Citynet, LLC v. Frontier West Virginia, Inc., et al.
Filing
465
MEMORANDUM OPINION AND ORDER directing that the 378 MOTION by Jimmy Gianato, Gale Given for Summary Judgment is granted; the 380 MOTION by Kenneth Arndt, Frontier West Virginia, Inc., Mark McKenzie, Dana Waldo for Summary Judgment is granted with respect to Counts I through VI and Count IX against those four defendants, granted with respect to Count VIII against McKenzie, and otherwise denied; the 382 MOTION by Citynet, LLC for Partial Summary Judgment is granted with respect to liability against Frontier and McKenzie on Count VII and otherwise denied, as set forth more fully herein. Signed by Senior Judge John T. Copenhaver, Jr. on 9/8/2022. (cc: counsel of record; any unrepresented parties) (kew)
Case 2:14-cv-15947 Document 465 Filed 09/08/22 Page 1 of 71 PageID #: 12444
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF WEST VIRGINIA
AT CHARLESTON
CITYNET, LLC, on behalf of
the United States of America,
Plaintiff/Relator,
v.
Civil Action No. 2:14-cv-15947
FRONTIER WEST VIRGINIA, INC.,
a West Virginia corporation;
KENNETH ARNDT, individually;
DANA WALDO, individually;
MARK MCKENZIE, individually;
JIMMY GIANATO, individually;
and GALE GIVEN, individually,
Defendants.
MEMORANDUM OPINION AND ORDER
Pending are three motions for summary judgment, each
filed July 8, 2022.
First is the summary judgment motion of
defendants Frontier West Virginia, Inc. (“Frontier”); Kenneth
Arndt (“Arndt”); Dana Waldo (“Waldo”); and Mark McKenzie
(“McKenzie”) (together, “Frontier Defendants”).
Mot. Summ. J., ECF No. 380.
Frontier Defs.
Second is the summary judgment
motion of defendants Jimmy Gianato (“Gianato”) and Gale Given
(“Given”).
Gianato Given Mot. Summ. J., ECF No. 378.
And third
is the partial summary judgment motion of plaintiff/relator
Citynet, LLC (“Citynet”).
Citynet Mot. Summ. J., ECF No. 382.
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I. Background
A. Grant application and award
As part of the American Recovery and Reinvestment Act
of 2009, Congress appropriated $4,700,000,000 to the National
Telecommunications and Information Association (“NTIA”) to carry
out the Broadband Technology Opportunities Program (“BTOP”).
Pub. L. No. 111-5, 123 Stat. 115, 128 (2009).
Through BTOP,
Congress aimed to “establish a national broadband service
development and expansion program” through which unserved and
underserved areas could gain access to broadband internet.
Id.
at 512-13.
On February 12, 2010, NTIA awarded the Executive
Office of West Virginia (“WVEO”) $126,323,296 of BTOP grant
funding.
See Financial Assistance Award No. NT10BIX5570031,
https://www2.ntia.doc.gov/grantee/executive-office-of-the-stateof-west-virginia (click “Financial Assistance Award Form CD450”).
In its application, the WVEO stated that “the primary
use of BTOP funding will be to extend the reach and density of
broadband access throughout the state.”
WVEO BTOP Application
11, https://www2.ntia.doc.gov/grantee/executive-office-of-thestate-of-west-virginia (click “Application Part 1 (Incorporated
into the award by reference)”).
WVEO’s “strategy” to accomplish
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that goal was, among other things, the “build out of an ‘open’
network middle mile solution that will provide fiber to critical
community anchor tenants.”
Id. at 7.
“Middle mile” is a
category of internet infrastructure comprising the fiber optic
lines that link the larger “backbone” fiber optic lines to “last
mile” lines that connect to the end consumer.
See Inquiry
Concerning the Deployment of Advanced Telecommunications
Capability, 15 FCC Rcd. 20913, 20922-23 (2000).
The WVEO proposed building a “backbone” 1 middle-mile
fiber-optic network to “community anchor institutions” (“CAI”)
like schools, libraries, and healthcare provider centers.
id. at 3.
See
Other internet service providers could then tap into
that middle mile -- it would be “open” to competitors -- for
“last mile” service directly to consumers.
See, e.g., id. at 9.
WVEO represented that the fiber network was “estimated to be 900
miles of new fiber.”
Id. at 26.
To assist in preparing the BTOP grant application and
in its implementation once awarded, Kelly Goes (“Goes”), 2
Secretary of Commerce for the State of West Virginia, arranged a
As previously noted, “backbone” and “middle mile” are separate
portions of internet infrastructure. The parties, however,
sometimes refer to “middle mile” as “backbone.”
1
Goes was originally a named defendant but was voluntarily
dismissed from the case without prejudice. ECF Nos. 92-93.
2
3
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grant team that included her; defendant Gianato, Director of the
West Virginia Division of Homeland Security and Emergency
Management; and Colonel Todorovich of the West Virginia National
Guard.
Goes Dep. 29, 92, ECF Nos. 380-2, 393-30, 396-3, 402-15;
Todorovich Dep. 19-20, ECF Nos. 380-2, 382-13, 393-1, 396-4,
402-16, 405-12; Gianato Given Ans. ¶ 14, ECF No. 224.
Goes left
office in December 2010, ending her involvement with the BTOP
grant.
Goes Dep. 128.
Given became part of the grant team upon
her appointment as the State of West Virginia’s Chief Technology
Officer on June 4, 2012.
See Given Dep. 52, 54-57, 59, 71-72,
ECF Nos. 379-2, 380-2, 382-23, 393-38, 396-13, 405-4.
Upon the State’s request, Frontier and Verizon West
Virginia Inc. (“Verizon”) 3 provided technical data and estimates
to the State for its grant application.
On July 8, 2009, Goes
requested from Frontier and other internet service providers
data on then-existing broadband access in West Virginia.
8, 2009, Letter, ECF No. 382-2.
July
Goes explained that the WVEO’s
grant application could be denied if the WVEO could not
accurately map broadband access for the federal government.
id.
Frontier complied with Goes’ request.
See
See Frontier
Frontier’s purchase of Verizon was announced in May 2009.
Gianato Dep. 47, ECF Nos. 379-1, 380-2, 393-13, 396-2, 402-19.
The Public Service Commission of West Virginia approved the
purchase on May 13, 2010. See Purchase Approval Order, ECF No.
396-11.
3
4
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Broadband Data Email Chains, ECF Nos. 394-2, 382-3, 394-3; July
15, 2009, Frontier Internal Memo, ECF No. 393-6.
Additionally,
the State requested, and Frontier and Verizon provided, data and
estimates on construction costs to build fiber to CAIs.
See
July 26, 2009, Frontier Internal Email, ECF No. 393-8; August 6,
2009, Letter from Verizon to Goes, ECF No. 380-30; see also July
15, 2009, Frontier Internal Memo.
Todorovich and
representatives of Frontier and Verizon have noted that time
constraints caused the data provided and, ultimately, the WVEO’s
application to rely on estimates rather than precise figures.
July 15, 2009, Frontier Internal Memo; August 6, 2009, Letter
from Verizon to Goes; Todorovich Dep. 30-31.
Kenneth Mason, Frontier’s Vice President of Government
and Regulatory Affairs, testified that Frontier’s role in the
WVEO’s grant application was merely to provide information when
asked, and that Frontier did not review, revise, or participate
in the drafting of the WVEO’s grant application.
Mason Dep.
142-43, ECF No. 380-2; see also McCarthy Dep. 135-37, ECF No.
380-2.
Likewise, Todorovich testified that State employees
wrote and developed the WVEO’s grant application.
Todorovich
Dep. 41-42.
During the time NTIA was considering the WVEO’s
application, an NTIA representative contacted Gianato twice with
5
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questions about the WVEO’s plan.
On December 9, 2009, NTIA
asked a series of questions attempting to resolve whether
“‘most’ of the fiber construction is in a large number of
‘short’ connections to anchor institutions.”
December 9, 2009,
Email Chain Between Gianato and NTIA, ECF No. 393-37.
Gianato
replied that the WVEO “will need to go back to Verizon
engineering” for an answer, which “will take a long time.”
Id.
The NTIA representative responded that “an off-the-cuff
estimate” would suffice.
Id.
On January 7, 2010, the NTIA
representative asked Gianato whether the fiber mileage reported
in the WVEO’s grant application was “all to be constructed new
or do they include some existing fiber.”
January 7, 2010, Email
Chain Between Gianato and NTIA, ECF No. 393-11.
Gianato
replied, “Based on the estimates from Verizon and Frontier, the
fiber is new fiber that does not exist today.
to the facility.”
It includes fiber
Id.
After the WVEO was awarded the grant, Arndt asked Goes
via email whether she “happen[ed] to know the amount [of the
grant] and will [Frontier] be able to play a role?”
February
17, 2010, Arndt and Goes Email Chain, ECF No. 380-19; Arndt Dep.
288-89, ECF No. 380-2.
At the same time, Frontier was having a
similar internal discussion about trying to glean details of the
WVEO’s grant award and whether Frontier could assist in its
6
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implementation.
See February 17, 2010, Frontier Internal Email
Chain, ECF No. 380-26; February 18, 2010, Frontier Internal
Email Chain, ECF No. 380-18; Arndt Dep. 286-87.
Arndt, Waldo,
and McKenzie were executive-level employees of Frontier during
the times relevant to the pending motions.
See McKenzie Decl. ¶
3, ECF No. 380-38; Aug. 26, 2010, Waldo Commentary, ECF No. 39328; February 17, 2010, Arndt and Goes Email Chain.
Eventually, the WVEO and Frontier agreed that Frontier
would serve as the WVEO’s contractor to build the middle-mile
fiber network component of the BTOP grant.
See August 30, 2010,
Frontier Internal Email Chain, ECF No. 393-29.
Todorovich
explained in a letter that “[t]his portion of the grant was
written in a manner utilizing the pre-existing State of West
Virginia MPLS contract” previously held by Verizon and passed to
Frontier with Frontier’s purchase of Verizon.
Todorovich Letter, ECF No. 402-8. 4
October 6, 2010,
But “[a]s [the WVEO] started
implementing the grant . . . , NTIA advised that we should treat
Frontier as a sub-recipient [of the BTOP grant] rather than a
contractor.”
Id.
“MPLS” is short for Multi-Protocol Label Switching. See
William Lehr, Would You Like Your Internet With or Without
Video?, 2017 Ill. J. of Law, Tech. & Policy 73, 87 n.62 (2017).
Under the MPLS contract, Frontier “provide[d] network facilities
and other services to the State of West Virginia.” See MOU at
1, ECF No. 380-4.
4
7
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Thus, in October 2010, the WVEO entered into a
memorandum of understanding (“MOU”) with Frontier to be the BTOP
grant’s subrecipient and to build the fiber network contemplated
by the grant.
See MOU.
The MOU provided that Frontier would
carry out its subrecipient duties under the BTOP grant pursuant
to the existing MPLS contract.
Id.
But because award of the
BTOP grant required acceptance of the grant terms and
conditions, Frontier and the WVEO also agreed to be bound by
those as well.
See id.; see also id. at 3.
The terms and conditions of the grant to the WVEO, of
which Frontier became the subrecipient, include the following,
as each was constituted at the time of the grant application and
award:
Department of Commerce Financial Assistance Standard
Terms and Conditions;
Award Specific Special Award Conditions, particular to
the BTOP grant;
Line Item Budget for the BTOP grant;
15 CFR Part 24, Uniform Administrative Requirements
for Grants and Agreements to States and Local
Governments;
OMB Circular A-87, Cost Principles for State, Local,
and Indian Tribal Governments;
OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations;
8
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Department of Commerce Pre-Award Notification
Requirements for Grants and Cooperative Agreements, 73
Fed. Reg. 7696 (Feb. 11, 2008); and
Notice of Funds Availability (“NOFA”) for BTOP grants
and subsequent amendments, 74 Fed. Reg. 33,104 (July
9, 2009); 74 Fed. Reg. 41,676 (Aug. 18, 2009); and 74
Fed. Reg. 42,644 (Aug. 24, 2009).
Among other things, these terms and conditions imposed
recordkeeping requirements and defined what costs could be
reimbursed with grant funds.
B. Grant implementation
Gianato recalls the original intent of the BTOP grant
to have been the building of fiber from each of the identified
CAIs back to one of Frontier’s various “central offices” 5 located
throughout the state.
Gianato Dep. 105, 216.
“[A]t some
point,” however, the implementation plan changed.
Id. at 163.
Gianato testified that “NTIA said you can’t build if fiber
already exists to a location,” that is, BTOP grant funds could
not be used to “overbuild where sufficient fiber already
existed” along the route to a CAI.
Id. at 215-16.
NTIA’s
overbuild limitation applied whether that fiber was owned by
Frontier or another company.
Id. at 204.
Additionally, some
A central office essentially is a terminal where Frontier
houses equipment. See Martin Dep. 120-21, ECF No. 380-2.
5
9
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CAIs turned out to have moved or no longer existed, and other
CAIs were added and dropped, such that “th[e] list was almost
evolving almost till the day” fiber construction ended.
204; see also Arndt Dep. 284.
Id. at
Under the BTOP grant terms and
conditions and the MOU, pre-existing fiber was not subject to
the BTOP grant’s open-access requirement.
Dunlap Dep. 62-64,
ECF Nos. 393-40, 396-5.
In a March 18, 2011, memorandum, Todorovich expressed
to Frontier that in recent meetings he “picked up overtones”
that Frontier would not be building fiber from central offices
to CAIs.
March 18, 2011, Memorandum from Todorovich to
Frontier, ECF No. 394-4.
Frontier responded, “You instructed us
to use the central office as the start location . . . , with the
plan that we would make appropriate modifications as we move
forward.
We still plan to do so.
We also plan to use existing
fiber where available and appropriate.”
March 21, 2011, Letter
from Frontier to Todorovich, ECF No. 393-33.
In a July 15, 2011, memorandum sent by Frontier to the
WVEO, Frontier memorialized discussions between Frontier and the
WVEO regarding “duplicative fiber pulls from CAI to central
offices.”
394-5.
July 15, 2011, Email from McKenzie to WVEO, ECF No.
Frontier recounted that the BTOP grant application “does
not contemplate the duplication of existing fiber facilities;”
10
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rather, “it states that West Virginia will ‘leverage its
existing infrastructure’ and ‘leverage the current [Frontier]
MPLS contract’ to ‘extend broadband connectivity’ to anchor
institutions through ‘Fiber Segments’ and ‘handoffs to existing
fiber networks.’”
Id. (quoting WVEO BTOP Application within
single quotation marks).
Frontier also recounted that
“[d]uplication of existing backbone facilities also is not
contemplated under the MOU,” and that “[t]he NTIA and the State
previously have stated repeatedly that their policy under the
Grant was against duplication of existing fiber facilities.”
Id.
Todorovich testified that, based on a conversation he
partly overheard, Gianato ultimately made the decision to allow
Frontier not to duplicate fiber, and that the federal government
was aware of that decision.
Todorovich Dep. 61-62, 64, 142.
Likewise, Gianato testified that he “[does not] know” if there
is written documentation of the changes to the fiber build
during the grant’s implementation, but that those issues were
discussed and approved during phone calls with NTIA.
Dep. 164.
Gianato
As noted, Gianato testified that the NTIA had a rule
against fiber overbuild.
See id. at 215-16.
Frontier constructed 675 new miles of fiber.
97.
11
Ultimately,
McKenzie Dep. 95-
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In addition to fiber overbuild, the July 15, 2011,
memorandum also discussed apparent issues with “CAI premises
conduit/entrance facilities.”
McKenzie to WVEO.
July 15, 2011, Email from
Frontier contended that prior documentation,
including grant documents, the MPLS contract, and the MOU,
showed “that the CAI is responsible for any conduit/entry work
needed.
In fact, the State allocated BTOP funding for this
purpose.”
Id.
Frontier also stated that “[its] business does
not ordinarily include this type of work.”
Id.
At some point,
however, the WVEO and Frontier agreed that Frontier would
perform this portion of the fiber build by hiring contractors,
which was later referred to as “facilities build-out” (“FBO”)
work.
393-19.
See Gregg Dep. 127-29, ECF Nos. 380-2, 382-11, 392-2,
FBO work involved building fiber from a “meet point”
outside each CAI into the CAI itself.
See id. at 128-29.
For
example, “actually doing whatever was necessary to drill into
that building and go to the closet, cabinet, whatever it was,
where the service would be terminated” and the CAI could connect
to the fiber network.
Id. at 128.
C. United States’ alternate remedy
Pursuant to 31 U.S.C. § 3730(b)(2), Citynet’s qui tam
complaint was filed on May 17, 2014, in camera, sealed, and
12
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served on the United States but not the defendants.
3.
ECF Nos. 2-
The United States then moved for several extensions under 31
U.S.C. § 3730(b)(3) while it investigated Citynet’s allegations
to decide whether to intervene and conduct the action on its own
behalf.
See ECF Nos. 4-26.
declined to intervene.
On June 17, 2016, the United States
ECF No. 27.
On July 18, 2016, Citynet
filed the first amended complaint, which is the operative
pleading in this matter.
ECF No. 30.
Under 31 U.S.C. § 3730(c)(5), the United States has
the option to pursue “any alternate remedy” in lieu of
intervening in a qui tam case.
After the decision not to
intervene, the United States Department of Commerce Office of
Inspector General (“OIG”) “continued to investigate several
allegations regarding Frontier’s performance as a subrecipient
under the West Virginia BTOP grant.”
U.S. Dep’t of Com. Off. of
Inspector Gen., Investigative Report No. 14-0480, at 1 (June
2017), ECF Nos. 380-28, 396-15, 404-6 [hereinafter OIG Report].
“Any finding of fact or conclusion of law made in such other
proceeding that has become final shall be conclusive on all
parties to” the corresponding FCA action.
31 U.S.C. §
3730(c)(5).
The OIG issued its report in June 2017.
summarized its findings as follows:
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The OIG
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The evidence developed over the course of our
investigation established that the [WVEO] reimbursed
Frontier from BTOP grant funds for approximately $4.7
million in costs that were unallowable under the
applicable rules and regulations.
OIG Report at 1.
That $4.7 million comprised “$465,000 in fees
to process [FBO]-related invoices for work performed by
contractors” and “$4.24 million in indirect ‘loadings’ charges.”
Id. at 1-2.
The following is a summary of the facts described by
the OIG in reaching its conclusions.
To begin, the OIG
described the billing and payment system under the BTOP grant.
The BTOP grant provided that Frontier, as a grant subrecipient,
would submit its invoices directly to the WVEO without NTIA
review.
Id. at 7.
The BTOP grant further provided that the
WVEO could unilaterally draw down grant funds to pay Frontier.
Id.
Thus, the BTOP grant charged the WVEO with monitoring
Frontier’s compliance with the grant’s terms and conditions.
Id.
The WVEO maintained an internal review system to evaluate
Frontier’s invoices before drawing down grant funds for
reimbursement to Frontier.
Id. 6
The WVEO was not completely unsupervised. It was required to
file quarterly reports and participate in biweekly phone
conferences with NTIA to discuss the BTOP grant. OIG Report at
7. Frontier participated in the biweekly conferences. Id.
6
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One part of Frontier’s BTOP grant responsibilities was
FBO work,
in which Frontier oversaw additional construction
(build-out) within the premises of certain CAIs in
order to allow for the installation of fiber optic
cable. Frontier did not perform build-out work
itself, but rather subcontracted vendors to perform
the work and then processed the payment for that work
through the grant.
Id.
From the beginning of the grant until early 2013, Frontier
charged the grant a 35.2% “markup” “on the total amount of the
vendor costs on all FBO-related invoices.”
Id. at 8.
Indeed,
Frontier emails show that Frontier considered the markup rate as
“a revenue opportunity for Frontier,” id., and “profit,” id. at
14.
The OIG concluded that “the 35.2% fee was seen within
Frontier as distinct from its actual costs in processing the
invoices.”
Id. at 8.
Indeed, “no Frontier employees
interviewed by the OIG could confirm that [the markup] was based
on an analysis of actual Frontier costs in processing the BTOP
FBO vendor invoices.”
Id.
“Additionally, the OIG found no evidence that the
specific amount and nature of the FBO markup were ever
communicated to the State of West Virginia.”
Id.
Although
Frontier prepared a memorandum to the State addressing the
markup rate, Frontier never sent the memorandum.
15
Id. at 8-9.
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In November 2012, a State official expressed concerns
over the FBO markup rate.
Id. at 9.
Frontier responded in
January 2013 with a memorandum proposing the replacement of the
percentage-based markup with a flat fee of $1,808.
Id.
Frontier represented that $1,808 was its average cost to process
each FBO invoice, based on correspondence with the various
Frontier departments involved in such processing.
State agreed to the flat-fee proposal.
Id.
Id.
The
In a signed
agreement between Frontier and the State, Frontier restated its
assertion that $1,808 was its actual costs incurred to process
each FBO invoice.
Id.
“The OIG,” however, “found no evidence of any backup
documentation . . . to support Frontier’s [FBO] invoice
processing fees.”
Id. at 10.
Instead, Frontier’s memorandum
showed that the $1,808 cost-per-invoice was simply the quotient
of the amount it had received in FBO markup fees by that time
over the number of FBO invoices it had processed.
Id. at 9.
The OIG found that “Frontier’s true costs appear to be nowhere
close to the amount charged for processing the FBO invoices.”
Id. at 14.
Still, Frontier represented that it arrived at the
$1,808 by analyzing a purported eleven-step process that took
four hours to complete.
Id.
But “the evidence does not support
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that Frontier actually went through this 11-step, four-hour
process for every FBO invoice.”
Id. at 14.
Indeed, the OIG
classified the process as an “estimate” that was not based on
discussions with relevant employees or analysis of relevant
documents.
Id. at 14-15.
And again, the actual fixed fee
itself was based on the percentage markup Frontier had already
been charging the grant, which was devised before Frontier ever
undertook a supposed analysis of the steps it took in processing
FBO invoices.
See id. at 9-10, 14-15.
In addition to FBO processing fees ($465,000),
Frontier also added loadings charges ($4,240,000) to its
invoices submitted to the WVEO.
“The evidence established that
‘loads’ or ‘loadings’ represented Frontier’s purported indirect
costs,” that is, overhead expenses, “associated with carrying
out work under the BTOP project.”
11.
Id. at 10; see also id. at
“The evidence also established that Frontier informed WVEO
officials about the loadings charges,” including that loadings
were equivalent to overhead expenses or indirect costs.
Id. at
10-11; see also id. at 16.
As noted, the WVEO was responsible for ensuring
Frontier’s compliance with the BTOP grant’s terms and
conditions.
Id. at 7.
In May 2013, the WVEO obtained an
opinion from “a prominent accounting firm” (Ernst & Young) on
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Frontier’s billing for indirect costs.
Id. at 11.
The
accounting firm “concluded that Frontier, as a commercial
organization, was not subject to the rules that would have
prevented a similarly situated governmental entity from
recovering its indirect costs” under the grant.
Id.
Likewise,
in 2012 and 2014, Frontier underwent audits submitted to the
NTIA in which “a major accounting firm” (KPMG) “concluded that
Frontier’s performance and costs complied with all requirements
that could have a direct and material effect on the grant.”
Id.
at 12.
In addition, the WVEO corresponded with the NTIA
concerning FBO invoice processing fees and loadings charges.
In
May 2013, an NTIA official reviewed the eleven-step FBO invoice
process outlined by Frontier and “agreed with [a WVEO]
official’s initial determination that the costs were direct
charges.”
Id.
In June 2013, the same NTIA official and an WVEO
official discussed whether Frontier’s invoice processing fees
were direct or indirect and determined that classifying them as
direct was not an issue.
Id.
However, when interviewed by the OIG, the NTIA
official who had spoken with WVEO officials denied approving
loadings charges as reimbursable direct charges, “and stated
that he had merely opined that Frontier’s FBO invoice processing
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fees, which at times were also referred to as ‘loadings,’ were
in fact direct charges and not indirect.”
Id.
Further, the
official denied ever seeing invoices with “loadings,” stated
that he did not know what Frontier’s “loadings” were, and
affirmed that he never spoke with a WVEO official about loadings
charges.
Id.
The official also stated that Frontier’s loadings
were “clearly indirect” and thus not reimbursable with BTOP
grant funds.
Id.
The WVEO official who spoke with the NTIA
official believed at the time that NTIA had approved Frontier’s
FBO and loadings charges.
Id.
Ultimately, the OIG found that “the evidence
established that Frontier’s FBO invoice processing fees . . .
should not have been paid with BTOP grant funds.”
Id. at 15.
Concerning the NTIA official’s approval of FBO fees, the OIG
noted that “there is insufficient evidence to conclude that NTIA
knowingly approved the construct and factual underpinnings of
the processing fees that Frontier charged.”
Id. at 16.
In
fact, the OIG concluded that Frontier’s memorandum detailing its
eleven-step FBO invoicing process, provided to NTIA, “contained
several material representations that are not supported by the
facts.”
Id.
“[A]t best,” the OIG continued, “Frontier provided
. . . incomplete information.”
Id.
As for the WVEO, the OIG
concluded that “the evidence shows that the WVEO consulted with
19
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NTIA in good faith” about whether the FBO processing fees could
be paid with BTOP grant funds.
Id.
Turning to Frontier’s loadings charges, the OIG noted
competing interpretations of BTOP grant documents.
Id. at 17.
The OIG concluded as follows:
Although the evidence establishes that Frontier was
transparent about the nature and amount of its
‘loadings’ charges and that the [WVEO] (based on the
latter’s opinion from the accounting firm and
communications with NTIA) believed that Frontier’s
indirect costs were reimbursable with BTOP funds, the
OIG defers to NTIA’s interpretation of the prevailing
grant rules.
Id.
In so finding, the OIG emphasized that “the evidence shows
that the [WVEO] believed in good faith that NTIA had approved
the loadings charges.”
Id. at 18.
Apart from FBO and loadings charges, the OIG also
investigated Frontier’s installation of maintenance coil, which
“is the extra cable stored at a particular facility that service
providers use to repair damaged fiber and to connect new fiber
to the network.”
omitted).
Id. at 19 (quotation marks and alteration
The OIG summarized the results of its investigation
as follows:
On multiple occasions, Frontier represented to the
State of West Virginia, to the public, and to the OIG
that, consistent with industry standard, it had
installed 100 feet of maintenance coil for every mile
of BTOP fiber placed, for a total of 12 miles of
maintenance coil. The OIG’s investigation, however,
identified evidence calling into question the accuracy
20
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of that representation, and Frontier ultimately
acknowledged that it installed approximately 49 miles
of maintenance coil, or nearly four times the amount
that it had previously asserted was installed in
accordance with industry standards.
Id.
The OIG recounted that, in a January 2014 email
exchange between a Frontier employee and a consultant, the
consultant stated that “not only do we not know how much fiber
[Frontier] actually placed, but we don’t know how much of what
we placed is coiled up on poles,” that the total length of
maintenance coils appeared “4 times greater than [Frontier] told
[the State],” and that “I don’t think we need to tell [the
State] unless . . . ask[ed] again.”
Id. at 20.
Frontier did
not tell the State about the maintenance coils, id. at 20-21,
although a Frontier employee told the OIG that it was believed
that the consultant was unqualified to opine on the length of
maintenance coils, id. at 20.
The OIG did not take a position on whether the length
of maintenance coil was within industry standards and referred
the matter to NTIA for further consideration.
Id. at 21.
NTIA concluded that
The
only those costs associated with 12 miles of
maintenance coil are reasonable and necessary for the
project. This determination is consistent with
Frontier’s previous representations to the West
Virginia Legislature, the public and to the OIG that,
consistent with industry standards, Frontier installed
21
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12 miles of maintenance coil for [the BTOP grant]
project. . . . Thus, the costs associated with the 37
miles of excess maintenance coil are hereby
disallowed.
U.S. Dep’t of Com. Nat’l Oceanic & Atmospheric Admin.,
Investigation Resolution Demand Letter (May 24, 2018), ECF No.
206-5.
Thus, in addition to the $4.7 million already disallowed
by the OIG for improper FBO ($465,000) and loadings ($4,240,000)
charges, the NTIA further disallowed $244,200 for excess
maintenance coils, id., for a total of $4,949,200 in disallowed
costs under the BTOP grant.
The State of West Virginia has
agreed to pay the amounts owed.
See ECF No. 185 at 2.
D. Citynet’s claims
Citynet initiated this action on May 7, 2014, with the
filing of its qui tam complaint under the False Claims Act
(“FCA”), 31 U.S.C. §§ 3729-3733.
prevention statute.”
“The [FCA] is a fraud
United States ex rel. Gugenheim v.
Meridian Senior Living, LLC, 36 F.4th 173, 179 (4th Cir. 2022)
(quotation marks omitted).
It contains three causes of action
relevant to this case: an action for the presentment of a false
claim under 31 U.S.C. § 3729(a)(1)(A), an action for the making
or using of a false record or statement material to a false
claim under 31 U.S.C. § 3729(a)(1)(B), and a conspiracy claim
under 31 U.S.C. § 3729(a)(1)(C).
22
United States ex rel.
Case 2:14-cv-15947 Document 465 Filed 09/08/22 Page 23 of 71 PageID #: 12466
Nicholson v. MedCom Carolinas, Inc., 42 F.4th 185, 193 (4th Cir.
2022) (quotation marks and footnotes omitted).
“Roughly
speaking, a presentment claim alleges that a defendant knowingly
submitted a false claim to the government themselves[, a] falserecord-or-statement claim alleges that a defendant knowingly
made a false statement or produced a false record material to a
false claim that was submitted to the government by someone
else[, a]nd a conspiracy claim covers knowing agreements to do
either.”
Id.
Citynet alleges generally that the defendants
defrauded the United States in connection with the grant in
violation of the FCA.
No. 30.
First Am. Compl. ¶¶ 3-6, 9-12, 14, ECF
Citynet’s specific causes of action can be separated
into four categories based on the facts alleged.
First, in Counts I (presentment) and V (false record),
Citynet alleges that the defendants fraudulently induced the
NTIA to award the grant to the WVEO by misrepresenting aspects
of how they intended to use the grant funds.
Compl. ¶¶ 133-39, 161-67.
See First Am.
As more fully explained in the
court’s memorandum opinion and order denying the Frontier
Defendants’ motion for partial summary judgment filed February
22, 2022, and entered contemporaneously herewith, operation of
the FCA’s public disclosure bar limits Counts I and V to
23
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allegations of false or fraudulent conduct that occurred before
March 23, 2010.
See 31 U.S.C. 3730(e)(4)(A) (public disclosure
bar).
Second, in Counts II (presentment) and VI (false
record), Citynet claims that the defendants fraudulently billed
the United States for Frontier’s loadings costs.
Compl. ¶¶ 140-46, 168-74.
See First Am.
Third, Citynet asserts in Counts III
(presentment) and VII (false record) that the defendants
likewise fraudulently billed the United States for Frontier’s
FBO invoice processing costs.
See id. ¶¶ 147-53, 175-81.
Fourth, in Counts IV (presentment) and VIII (false record),
Citynet alleges that Frontier and McKenzie falsified the amount
of fiber built and fraudulently charged the United States for
excessive maintenance fiber coils.
See id. ¶¶ 154-60, 182-88.
Additionally, in Count IX, Citynet alleges a conspiracy among
the defendants to commit the FCA violations in Counts I through
VIII.
See id. ¶¶ 189-94.
II. Summary Judgment Standard
Summary judgment is appropriate only “if the movant
shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
“Material” facts are those necessary to
24
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establish the elements of a party’s cause of action.
Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also News
& Observer Publ’g Co. v. Raleigh-Durham Airport Auth., 597 F.3d
570, 576 (4th Cir. 2010).
A “genuine” dispute of material fact
exists if, in viewing the record and all reasonable inferences
drawn therefrom in a light most favorable to the non-moving
party, a reasonable fact-finder could return a verdict for the
non-moving party.
Anderson, 477 U.S. at 248.
“When faced with
cross-motions for summary judgment, [a court must] consider each
motion separately on its own merits to determine whether either
of the parties deserves judgment as a matter of law.”
Bacon v.
City of Richmond, 475 F.3d 633, 637-38 (4th Cir. 2007)
(quotation marks omitted).
A party is entitled to summary judgment if the record,
as a whole, could not lead a reasonable trier of fact to find
for the non-moving party.
823 (4th Cir. 1991).
Williams v. Griffin, 952 F.2d 820,
Conversely, summary judgment is
inappropriate if the evidence is sufficient for a reasonable
fact-finder to return a verdict in favor of the non-moving
party.
Anderson, 477 U.S. at 248.
25
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III. Discussion
Presentment and false-record-or-statement claims share
the same four elements of proof:
(1) there was a false statement or fraudulent course
of conduct; (2) made or carried out with the requisite
scienter; (3) that was material; and (4) that caused
the government to pay out money or to forfeit moneys
due.
Nicholson, 42 F.4th at 193.
FCA conspiracy requires an
“agree[ment by the conspirators] that [a] false record or
statement would have a material effect on the Government’s
decision to pay [a] false or fraudulent claim.”
third alterations in original).
Id. (second and
Further, FCA conspiracy is not
actionable absent an underlying violation of the FCA.
United
States ex rel. Kasowitz Benson Torres LLP v. BASF Corp., 929
F.3d 721, 728-29 (D.C. Cir. 2019); United States ex rel. Godfrey
v. KBR, Inc., 360 F. App’x 407, 412-13 (4th Cir. 2010).
Gianato, Given, and the Frontier Defendants seek
summary judgment on all counts.
See Gianato Given Mot. Summ.
J.; Frontier Defs. Mot. Summ. J.
Citynet seeks summary judgment
against only the Frontier Defendants, and on only the loadings
charges claims of Counts II and VI and the FBO charges claims of
Counts III and VII.
See Citynet Mot. Summ. J. 7
The court begins
Citynet also seeks judgment on a number of the Frontier
Defendants’ affirmative defenses since “they are not legally
7
26
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with Gianato and Given before turning to the cross-motions of
the Frontier Defendants and Citynet.
A. Gianato and Given
At the outset, the court notes the OIG’s findings that
the WVEO consulted with NTIA in good faith about reimbursement
of Frontier’s FBO processing fees and loadings charges and that
the WVEO believed in good faith that NTIA had approved
reimbursement of Frontier’s FBO processing fees and loadings
charges.
OIG Report at 15, 18.
Inasmuch as those findings of
good faith are conclusive on this action, 31 U.S.C. §
3730(c)(5), Citynet faces a virtually insurmountable hurdle to
prove that Gianato or Given acted with the requisite scienter to
establish FCA liability on the claims related to FBO and
loadings charges, see United States ex rel. Taylor v. Boyko, 39
F.4th 177, 198 (4th Cir. 2022) (explaining that the FCA’s
scienter requirement concerns, at its furthest extent, those who
viable defenses in response to an FCA claim.” See Citynet Mem.
Supp. 33-34, ECF No. 383. The court declines to address those
affirmative defenses absent evidence that the Frontier
Defendants intend to invoke them at trial. The Frontier
Defendants state that they do not. See Frontier Defs. Resp. 1415, ECF No. 392.
27
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“fail[] to make simple inquiries” that would alert the person of
the false claims).
Even so, Citynet urges the court to discount the OIG’s
findings because NTIA’s approval of reimbursement of the
loadings and FBO charges was “premised on incomplete
information.”
396.
See Citynet Resp. to Gianato Given 15, ECF No.
The FCA, however, “is not intended to punish honest
mistakes.”
United States ex rel. Ubl v. IIF Data Sols., 650
F.3d 445, 452 (4th Cir. 2011).
An honest mistake is precisely
what the OIG found happened in this case concerning the WVEO’s
decision to reimburse loadings and FBO charges.
Therefore, Gianato and Given are entitled to summary
judgment on Citynet’s loadings costs claim (Counts II and VI)
and FBO invoice processing costs claim (Counts III and VII). 8
Inasmuch as those are the only FCA violations alleged against
Given, Given is also entitled to summary judgment on Citynet’s
conspiracy claim (Count IX).
The only remaining claims are against Gianato for
misrepresentation of the network the WVEO intended to build
(Counts I and V) and conspiracy (Count IX).
Gianato solely
Indeed, Citynet does not contest summary judgment in Gianato’s
favor on the loadings and FBO invoice processing costs claims.
8
28
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focuses on his scienter, or lack thereof.
Mem. Supp. 9-12, 14-15.
See Gianato Given
“[A] person acts with the requisite
scienter if they (1) have ‘actual knowledge of the [falsity of
the] information’; (2) act ‘in deliberate ignorance of the truth
or falsity of the information’; or (3) act ‘in reckless
disregard of the truth or falsity of the information.’”
39 F.4th at 197 (quoting 31 U.S.C. § 3729(b)(1)(A)).
Taylor,
“[N]o
proof of specific intent to defraud” is required to establish
scienter.
31 U.S.C. § 3729(b)(1)(B).
Gianato argues that Citynet has failed to “establish[]
that [he] knew BTOP grant funds would be used to construct any
part of a network that was not considered middle-mile.”
Given Mem. Supp. 10.
Gianato
Gianato contends that he “had no reason to
question” Frontier’s and Verizon’s estimates, that he told NTIA
that the proposed fiber build was based upon those third-party
estimates by Frontier and Verizon, and that adjustments during
grant construction were made with NTIA’s knowledge and approval
because of changing project needs.
See id.; Gianato Given Reply
5-6, ECF No. 400.
“Citynet’s claim [against Gianato] is premised on the
fact that [he] represented” in the January 7, 2010, email with
an NTIA official “that the state intended to build middle mile
infrastructure when,” Citynet contends, “[the state] intended to
29
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and did rubber stamp the Frontier Defendants’ project regardless
of what it built.”
Citynet Resp. to Gianato Given 14-15.
As
proof, Citynet offers evidence of a purported “quid pro quo.”
Id. at 14.
Specifically, Citynet points to evidence that
Frontier expedited fiber construction in McDowell County,
Gianato’s home county, at Gianato’s urging.
See id. (citing
February 1, 2012, Email Chain Between Gianato and Frontier, ECF
No. 396-10).
More generally, Citynet accuses Gianato as having
“acquiesced in [the Frontier Defendants’] desires on the BTOP
project as a de facto reward for [their] investment” in West
Virginia.
Id.
The evidence, Citynet argues, demonstrates that
“[w]hen the Frontier Defendants wanted to misrepresent the scope
of infrastructure that existed to the NTIA, Defendant Gianato
accommodated them,” and “[w]hen Defendant Gianato wanted certain
projects prioritized, the Frontier Defendants accommodated him.”
Id.
Citynet’s argument is mere speculation, which is
insufficient to defeat a summary judgment motion.
Verisign,
Inc. v. XYZ.COM LLC, 848 F.3d 292, 298 (4th Cir. 2017)
(explaining that, to defeat a summary judgment motion, the
nonmovant “must provide more than a scintilla of evidence -- and
not merely conclusory allegations or speculation -- upon which a
jury could properly find in its favor”).
30
Citynet’s position is
Case 2:14-cv-15947 Document 465 Filed 09/08/22 Page 31 of 71 PageID #: 12474
that Gianato’s “plan all along” was to allow the Frontier
Defendants to run roughshod over the BTOP grant and, in
exchange, Frontier would allow him concessions and favors during
construction.
See Citynet Resp. to Gianato Given 13-15.
But
Citynet fails to provide any evidence of the alleged “quid pro
quo” between Gianato and the Frontier Defendants, much less one
that arose before March 23, 2010.
See Gugenheim, 36 F.4th at
179 (“[Relator] bears the burden to prove scienter at trial.
Therefore, summary judgment is warranted if [Relator] has failed
to marshal evidence from which a reasonable jury could find that
Defendants acted with the requisite state of mind.”).
In fact, Frontier appears to have resisted Gianato’s
request to expedite construction in McDowell County.
See
February 1, 2012, Email Chain Between Gianato and Frontier.
And
more broadly, as Citynet points out, the Frontier Defendants
evidently were permitted to avoid overbuilds over the entire
grant implementation only after they “repeated[ly] objected” to
doing so over the course of months.
Citynet Resp. to Gianato
Given 4 (citing March 21, 2011, Letter from Frontier to
Todorovich; July 15, 2011, Email from McKenzie to WVEO).
Moreover, Citynet has failed to identify evidence suggesting
that Gianato knowingly, recklessly, or in deliberate ignorance
passed false estimates from Verizon and Frontier to NTIA.
31
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No reasonable jury could find that Gianato and the
Frontier Defendants had a quid pro quo agreement because there
is no evidence that a quid pro quo existed.
the evidence suggests just the opposite.
On the contrary,
Inasmuch as Citynet
has not identified any evidence or theory to show that Gianato
acted with the requisite scienter for an FCA claim, Gianato is
entitled to summary judgment on Citynet’s claim that he
misrepresented the network the WVEO intended to build (Counts I
and V) and, in turn, the conspiracy claim against him (Count IX)
fails.
B. The Frontier Defendants
At the outset, the court notes that the Frontier
Defendants seek dismissal of the conspiracy claim against them
pursuant to the intracorporate conspiracy doctrine.
Defs. Mem. Supp. 31.
Frontier
The intracorporate conspiracy doctrine,
which was developed under antitrust law, holds that a
corporation and its agents in their corporate capacity cannot
conspire among themselves because they are effectively the same
entity; that is, a corporation cannot conspire with itself.
See
Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 769
(1984); see also Buschi v. Kirven, 775 F.2d 1240, 1251-54 (4th
Cir. 1985).
Although the Fourth Circuit has not yet been called
32
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to decide whether the intracorporate conspiracy doctrine applies
to the FCA, the district courts in this circuit, including one
court in this district, have applied the doctrine to FCA
conspiracy.
See United States ex rel. Brooks v. Lockheed Martin
Corp., 423 F. Supp. 2d 522, 528 (D. Md. 2006); United States ex
rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617, 65152 (E.D. Va. 2005), rev’d on other grounds, 562 F.3d 295 (4th
Cir. 2009); United States v. Gwinn, No. 5:06-cv-00267, 2008 WL
867927, at *20-25 (S.D. W. Va. Mar. 31, 2008).
Citynet does not
contend that the doctrine should not apply to this case.
Inasmuch as the only remaining defendants in this matter are
Frontier and its corporate agents, Citynet’s conspiracy (Count
IX) claim against the Frontier Defendants fails.
The court further notes that the evidence shows the
Frontier Defendants did not themselves present a claim to the
United States.
Rather, it is undisputed that the billing
structure required the Frontier Defendants to submit invoices to
the WVEO, which in turn submitted claims to the United States.
Inasmuch as a presentment claim under 31 U.S.C. § 3729(a)(1)(A)
requires a defendant to “knowingly submit[] a false claim to the
government [itself],” Nicholson, 42 F.4th at 193, the Frontier
Defendants are entitled to summary judgment on Citynet’s
presentment claims, Counts I through IV.
33
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Remaining are Citynet’s false records claims, Counts V
through VIII, which require “a defendant knowingly [to have]
made a false statement or produced a false record material to a
false claim that was submitted to the government by someone
else.”
Id.
The court proceeds with Counts V through VIII
below.
1. Count V -- Frontier Defendants’ misrepresentation
of fiber build
In Count V, Citynet brings a false-records fraudulent
inducement claim related to the WVEO’s application for BTOP
grant funds.
Under the FCA, liability for fraudulent inducement
arises out of “fraud surrounding the efforts to obtain the
contract or benefit status, or the payments thereunder.”
Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788
(4th Cir. 1999).
Citynet alleges that the Frontier Defendants
assisted the WVEO in preparing its grant application and
“misrepresented the scope of the project [they] intended to
build with BTOP funds.”
Citynet Resp. to Frontier Defs. 15, ECF
No. 393.
The Frontier Defendants argue they are entitled to
summary judgment on Count V for three reasons: (a) there was no
false statement because they did not contribute to the WVEO’s
34
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grant application; (b) any false contribution was made without
the requisite scienter; and (c) any false contribution was
immaterial to the United States’ decision to award BTOP grant
funds to the WVEO.
As previously noted, “a person acts with the requisite
scienter [under the FCA] if they (1) have ‘actual knowledge of
the [falsity of the] information’; (2) act ‘in deliberate
ignorance of the truth or falsity of the information’; or (3)
act ‘in reckless disregard of the truth or falsity of the
information.’”
Taylor, 39 F.4th at 197 (4th Cir. 2022) (quoting
31 U.S.C. § 3729(b)(1)(A)).
The latter two states of mind are
intended to capture defendants who “bur[y their] head[s] in the
sand and fail[] to make simple inquiries which would alert
[them] that false claims are being submitted.”
(quotation marks omitted).
Id. at 198
Although that standard does not
require “specific intent to defraud,” 31 U.S.C. § 3729(b)(1)(B),
it is not intended to punish “honest disagreements, routine
adjustments and corrections, and sincere and comparatively minor
oversights.”
United States ex rel. Owens v. First Kuwaiti Gen.
Trading & Contracting Co., 612 F.3d 724, 734 (4th Cir. 2010).
Nor does the FCA reach “[b]ad math,” mere “proof of mistakes,”
or “the common failings of engineers and other scientists.”
Id.
“Likewise, [a]n FCA relator cannot base a fraud claim on nothing
35
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more than his own interpretation of an imprecise contractual
provision.”
Id. (quotation marks omitted).
The requisite scienter for Count V is further informed
by Citynet’s theory of liability, fraudulent inducement.
“[F]raudulent inducement claims are concerned with whether the
contract or extension of government benefit was obtained
originally through false statements or fraudulent conduct.”
United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525
F.3d 370, 378 (4th Cir. 2008) (quotation marks and emphasis
omitted).
That is, the scienter behind fraudulent inducement is
an intent not to perform a contract at the time the contract is
made, or, in the context of the FCA, at least a deliberate
indifference or reckless disregard to future performance.
See
id.
As evidence of scienter, Citynet hones in solely on
Gianato’s January 7, 2010, email response to the NTIA during the
NTIA’s consideration of the WVEO’s application.
to Frontier Defs. 17.
Citynet Resp.
In that email, Gianato represented that
“[b]ased on the estimates from Verizon and Frontier, the fiber
is new fiber that does not exist today.
the facility.”
It includes fiber to
January 7, 2010, Email Chain Between Gianato and
36
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NTIA. 9
According to Citynet, a reasonable jury could view that
email alone and find that the Frontier Defendants
“misrepresented the scope of their existing infrastructure” to
induce the NTIA to award the WVEO a grant, all the while
intending to build less fiber with virtually no open-access
potential.
Id. at 18.
As the Frontier Defendants contend,
however, Citynet’s position is far too tenuous to survive a
summary judgment challenge.
See Frontier Defs. Mem. Supp. 17.
Most importantly, the January 7, 2010, email is not
evidence of scienter by itself.
It states merely that Frontier
estimated that the WVEO’s proposed fiber network was all new
fiber to be constructed.
To be sure, the network did not
require all new fiber since certain segments already had
existing fiber in place and the decision was made not to
overbuild new fiber in those places.
But at common law, the
isolated fact of nonperformance is not enough to prove an
intention not to perform.
The Seventh Circuit has aptly
summarized as follows:
A statement about one’s present intent to perform some
act in the future can be false. But the mere fact
that the promised act is not subsequently performed
does not necessarily mean that the promisor did not
The Verizon and
unknown, although
provided the WVEO
grant application
9
Frontier estimates to which Gianato refers are
the court notes that Verizon and Frontier
with technical data and estimates during the
process.
37
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intend to perform the act at the time of making the
promise.
United States ex rel. Absher v. Momence Meadows Nursing Ctr.,
Inc., 764 F.3d 699, 712 n.14 (7th Cir. 2014); see also
Restatement (Second) of Torts § 530 cmt. d (Am. Law Inst. 1977)
(“The intention of the promisor not to perform an enforceable or
unenforceable agreement cannot be established solely by proof of
its nonperformance, nor does his failure to perform the
agreement throw upon him the burden of showing that his
nonperformance was due to reasons which operated after the
agreement was entered into.”); cf. Wilson, 525 F.3d at 380
(“[I]n the context of a fraudulent inducement FCA claim, the
requisite intent must be coupled with prompt, substantial
nonperformance.” (quotation marks omitted)).
Thus, the fact
that Frontier’s estimate turned out to be inaccurate is
insufficient to prove that it was knowingly false at the time it
was made.
Otherwise, Citynet has simply failed to identify any
other evidence -- no deposition testimony, affidavits, or
documentation -- to support its contention that the Frontier
Defendants knowingly misrepresented the scope of the proposed
fiber build, or that the Frontier Defendants recklessly
disregarded or deliberately ignored the estimate’s accuracy or
its ability or willingness to carry it out.
38
See generally
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United States ex rel. Bunk v. Gov’t Logistics N.V., 842 F.3d
261, 276 (4th Cir. 2016) (explaining that “[b]ecause direct
evidence of such an intention is a rarity, courts generally look
to indirect and circumstantial evidence” to prove a person’s
state of mind); Restatement (Second) of Torts § 530 cmt. d
(“[Fraudulent] intention may be shown by any other evidence that
sufficiently indicates its existence, as, for example, the
certainty that he would not be in funds to carry out his
promise.”).
Accordingly, Citynet’s conclusory assertions about the
Frontier Defendants’ states of mind is not enough for Count V to
survive summary judgment.
See Gugenheim, 36 F.4th at 179
(noting that the relator bears the burden on a defendant’s
summary judgment motion “to marshal evidence from which a
reasonable jury could find that [the defendant] acted with the
requisite state of mind”); see also United States v. The Boeing
Co., 825 F.3d 1138, 1149 (10th Cir. 2016) (“The relators’ naked
assertions, devoid of any evidence of scienter, can’t survive
summary judgment.”).
Turning to another factor, “the term ‘material’ means
having a natural tendency to influence, or be capable of
influencing, the payment or receipt of money or property.”
U.S.C. § 3729(b)(4).
The Supreme Court explains that
39
31
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materiality is tested by “the effect on the likely or actual
behavior of the recipient of the alleged misrepresentation.”
Universal Health Servs., Inc. v. United States ex rel. Escobar,
579 U.S. 176, 193 (2016).
Materiality is intended to be “a
rigorous and demanding” standard, Taylor, 39 F.4th at 190
(quotation marks omitted), so that the FCA does not transform
into “a vehicle for punishing garden-variety breaches of
contract or regulatory violations,” Escobar, 579 U.S. at 194.
“Materiality is a mixed question of law and fact.”
Harrison,
176 F.3d at 785.
Even if the court assumes that the estimate that
Frontier provided Gianato for his January 7, 2010, email to the
NTIA was knowingly false -- the only alleged misrepresentation
Citynet identifies under Count V -- Citynet cannot establish
that such misrepresentation was material.
The facts show, as
the Frontier Defendants contend, that the Frontier Defendants’
alleged misrepresentation did not actually matter to the NTIA.
See Frontier Defs. Mem. Supp. 20-21; Frontier Defs. Reply 15-16,
ECF No. 402-2.
It is undisputed that the NTIA at least approved
of -- perhaps even required -- the changes to the grant during
implementation that led to a lower amount of miles of new fiber
being built.
And there is no suggestion in the record that the
NTIA took any action against the WVEO or the Frontier Defendants
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over those changes, even after the filing of this action.
See
Escobar, 579 U.S. at 195 (“[I]f the Government pays a particular
claim in full despite its actual knowledge that certain
requirements were violated, that is very strong evidence that
those requirements are not material.”); 10 United States ex rel.
McBride v. Halliburton Co., 848 F.3d 1027, 1034 (D.C. Cir. 2017)
(stating that where the government investigates and does not
disallow certain costs, the investigating body’s lack of action
is “very strong evidence” against materiality).
Accordingly, the Frontier Defendants are entitled to
summary judgment on Count V.
2. Count VI -- Loadings costs
In Count VI, Citynet advances a false records claim
related to the billing of Frontier’s loadings costs under the
grant.
As previously explained, loadings costs were Frontier’s
indirect costs, or overhead expenses, associated with its work
on the BTOP grant.
See OIG Report at 10-11. 11
Citynet claims
There is no evidence in the record that the changes to the
grant’s implementation violated the grant terms and conditions.
10
NTIA explained the difference between direct and indirect
costs as follows:
11
Direct costs are those that can be identified
specifically with a particular final cost objective,
i.e., a particular award, project, service, or other
41
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that the Frontier Defendants charged loadings costs to the BTOP
grant despite knowing those costs were impermissible.
Citynet Mem. Supp. 17, ECF No. 383.
See
Citynet and the Frontier
Defendants filed cross-motions for summary judgment on Count VI.
The Frontier Defendants’ motion is limited to the issues of
falsity and scienter.
The Frontier Defendants’ loadings charges were a
primary subject of the OIG’s investigation and report.
generally OIG Report.
See
The OIG concluded that Frontier’s
loadings costs “were unallowable under the applicable rules and
regulations.”
Id. at 1.
In its final analysis, however, the
OIG found that “the evidence establishes that Frontier was
direct activity of an organization. In the case of
BTOP, direct costs are those specifically identified
with the recipient’s execution of its BTOP project.
Indirect costs are the costs incurred by an
organization that are not readily identifiable with a
particular project or program but are necessary to the
operation of the organization and the performance of
its programs.
U.S. Dep’t of Com., Fact Sheet for BTOP Indirect Costs (Nov.
2010), https://www2.ntia.doc.gov/compliance (click “Indirect
Cost Rates”) [hereinafter “Indirect Cost Fact Sheet”]; see also
OMB Circular A-87 Attach. A § F.1 (rev’d May 10, 2004)
(“Indirect costs are those: (a) incurred for a common or joint
purpose benefiting more than one cost objective, and (b) not
readily assignable to the cost objectives specifically
benefitted, without effort disproportionate to the results
achieved.”),
https://obamawhitehouse.archives.gov/omb/circulars_a087_2004/.
42
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transparent about the nature and amount of its ‘loadings’
charges.”
Id. at 17.
As previously discussed, the OIG recounted that the
Frontier Defendants explained to the WVEO “the nature and amount
of its ‘loadings’ charges.”
OIG Report at 17.
“The various
loadings expenses were conspicuously marked as indirect costs
on” Frontier’s invoices to the WVEO, and “the evidence
establishes that Frontier provided a document explaining the
bases for the various loadings charges to the [WVEO] and met
with State officials on several occasions to discuss loadings.”
Id. at 16; see also id. at 10-11; Sample March 5, 2013, Invoice,
ECF No. 380-5; May 9, 2013, WVEO Internal Email Containing
Frontier Document Explaining Loadings, ECF No. 393-41. 12
Additionally, “Frontier was required to undergo biannual audits”
by the accounting firm KPMG LLP (“KPMG”), “the results of which
were submitted to NTIA.”
OIG Report at 12.
“In 2012 and 2014,”
KPMG “concluded that Frontier’s performance and costs complied
with all requirements that could have a direct and material
effect on the grant.”
Id.; see also KPMG Audit Reports, ECF No.
380-17; January 30, 2012, Letter from Frontier to KPMG Regarding
As noted by the OIG, an accounting firm hired by the WVEO
opined that Frontier could charge its loadings costs to the BTOP
grant, and the WVEO also had a good-faith belief that the NTIA
had approved of the reimbursement of Frontier’s loadings costs.
See OIG Report at 11, 17-18.
12
43
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2012 Audit Results, ECF No. 384-3; BTOP Audit Compliance Meeting
Minutes, ECF No. 402-13.
“The 2014 audit report identified
Frontier’s indirect costs and included them as a line item in
its Schedules of Project Costs.”
OIG Report at 13; see also
KPMG Audit Reports.
The OIG’s finding on the Frontier Defendants’
transparency presents a nearly insurmountable hurdle to a
triable issue of scienter, which Citynet fails to clear.
As
noted above, at its outer limit the FCA reaches entities that
act in deliberate ignorance or with reckless disregard to the
truth or falsity of a record.
31 U.S.C. § 3729(b)(1)(A).
The
Frontier Defendants’ forthrightness with two entities tasked
with monitoring its grant compliance all but rules out those
states of mind.
Moreover, Citynet has failed to proffer any
evidence from which a reasonable jury could infer an unlawful
state of mind, other than the OIG’s decision that the loadings
costs were improper.
Absent some compelling evidence to the
contrary, the Frontier Defendants’ conduct -- and that of the
WVEO and KPMG -- is the type of “honest mistake[] or incorrect
[submission of] claims . . . through mere negligence” that falls
outside the FCA’s purview.
United States ex rel. Drakeford v.
Tuomey, 792 F.3d 364, 380 (4th Cir. 2015).
44
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The Frontier Defendants invoke the “government
knowledge inference,” which tends to illustrate why the scienter
element fails on Count VI.
Under the government knowledge
inference, “the government’s knowledge of the facts underlying a
claim is relevant to the question of an FCA defendant’s intent.”
Ubl, 650 F.3d at 453.
The circumstances in this case are not
typical of the government knowledge inference inasmuch as the
Frontier Defendants’ disclosures were to the WVEO, rather than
to the NTIA.
See United States ex rel. Becker v. Westinghouse
Savannah River Co., 305 F.3d 284, 289 (4th Cir. 2002)
(explaining that “the presenter cannot be said to have knowingly
presented a fraudulent or false claim” when “the government
knows and approves of the particulars of [the] claim”).
Nonetheless, the WVEO’s acceptance and reimbursement of
Frontier’s loadings costs demonstrates the Frontier Defendants’
lack of the required scienter for reasons similar to those
underpinning the government knowledge inference.
See United
States v. Southland Mgmt. Corp., 288 F.3d 665, 686 (5th Cir.
2002), aff’d en banc on other grounds, 326 F.3d 669 (5th Cir.
2003) (quoted with approval by Becker, 305 F.3d at 289)
(explaining that the government knowledge inference is a
recognition “that [a] defendant [may] actually believe[] his
45
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claim was not false because the government approved and paid the
claim with full knowledge of the relevant facts”). 13
Citynet argues that because the BTOP grant terms and
conditions prohibited indirect costs, the Frontier Defendants’
submission of invoices containing Frontier’s indirect loadings
costs was, ipso facto, knowingly violative of the grant.
See
Citynet Mem. Supp. 21-22; Citynet Resp. to Frontier Defs. 19-28;
Citynet Reply 6-7, ECF No. 405.
Under the “implied
certification theory” of FCA liability, “a contractor can be
liable under the FCA when [it] submits a claim for payment that
makes specific representations about the goods or services
provided, but knowingly fails to disclose [its] noncompliance
with a statutory, regulatory, or contractual requirement.”
United States v. Triple Canopy, Inc., 857 F.3d 174, 176 (4th
Cir. 2017) (quotation marks omitted and second alteration
The Frontier Defendants also argue that they did not act with
the requisite scienter because their actions were based on an
“objectively reasonable interpretation” of the terms and
conditions governing the BTOP grant. See Frontier Defs. Mem.
Supp. 24-27. The Frontier Defendants cite the Fourth Circuit’s
recent decision in United States ex rel. Sheldon v. Allergan
Sales, LLC, which is set for rehearing en banc. 24 F.4th 340
(4th Cir. 2022), reh’g en banc granted, 2022 WL 1467710 (4th
Cir. May 10, 2022). Under Fourth Circuit Rule of Appellate
Procedure 35(c), “[g]ranting of rehearing en banc vacates the
previous panel judgment and opinion.” The court therefore
declines to apply Sheldon in this case and instead evaluates the
effect of interpretive questions on scienter through the lens of
existing case law, discussed further below.
13
46
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added).
Citynet’s argument proceeds that the grant terms and
conditions prohibited the reimbursement of indirect costs; the
Frontier Defendants invoiced the company’s indirect loadings
costs; and, therefore, the Frontier Defendants at least had
their heads unlawfully buried in sand regarding their compliance
with the grant.
See, e.g., Citynet Mem. Supp. 21-22.
There is, however, a significant gulf separating
violation of grant terms and conditions from scienter.
The
Fourth Circuit instructs that although “the correction of
regulatory problems” -- in this case, federal grant terms and
conditions -- “is a worthy goal, [it] is not actionable under
the FCA in the absence of actual fraudulent conduct.”
United
States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 702
(4th Cir. 2014) (alteration added, quotation marks and emphasis
omitted).
Outside the violation of the grant, Citynet has
failed to proffer any other evidence from which a reasonable
jury could infer that the Frontier Defendants submitted invoices
for loadings costs in reckless disregard or deliberate ignorance
of the grant’s terms and conditions.
Further, Citynet’s failure to adduce probative
evidence of the Frontier Defendants’ state of mind is
particularly fatal considering the interpretive difficulties at
issue.
The grant terms and conditions generally prohibited
47
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reimbursement of indirect costs absent approval for such costs.
See Indirect Cost Fact Sheet, supra; see also U.S. Dep’t of
Com., Pre-Award Notification Requirements for Grants and
Cooperative Agreements, 73 Fed. Reg. 7696, 7699-70 (Feb. 11,
2008) [hereinafter “Pre-Award Notification Requirements”];
Department of Commerce Financial Assistance Standard Terms and
Conditions at A.05.a, https://www2.ntia.doc.gov/compliance
(click “DOC Standard Terms and Conditions (March 2008)”)
[hereinafter “DOC Standard Terms and Conditions”].
not have approval to bill indirect costs.
The WVEO did
The grant terms and
conditions also mandated that “[t]he [grant] recipient shall
require all subrecipients . . . to comply with the provisions of
the award, including applicable cost principles.”
DOC Standard
Terms and Conditions, at J.02.a, supra.
Yet, when discussing eligible costs, the Notice of
Funds Availability, or NOFA, which also comprised part of the
grant terms and conditions, stated as follows:
[T]here is a set of federal principles for determining
eligible or allowable costs. Allowability of costs
will be determined in accordance with the cost
principles applicable to the entity incurring the
costs. . . . The allowability of costs incurred by
commercial organizations . . . is determined in
accordance with the provisions of the Federal
Acquisition Regulation (FAR) at 48 CFR pt. 31.
NOFA at 33,112 n.37.
Those provisions of the Federal
Acquisition Regulation contain regulations that allow indirect
48
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costs for commercial organizations like Frontier, see 48 C.F.R.
§ 31.203, and regulations governing indirect cost rates, see 48
C.F.R. § 42.700 et seq.
That provision of the NOFA dovetails
with OMB Circular A-87, which states as follows:
All subawards are subject to those Federal cost
principles applicable to the particular organization
concerned. Thus, if a subaward is to a governmental
unit (other than a college, university or hospital),
this Circular shall apply; if a subaward is to a
commercial organization, the cost principles
applicable to commercial organizations shall apply . .
. .
OMB Circular A-87 Attach. A § A.3.b.
The court finds that there is ambiguity in the terms
and conditions of the WVEO’s grant concerning whether Frontier
could invoice indirect loadings costs.
On the one hand, the
grant generally prohibited indirect costs absent approval.
On
the other hand, the grant appears flatly to permit subrecipients
who are commercial organizations to recoup their indirect costs.
Notably, the “prominent accounting firm” hired by the WVEO to
opine on this issue “concluded that Frontier, as a commercial
organization, was not subject to the rules that would have
prevented a similarly situated governmental entity from
recovering its indirect costs.”
OIG Report at 11; see also May
17, 2013, Email from Ernst & Young to Frontier, ECF No. 405-9.
The court’s conclusion is bolstered by the various readings
present in this case: the NTIA’s; the WVEO’s and that of the
49
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accounting professionals hired by the WVEO and Frontier; and the
OIG’s mere “defer[ral] to NTIA’s interpretation of the
prevailing grant rules,” OIG Report at 17.
Violations of ambiguous rules and conditions or other
governing authority can still give rise to FCA liability so long
as the necessary scienter is present.
at 181.
See Gugenheim, 36 F.4th
But a court “cannot infer scienter from an alleged
regulatory violation itself.”
Id.
That is “especially” true
“where there is . . . ambiguity as to whether [d]efendants’
conduct even violated the [regulation].”
omitted and alterations added).
Id. (quotation marks
Indeed, “[e]stablishing even
the loosest standard of knowledge, i.e., acting in reckless
disregard of the truth or falsity of the information, is
difficult when -- as here -- falsity turns on a disputed
interpretive question.”
Id. (quotation marks omitted and
alteration added); see also United States ex rel. Purcell v. MWI
Corp., 807 F.3d 281, 287-88 (D.C. Cir. 2015) (“Consistent with
the need for a knowing violation, the FCA does not reach an
innocent, good-faith mistake about the meaning of an applicable
rule or regulation.”).
Accordingly, the “sufficiently
ambiguous” grant terms and conditions further undermine
Citynet’s case for scienter.
Gugenheim, 36 F.4th at 181.
Without evidence that could bear on the Frontier Defendants’
50
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scienter other than the fact of the violation itself, Count VI
must fail.
3. Count VII -- FBO invoice processing costs
Count VII is a false records claim related to the
billing of Frontier’s FBO invoice processing costs under the
grant.
As explained above, FBO work involved building the fiber
from outside a CAI into the CAI where the customer could connect
to the fiber network.
Frontier hired contractors to perform
this work, and Frontier’s FBO invoice processing costs were its
purported costs to process the invoices it received from the
contractors.
Frontier billed its FBO invoice processing costs
to the grant.
Citynet alleges that the Frontier Defendants billed
FBO invoice processing costs to the grant despite lacking
documentation to support the costs and knowing the costs were
impermissible and not reflective of costs actually incurred.
See Citynet Mem. Supp. 27-29.
Citynet and the Frontier
Defendants filed cross-motions for summary judgment on Count
VII.
The Frontier Defendants’ motion is limited to the element
of scienter.
51
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Based upon Citynet’s briefing and the OIG’s analysis,
the FBO invoice processing costs claim can be divided into two
categories: (1) failure to comply with grant terms and
conditions and (2) invoice amounts that were not reflective of
actual costs incurred.
13-16.
See Citynet Mem. Supp. 29; OIG Report
These categories will be referred to herein as the
compliance claim and the amounts claim, respectively.
Starting with the compliance claim, the OIG found that
Frontier violated the grant by failing to adequately document
the costs it allegedly incurred in processing FBO invoices,
which in turn caused Frontier to violate the grant by lacking
documentation to show that its FBO invoice processing costs were
allocable to the grant as opposed to some other work in which
Frontier was engaged.
See OIG Report at 13 (citing 48 C.F.R. §§
31.201-2(d), 31.201-4(a) and OMB Circular A-87 Attach. A §§
C.1.a, b, and j).
The OIG also concluded that Frontier violated
the grant by charging an unreasonably high amount for its FBO
invoice processing costs.
See id. at 14-16 (citing 48 C.F.R. §
31.201-3(a) and OMB Circular A-87 Atach. A § C.2).
Further,
Citynet claims that the Frontier Defendants billed the company’s
FBO invoice processing costs improperly as a profit-making
opportunity in violation of the grant’s no-profit requirement,
as explained in further detail below.
52
See Citynet Mem. Supp. 27
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(citing NOFA at 33,113).
The NTIA had notified Frontier via
email of the grant’s no-profit requirement on February 11, 2010.
See February 11, 2010, Email from NTIA to Frontier, ECF No. 38214.
Turning to the amounts claim, the court earlier
recounted the material facts as shown in the OIG Report.
Part I.C, supra.
See
Originally, Frontier set its FBO invoice
processing costs as a fee of 35.2% of what its contractors
charged to perform the FBO work.
Dep. 253.
See OIG Report at 8; McKenzie
Internal Frontier emails called the FBO invoice
processing costs “markup,” and a “Frontier senior executive”
“told the OIG that it was accurate to describe the FBO fee as a
‘percentage-based markup.’”
OIG Report at 8; November 2, 2012,
Internal Frontier Email, ECF No. 384-8; January 28, 2013,
Internal Frontier Email, ECF No. 382-30; July 16, 2013, Internal
Frontier Email, ECF No. 384-14. 14
Internal Frontier emails and
documents also refer to the company’s FBO invoice processing
costs as a “revenue opportunity,” “profit,” “income,” and
“actual cost + 35.2%.”
OIG Report at 8; see also November 30,
2011, Internal Frontier Email, ECF No. 384-7 (“revenue
opportunity”); November 2, 2012, Internal Frontier Email,
“Markup” means “an amount added to the cost price to determine
the selling price,” or broadly “profit.” Markup, MerriamWebster, https://www.merriam-webster.com/dictionary/markup.
14
53
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(“profit,” “income,” and “actual cost + the 35.2%”); January 24,
2013, Internal Frontier Email, ECF No. 384-9 (“profit” and
“profit increase”); January 28, 2013, Internal Frontier Email
(“income”); July 16, 2013, Internal Frontier Email (“income”);
see also McKenzie Dep. 176-77 (agreeing that FBO invoice
processing costs were actual cost plus 35.2%).
There is no evidence that the 35.2% markup figure was
based on the costs Frontier actually incurred processing FBO
invoices.
OIG Report at 8.
Rather, the evidence shows that the
markup was “actual cost + 35.2%.”
OIG Report at 8; November 2,
2012, Internal Frontier Email; McKenzie Dep. 176-77.
Furthermore, the evidence shows that Frontier never communicated
“the specific amount and nature of the FBO markup . . . to the
[WVEO].”
OIG Report 8; see also November 20, 2012, Internal
Frontier Email, ECF No. 382-27 (“I cannot confirm the 35.2%
loading was fully communicated [to the WVEO].”); Given Dep. 15657, 230.
On November 15, 2012, Given asked McKenzie, “what
activities does Frontier perform on each FBO site?”
November 15
and 16, 2012, Email Chain Between Given and McKenzie, ECF No.
382-26.
McKenzie replied that the percentage-based markup was
reflective of Frontier’s incurred costs: “our Corporate office
did a cost analysis for this function and hence the standard
[cost] you see on these invoices.”
54
Id.
McKenzie also set forth
Case 2:14-cv-15947 Document 465 Filed 09/08/22 Page 55 of 71 PageID #: 12498
a purported eleven-step process for processing FBO invoices from
contractors.
Id.
On November 16, 2012, Given expressed concern that the
35.2% markup “seems entirely unreasonable.”
Id.
At her
deposition, Given correctly explained that a rate-based fee
could not accurately capture Frontier’s actual costs incurred to
process an FBO invoice.
at 9.
See Given Dep. 158; see also OIG Report
This is because the actual cost to process an invoice
would be roughly the same from invoice to invoice, while a ratebased fee could vary wildly with the amount charged by a
contractor.
See Given Dep. 158; see also OIG Report at 9.
In response, on January 29, 2013, Frontier, through a
memorandum authored by McKenzie, proposed a $1,808 flat fee for
each invoice submitted by it for its FBO invoice processing
costs.
January 29, 2013, Memorandum to Given, ECF No. 380-6;
see also McKenzie Dep. 187-89.
Frontier represented that its
flat-fee figure was “[b]ased upon actual costs incurred by
Frontier in processing FBO invoices,” which it calculated after
“correspond[ing] with the multiple Frontier departments who
process invoices associated with [FBO] work.”
Memorandum to Given.
January 29, 2013,
The memorandum details an eleven-step
process for each FBO invoice that took sixteen separate
employees four hours total on average to complete.
55
Id.
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However, the face of the memorandum plainly “show[s]
that Frontier arrived at the figure” not by analyzing the costs
associated with the purported eleven-step process, but rather
“by simply taking the total amount of FBO fees as of that date
that had been generated by the 35.2% markup . . . and dividing
it by the total number of FBO invoices that had been processed.”
OIG Report at 9; see January 29, 2013, Memorandum to Given.
Internal Frontier emails show a consultant hired by Frontier,
Billy Jack Gregg, proposing various flat fees not based on
actual costs, but based on a “target loading percentage.”
December 13, 2012, Email from Gregg to Frontier, ECF No. 384-11;
see also December 12, 2012, Email from Gregg to Frontier, ECF
No. 384-1; December 19, 2012, Email from Gregg to Frontier, ECF
No. 384-12.
As the OIG found,
Since Frontier had already submitted 84 invoices to
the State with a 35.2% fee that totaled $266,952, it
proposed, and the [WVEO] agreed, for Frontier to
charge a reduced invoice processing fee of $1,340.20
on [each of] the remaining estimated 246 FBO invoices.
The amount was intended ultimately to result in the
same total amount as if $1,808 had been charged for
every FBO invoice.
OIG Report at 9-10.
There is no evidence to support an $1,808 processing
fee as FBO invoice processing costs.
the OIG explained:
56
Id. at 10.
Instead, as
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[S]everal Frontier employees, all of whom had some
knowledge of the process by which Frontier developed
the 11-step process . . . , told the OIG that Frontier
did not review any such documentation in devising the
steps, and furthermore asserted that Frontier did not
possess any such documentation.
Id.
McKenzie testified that, in helping to devise the eleven-
step process -- which was plainly not the basis for the fixed
fee -- he spoke to Frontier employees but did not review any
documents.
McKenzie Dep. 187-89.
Viewing these facts on Citynet’s and the Frontier
Defendants’ cross-motions for summary judgment, Citynet is
entitled to judgment as a matter of law against Frontier and
McKenzie, but not Arndt or Waldo, on Count VII.
Starting with falsity, because “Congress did not
define what makes a claim ‘false’ or ‘fraudulent,’” the courts
must turn to the “common-law meaning” of those terms.
39 F.4th at 200.
Taylor,
“At common law, a false statement encompassed
any ‘words or conduct’ that ‘amount[] to an assertion not in
accordance with the truth’ . . . .”
Id. (quoting Restatement
(Second) of Torts § 525 cmt. b (1977)).
Under an “implied
certification theory” of FCA liability, a record is false when
it “fails to disclose the defendant’s violation of a material
statutory, regulatory, or contractual requirement.”
57
Id. at
Case 2:14-cv-15947 Document 465 Filed 09/08/22 Page 58 of 71 PageID #: 12501
190. 15
In any case, to be false under the FCA, “the statement or
conduct alleged must represent an objective falsehood.”
Wilson,
525 F.3d at 376.
The undisclosed violations of grant terms and
conditions described above would mislead anyone reviewing a
Frontier invoice to believe that the FBO invoice processing
costs were properly documented, attributable to the grant,
reasonable, not a profit tool, and based on actual costs
incurred.
The omission of those critical factors by Frontier
renders the invoices for FBO invoice processing costs false.
Additionally, Frontier’s misrepresentation that the FBO invoice
processing costs markup was based on actual costs incurred was
objectively false.
As for McKenzie, the evidence demonstrates
that he falsely represented that the FBO invoice processing
costs markup was based on actual costs incurred and authored the
“Material,” as it is used here in the falsity element, appears
to be different than the materiality element. The Supreme Court
explains that under the implied certification theory, an
omission of a statutory, regulatory, or contractual requirement
is false “if [it] render[s] the defendant’s representations
misleading with respect to the goods or services provided.”
Escobar, 579 U.S. at 187 (alterations added). An omission is
misleading, the Supreme Court continues, if it constitutes a
“half-truth[]”: a “representation[] that state[s] the truth only
so far as it goes, while omitting critical qualifying
information.” Id. at 188 (alterations and emphasis added).
15
58
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memorandum that falsely set forth the flat-fee basis for FBO
invoice processing costs.
Materiality, as previously explained, “look[s] to the
effect on the likely or actual behavior of the recipient of the
alleged misrepresentation.”
Escobar, 579 U.S. at 193.
Under an
implied certification theory, “a minor or insubstantial
requirement will not suffice to show materiality.”
F.4th at 190 (quotation marks omitted).
Taylor, 39
“Instead, the provision
at issue must be so central to the services provided that the
Government would not have paid these claims had it known of
these violations.”
Id. (quotation marks omitted).
Implied
certification materiality is a measure of function over form.
See id. (explaining that regulatory compliance may be immaterial
“even if . . . labeled [a] condition[] of payment” (alterations
added)).
As a matter of function, the NTIA likely would not
have approved the reimbursement of the FBO invoice processing
costs had it known that those costs lacked underlying
documentation, could not be shown to be attributable to BTOP
grant work, were unreasonably high, were profit centers, and did
not reflect Frontier’s actual costs.
The materiality of those
falsities is so central to the grant as to be self-evident.
Indeed, common sense dictates that the NTIA would not have
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approved reimbursement of Frontier’s FBO invoice processing
costs had it known those costs were undocumented profit centers
untethered to actual costs.
Turning to scienter, the FCA reaches “a person [who]
‘has actual knowledge of the [falsity of the] information,’
‘acts in deliberate ignorance of the truth or falsity of the
information,’ or ‘acts in reckless disregard of the truth or
falsity of the information.’”
Gugenheim, 36 F.4th at 179
(alterations added) (quoting 31 U.S.C. § 3729(a)(1)(A)).
With respect to the compliance claim, Frontier, at the
very least, “buried [its] head in the sand” in deliberate
ignorance or reckless disregard of the truth or falsity of its
invoices for FBO invoice processing costs.
198.
Taylor, 39 F.4th at
The grant terms were clear: “A contractor is responsible
for accounting for costs appropriately and for maintaining
records, including supporting documentation, adequate to
demonstrate that costs claimed have been incurred, are allocable
to the contract, and comply with applicable cost principles . .
. .”
48 C.F.R. § 31.201-2(d); see also 31.201-4(a) and OMB
Circular A-87 Attach. A §§ C.1.a, b, and j.
to meet those most basic of requirements.
Yet Frontier failed
It could not show the
OIG, and has not shown the court, any documentation of its FBO
invoice processing costs.
See Siebert v. Gene Security Network,
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Inc., 75 F. Supp. 3d 1108, 1119 (N.D. Cal. 2014) (recognizing
the “general principle that those who submit claims to the
government for reimbursement may be acting in reckless disregard
as to the truth or falsity of their submissions if they fail to
take steps to confirm the accuracy of those submissions”).
Further, the NTIA specifically warned Frontier about the grant’s
no-profit condition, but the evidence establishes that Frontier
viewed FBO invoice processing costs as a profit opportunity.
reasonable jury could view Frontier’s compliance claim
No
shortcomings as “honest mistakes” or “mere negligence.”
Gugenheim, 36 F.4th at 179.
The evidence of the amounts claim is more damning.
Frontier and McKenzie repeatedly told the WVEO that Frontier’s
FBO invoice processing costs were based on actual costs
incurred.
Frontier and McKenzie knew that was false because
their own calculation of FBO invoice processing costs had
nothing to do with Frontier’s actual costs.
Frontier and
McKenzie also knew that was false because they viewed FBO
invoice processing costs as a profit-maker untethered to
Frontier’s actual costs -- “actual cost + 35.2%.”
Thus,
Frontier and McKenzie acted “knowingly” with respect to the
amounts claim as a matter of law.
61
31 U.S.C. § 3729(a)(1)(B).
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The facts of this case are at least as egregious as
United States v. Krizek, where the District of Columbia Circuit
Court determined that the conduct of a psychiatrist and his
billing assistant “[rose] to the level of reckless disregard” in
violation of the FCA.
111 F.3d 934, 942 (D.C. Cir. 1997).
In
Krizek, the billing assistant completed documentation “with
little or no factual basis” and “made no effort to establish how
much time [the psychiatrist] spent with any particular patient.”
Id. (alteration added).
The psychiatrist, for his part,
“‘failed utterly’ to review bills submitted on his behalf.’”
Id.
Most telling of the pair’s scienter, they requested payment
for patient treatment of nearly twenty-four hours in a single
day on several occasions and sometimes sought payment for more
than twenty-four hours in a single day.
Id.
The circuit court
concluded that the psychiatrist and his billing assistant acted
with reckless disregard because “even the shoddiest
recordkeeping would have revealed that false submissions were
being made.”
Id.
In this case, the compliance claim resembles Krizek
inasmuch as Frontier completely lacked a factual basis or
documentation for the FBO invoice processing costs, which were
patently unreasonable.
See OIG Report at 14 (noting that
Frontier charged $452 per hour for labor to process FBO
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invoices).
So, too, does the amounts claim.
Frontier knew, or
at least acted in reckless disregard to the fact, that its FBO
invoice processing costs were a profit-maker unrelated to its
actual costs despite its repeated statements to the contrary.
See also United States ex rel. Compton v. Midwest Specialties,
Inc., 142 F.3d 296, 304 (6th Cir. 1998) (finding that a
defendant at least acted with reckless disregard when it
attested that its product conformed to contractual requirements
despite knowing it had failed to test the product for
compliance); United States v. Stevens, 605 F. Supp. 2d 863, 869
(W.D. Ky. 2008) (finding that a defendant at least acted with
reckless disregard where he did nothing to make sure his
billings were correct and “simply assumed the claims were
correct because they were being paid”).
The Frontier Defendants offer a few arguments to the
contrary, none of which is availing.
First, the Frontier
Defendants purport that “the OIG found that [the FBO] costs were
assessed to the grant in ‘good faith.’”
13.
Frontier Defs. Resp.
The Frontier Defendants thus contend that the government
knowledge inference weighs in their favor and precludes summary
judgment.
See Frontier Defs. Mem. Supp. 29-30.
But that misrepresents what the OIG found.
Rather,
the OIG found that “the evidence shows that the [WVEO] consulted
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with NTIA in good faith on the allowability of Frontier’s [FBO
invoice processing costs]” as a direct or indirect cost.
Report at 16.
OIG
But concerning Frontier, the OIG explained that
“there is insufficient evidence to conclude that NTIA knowingly
approved the construct and factual underpinnings of the [FBO
invoice processing costs] that Frontier charged” because “the
Frontier memorandum outlining the 11-step FBO invoice process
that was provided to the NTIA official contained several
material representations that are not supported by the facts.”
Id.
Further, the OIG continued “that, at best, Frontier
provided the [WVEO] (which, in turn provided to NTIA) incomplete
information.”
Id.
Thus, far from “good faith,” the OIG
concluded, and the evidence shows, that Frontier and McKenzie
provided misleading information to the WVEO, which precludes
application of the government knowledge inference.
Second, the Frontier Defendants contend that Frontier
was simply trying to secure a reasonable rate, and that Citynet
cannot show scienter because it does not suggest what a
reasonable rate might have been.
12; Frontier Defs. Reply 17-18.
See Frontier Defs. Resp. 11The evidence, however,
disproves the Frontier Defendants’ notion of a reasonable rate.
Frontier’s explicit goal was profit.
And the grant terms and
conditions state what is reasonable under the grant: no profit.
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And third, the Frontier Defendants attempt to wave off
the company’s use of terms like “revenue opportunity” as “offhand reference[s].”
Frontier Defs. Resp. 12.
The Frontier
Defendants cite a portion of McKenzie’s testimony where McKenzie
says he called FBO invoice processing costs “margin profit”
because another Frontier executive had called FBO invoice
processing costs “income.”
Frontier Defs. Resp. 13.
McKenzie Dep. 176-77; see also
It is unclear how McKenzie’s testimony
absolves Frontier or McKenzie.
Just after McKenzie’s supposed
clarification, he agreed that FBO invoice processing costs were
“actual cost plus the 35.2 percent” -- profit.
177.
McKenzie Dep.
And as detailed above, it is undisputed that Frontier
internally viewed FBO invoice processing costs as a profit
opportunity.
Regardless, even if McKenzie’s testimony were
deemed to prove that Frontier did not derive a profit from FBO
invoice processing costs -- though it plainly does not -Frontier would still be liable for the false records it
submitted under the compliance claim.
Lastly, liability under the FCA does not arise without
causation.
See Taylor, 39 F.4th at 188.
It is undisputed that
the false records containing the FBO invoice processing costs
caused the payment of those costs.
Accordingly, Citynet is
entitled to summary judgment against Frontier and McKenzie on
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Count VII.
Concerning damages, however, the court notes that
the OIG accounted for $465,388 in FBO invoice processing costs
and 311 invoices containing FBO invoice processing costs, OIG
Report 10, while Citynet claims that Frontier “submitted 327
invoices with improper FBO Invoice Processing fees in the amount
of $461,106.94,” Citynet Mem. Supp. 32.
This dispute precludes
summary judgment on damages.
As for Arndt and Waldo, the court finds that a
reasonable jury could find against them on Count VII.
Starting
with Arndt, the internal Frontier emails dated November 2, 2012,
show McKenzie reporting to Arndt the “[s]teps being taken to
show BTOP FBO margin profit,” which included calculating FBO
invoice processing costs as “income,” “actual cost + the 35.2%,”
and “the 35% mark up.”
Email.
November 2, 2012, Internal Frontier
Additionally, an email within the November 30, 2011,
email chain suggests that Arndt had an active role in viewing
FBO invoice processing costs as profit, stating that the “rate
has been established . . . so that this is a revenue opportunity
for Frontier via Ken Arndt.”
Frontier Email.
November 30, 2011, Internal
Lastly, an email within the Ju16, 2013,
internal Frontier email chain shows a Frontier employee sending
Arndt a spreadsheet documenting Frontier’s FBO invoices showing
“the markup amount (either a flat fee after Dana cut the deal
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with the [WVEO]) or the % markup that we were doing in the
beginning.
$2.3M.
As you will see, there are 307 invoices totaling
Our markup’s total [is] $456K.”
July 16, 2013, Internal
Frontier Email.
Turning to Waldo, the “Dana” in the July 16, 2013,
email chain who “cut the deal” regarding the flat fee could be
Dana Waldo, although that fact requires further development.
Id.
Additionally, Waldo is a recipient of the series of emails
by Gregg proposing various flat fees for FBO invoice processing
costs not based on actual costs incurred.
See December 12,
2012, Email from Gregg to Frontier; December 13, 2012, Email
from Gregg to Frontier; December 19, 2012, Email from Gregg to
Frontier.
The aforementioned facts suggest not only that Arndt
and Waldo had knowledge of the falsity of the FBO invoice
processing fees, but also that they had a role in the making and
using of those fees.
The nature and extent of Arndt’s and
Waldo’s involvement in the FBO invoice processing costs scheme
is a matter within the province of a jury.
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4. Count VIII -- Maintenance coils
In Count VIII, Citynet brings a false records claim
against Frontier and McKenzie related to the amount of
maintenance coil included in Frontier’s fiber build.
As noted
above, maintenance coil “is the extra cable stored at a
particular facility that service providers use to repair damaged
fiber and to connect new fiber to the network.”
19 (quotation marks and alteration omitted).
OIG Report at
Citynet claims
that Frontier and McKenzie installed an excessive amount of
maintenance coil, and that it used the excessive amount to
inflate its invoices.
See Citynet Resp. 30.
Citynet also
claims that Frontier and McKenzie “falsified the total length of
fiber built and the number of strands on multiple jobs.”
Id. at
30 n.6. 16
It is undisputed that Frontier installed about four
times as much maintenance coil than it originally reported to
the WVEO.
See OIG Report at 19.
When questions concerning
Frontier’s installation of maintenance coil first arose in
public in 2013, Frontier represented to the public that it built
“approximately 12 miles of [maintenance coil],” which it claimed
Frontier and McKenzie do not seek summary judgment on this
component of Count VIII.
16
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was consistent with “industry standards” of “100 feet of fiber
maintenance coil for every mile of fiber placed.”
Id.
But a
January 24, 2014, email from Gregg to McKenzie shows that
Frontier “not only do[es] . . . not know how much fiber we
actually placed, but we don’t know how much of what we placed is
coiled up on poles.”
January 24, 2014, Internal Frontier
Emails, ECF No. 394-7; see also OIG Report at 20.
Gregg
estimated that Frontier installed “4 times” more maintenance
coil than it had previously told the WVEO, and he recommended
that “I don’t think we need to tell [the WVEO] unless [it] asks
again.”
Id.; see also OIG Report at 20.
It appears that
Frontier and McKenzie did not tell the WVEO.
20-21.
See OIG Report at
“[A] Frontier employee told the OIG that he believes
Frontier did include maintenance coils in its mileage totals . .
. .”
Id. at 21.
Viewing the facts in Citynet’s favor, Frontier has not
shown entitlement to summary judgment on the maintenance coil
component of Count VIII, but McKenzie has.
The amount of fiber
originally reported to the WVEO appears to have been an
objective falsehood.
A reasonable jury could find that Frontier
took Gregg’s advice, just noted above, and withheld from the
WVEO the real length of maintenance coil, which is evidence that
such information was material.
That an NTIA official “gave
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Frontier unofficial guidance that Frontier should not count coil
at all in its mileage totals” is also evidence of materiality.
As for scienter, a reasonable jury could find that Frontier
acted in deliberate ignorance or reckless disregard because of
its apparent lack of knowledge of how much maintenance coil -for which the company billed -- was installed in the first
place. 17
Last, a reasonable jury’s conclusion on causation could
follow the other elements in Citynet’s favor against Frontier.
Concerning McKenzie, however, there is insufficient evidence
from which a reasonable jury could find that McKenzie made a
false record or statement related to maintenance coils, even
though it appears he had some knowledge of the problems related
to maintenance coils.
The Frontier Defendants’ motion for
summary judgment on Count VIII is denied.
IV. Conclusion
Accordingly, for the foregoing reasons, it is ORDERED
as follows:
1.
Gianato and Given’s motion for summary judgment be,
and hereby is, granted;
Also concerning is that Frontier apparently did not know how
much fiber it had installed over the entire build.
17
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2.
Frontier, Arndt, Waldo, and McKenzie’s motion for
summary judgment be, and hereby is, granted with
respect to Counts I through VI and Count IX against
those four defendants, granted with respect to Count
VIII against McKenzie, and otherwise denied; and
3.
Citynet’s motion for summary judgment be, and hereby
is, granted with respect to liability against Frontier
and McKenzie on Count VII and otherwise denied.
Remaining in this case are the issues of damages
against Frontier and McKenzie under Count VII, liability and
damages against Waldo under Count VII, and liability and damages
against Frontier under Count VIII.
The Clerk is requested to transmit copies of this
order to all counsel of record and any unrepresented parties.
ENTER: September 8, 2022
71
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