United States of America ex rel. et al v. Modern Manufacturing and Engineering, Inc. et al
MEMORANDUM OPINION ANDORDER GRANTING DEFENDANTS' MOTION TO DISMISS 19 . Let Judgment be entered accordingly. (Written Opinion) Signed by Chief Judge John R. Tunheim on 7/3/2018. (JMK)
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UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
UNITED STATES OF AMERICA ex rel.
Civil No. 16-3014 (JRT/BRT)
MODERN MANUFACTURING AND
ENGINEERING, INC. and HUE VAN
AND ORDER GRANTING
Nathaniel F. Smith and Susan M. Coler, HALUNEN LAW, 80 South
Eighth Street, Suite 1650, Minneapolis, MN 55402, for John Christie.
James F. Baldwin, MOSS & BARNETT, PA, 150 South Fifth Street, Suite
1200, Minneapolis, MN 55402, for defendants.
This case involves an action for damages and civil penalties under the Federal
False Claims Act, 31 U.S.C. §§ 3729-3733 (“FCA”). Relator John Christie, on behalf of
the United States, alleges that Modern Manufacturing and Engineering, Inc. (“MME”)
and its owner Hue Van Lien (collectively “Defendants”) falsely represented that MME
followed required quality control processes in manufacturing parts to fulfill government
contracts and subcontracts and falsely represented MME’s status as a Small
Disadvantaged Business (“SDB”) for purposes of government contracting. Presently
before the Court is Defendants’ Motion to Dismiss pursuant to Federal Rule of Civil
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Because Christie fails to plead allegations of fraud with sufficient particularity, the
Court will grant Defendants’ motion and dismiss the action without prejudice.
Relator John Christie has been working for MME as a parts inspector since 2013,
inspecting parts to ensure compliance with contractual requirements. (Compl. ¶¶ 11, 77,
Sept. 7, 2016, Docket No. 1.) MME is a manufacturing company with its principal
offices in Brooklyn Park, Minnesota. (Id. ¶ 14.) MME provides “milling, turning, and
engineering services to a variety of contracting partners, including Alliant Techsystems
(ATK), L3 Communications, Lockheed Martin, and Rockwell Collins” and manufactures
parts used for aerospace, commercial, military, and medical applications. (Id. ¶ 12.)
MME reported about $21 million in sales for 2012, and Christie estimates that 50 percent
of its sales are to the Government. (Id. ¶ 13.) Hue Van Lien is the owner and CEO of
MME. (Id. ¶ 15.) He is an Asian Pacific American. (Id.)
Government Compliance Regulations
The United States requires its contractors to meet various inspection standards,
such as the Federal Acquisition Regulations (“FAR”). (See id. ¶¶ 29-33.) Contracts
involving “complex or critical items” require compliance with higher-level quality
The Court assumes for purposes of the present motion that all factual allegations in
Christie’s complaint are true. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
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standards, which include a parts-inspection requirement dictated by MIL-STD-1916. (Id.
MIL-STD-1916 is the currently approved Department of Defense Test
Methods Standard for Acceptance of Product. (Id. ¶ 45.) When referenced in a contract,
MIL-STD-1916 applies to the prime contractor “and should be extended to
subcontractors or vendor facilities.”
(Id. ¶ 47.)
It requires contractors “to submit
deliverables that conform to requirements and to generate and maintain sufficient
evidence of conformance.” (Id. ¶ 48 (quoting MIL-STD-1916 Foreward, ¶ 7).)
MIL-STD-1916 requires contractors to perform sampling inspection in accordance
with certain standards unless the contractor has submitted an alternate acceptance
method. (Id. ¶ 50 & n.3.) Section 4.2 sets out various sampling plans, indexed by
verification levels and lot or production interval size. (Id. ¶¶ 50-52.) The purpose of
inspecting sample sizes is to identify nonconforming units and implement corrective
action for that portion of the lot to ensure that the government receives “only products
that conform with all contract requirements and specifications.” (Id. ¶¶ 55-58.)
Verification of Conformance
Government contracts require verification of conformance under 48 C.F.R.
§ 52.246-15 in the form of a Certificate of Conformance. (Id. ¶ 40.) In some cases, the
FAR allows these certificates to be used instead of source inspection at the discretion of
the contracting officer. (Id. ¶ 41 (citing FAR § 46.504).)
Small Disadvantaged Business Status
Federal regulations require contractors intending to do business with the
Government to submit and maintain accurate information in a central database called the
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System for Award Management (“SAM”). (Id. ¶ 60.) The SAM record “includes a series
of representations and certifications by the participating business to verify eligibility to
bid on federal government contracts set aside for small businesses of various types.” (Id.
¶¶ 62-63.) For a business claiming SDB status, the SAM record includes a certification
that the business is SDB certified by the Small Business Administration (“SBA”) and that
“no material change in disadvantaged ownership and control has occurred since [the
business’s] certification.” (Id. ¶ 64 (quoting FAR § 52.212-3(c)(10)(i)(A)).)
To qualify as an SDB, a company must show that it is controlled by a socially and
economically disadvantaged individual.
C.F.R. § 124.1002(b)(3)).)
(Id. ¶ 72 (citing 15 U.S.C. § 637(a)(4); 13
Asian Pacific Americans are presumed to be socially
disadvantaged. (Id.) To qualify as economically disadvantaged, an individual must show
diminished capital and credit opportunities. (Id.)
Using the SAM, the SBA generates an internal database of small businesses called
the Dynamic Small Business Search (“DSBS”). (Id. ¶ 67.) Government entities use the
SAM and the DSBS to identify potential businesses that meet requirements for particular
government contracts and to publish solicitations for bids in databases that are accessible
to SAM-registered entities. (Id. ¶¶ 68-69.) Vendors submitting bids on government
contracts must include relevant representations and certifications, including status as an
SDB, either in the bid or through its SAM record. (Id. ¶¶ 70-71.) Any time a business
willfully seeks and receives an award intended for SDBs by misrepresentation, there is a
presumption of loss to the United States based on the total amount expended on the
contract or subcontract. (See id. ¶ 71 (citing 15 U.S.C. § 632(w)(1)).)
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Allegations of MME’s Non-Compliance
Failure to Inspect
When Christie first began working for MME, he was trained by a fellow inspector,
Ben Jones. (Id. ¶ 82.) Jones told Christie that he should not inspect the number of units
required under MIL-STD-1916, but only 2-5 units, and “even that takes too long.” (Id.)
MME’s quality manager, Dan Lopez, also told the inspectors, including Christie, to
inspect 2-5 units, if any, of any lot production. (Id. ¶ 83.) Lopez made clear to Christie
that MME’s top priority was to ensure that parts were shipped as quickly as possible so
that MME could get paid. (Id.) He told Christie, “If we did proper inspections, then we
would never get our parts out the door.” (Id.) Christie’s supervisor, Dan Rodamacker,
“routinely reprimands [Christie] for working ‘too slow,’ because [he] conducts his lot
inspections as required by MIL-STD-1916.” (Id. ¶ 84.) Rodamacker “continuously
pressures [Christie] to work faster and uses intimidating tactics to force [him] to comply
with [MME’s] directive to inspect fewer than the required number of parts in various
lots.” (Id.) Rodamacker has even threatened his job security. (Id.)
Christie refers to Job #153342 as representative of his allegations. (Id. ¶ 90.) The
inspection for that job required inspection of 11 units from an initial lot size of 110 units.
(Id.) An “In-process Inspection Sheet,” which allows inspectors to track their findings on
each unit inspected, was filled out for Job #153342, but only two columns – representing
two units – were filled out. (Id. ¶¶ 89-92.) The final job size of 124 units required a final
inspection of 12 units under MIL-STD-1916, and the “Final Inspection Report & Record”
noted in the “quantity inspected” row that 12 units had been inspected. (Id. ¶ 91.) Only 2
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units of that lot were ever inspected, and the “lot was ultimately submitted for use by the
U.S. government with a Certificate of Compliance stating that MME’s parts met all
contractual requirements and specifications, when [they] in fact did not.” (Id. ¶ 92.)
Christie “has observed this pattern of conduct throughout his employment” with
MME. (Id. ¶ 93.) He has observed his supervisors “throwing reject forms for parts into
the wastebasket, thereby allowing those parts to be included in lots delivered to the
contractor.” (Id. ¶ 94.) MME has not inspected the machines it uses to manufacture parts
for compliance, which violates required quality assurance processes and makes it “more
likely that non-conforming parts would be presented to the government.” (Id. ¶ 95.)
MME hides non-conforming parts when they are discovered, sends out units not within
specification requirements even when supervisors are on notice of the non-conformities,
and signs off on non-conforming parts to expedite delivery. (Id. ¶¶ 96-100.)
In addition to the false certificate of compliance sent out for Job #153342, Christie
alleges that the certificates sent with all government lots were false because Defendants
failed to properly inspect as required by MIL-STD-1916. (Id. ¶¶ 102-104.)
Misrepresentation of MME’s Status as an SDB
“Every page but the home page” of MME’s website represents that it is registered
as an SDB, but MME was only so registered from January 2008 to January 2011. (Id.
¶ 106.) MME’s SAM profile states in one section that it is an SDB but states in another
section that it is not. (Id. ¶ 107.) The former section is “set aside for use by those entities
claiming disadvantaged status,” thus MME’s completion of that section is “a
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misrepresentation of MME’s status.” (Id.) Also, Lien does not meet the requirements to
claim status as owner of an SDB. (Id. ¶ 108.) Lien owns assets whose value exceeds the
SBA’s threshold for economically disadvantaged status, and Lien has not had difficulty
accessing capital and credit opportunities. (Id. ¶¶ 109-110.) Christie alleges that “[i]t is
likely that Defendants’ misrepresentation that MME is [an SDB] has resulted in receiving
contracts or purchases intended for actual [SDBs],” because prime contractors are
required to use SDBs as sub-contractors in certain Government contracts. (Id. ¶ 111.)
Christie brought this action under the FCA on September 7, 2016. (Compl.) The
United States declined to intervene. (Gov’t Notice of Election to Decline Intervention,
Aug. 1, 2017, Docket No. 11.) Defendants filed a motion to dismiss, (Defs.’ Mot. to
Dismiss, Oct. 20, 2017, Docket No. 19), which Christie opposes, (Opp’n Mem., Nov. 13,
2017, Docket No. 30).
STANDARD OF REVIEW
In reviewing a motion to dismiss brought under Federal Rule of Civil Procedure
12(b)(6), the Court considers all facts alleged in the complaint as true to determine if the
complaint states a “claim to relief that is plausible on its face.” See, e.g., Braden v. WalMart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009)). To survive a motion to dismiss, a complaint must provide more than
“‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action.’”
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Iqbal, 556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
Although the Court accepts the complaint’s factual allegations as true, it need not accept
as true legal conclusions couched as factual allegations.
“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.” Id. A claim
“stops short of the line between possibility and plausibility” and must be dismissed when
the facts pled “are ‘merely consistent with’ a defendant’s liability.”
Twombly, 550 U.S. at 557).
The False Claims Act
The FCA creates civil liability to the United States for someone who:
(A) knowingly presents, or causes to be presented, a false or
fraudulent claim for payment or approval; (B) knowingly
makes, uses, or causes to be made or used, a false record or
statement material to a false or fraudulent claim; [or]
(C) conspires to commit a violation of subparagraph (A) [or]
(B) . . . .
31 U.S.C. § 3729(a)(1). The FCA allows a private person to bring a so-called “qui tam”
civil action for violation of this section in the name of the United States Government. Id.
§ 3730(b)(1). The Government may choose to intervene in the proceeding, or may notify
the court that it declines to take over the action. Id. § 3730(b)(2), (b)(4)(B).
Rule 9(b)’s Heightened Pleading Requirement
Under Federal Rule of Civil Procedure 8(a)(2), plaintiffs need only plead “a short
and plain statement of the claim showing that [they are] entitled to relief.” However, a
heightened pleading standard applies to fraud claims. “In alleging fraud or mistake, a
party must state with particularity the circumstances constituting fraud or mistake.” Fed.
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R. Civ. P. 9(b).
Rule 9(b) applies to FCA claims.
United States ex rel. Roop v.
Hypoguard USA, Inc., 559 F.3d 818, 822 (8th Cir. 2009).
Accordingly, an FCA
complaint “must identify who, what, where, when, and how.” Id. (quoting United States
ex rel. Costner v. United States, 317 F.3d 883, 888 (8th Cir. 2003)). A relator must plead
facts such as “the time, place, and content of the defendant’s false representations, as well
as the details of the defendant’s fraudulent acts, including when the acts occurred, who
engaged in them, and what was obtained as a result.” United States ex rel. Thayer v.
Planned Parenthood of the Heartland, 765 F.3d 914, 916 (8th Cir. 2014).
The purpose of the heightened pleading requirement is to give defendants notice of
the particular misconduct alleged so that they can defend against specific charges and not
just generally deny wrongdoing.
Costner, 317 F.3d at 889.
defendants to investigate, retrieve contemporaneous documents, call contemporaneous
witnesses, and hire experts to testify regarding specific incidents. See id. Scrupulous
adherence to the heightened pleading standards is especially important in FCA claims to
prevent qui tam plaintiffs from filing suit as a pretext to uncover unknown wrongs.
United States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 559 (8th Cir. 2006).
SUFFICIENCY OF CHRISTIE’S COMPLAINT
Christie’s complaint fails the heightened pleading requirements of Rule 9(b)
because his allegations are not sufficiently particular as to the actual filing of false claims
for payment from the government.
Failure to Inspect and Submission of Certificates of Conformance
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Christie’s allegations lack the required particularity.
In Roop, a relator’s
complaint lacked particularity when it alleged generally that a company’s blood glucose
monitors and test strips were defective, that the company knew as much and failed to file
reports of defects as required by federal reporting regulations, and that – as a result –
Medicare paid fraudulent reimbursement claims submitted by the company’s distributors.
559 F.3d at 820. Christie’s complaint similarly lacks particularity. He alleges that the
parts MME produced were not in compliance with inspection standards, that MME knew
as much yet certified them anyway, and that – as a result – the United States paid for
claims that were fraudulently submitted. But “[l]iability under the FCA attaches ‘not to
the underlying fraudulent activity, but to the claim for payment.’” Thayer, 765 F.3d at
916 (quoting In re Baycol Prods. Litig., 732 F.3d 869, 875 (8th Cir. 2013)). Christie fails
to provide details regarding the time, place, and content of the MME’s false claims for
payment, as well as who filed the false claims and what was obtained as a result. See id.
Even Christie’s allegations about Job #153342 lack most of these details.
A qui tam plaintiff alleging a systematic practice of submitting fraudulent claims
must provide “some representative examples” in the complaint to satisfy Rule 9(b).
Joshi, 441 F.3d at 557. Alternatively, “a relator can satisfy Rule 9(b) without pleading
representative examples of false claims if the relator can otherwise plead the ‘particular
details of a scheme to submit false claims paired with reliable indicia that lead to a strong
inference that claims were actually submitted.’” Thayer, 765 F.3d at 918 (quoting United
States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009)).
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Christie’s allegations fail under both standards.
Christie appears to use Job
#153342 as an attempt to satisfy the “representative examples” requirement. He alleges
that Job #153342 was not properly inspected and that an inspection record was created
representing that it had been. Christie alleges that “[t]his lot was ultimately submitted for
use by the U.S. government with a Certificate of Compliance stating that MME’s parts
met all contractual requirements and specifications, when in fact it did not.” (Compl.
¶ 92.) These allegations are insufficiently particular. Representative examples must
specify time, place, and content of the false representations, details of the fraudulent acts,
when the acts occurred, who engaged in them, and what was obtained as a result. Joshi,
441 F.3d at 556-57. The Complaint does not allege when Job #153342 occurred, who
failed to inspect, what the lot consisted of, who falsely filled out the Final Inspection
Report & Record, who submitted the lot along with a Certificate of Compliance, when
the lot and Certificate were submitted, or what payment MME obtained as a result.
Christie’s allegation that the lot was “submitted for use by the U.S. government,”
(Compl. ¶ 92), is unsupported by any further facts or details. Christie is an inspector. He
administration/documentation. Nor does he allege that he has first-hand knowledge of
any of these aspects of Job #153342.
In addition to lacking sufficiently pled representative examples, Christie’s
allegations also lack “particular details of a scheme to submit false claims paired with
reliable indicia that lead to a strong inference that claims were actually submitted.”
Thayer, 765 F.3d at 918 (quoting Grubbs, 565 F.3d at 190). In Thayer, the relator was
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the center manager of two clinics, oversaw their billing and claims systems, and “was
able to plead personal, first-hand knowledge of [their] submission of false claims.” Id. at
917. Thus, her claims regarding the clinics she managed were supported by sufficient
indicia of reliability. Id. at 919. That is not the case here. Christie pleads first-hand
knowledge of inspection practices but not of filing claims. Christie has not alleged firsthand knowledge of MME’s shipping system, billing system, certification of lots, or
acceptance and fulfillment of any contracts, much less Government contracts. In Thayer,
the relator’s allegations regarding hospitals that she did not manage lacked sufficient
indicia of reliability because she did not have first-hand knowledge of those hospitals’
billing processes; she could only speculate.
Id. at 919-20.
allegations regarding false claims to the government are speculative. See id.; see also
United States ex rel. Scharber v. Golden Gate Nat’l Senior Care LLC¸ 135 F. Supp. 3d
944, 960-61 (D. Minn. 2015) (relators had personal knowledge of the defendants’ inner
business workings, billing practices, and submission of false claims).
A further deficiency of Christie’s complaint is that it fails to allege that MIL-STD1916 is universally required in government contracts. The Complaint states that MILSTD-1916 applies to contracts “when referenced.” (Compl. ¶ 47.) Because Christie’s
allegations lack specificity, it is impossible for Defendants or the Court to determine
which inspection requirements applied to which contracts, whether those requirements
were followed, and whether a false claim was submitted with regard to those contracts.
Christie’s allegations regarding failure to inspect machines, concealment of nonconforming parts, and shipment of defective units are also insufficiently specific.
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Christie does not allege which machines MME failed to inspect, which parts were
produced by those machines, which contracts were fulfilled with those parts, what
requirements applied to those contracts, what certificates were sent along with the parts,
who sent the certificates, when the certificates were sent, or what payment MME
obtained as a result. He does not allege with any specificity which parts were nonconforming or defective, which contracts were fulfilled with those parts, what
requirements applied to those contracts, what certificates were sent along with the parts,
who sent the certificates, when the certificates were sent, or what payment MME
obtained as a result.
Because Christie’s allegations regarding failure to inspect and submission of false
certificates of conformance do not allege fraud with particularity, the Court will dismiss
the action without prejudice.
Small Disadvantaged Business Status
Christie’s allegations regarding MME’s misrepresentation of its status as an SDB
likewise fail to meet Rule 9(b)’s heightened pleading standard because he has not alleged
with particularity that any government contracts were actually obtained as a result of this
Christie alleges that “[i]t is likely that Defendants’
misrepresentation that MME is [an SDB] has resulted in receiving contracts or purchases
intended for actual [SDBs].”
(Id. ¶ 111 (emphasis added).)
In support of this
supposition, he alleges only that prime contractors are required to use SDBs as subcontractors in certain Government contracts.
These allegations are not
particularized enough to meet Rule 9(b)’s heightened standard. Christie has not alleged
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what contracts were fraudulently obtained as a result of this status, when they were
obtained, or what payment MME received as a result. He also does not allege that
MME’s status as an SDB was material to any payment decision. See United States ex rel.
Johnson v. Golden Gate Nat’l Senior Care, L.L.C., 223 F. Supp. 3d 882, 891 (D. Minn.
2016) (“[M]isrepresentation about compliance with a statutory, regulatory, or contractual
requirement must be material to the Government’s payment decision in order to be
actionable under the [FCA].” (alteration in original) (quoting Universal Health Servs.,
Inc. v. United States, 136 S. Ct. 1989, 2002 (2016))).
Because Christie does not plead particular details regarding any claim for payment
made in connection with SDB status, this claim also fails.
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that Defendants’ Motion to Dismiss [Docket No. 19] is
GRANTED and this action is DISMISSED without prejudice.
LET JUDGMENT BE ENTERED ACCORDINGLY.
DATED: July 3, 2018
at Minneapolis, Minnesota.
__________ s/John R. Tunheim __________
JOHN R. TUNHEIM
United States District Court
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