” or
“ASI”) in the United States District Court for the Southern District of Illinois. At the time
of the initial filing, the Relators acted on behalf of the United States of America. The United
States was the original plaintiff in this action, but withdrew its intervention on January 21,
2014. See Order, ECF No. 52. Relators Hedley and Rauch allege that ASI orchestrated a
fraudulent scheme whereby it falsely represented the use of a Disadvantaged Business
Enterprise (“DBE”) subcontractor in order to receive payments under a government
contract. Specifically, Relators allege violations of the False Claims Act, 31 U.S.C. §§ 3729, et
seq. (the “FCA”).2
1 Although this action previously named Hedley and Rauch as plaintiffs, the Clerk of the Court is now
directed to re-caption this action as “United States of America, ex rel. Joseph M. Hedley and Fred A. Rauch,
III.”
2 Relators originally asserted violations of the False Claims Act and various state law claims. See First
Amended Compl., ECF No. 19.
1
After the United States District Court for the Southern District of Illinois transferred
the action to this Court pursuant to 28 U.S.C. § 1404(a), ASI filed a Renewed Motion to
Dismiss (ECF No. 76).3 On July 31, 2015, this Court issued a Memorandum Opinion (ECF
No. 84) and Order (ECF No. 85) granting ASI’s Motion to Dismiss, dismissing Counts I-III
without prejudice, and dismissing Counts IV, V, and VII with prejudice. Relators
subsequently filed a Motion to Alter or Amend Judgment and for Leave to File Amended
Complaint (ECF No. 87), which this Court granted in part and denied in part. See Mem.
Order, ECF No. 92. Of relevance to the pending Motion, this Court found that Relators’
Second Amended Complaint satisfied the “liberal rule” of Rule 15(a) of the Federal Rules of
Civil Procedure. However, as this Court merely dismissed Relators’ claims in its earlier
ruling, no judgment existed that this Court could alter or amend under Rule 59(e) of the
Federal Rules of Civil Procedure.
Presently pending is Defendant ASI’s Motion to Dismiss Relators’ Second Amended
Complaint (ECF No. 97). The parties’ submissions have been reviewed and no hearing is
necessary. See Local Rule 105.6 (D. Md. 2014). For the reasons that follow, Defendant ASI’s
Motion to Dismiss Relators’ Second Amended Complaint (ECF No. 97) is DENIED. In
sum, the Second Amended Complaint sufficiently alleges, with the requisite specificity of
Federal Rule of Civil Procedure 9(b), that ASI knowingly submitted false claims for payment
to the government, in violation of the False Claims Act.
BACKGROUND
Prior to the transfer to this Court, ASI had filed a Motion to Dismiss (ECF No. 33). The district court held
a hearing on ASI’s Motion to Dismiss on July 7, 2014 (ECF No. 62). That court dismissed with prejudice the
unjust enrichment claim (Count VI), and transferred the action to this Court. See Minute Entry, ECF No. 62;
Order, ECF No. 63.
3
2
This Court accepts as true the facts alleged in a plaintiff’s complaint. See Aziz v.
Alcolac, Inc., 658 F.3d 388, 390 (4th Cir. 2011). The present action arises from a contract
between Defendant ASI and the Maryland State Highway Administration (“MSHA”) for the
cleaning and repainting of the Severn River Bridge4 (the “Contract”). See Second Amended
Compl. ¶¶ 19-20, 44, ECF No. 93. Relators Joseph Hedley and Fred Rauch were, at all times
relevant to this action, officers of Brighton Painting Company (“Brighton”), a participant in
the alleged scheme.
On April 25, 2006, MSHA invited the submission of bids to clean and repaint the
Severn River Bridge. Id. ¶ 20. As a recipient of Department of Transportation (“DOT”)
funding, MSHA was “require[d] . . . establish annual statewide [Disadvantaged Business
Enterprise (“DBE”)] participation goals[.]” Id. ¶¶ 11.5 MSHA thus was obligated to “award
the contract [for a project] only to a bidder or offeror who meets or makes good faith efforts
to meet the [DBE] contract goal.” Id. ¶ 13 (citing 49 C.F.R. 26.53). MSHA was then
“required to implement appropriate mechanisms to ensure compliance with regulatory
requirements by all program participants, including DBEs and prime contractors.” Id. (citing
49 C.F.R. 26.37). To count towards the DBE participation goal in a contract, the DBE must
perform a “commercially useful function on the contract.” Id. ¶ 15 (citing 49 C.F.R. 26.55).
Relators allege that “[f]ailure by a contractor to carry out the requirements of 49 CFR part
26,” including the DBE conditions, “is a material breach of the contract.” Id. ¶ 16 (citing 49
C.F.R. § 26.13(b)).
The Severn River Bridge is officially named the “Pearl Harbor Memorial Bridge.” Id. ¶ 19.
As set forth in the Second Amended Complaint, the DBE program aims to help[] small businesses owned
and controlled by socially and economically disadvantaged individuals, including minorities and women, to
fairly compete for contracting opportunities created by DOT financial assistance programs.” Id. ¶ 10.
4
5
3
The Severn River Bridge project stipulated that a prospective contract must include,
inter alia, a “fifteen percent (15%) DBE . . . participation goal[,]” under which “the low
bidder would be required to submit an acceptable Affirmative Action Plan (“AAP”) within
ten days.” Id. ¶¶ 22-23. The proposal guidelines, however, warned that “[t]he Contract will
not be awarded without the Bidder’s AAP being approved by the [MSHA].” Id. ¶ 23. At a
minimum, the “Contract . . . [must] include . . . a ‘Schedule of Participation of DBE/MBE’6 .
. . and a ‘DBE/MBE Disclosure and Participation Certificate[.]’” Id. ¶ 24.
ASI submitted a bid proposal to MSHA stating that it intended to achieve MSHA’s
required fifteen percent DBE participation goal by employing Northeast Work and Safety
Boats, LLC (“NWSB”), a certified DBE contractor, as a subcontractor. Id. ¶¶ 27-28; see also
id. ¶¶ 33-35 (ASI Schedule of Participation). Under this “fraudulent scheme,” ASI agreed to
pay NWSB eight percent of the funds ASI received as payment with the understanding that
“NWSB would not actually perform any commercially useful function on the Project or
under the Contract.” Id. ¶ 28. ASI then contracted with Brighton to provide the services
purportedly rendered by NWSB. Id. ¶ 31.
As the lowest bidder, ASI was ordered to submit its Affirmative Action Plan to detail
the specifics of its intended compliance with the DBE provisions. Id. ¶¶ 36-37. ASI
submitted the requested document, allegedly certifying that NWSB would “perform
$1,569,200.00 worth of work as a subcontractor on the Contract, or 15.12% of the total
Contract price.” Id. ¶ 38. ASI’s DBE/MBE Disclosure and Participation Certificate allegedly
On the Schedule of Participation, MSHA expressly stated that “FAILURE TO COMPLETE THIS FORM
MAY BE GROUNDS FOR THE BID TO BE DECLARED NON-RESPONSIVE.” Id. ¶ 33 (emphasis in
original).
6
4
reiterated ASI’s intentions with respect to NWSB. Id. ¶ 40. Relators allege that both
documents were false, as ASI knew both that Brighton, and not NWSB, would perform the
work at issue under the Contract. Id. ¶¶ 42-43. Relators allege that, as payment under the
Contract was supplied by federal funding from the DOT, MSHA could not obtain the DOT
funds without ASI’s bid proposal and related Affirmative Action Plan. Id. ¶ 45; see also id. ¶
11. ASI’s representations of DBE compliance thus allegedly caused federal funds to be paid,
via MSHA. Id. ¶ 45.
On the basis of ASI’s representations, MSHA awarded the Contract to ASI on July
21, 2006. Id. ¶ 44. ASI then commenced work on the Severn River Bridge. Id. ¶ 47. Under
the DBE program, MSHA was tasked with ensuring ASI’s compliance by close monitoring
of its progress under the Contract and, if necessary, withholding progress payments or
terminating the contract for non-compliance. Id. ¶¶ 48, 52-53. The prescribed monitoring
included review of ASI’s payroll records. Id. In furtherance of the alleged scheme, ASI
allegedly submitted false employee payrolls of fictitious NWSB employees, detailing the
compensation and benefits provided to NWSB employees under the Contract. Id. ¶¶ 54-55.
These fictitious NWSB employees were, in reality, employees of Brighton. Id. ¶ 55. Relators
allege that ASI knew the records were false. Id. ¶ 58. MSHA, on the basis of the false payroll
records, represented to DOT that ASI had thus far satisfied the DBE requirements. Id. ¶ 59.
This alleged certification thus caused the payment of federal funds to MSHA, which
forwarded the funds to ASI. Id.
Relators also allege that ASI knowingly submitted false quarterly DBE participation
reports to MSHA, describing the DBE-related funds going to NWSB for multiple periods.
5
Id. ¶¶ 62, 72. Like the submission of payroll records, the quarterly DBE participation reports
were necessary to payment under the Contract. Id. ¶¶ 62-66. After ASI initially failed to
submit the requisite reports, MSHA sent a series of letters demanding the reports and
warning that ASI’s non-compliance could result in the suspension of progress payments. Id.
¶¶ 66-71. ASI subsequently created false reports about the supposed NWSB employees
working on the project. Id. ¶¶ 72, 74. The employees described, however, were employees of
Brighton, and not NWSB. Id. ¶ 74. Once again, ASI knew the reports were false. Id. ¶ 74; see
also id. ¶ 76 (detailing the submitted reports). MSHA approved the final payment to ASI
“based on the DBE participation quarterly reports and their supporting documentation” on
December 31, 2008. Id. ¶ 78.
Finally, Relators allege that ASI submitted twenty false Contractor’s Progress
Estimates to MSHA. Id. ¶¶ 80-81. Under the Contract, these reports were necessary to ASI’s
continued receipt of progress payments while perpetuating the fraudulent scheme. Id. The
reports represented that ASI had paid NWSB for its purported work as subcontractor. Id. ¶
88. As ASI had not made the stipulated payments to NWSB for the work described in the
Contract, ASI knew that the reports were false. Id. ¶¶ 88-89. Believing that ASI had
complied with the terms of the Contract, MSHA submitted claims for payment to the DOT.
Id. ¶ 91. The requested federal funds were then paid to ASI. Id.
ASI completed its cleaning and repainting of the Severn River Bridge on July 17,
2008. Id. ¶ 92. To receive final payment under the Contract, ASI certified that it had
complied with all terms including, inter alia, the use of the agreed-upon subcontractors. Id. ¶
97. ASI’s certification was premised on false statements, as ASI had not used the services of
6
NWSB. Id. ¶ 98.
In the subject action, Relators assert three claims against ASI under the False Claims
Act, 31 U.S.C. §§ 3729(a)(1)-(3). 7 After contesting Relators’ submission of the Second
Amended Complaint (ECF No. 88), ASI now moves to dismiss all counts pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure. Def.’s Mot. to Dismiss Relators’ Second
Amended Compl., ECF No. 97.
STANDARDS OF REVIEW
A. Rule 12(b)(6) of the Federal Rules of Civil Procedure
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must contain
a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.
R. Civ. P 8(a)(2). Rule 12(b)(6) of the Federal Rules of Civil Procedure authorizes the
dismissal of a complaint if it fails to state a claim upon which relief can be granted. The
This Court notes that the statutory citations of Counts I-III refer to the 1986 version of the False Claims
Act. The Fraud Enforcement Recovery Act of 2009 (“FERA”), Pub. L. No. 111-21, § 386, 123 Stat. 1617
(2009), amended certain sections of the False Claims Act, including the sections at issue in this case. Under
the amendments of FERA, Count I, § 3729(a)(1), is found at § 3729(a)(1)(A), Count II, § 3729(a)(2), at §
3729(a)(1)(B), and Count III, § 3729(a)(3), at § 3729(a)(1)(C). FERA became law on May 20, 2009, and
contains a retroactivity provision that states:
7
The amendments made by this section shall take effect on the date of
enactment of this Act and shall apply to conduct on or after the date of
enactment, except that (1) subparagraph (B) of section 3729(a)(1) of title 31,
United States Code, as added by subsection (a)(1), shall take effect as if
enacted on June 7, 2008, and apply to all claims under the False Claims Act
(31 U.S.C. 3729 et seq.) that are pending on or after that date.
FERA § 4(f), 123 Stat. 1625. Relators filed their Complaint on April 25, 2011, but the conduct complained of
spans the time period April 25, 2006 through December 5, 2008. See generally Second Amended Compl. For
purposes of the pending Motion to Dismiss, this Court need not determine whether the pre- or post-FERA
versions of § 3729 apply. First, this Court can discern no material difference between the earlier or postFERA versions of §§ 3729(a)(1)-(3) as the statute applies to this case. See United States ex rel. Bennett v. Medtronic,
Inc., 747 F. Supp. 2d 745, 764 n.17 (S.D. Tex. 2010) (describing the differences between pre- and post-FERA
versions of § 3729). Second, Relators allege that ASI submitted false claims after June 7, 2008. Second
Amended Compl. ¶¶ 91-96. Accordingly, this Court will not differentiate between the pre- and post-FERA
versions of the False Claims Act at this time.
7
purpose of Rule 12(b)(6) is “to test the sufficiency of a complaint and not to resolve contests
surrounding the facts, the merits of a claim, or the applicability of defenses.” Presley v. City of
Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006).
The Supreme Court’s recent opinions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544
(2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), “require that complaints in civil actions be
alleged with greater specificity than previously was required.” Walters v. McMahen, 684 F.3d
435, 439 (4th Cir. 2012) (citation omitted). In Twombly, the Supreme Court articulated “[t]wo
working principles” that courts must employ when ruling on Rule 12(b)(6) motions to
dismiss. Iqbal, 556 U.S. at 678. First, while a court must accept as true all the factual
allegations contained in the complaint, legal conclusions drawn from those facts are not
afforded such deference. Id. (stating that “[t]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice” to plead a claim); see also
Wag More Dogs, LLC v. Cozart, 680 F.3d 359, 365 (4th Cir. 2012) (“Although we are
constrained to take the facts in the light most favorable to the plaintiff, we need not accept
legal conclusions couched as facts or unwarranted inferences, unreasonable conclusions, or
arguments.” (internal quotation marks omitted)).
Second, a complaint must be dismissed if it does not allege “a plausible claim for
relief.” Iqbal, 556 U.S. at 679. Although a “plaintiff need not plead the evidentiary standard
for proving” her claim, she may no longer rely on the mere possibility that she could later
establish her claim. McCleary-Evans v. Maryland Department of Transportation, State Highway
Administration, 780 F.3d 582, 586 (4th Cir. 2015) (emphasis omitted) (discussing Swierkiewicz
v. Sorema N.A., 534 U.S. 506 (2002) in light of Twombly and Iqbal). Under the plausibility
8
standard, a complaint must contain “more than labels and conclusions” or a “formulaic
recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555.
B. Rule 9(b) of the Federal Rules of Civil Procedure
A false claim allegation is an averment of fraud. Harrison v. Westinghouse Savannah River
Co., 176 F.3d 776, 783-84 (4th Cir. 1999) (“Harrison I”). A complaint alleging false claims
thus must comply with the heightened standard of Federal Rule of Civil Procedure 9(b),
which requires a pleader to “state with particularity circumstances constituting fraud or
mistake.” Fed. R. Civ. P. 9(b).8 The United States Court of Appeals for the Fourth Circuit
has held that “time, place, and contents of the false representations, as well as the identity of
the person making the misrepresentation and what he obtained thereby” are the
circumstances that must be pled with particularity. U.S. ex rel. Wilson v. Kellogg Brown & Root,
Inc., 525 F.3d 370, 379 (4th Cir. 2008) (quoting Harrison I, 176 F.3d at 784). This set of
information is often referred to as the “who, what, when, where, and how” of the alleged
fraud. Id. at 379 (internal quotation marks omitted). Moreover, as to the “what” requirement,
“a plaintiff must show a link between allegedly wrongful conduct and a claim for payment
actually submitted to the government.” U.S. ex rel. Dugan v. ADT Security Services, Inc., No.
8
Four justifications for Rule 9(b)’s heightened pleading standards are often invoked:
First, the rule ensures that the defendant has sufficient information to formulate a defense
by putting it on notice of the conduct complained of. . . . Second, Rule 9(b) exists to protect
defendants from frivolous suits. A third reason for the rule is to eliminate fraud actions in
which all the facts are learned after discovery. Finally, Rule 9(b) protects defendants from
harm to their goodwill and reputation.
Harrison I, 176 F.3d at 784 (4th Cir. 1999); see also Banca Cremi, S.A. v. Alex Brown & Sons, Inc., 132 F.3d 1017,
1036 n.25 (4th Cir. 1997).
9
DKC-03-3485, 2009 WL 3232080, at *14 (D. Md. Sept. 29, 2009) (citing Clausen, 290 F.3d at
1311). By requiring a plaintiff to plead circumstances of fraud with particularity and not by
way of general allegations, Rule 9(b) screens “fraud actions in which all the facts are learned
through discovery after the complaint is filed.” Harrison I, 176 F.3d at 789 (citation omitted).
ANALYSIS
A. The False Claims Act—Counts I and II
In pertinent part, the False Claims Act subjects to civil liability “[a]ny person who
knowingly presents or causes to be presented, to . . . the United States Government . . . a
false or fraudulent claim for payment or approval,” 31 U.S.C. § 3729(a)(1), as well as “[a]ny
person who knowingly makes, uses, or causes to be made or used, a false record or
statement to get a false or fraudulent claim paid or approved by the Government.” 9 31
U.S.C. § 3729(a)(2). To state a claim under the False Claims Act, a plaintiff must plead “(1)
that the defendant made a false statement or engaged in a fraudulent course of conduct; (2)
such statement or conduct was made or carried out with the requisite scienter; (3) the
statement or conduct was material; and (4) the statement or conduct caused the government
to pay out money or to forfeit money due.” U.S. ex rel. Harrison v. Westinghouse Savannah River
Co., 352 F.3d 908, 913 (4th Cir. 2003) (“Harrison II”).10
The quoted language from the False Claims Act corresponds to the pre-FERA version of the Act. As
previously noted, this Court cannot discern any material difference between the two versions of the Act that
would affect this litigation. The Second Amended Complaint references the earlier version of the statute, thus
this Court will cite that version for ease of reference.
10 Although this action was originally filed in the United States District Court for the Southern District of
Illinois, it was transferred to this Court pursuant to 28 U.S.C. § 1404(a). When questions of federal law are
presented, the “law of the circuit where the transferee court sits governs[.]” In re Mutual Funds Inv. Litigation,
767 F. Supp. 2d 542, 545 (D. Md. 2011). The law of the United States Court of Appeals for the Fourth
Circuit thus controls in this case.
9
10
Given the “essentially punitive”11 nature of the damages available in False Claims Act
cases, “[t]he Supreme Court has cautioned that the False Claims Act was not designed to
punish every type of fraud committed upon the government.” Harrison I, 176 F.3d at 785
(citing United States v. McNinch, 356 U.S. 595, 599 (1958)). The Act “imposes liability not for
defrauding the government generally; it instead only prohibits a narrow species of fraudulent
activity: ‘present[ing], or caus[ing] to be presented . . . a false or fraudulent claim for payment
or approval.” United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 504 (6th Cir.
2007) (citation omitted); see also Harrison I, 176 F.3d at 785 (“The statute attaches liability, not
to the underlying fraudulent activity or to the government’s wrongful payment, but to the
‘claim for payment.’”) (citation omitted). “Therefore, a central question in False Claims Act
cases is whether the defendant ever presented a ‘false or fraudulent claim’ to the
government.” Harrison I, 176 F.3d at 785.
Moreover, the heightened pleading standard of Rule 9(b) requires that plaintiffs or
relators plead the elements of a False Claims Act claim with particularity. United States ex rel.
Owens v. First Kuwaiti Gen. Trading & Contracting Co., 612 F.3d 370, 379 (4th Cir. 2010)
(explaining that, as the False Claims Act is a “fraud prevention statute,” the heightened
pleading standard of Rule 9(b) applies). Specifically, a plaintiff must state the “time, place,
and contents of the false representations, as well as the identity of the person making the
misrepresentation and what he obtained thereby” to survive a motion to dismiss. Kellogg
Vermont Agency of Nat. Res. v. Stevens, 529 U.S. 765, 784 (2000) (“[T[he current version of the FCA imposes
damages that are essentially punitive in nature . . . .”); see also Texas Indus., Inc. v. Radcliffe Materials, Inc., 451 U.S.
630, 639 (1981) (“The very idea of treble damages reveals an intent to punish past, and to deter future,
unlawful conduct, not to ameliorate the liability of wrongdoers.”); United States ex rel. Sikkenga v. Regence
Bluecross Blueshield of Utah, 472 F.3d 702, 734 (10th Cir. 2006) (Hartz, J., concurring) (“[T]he False Claims Act
is a punitive statute . . . .”).
11
11
Brown & Root, 525 F.3d at 379 (quoting Harrison I, 176 F.3d at 784). In the Fourth Circuit,
Rule 9(b)’s heightened pleading “appl[ies] with particular force in the context of the [False
Claims] Act, given the potential consequences flowing from allegations of fraud by
companies who transact business with the government.” United States ex rel. Nathan v. Takeda
Pharm. N. Am., Inc., 707 F.3d 451, 454 (4th Cir. 2013). Failure to comply with the heightened
standard of Rule 9(b) necessitates the dismissal of the deficient claim under Rule 12(b)(6).
Harrison I, 176 F.3d at 783 n.5.
In contrast to the First Amended Complaint, the Second Amended Complaint
sufficiently alleges that Defendant ASI violated the False Claims Act. As a preliminary
matter, ASI does not dispute that Relators have sufficiently pled that ASI possessed the
requisite scienter and that the government did, indeed, pay out sums of money. Rather, ASI
argues that Relators fail to allege with the requisite particularity of Rule 9(b) that ASI made a
false claim for payment to the government or that any alleged false statements was material
to the government’s payment of federal funds. Each argument will be addressed in turn.
1. False Claims for Payment
Relators identify five categories of allegedly false documents submitted by ASI to
MSHA: (1) ASI’s initial bid proposal; (2) payroll documents; (3) quarterly DBE participation
reports; (4) contractor progress estimates; and (5) documents related to ASI’s request for
final payment. Relators explain that each document falsely detailed the use of NWSB, a
certified DBE contractor, as subcontractor, when the services at issue were actually provided
by Brighton. Relators identify the individuals at ASI who either produced the documents or
reviewed the documents before submission. See, e.g., Second Amended Compl. ¶¶ 72-76
12
(explaining how an ASI employee, Ryan Glen, created the false quarterly DBE participation
reports at the direction of Gail Svoboda, the president of ASI).
Relators do not simply allege that the documents are false; rather, they claim that
these false documents constituted “false claims” within the meaning of the False Claims Act.
Although the False Claims Act certainly “was not designed to punish every type of fraud
committed upon the government[,]” it is “intended to reach all types of fraud, without
qualification, that might result in financial loss to the Government . . . .” Harrison I, 176 F.3d
at 785, 788 (internal citations omitted). Given this broad construction, the FCA “reaches
beyond ‘claims’ which might be legally enforced, to all fraudulent attempts to cause the
Government to pay out sums of money.” Id. at 788 (quoting United States v. Neifert-White Co.,
390 U.S. 228, 233 (1968)). In other words, “any time a false statement is made in a
transaction involving a call on the U.S. fisc, False Claims Act liability may attach.” Harrison I,
176 F.3d at 788.
Relators allege that the specified documents constitute false claims under two
theories. In the first, Relators allege that the documents substantiate ASI’s repeated false
certifications to MSHA that it had complied with the DBE participation requirements. The
certifications were not merely suggested or in any way optional. Rather, Relators allege with
particularity that MSHA required the submission of the documents as a condition of
payment under the Contract. See, e.g., Second Amended Compl. ¶¶ 48, 52, 62-67. After
receiving the documents certifying DBE compliance, MSHA in turn submitted claims to
DOT for the requisite funds to pay ASI. See, e.g., id. ¶¶ 59-60. The DOT allegedly requires
participating states to award contracts only to contractors complying with the state DBE
13
goal. Id. ¶¶ 11, 13. Thus, through MSHA, ASI’s false statements were clearly made in an
effort to induce the government to pay out federal funds. See United States v. Triple Canopy,
Inc., 775 F.3d 628, 636 (4th Cir. 2015) (explaining that the defendant’s certifications were
“fraudulent attempts to cause the Government to pay sums of money”).
Alternatively, Relators allege that ASI fraudulently secured the Contract by certifying
in its bid proposal its intention to use NWSB to comply with MSHA’s DBE participation
goal. This “fraud-in-the-inducement” theory extends FCA liability to occasions in which
“the contract or extension of a government benefit was obtained originally through false
statements or fraudulent conduct.” Harrison I, 176 F.3d at 787; see also United States ex rel.
Marcus v. Hess, 317 U.S. 537, 542 (1943) (finding FCA liability where the defendants obtained
government contracts through “collusive bidding”). As the United States Supreme Court
explained, the “initial fraud did not spend itself with the execution of the contract . . . The
initial fraudulent action and every step thereafter taken, pressed ever to the ultimate goal—
payment of government money to persons who had caused it to be defrauded.” Marcus, 317
U.S. at 543-44. Here, ASI did not receive the Contract until after it had submitted DBErelated documents, such as its Affirmative Action Plan, to MSHA. Even if ASI’s subsequent
statements were not false, the initial false documents were integral to the success of its
“ultimate goal—payment of government money to [ASI].”
In moving to dismiss, ASI essentially argues that Relators have failed to prove that
MSHA submitted claims only after the submission of the false documents or that DOT’s
payment was somehow related to that submission. Yet, this argument applies far too high a
burden on Relators at this stage in the proceedings. ASI correctly states that Rule 9(b)
14
applies a heightened pleading standard to FCA claims. This standard, however, remains a
pleading standard, and not a burden of proof. Relators have sufficiently alleged that MSHA
required the certification of DBE compliance prior to payment of the designated federal
funds. ASI may dispute the degree to which the certification documents were “required,” but
such an argument is properly reserved for a later time.
2. Materiality
Under the False Claims Act, the materiality of a false statement or conduct “turns on
whether the false statement has a natural tendency to influence agency action or is capable of
influencing agency action. United States ex rel. Berge v. Bd. of Tr. of Univ. of Ala., 104 F.3d 1453,
1460 (4th Cir. 1997). Materiality does not look to whether the false statements actually
influenced agency action, but rather whether the statements are “capable” of having such an
influence. Harrison II, 352 F.3d at 916-17.
The Second Amended Complaint alleges with specificity that ASI’s continued
certification of DBE compliance had the “natural tendency” to induce the government,
through MSHA, to pay the designated federal funds. As discussed supra, the Affirmative
Action Plan, in which ASI described its intent to use NWSB to satisfy the DBE requirement,
was allegedly necessary to the selection of ASI as contractor. Second Amended Compl. ¶¶
33, 45-46. The failure to adhere to this DBE requirement was, according to Relators, a
material breach of the Contract. Id. ¶ 17. MSHA had the authority to, if necessary, withhold
progress payments or terminate the contract for non-compliance. Id. ¶ 48. Indeed, MSHA
explicitly warned of this possibility when ASI failed to submit the requisite quarterly DBE
participation reports. Id. ¶¶ 66-71. Absent documented DBE compliance, Relators allege that
15
MSHA would not have submitted claims for payment to DOT on behalf of ASI. See, e.g., id.
¶¶ 59-60, 79, 90-91. As alleged by the Second Amended Complaint, ASI’s repeated DBE
certifications to MSHA, and thus, to DOT, had the “natural tendency” to cause the payment
of federal funds.
Once again, ASI seeks to apply far too strenuous a burden than that contained in
Rule 9(b). ASI essentially argues that Relators have not shown materiality by failing to prove
that, absent the false statements, the government would not have paid the federal funds at
issue. This argument is unpersuasive for several reasons, the first of which is the
misinterpretation of Rule 9(b) as a standard of proof, and not merely a pleading standard.
Second, ASI argues that MSHA’s use of the term “may” rather than “shall,” or another
similarly imperative term, when threatening suspension of payment or termination for noncompliance, does not establish the requisite materiality. Yet, the False Claims Act commands
only that the false statements be “capable” of influencing government action. Harrison II, 352
F.3d at 916-17. ASI, on the other hand, seems to demand that Relators show that the false
statements actually did influence the payment of federal funds. ASI’s dispute is with the
degree of influence, and not whether the false statements were capable of influence. Finally,
Relators allege not only that the false statements were capable of influencing agency action,
but actually did so when ASI failed to submit the prescribed DBE participation reports. The
Second Amended Complaint thus sufficiently alleges that the false statements were material
to the payment of federal funds.
B. The False Claims Act—Count III
16
The False Claims Act also imposes civil liability on those individuals who “conspire[]
to defraud the government by getting a false or fraudulent claim allowed or paid.” 31 U.S.C.
§ 3729(a)(3). While the Act does not define conspiracy, courts have concluded that general
civil conspiracy principles apply. See, e.g., United States ex rel. Durcholz v. FKW Inc., 189 F.3d
542, 545 n.3 (7th Cir. 1999); United States v. Toyobo Co. Ltd., 811 F. Supp. 2d 37, 50 (D.D.C.
2011). To state a claim under § 3729(a)(3), a plaintiff must allege that the defendant
“conspired with one or more persons to have a fraudulent claim paid by the United States, . .
. that one or more of the conspirators performed any act to have such a claim paid by the
United States, and . . . that the United States suffered damages as a result of the claim.” Id.
(quoting United States v. Bouchey, 860 F. Supp. 890, 893 (D.D.C. 1994) (internal citations
omitted)). Further, the plaintiff must plead that the alleged conspirators “had the purpose of
‘getting’ the false record or statement to bring about the Government’s payment of a false or
fraudulent claim.” Allison Engine Co., Inc. v. United States ex rel. Sanders, 553 U.S. 662, 672
(2008).
As a conspiracy claim is premised on the underlying False Claims Act claims, it “rises
and falls with the individual claims.” United States ex rel. Godfrey v. KBR, Inc., 360 F. App’x 407,
413 (4th Cir. 2010). In this case, Relators have sufficiently alleged the underlying False
Claims Act violations, thus they have sufficiently alleged a related conspiracy.
C. Damages
Finally, ASI argues that Relators failed to establish the “essential element” of
damages. Mem. in Support of Def.’s Resp. in Opp’n, 12, ECF No. 97-1. Relators seek
disgorgement of “all illegal profits” paid to ASI. Second Amended Compl. ¶ 1. ASI insists
17
that Relators must establish actual damages, defined as “the amount of money the
government paid by reason of the false statement above what it would have paid absent the
false statement,” Harrison II, 352 F.3d at 922, to plead a claim under the FCA. As ASI was
the lowest bidder, Relators have not, and cannot, according to Defendant, prove that the
United States paid more than it would have absent the alleged fraud.
In this Circuit, however, the standard for pleading damages is hardly as wellestablished as Defendant contends. As a preliminary matter, a plaintiff or relator pleads a
FCA claim by sufficiently alleging four elements: (1) “the defendant made a false statement .
. . [;]” (2) that statement “was made . . . with the requisite scienter;” (3) materiality; and (4)
“the statement or conduct caused the government to pay out money or to forfeit money
due.” Harrison II, 352 F.3d at 913. Absent from this list is any requirement that, at least at the
pleading stage, the plaintiff or relator establish actual damages.
Moreover, the United States Court of Appeals for the Fourth Circuit has expressly
acknowledged that “[w]e have not adopted one particular standard by which damages should
be measured under the FCA.” Id. at 922. In Harrison II, the Fourth Circuit chose to apply
ASI’s proposed standard “under the particular facts of [that] case.” Id. at 923. Specifically,
that standard was appropriate after “no evidence [was] adduced at trial suggesting that [the
defendant] failed to perform the work that it was required to perform under the subcontract
or that the government did not receive the benefit of the work performed.” Id. The Fourth
Circuit did not, contrary to ASI’s contention, adopt this standard for all FCA claims seeking
disgorgement for work performed under a contract. It was simply a standard adopted by
“[s]ome courts[.]” Id. at 922 (citing United States v. Ekelman & Assocs., 532 F.2d 545, 550 (6th
18
Cir. 1976)). The Fourth Circuit further acknowledged that “[o]ther factual scenarios could
exist in which the contractor’s performance so lacks any value as to make recovery of all
monies paid by the government an appropriate remedy.” Id. at 923 n.17 (citing United States v.
TDC Mgmt. Corp., 288 F.3d 421, 428 (D.C. Cir. 2002)).
At the pleading stage, this Court declines to adopt a specific standard by which
damages will be measured. ASI asks for proof of damages, but Relators need only plead
damages to survive a motion to dismiss. Relators have fulfilled that obligation, alleging that
the ASI’s false statements deprived the government of the benefit of its bargain by
circumventing a central goal of the DBE program—to support DBE businesses. Indeed,
some courts have applied disgorgement as the appropriate remedy after a defendant’s false
statements robbed the government of an important intangible benefit. See, e.g., United States
ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458 (5th Cir. 2009). Only after discovery
will Relators be required to prove damages, at which point the facts of the case will
determine the appropriate standard of measurement. As such, Relators have sufficiently pled
damages to survive the pending Motion.
CONCLUSION
For the reasons stated above, Defendant ASI’s Motion to Dismiss Relators’ Second
Amended Complaint (ECF No. 97) is DENIED. In sum, the Second Amended Complaint
sufficiently alleges, with the requisite specificity of Federal Rule of Civil Procedure 9(b), that
ASI knowingly submitted false claims for payment to the government, in violation of the
False Claims Act.
A separate Order follows.
19
Dated: July 29, 2016
/s/______________________________
Richard D. Bennett
United States District Judge
20
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?