Citynet, LLC v. Frontier West Virginia, Inc., et al.
Filing
94
MEMORANDUM OPINION AND ORDER granting in part and denying in part as set forth herein State Employees 62 MOTION to Dismiss the Complaint; granting in part and denying in part Frontier Defendants' as set forth herein 64 MOTION to Dismiss th e Complaint; denying Citynet's, LLC 87 MOTION for Leave to File to File Sur-Reply in Opposition to the Motions to Dismiss of the Frontier Defendants and Defendant Gale Given. Signed by Judge John T. Copenhaver, Jr. on 3/30/2018. (cc: attys; any unrepresented party) (tmr)
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. 2:14-15947
FRONTIER WEST VIRGINIA INC.,
a West Virginia Corporation,
and KENNETH ARNDT, individually,
and DANA WALDO, individually,
and MARK McKENZIE, individually,
and KELLY GOES, individually,
and JIMMY GIANATO, individually,
and GALE GIVEN, individually,
Defendants.
MEMORANDUM OPINION AND ORDER
Pending are two motions to dismiss the complaint, one
filed by defendants Frontier West Virginia Inc. (“Frontier”),
Kenneth Arndt, Dana Waldo, and Mark McKenzie (collectively, “the
Frontier Defendants”) on August 23, 2016, and the other filed by
Kelley Goes, Jimmy Gianato, and Gale Given (collectively, “the
State Employees”) on August 23, 2016.
1
I. Introduction
Relator, Citynet, LLC (“Citynet”), a West Virginia
limited liability company with its principal place of business in
West Virginia, instituted this action by filing a Qui Tam
complaint on behalf of the United States on May 7, 2014, under
seal.
On June 17, 2016, the United States declined to intervene
in the case, which was then placed on the active docket.
Citynet
thereafter filed the first amended Qui Tam complaint, which is the
operative complaint and will be referred to herein simply as the
complaint.
At all times relevant herein, Frontier was a West
Virginia corporation with its principal place of business in West
Virginia; Kenneth Arndt was a citizen of West Virginia and General
Manager and Senior Vice President of Southeast Region at Frontier
Communications Corporation; Dana Waldo was a citizen of West
Virginia and Senior Vice President and General Manager of
Frontier; Mark McKenzie was a citizen of West Virginia and
employee of Frontier; Kelly Goes was a citizen of West Virginia
and Secretary of the West Virginia Department of Commerce (“DOC”);
and Jimmy Gianato was a citizen of West Virginia and Director of
the West Virginia Division of Homeland Security and Emergency
Management.
First Amended (“Am.”) Qui Tam Complaint (“Compl.”) at
2
¶¶ 8-11, 13-14.
Gale Given was employed as Regional President of
Verizon covering the state of West Virginia from July 1, 2010, to
July 1, 2012, when she became the West Virginia State Technology
Officer.
Id. at ¶ 12.
In the complaint, Citynet alleges nine counts under the
False Claims Act (“FCA”), 31 U.S.C. § 3729 et. seq.
Counts I
through IV allege the presentation of false claims, §
3729(a)(1)(A); Counts V through VIII allege the making of false
records, § 3729(a)(1)(B); and Count IX alleges a conspiracy to
present false claims and make false records, § 3729(a)(1)(C).
Counts I through III, V through VII, and IX are against all
defendants, while Counts IV and VIII are against only Frontier and
Mr. McKenzie.
Citynet alleges that under the American Recovery and
Reinvestment Act (“ARRA”), which became law in February 2009,
$4,700,000,000 in federal funds were appropriated to the Broadband
Technology Opportunities Program (“BTOP”) in order to expand
broadband technology.
First Am. Qui Tam Compl. at ¶ 1.
Citynet
claims that the grant program “was designed to allow for the
construction of open access middle-mile broadband networks.”
3
Id.
Citynet contends that Frontier, Mr. Arndt, Mr. Waldo,
Mr. McKenzie, Ms. Goes, and Mr. Gianato assisted the West Virginia
Executive Office (“the WVEO”) in the submission of its application
for $126,323,296 in funds from the BTOP grant for a project titled
“West Virginia Statewide Broadband Infrastructure Project —
Middle-mile.”
Id. at ¶¶ 2, 27.
According to Citynet, the WVEO
grant application contained numerous misrepresentations, some of
which were based on information provided to WVEO by Frontier and
its representatives.
Id. at ¶ 2.
During the application process,
thirty-four proposals, including one from Citynet, were submitted
to the National Telecommunications and Information Administration
(“the NTIA”) for consideration under BTOP.
Id. at ¶ 22.
In
addition, Frontier as well as its subsidiary, Citizens
Telecommunications Company of West Virginia (“CTC”), submitted
proposals to fund last mile projects, which would provide
broadband fiber to Community Anchor Institutions (“CAIs”).
Id. at
¶¶ 24, 26.
The WVEO proposal contained three parts: “1) the
provision of 1,064 Cisco routers to each of the CAIs; 2) the
construction of, and upgrade to, the State’s emergency microwave
tower system; and 3) the construction of a 2,429 mile ‘openaccess’ Middle-Mile network that would provide broadband service
4
to the 1,064 CAIs throughout the state.”
Id. at ¶ 28.
According
to Citynet, the WVEO application, at Ms. Goes’ direction, took
Frontier’s and CTC’s last mile applications, with Frontier’s
knowledge, and simply “regenerated them as its own Middle-Mile
project in order to make it more attractive to the NTIA.”
¶ 30.
Id. at
Specifically, Citynet alleges that Frontier, Mr. McKenzie,
Ms. Goes, Mr. Gianato, and others, helped to prepare the WVEO
grant application with the intent that Frontier would receive the
grant funds, if awarded to the WVEO.
Id. at ¶ 31.
In addition, Frontier and Verizon also helped the state
determine the amount of new fiber to be constructed if the grant
was awarded to the WVEO.
Id. at ¶ 32; see Ex. 5 to First Am. Qui
Tam Compl. (Emails between Mark Luker and Jimmy Gianato regarding
the amount of fiber to be constructed, stating, in part, “Based on
the estimates from Verizon and Frontier, the fiber is new fiber
that does not exist today”).
While the grant applications were
being submitted, Frontier was in merger negotiations with Verizon,
and both Frontier and Verizon further assisted the State in
drafting its application by providing construction plans and
engineering information to the WVEO.
¶ 35.
First Am. Qui Tam Compl. at
In fact, during the merger negotiations between Verizon and
Frontier, Frontier and the state had contemplated that it would
5
receive a grant, and that a considerable portion of it would go to
Frontier.
Id. at ¶ 36.
On January 14, 2010, the State informed
Frontier that it would be required to make a capital investment of
$250-$300 million in West Virginia if the merger were to be
approved by the West Virginia Public Service Commission.
Id. at ¶
37; see also Ex. 7 to First Am. Qui Tam Compl. (Email from Dan
McCarthy to Kelley Goes regarding the capital planned when
Frontier takes control of Verizon’s West Virginia Operations).
Citynet alleges that the WVEO application contained
false statements that were included to insure that the state would
receive the grant and that Frontier, Mr. Arndt, Mr. McKenzie, Ms.
Goes and Mr. Gianato and others caused the false statements in the
WVEO grant application.
First Am. Qui Tam Compl. at ¶ 38.
Citynet first alleges that the WVEO grant application
misrepresented that “the fiber would comprise a single
interconnected network by connecting each CAI to Frontier’s local
central offices, which in turn would allow other service providers
to connect at the Frontier Central Office to provide their LastMile services to consumers.”
Id. at ¶ 39.
By connecting the
fiber from CAIs to central offices, which are the locations that
Frontier maintains equipment to route calls to and from end users,
other service providers would have been able to connect at the
6
central office to provide last mile services to consumers.
¶ 40.
Id. at
Citynet also alleges that the WVEO application
misrepresented that no part of the “‘service layer’ (i.e. LastMile)” would be funded from the grant.
Id. at ¶ 41.
Citynet next alleges that the WVEO application
misrepresented that the 1,064 CAIs in the application did not
already have fiber service when in fact 416 of the CAIs “already
had existing fiber, no longer were in existence or had received
other stimulus,” meaning that only 648 CAIs needed new fiber.
at ¶¶ 43-44.
Id.
Because only 648 CAIs needed new fiber, the amount
of new fiber miles to be built decreased from 2,429 in the
application to 915 and then was decreased again to 536.
Id. at ¶
45.
Citynet also contends that the decreased figure of 536
miles of fiber to be built was inflated because miles were “double
counted” and the application also misrepresented the distances of
fiber necessary to reach many of the CAIs.
Id. at ¶ 45.
Specifically, Citynet states that the estimation of fiber to be
built on “hundreds of” CAIs were grossly inflated.
Id. at ¶ 46.
For example, Citynet contends that the WVEO application estimated
that 73,250 feet of new fiber would be required to provide
broadband service to the CAI “Hygenia Facilities Foundation” in
7
Boone County, but that the pertinent location construction request
(“LCR”) indicates that only 1,201 feet of fiber was constructed.
Id.
The double-counting of miles that Citynet alleges refers to
the fact that the miles of fiber was inflated in the application
by including the miles to connect the Central Office to two CAIs,
when only one CAI was directly connected to the Central Office.
Id. at ¶ 47.
For example, while the Martinsburg Correctional
Center in Berkeley County is located next to the Eastern Regional
Jail, Frontier estimated to the state that it would take 10,000
feet of fiber to connect to the Correctional Center and 10,000
additional feet of fiber to connect to the Eastern Regional Jail.
Id. at ¶ 48.
Instead, Citynet alleges that it only took 6,650
feet of fiber to connect to the Correctional Center and 794 feet
of fiber to connect the Eastern Regional Jail to the Correctional
Center.
Id.
“By double-counting the build back to the Central
Office for both jobs,” Citynet alleges that “Frontier inflated the
estimated mileage by 10,000 feet on this job alone.”
Id.
Citynet
contends that the amount of new fiber needed was double-counted on
at least fifty-eight projects.
Id. at ¶ 50.
Finally, Citynet contends that the proposed fiber
distances for the CAIs were also misrepresented in the WVEO
application by “simply inputting the same number for several
8
projects.”
Id. at ¶ 51.
For example, Citynet alleges that the
WVEO application had thirty-six CAIs that required the same 4,390
feet of new fiber, with five new poles, 3,882 feet of aerial fiber
and 508 feet of buried fiber.
Id. at ¶¶ 51-52.
Citynet also alleges that defendants misrepresented that
a middle mile network did not exist in West Virginia, when in
actuality, Mr. Arndt had informed the state representatives that
“90% of the stimulus project either existed or would be completed
shortly after the Frontier acquisition of Verizon.”
See Ex. 11 to
First Am. Qui Tam Compl. (Email from Kenneth Arndt to Kelley Goes,
Jimmy Gianato and others stating that “90% of the stimulus project
either exists or will be completed shortly after the acquisition
is closed”).
Additionally, defendants certified that the project
complied with the “Notice of Funds Availability and Solicitation
of Applications” (“NOFA”) requirements because no private entity
could afford to build the $42,000,000 proposed network and that it
would not be built but for the grant.
¶ 54.
First Am. Qui Tam Compl. at
Despite this certification, defendants knew that Frontier
had already committed to spend $279,000,000 in West Virginia to
upgrade facilities and infrastructure so that the Verizon merger
would be approved.
Id.
9
Other misrepresentations that Citynet claims defendants
made in the WVEO application include the statement that the
broadband services could be resold by the state to businesses and
individuals when they could not be resold, meaning that “the CAIs
that received broadband under the WVEO project would be the
ultimate end-user of only Frontier/ Verizon services which in turn
made the project a Last-Mile project.”
Id. at ¶ 55.
Also, while
defendants stated that the WVEO application was a middle mile
solution, Ms. Goes advised Citynet that $40 million of the grant
funds would be given to Frontier “to construct ‘tails’ to
government facilities from the nearest Frontier hub or similar
facility and that the construction of the ‘Last-Mile’ tails would
constitute the full extent of fiber construction under the WVEO’s
plan.”
Id. at ¶ 56.
Citynet claims that “the overall effect of
the misrepresentations in the WVEO grant application led to the
grant being awarded to the WVEO for the sole benefit of Frontier.”
Id. at ¶ 57.
Around February 12, 2010, the WVEO was awarded
$126,323,296 from the BTOP Grant for the WVEO grant application
entitled “West Virginia Statewide Broadband Infrastructure Project
— ‘Middle-Mile.’”
Id. at ¶ 58.
By accepting the grant, the
recipient (here, the WVEO) agreed to comply with certain terms and
10
conditions, including: “1) the [DOC] Financial Assistance Standard
Terms and Conditions; 2) Award Specific Special Award Conditions;
3) Line Item Budget; 4) 15 C.F.R. Part 24, Uniform Administrative
Requirements for Grants and Agreements to States and Local
Governments; 5) OMB Circular A-87, Cost Principals for State,
Local and Indian Tribal Governments; 6) OMB Circular A-133, Audits
of States, Local Governments, and Non-Profit Organizations; 7)
[DOC] Pre-Award Notification Requirements for Grants and
Cooperative Agreements; and 8) DOC American Recovery and
Reinvestment Act Award Terms.”
Id. at ¶ 59.
The Special Award
Conditions stated “This award supports the work described in the
recipients proposal entitled West Virginia Statewide Broadband
Infrastructure Project – ‘Middle Mile’ dated 8-20-09 and revision
dated 2/5/10 for budget narrative which is incorporated into the
award by reference.”
Id. at ¶ 60.
According to Citynet, the proposed budget narrative
contained potential categories of costs of the project to be
identified by the applicant, with a summary of the items in each
category.
Id. at ¶ 61.
The addendum to the Budget Narrative
provided that, “If indirect costs . . . and/or fringe benefits are
included in the budget, please provide a copy of your existing
Negotiated Indirect Cost Recovery Agreement (NICRA), if available.
11
If the NICRA is not available or is not consistent with the
rates/calculations in the budget, please provide an explanation of
how the amounts were calculated.
Please clearly list the manner
in which indirect costs are calculated in the budget.”
62.
Id. at ¶
No indirect costs were identified in the WVEO grant
application.
Id. at ¶ 63.
In addition, other terms and conditions that the WVEO
agreed to comply with upon receipt of the grant funds, including
the DOC Financial Assistance Standard Terms and Conditions, the
ARRA Award Terms, 74 FR 33104, and the DOC Pre-Award Notification
Requirements for Grants and Cooperative Agreements, did not permit
payment of indirect costs not included in a line-item budget.
at ¶¶ 64-66.
Id.
Citynet alleges that Frontier was a sub-recipient of
the grant pursuant to a Memorandum of Understanding (“MOU”)
entered between the parties on October 1, 2010.
Id. at ¶¶ 69-70.
The MOU stated that if awarded the grant, Frontier as a subrecipient of the grant would construct 915 miles of fiber
contemplated in the WVEO application, and would “establish a
middle-mile broadband network to over 1,000 points of interest
throughout West Virginia.”
Id. at ¶¶ 70-71.
As a sub-recipient
of the grant, Frontier also agreed to comply with the Special
Award Conditions, all other laws, rules and regulations that
12
governed the grant award and with all accounting requirements in
the NOFA, as well as to ensure that the WVEO would be invoiced for
eligible grant costs and that costs not eligible under the grant
would be billed to the WVEO separately.
Id. at ¶¶ 72-74.
Citynet alleges that Frontier did not construct the
middle mile network proposed in the WVEO application and that it
agreed to construct in the MOU, but instead it began to build the
last mile project it proposed in its joint application with CTC,
which was not given funds under the BTOP grant.
Id. at ¶ 75.
According to Citynet, Frontier did not need to build the 915-mile
network that was proposed in the WVEO application because a “vast
majority of the proposed Middle-Mile network already existed.”
Id. at ¶ 76.
Because Frontier did not build the existing middle
mile network with funds from the grant, the “open access”
requirement did not apply to it, meaning that Frontier could deny
its competitors access to the existing network.
Id. at ¶ 76.
Citynet further alleges that Frontier did not want to build an
open-access middle mile network because “it would allow
competition from other broadband services providers” which “would
be catastrophic to Frontier’s business.”
Id. at ¶ 77.
Instead of
constructing fiber from one of its Central Offices to another
Central Office, or from the CAI back to the Central Office, as
13
provided for in the WVEO application, Citynet alleges that
Frontier “merely constructed fiber from the CAI to Frontier’s
nearest utility pole (i.e., driveways to local streets).”
¶ 78.
Id. at
Citynet alleges that the decision to do this was
“unilaterally made by [Mr.] Gianato.”
Id. at ¶ 79.
In support of the contention that the WVEO grant
application proposed building fiber from Central Office to each
CAI, Citynet alleges that “areas of potential affect maps” (“APE
maps”) were provided to the NTIA that identified the routes for
the fiber to be built to each CAI and the footage of fiber that
would be required for each CAI.
Id. at ¶ 80.
The APE maps showed
that fiber would be built from the Central Office to the CAI.
at ¶ 81.
Id.
After the construction was completed, Frontier submitted
“as-built” maps that were not typically used in the industry,
which showed that the fiber was not built back to the Central
Office, as proposed, but instead, a “‘service drop’ was installed
from the CAI to the nearest utility pole.”
Id. at ¶¶ 82-83.
By
using the “service drop” method instead of building the fiber back
to the Central Office, “the fiber built [was rendered] useless to
third parties thus defeating the open access conditions set forth
in the grant award.”
Id. at ¶ 84.
14
Citynet contends that Frontier admitted to the Federal
Communications Commission that the facilities constructed with the
grant funds were last mile and not middle mile facilities.
Id. at
¶ 85; see Ex. 14 to First Am. Qui Tam Compl. (Comments of Frontier
before the Federal Communications Commission).
Citynet also alleges that Frontier “billed the . . .
grant for material and labor it did not provide, and for fiber
lengths that were not constructed.”
86.
First Am. Qui Tam Compl. at ¶
One way Frontier did this was by using excessive maintenance
coils to conceal the fact that it did not construct the fiber it
alleged it did.
Id. at ¶ 87.
For example, for one CAI, Frontier
billed the state for constructing 1,380 feet of fiber, but its
engineering map shows that it only built 735 feet of fiber and
placed an additional 600 feet of fiber in maintenance coils.
at ¶ 88.
Id.
Citynet alleges that Frontier routinely placed excessive
amounts of fiber in maintenance coils in order to “inflate its
invoices in an attempt to draw down the surplus BTOP funds.”
at ¶ 90.
Id.
As a result, Frontier used the WVEO grant funds to “1)
expand its existing network within its service territory; 2)
ensure that its competitors would not have access to the network;
and 3) lock the State (the CAIs) into doing business with Frontier
in perpetuity.”
Id. at ¶ 91.
15
In total, Frontier submitted invoices totaling
$41,531,832.25 to the state.
Id.
Although Frontier only built
590 miles of fiber, the total cost was $856,939 more than the
amount Frontier represented it would cost to build the 1,793 miles
of fiber contemplated in the grant application.
Id. at p. 18 n.1.
In their own grant applications, Frontier and CTC estimated that
fiber construction would cost $24,816 per mile, but Frontier
received triple that amount for the 536 miles of fiber it built.
Id. at ¶ 93.
According to Citynet, Frontier “devised a plan to
expend all of the $42,000,000 of the budgeted BTOP funds by: 1)
charging for impermissible ‘loadings’ that were nothing more than
prohibited indirect costs; 2) fabricating the amount of fiber
built by utilizing maintenance coils; 3) fabricating the amount of
fiber built after the length of the maintenance coils had already
been considered in total; 4) double-billing for ‘Facility BuildOuts’ that were already contemplated as part of the original
construction estimate; and 5) billing for inappropriate ‘invoicing
fees’ that were not allowed under the grant.”
Id. at ¶ 92.
Ms. Given and Mr. Gianato allegedly assisted Frontier in
this plan by: “1) knowingly approving improper ‘loading’ and
‘invoice processing fee’ charges; 2) failing to verify Frontier’s
invoices and the corresponding charges; 3) failing to verify that
16
Frontier completed the work billed for; and 4) purposefully
holding Frontier’s invoices for up to eighteen (18) months at a
time before processing them so that the other service providers
would not be able to determine whether there would be surplus BTOP
funds available.”
Id. at ¶ 94.
According to Citynet, most of
these events occurred after Ms. Given became the State Technology
Officer.
Id.
Citynet alleges that Frontier “caused the federal
government to pay 365 Frontier invoices that included prohibited
indirect costs.”
Id. at ¶ 95.
Citynet contends that because the
WVEO application did not include indirect costs on the line item
budget, it was prohibited from collecting it under the NOFA, ARRA
Award Terms, 74 FR 33104 and the Special Award Conditions.
¶ 101.
Id. at
Frontier allegedly attempted to obtain reimbursement for
indirect costs before Ms. Given became the Chief Technology
Officer, but these requests were denied by Col. Michael
Todorovich.
Id. at ¶ 96.
He advised the Grant Implementation
Team and the West Virginia Office of Technology (“WVOT”) that
indirect costs were not reimbursable under the grant.
Id.; see
Ex. 17 to First Am. Qui Tam Compl. (Memorandum from Michael
Todorovich, PI/PD, regarding Reimbursement Process dated February
14, 2012).
Col. Todorovich additionally refused access to the
17
grant funds except for payment of construction that was already
completed.
First Am. Qui Tam Compl. at ¶ 97.
According to Citynet, the WVOT developed a protocol that
was used to process the vendor invoices that were submitted for
payment from the grant funds.
Id. at ¶ 98.
The process provided
that the vendor would first submit the invoice for review by the
WVOT, where a WVOT employee would match it against the original
LCR and approve it.
Id.
Next, the invoice was sent to Col.
Todorovich, who would ensure that the invoice was properly
approved by the WVOT and that there were sufficient grant funds to
pay the invoice.
Id.
The invoice was sent to the Governor’s
accountant for review and then was entered into the Department of
Treasury’s Automated Standard Application for Payments (“ASAP”).
Id.
Once the invoice is entered into ASAP, the funds were
dispersed to the WVOT, and it then forwarded the funds to
Frontier.
Id.
On July 1, 2012, Ms. Given, the former Regional
President of Verizon for the area covering West Virginia, was
appointed as the new State Technology Officer.
Id. at ¶¶ 12, 99.
She immediately took control of approving Frontier’s invoices for
the grant project.
Id.
After Ms. Given became the State
Technology Officer, Citynet alleges that Frontier began submitting
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invoices with a “Loadings” charge.
Id. at ¶ 100.
According to
Frontier’s invoices, the loadings charge was for “allocated
indirect costs such as vehicles, accounting, administration, etc.”
Id. at ¶ 101 (emphasis omitted).
Citynet contends that the
loadings charge was an indirect cost, which was in violation of
the various award conditions previously mentioned.
Id.
Despite
being an indirect charge unauthorized under the grant, Ms. Given
approved the Frontier invoices containing the loading fee, which
in some instances was higher than the original cost estimate for
the entire build.
Id. at ¶¶ 102-103.
In total, Frontier
submitted 365 invoices containing the improper loadings fee,
totaling $4,553,387.31.
Id. at ¶ 104.
The state budget and the
budget narrative provided by the state did not include indirect
costs and the grant award was not amended to permit indirect costs
to be reimbursed by the grant.
Id. at ¶ 106.
Citynet also contends that Frontier submitted 327
invoices for payment from grant funds that included facility build
out fees and invoice processing fees that were unlawful.
107.
Id. at ¶
The facility build out (“FBO”) fees included on the Frontier
invoice allegedly “consisted of the cost of construction inside
the CAI to allow the facility to accept the newly placed fiber.”
Id. at ¶ 108.
Citynet alleges that once Ms. Given was hired as
19
the State Technology Officer, Frontier began submitting invoices
with the FBO charge.
Id. at ¶ 109.
While Frontier claims that
the FBO charge was not part of the original grant estimate because
“the need for the FBO was not discovered until the project was
under way,” Citynet contends that the WVEO listed “DMARC Const.
Cost” in the original grant proposal, with a unit cost of $9,750
for 250 units, which was the equivalent of FBO costs, and
therefore was part of the original estimate in the WVEO proposal.
Id. at ¶¶ 109-10.
Citynet contends that Frontier “created the
fiction” that the charge was not originally part of the estimate
so that they could be double-billed for the “DMARC Const. Cost”
and the FBO costs.
Id. at ¶ 111.
Frontier also allegedly added “significant ‘invoice
processing fees’” to the FBO invoices after Ms. Given became the
State Technology Officer.
Id. at ¶ 112.
Mr. McKenzie allegedly
provided the state with a list of the costs associated with
processing a FBO invoice.
Id. at ¶ 113.
In the breakdown of
costs, Mr. McKenzie claimed it took sixteen employees four hours
to process one FBO invoice, at a cost of $1,808 or $452 per hour
to Frontier.
Id.; see also Ex. 20 to First Am. Qui Tam Compl.
(Letter from Mark McKenzie to Gale Given dated January 29, 2013
regarding “Frontier Incremental Processing Costs - FBO Invoices”).
20
On February 25, 2013, Mr. Waldo advised Ms. Given that it would
cost Frontier $596,640 to process 330 FBO invoices.
Quit Tam Compl. at ¶ 114.
First Am.
Since the state had paid the full
amount for 27 invoices, Mr. Waldo additionally advised Ms. Given
that it would only charge $1,340.20 per invoice, or $335.05 per
hour, for the remaining invoices.
Id.; see also Ex. 21 to First
Am. Qui Tam Compl. (Letter from Dana Waldo to Gale Given dated
February 25, 2013 regarding “invoicing for BTOP Projects Including
Facilities Build-Out Work”).
Frontier charged the invoice fee in
several instances when it performed no work.
Compl. at ¶ 115.
First Am. Qui Tam
In total, Frontier submitted 84 invoices with a
1,808 invoice fee and 243 invoices with a $1,340 invoice fee,
totaling $593,888.20, despite the fact that the processing fee is
an indirect cost that was prohibited under the terms of the grant
award.
Id. at ¶¶ 116-119.
Citynet also alleges that Frontier “and/or” Ms. Given
and Mr. Gianato held hundreds of invoices for months, which caused
other service providers to be unsure whether surplus BTOP funds
would be available.
Id. at ¶ 120.
Once Ms. Given began working
at the WVOT, the WVOT held the invoices “until it could rush the
processing and approval of a large number of the invoices at one
time.”
Id. at ¶ 121.
Additionally, the state began to pay a
21
$5.00 processing fee per invoice so that each of Frontier’s
invoices would be paid within twenty-four hours of its approval by
Ms. Given’s office.
Id. at ¶ 122.
Citynet also alleges that “mitigation plan” fraud took
place during the course of construction.
Id. at ¶ 123.
According
to it, the NTIA asked the WVEO and Frontier to develop a
“mitigation plan” so that the project construction would be
completed on schedule.
Id. at ¶ 124.
Frontier drafted the
mitigation plan, which Citynet alleges falsely misrepresented that
the construction to the CAIs was delayed because of environmental
issues and because of a fiber shortage from the 2011 tsunami in
Japan.
Id. at ¶ 125.
As a result, the mitigation plan stated
that due to environmental issues and fiber shortage, a reduction
of CAIs receiving fiber was necessary, thereby reducing the 1,064
CAIs to 668 and the 915 miles of fiber to 590.
Id.
In reality,
the reduction in the number of CAIs and the miles of fiber to be
built was not a result of delays, but because the CAIs already had
fiber when the WVEO grant application was submitted.
Id. at ¶
126.
Citynet finally contends that Mr. Waldo made
misrepresentations about the grant award.
First, he stated that
West Virginia’s national ranking for broadband connectivity would
22
rise from being one of the bottom five states to one of the top
five states after the project was completed.
Id. at ¶ 127.
Instead, West Virginia was ranked 48th in broadband access by the
FCC prior to the grant award, and 53rd after the completion of the
grant project, behind every other state, the District of Columbia,
Guam and Puerto Rico.
Id. at ¶ 131.
Mr. Waldo also
misrepresented to the West Virginia Legislature that Frontier had
constructed a middle mile network and that it had negotiated
several interconnection agreements with broadband wholesalers and
last mile providers for them to use the middle mile network.
at ¶ 128.
Id.
In its quarterly BTOP report, it was revealed that no
agreements were being negotiated or were ever entered into with
broadband wholesalers or last mile providers.
Id. at ¶ 129.
II. The Complaint
Based on the foregoing facts, Citynet’s complaint
alleges nine violations of the False Claims Act.
Count I alleges
that defendants violated 31 U.S.C. § 3729(a)(1)(A) by “knowingly
present[ing], or caus[ing] to be presented, to the United States
Government, at least 646 false or fraudulent claims for payment or
approval by seeking payment from funds restricted to an approved
NTIA grant award for construction of a . . . middle-mile network
23
for work that Frontier provided constructing a non-approved LastMile project.”
Id. at ¶ 134.
It additionally alleges that
Frontier “authorized, ratified and benefited from all of the
violations of the False Claims Act committed by its various
officers, agents and employees.”
Id. at ¶ 135.
As a result,
Citynet alleges that the government and the public have been
damaged in an amount not less than $41,531,832.25.
Id. at ¶ 136.
Counts II through IV also allege violations of §
3729(a)(1)(A).
Count II alleges a violation for defendants
“knowingly present[ing], or caus[ing] to be presented, to the
United States Government, at least 365 false or fraudulent claims
for payment or approval by seeking payment of no less than
$4,553,387.31 in prohibited Loadings and Indirect Costs under the
BTOP award grant.”
Id. at ¶ 141.
Due to the violation, Citynet
alleges that the government and the public have been damaged in
the amount of $4,553,387.31.
Id. at ¶ 143.
Count III alleges
that defendants violated § 3729(a)(1)(A) by knowingly presenting
or causing to be presented to the government, 327 false and
fraudulent claims for payment by seeking $593,888.20 in prohibited
FBO Invoice Fees and Indirect Costs under the grant award.
¶ 148.
Id. at
Count IV alleges that Frontier and Mr. McKenzie knowingly
presented or caused to be presented to the government false and
24
fraudulent claims by seeking payment for materials and services
not provided for under the grant award.
Id. at ¶ 155.
The
materials and services include, but are not limited to: 1)
excessive maintenance coils in the “as-built” amounts; 2)
falsification of the length of the fiber build; and 3)
falsification of the number of fiber strands provided on jobs.
Id.
Counts V through VIII allege violations of §
3729(a)(1)(B).
Count V alleges that “[d]efendants knowingly made,
used, or caused to be made or used, 646 false records or
statements material to false or fraudulent claims that were
presented to [the government] for payment from funds restricted to
an approved NTIA grant award for construction of a mile middlemile network for work that Frontier provided constructing a nonapproved Last-Mile project.”
Id. at ¶ 162.
Count VI alleges a
violation of § 3729(a)(1)(B) for defendants knowingly making,
using, or causing to be made or used, 365 false records or
statements material to false or fraudulent claims that were
presented to the government for payment of prohibited Loadings
charges and Indirect Costs under the grant.
Id. at ¶ 169.
Count
VII alleges a violation for knowingly making, using or causing to
be made or used, 327 false records or statements material to false
25
or fraudulent claims presented to the government for payment of
prohibited FBO Invoicing Fees under the grant.
Id. at ¶ 176.
Count VIII alleges that Frontier and Mr. McKenzie made, used or
caused to be made or used, false records or statements material to
false or fraudulent claims presented to the government for payment
for materials and services not provided under the grant.
Id. at ¶
183.
Count IX alleges a conspiracy by defendants to commit
violations of § 3729(a)(1)(A) and (B), in violation of §
3729(a)(1)(C).
Id. at ¶ 190.
It alleges that defendants engaged
in conduct including “1) providing false records and information
for use in the State’s grant application and subsequent claims for
payment; 2) falsifying the need for a Mitigation Plan; 3) engaging
in conduct to hide the fraudulent claims submitted to the United
States from being discovered; 4) assisting other Defendants in
submitting fraudulent claims; 5) agreeing to engage in a pattern
of conduct to allow the fraudulent claims to be submitted to, and
paid by, the United States; and 6) advising other Defendants on
how to submit fraudulent claims to be paid by the United States.”
Id.
In all Counts, Citynet seeks three times the amount of
damages sustained by the government, and a civil penalty for each
26
violation, both pursuant to § 3729(a)(1).
Id. at ¶ 193.
Citynet
additionally seeks its fees and costs pursuant to § 3729(a)(3).,
all statutory, legal, and equitable relief to which it is
entitled, pre and post-judgment interest, and any other relief the
court deems appropriate.
Id. at ¶ 194; id. at p. 32.
III. The Motions to Dismiss
The State Employees, Kelley Goes (improperly named
“Kelly” in the complaint), Jimmy Gianato, and Gale Given, filed a
joint motion to dismiss.
The State Employees argue that the
complaint should be dismissed as to them because: (1) they are not
persons subject to liability under the False Claims Act; (2) they
are immune from suit pursuant to the Eleventh Amendment; (3) they
are entitled to qualified immunity and are therefore immune from
suit; and (4) that Citynet’s claims are jurisdictionally barred
because they are based on public information.
Defendants’ Goes,
Gianato, and Given’s Memo. in Supp. of Mot. to Dismiss (“State
Employees’ Memo. in Supp. of Mot. to Dismiss”).
The Frontier Defendants, Frontier, Kenneth Arndt, Dana
Waldo and Mark McKenzie, filed a separate joint motion to dismiss.
They allege that the complaint should be dismissed as to them
because: (1) all claims have failed to state a claim pursuant to
27
Fed. R. Civ. P. 12(b)(6); (2) Counts one and five are subject to
dismissal pursuant to the False Claim’s Act public disclosure bar;
and (3) Count nine does not plead sufficient facts in order to
satisfy the plausibility standard and the particularity standard
of Fed. R. Civ. P. 9(b).
Frontier Defendants’ Memo. in Supp. of
Mot. to Dismiss at 1-2.
Citynet responded to both motion to dismiss, to which
both sets of defendants have replied.
In addition, the court
granted Citynet leave to file a surreply to Frontier’s reply, to
which Frontier responded.
On June 21, 2017, Citynet filed a motion to file a
second surreply in opposition to the Frontier Defendants and Gale
Given’s motion to dismiss.
In the second surreply, Citynet wishes
to discuss the Office of Inspector General’s June 2017 report
(“OIG Report”) which they contend found that “Frontier charged
invoice processing fees that were unreasonable, unallowable and
unsupported, and that Frontier built a significantly greater
amount of maintenance coils than had been previously disclosed.”
Citynet’s Mot. to File a Second Surreply at 1-2.
Citynet argues
that the court should take judicial notice of the OIG Report for
purposes of the pending motions to dismiss.
Id. at 3 (citing Fed.
R. Evid. 201 and United States v. Savannah River Nuclear Sols.,
28
LLC, No. 1:16-cv-00825-JMC, 2016 WL 7104823, at *8 (D.S.C. Dec. 6,
2016) (finding that a court may take judicial notice of OIG Report
findings)).
The State Employees and the Frontier Defendants both
filed responses in opposition to Citynet’s motion to file a second
sur-reply to which Citynet replied.
The State Employees state
that the OIG Report is not relevant to the arguments set forth in
their motion to dismiss and actually supports their argument that
the claims in the complaint were publicly disclosed.
Employees’ Resp. to Mot. to File Surreply at 3.
State
Because the OIG
Report was released after Citynet’s complaint was filed, it cannot
qualify as a public disclosure.
The Frontier Defendants contend
that while the court can take judicial notice of the OIG Report
itself, it may not take judicial notice for the truth of the
information contained in the report.
Because the court has reviewed the OIG Report and
determined its use at this stage would not change the court’s
ruling on the motions to dismiss, the court need not reach the
determination as to whether the court may take judicial notice of
the facts contained therein.
Accordingly, Citynet’s motion to
file a second surreply is denied.
29
IV. Applicable Law
Federal Rule of Civil Procedure 8(a)(2) requires that a
pleader provide “a short and plain statement of the claim showing
. . . entitle[ment] to relief.”
S. Ct. 2197, 2200 (2007).
See also Erickson v. Pardus, 127
Rule 12(b)(6) correspondingly permits a
defendant to challenge a complaint when it “fail[s] to state a
claim upon which relief can be granted.”
Fed. R. Civ. P.
12(b)(6).
The required “short and plain statement” must provide
“‘fair notice of what the . . . claim is and the grounds upon
which it rests.’”
Bell Atlantic Corp. v. Twombly, 127 S. Ct.
1955, 1964 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47
(1957), overruled on other grounds, Twombly, 127 S. Ct. at 1969));
see also Anderson v. Sara Lee Corp., 508 F.3d 181, 188 (4th Cir.
2007).
Additionally, the showing of an “entitlement to relief”
amounts to “more than labels and conclusions.”
Ct. at 1965.
Twombly, 127 S.
It is now settled that “a formulaic recitation of
the elements of a cause of action will not do.”
Id.; Giarratano
v. Johnson, 521 F.3d 298, 304 (4th Cir. 2008).
The complaint need not, however, “make a case” against a
defendant or even “forecast evidence sufficient to prove an
30
element” of the claim.
Chao v. Rivendell Woods, Inc., 415 F.3d
342, 349 (4th Cir. 2005) (quoting Iodice v. United States, 289
F.3d 270, 281 (4th Cir. 2002)).
Instead, the opening pleading
need only contain “[f]actual allegations . . . [sufficient] to
raise a right to relief above the speculative level.”
Twombly,
127 S. Ct. at 1965; Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949
(2009) (noting the opening pleading “does not require ‘detailed
factual allegations,’ but it demands more than an unadorned, thedefendant-unlawfully-harmed-me accusation”).
Stated another way,
the complaint must allege “enough facts to state a claim to relief
that is plausible on its face.”
Giarratano, 521 F.3d at 302.
Twombly, 127 S. Ct. at 1974;
The decision in Iqbal provides some
guidance concerning the plausibility requirement:
A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for
the misconduct alleged. . . .
. . . But where the well-pleaded facts do not permit the
court to infer more than the mere possibility of
misconduct, the complaint has alleged - but it has not
“show[n]” - “that the pleader is entitled to relief.”
129 S. Ct. at 1949-50.
As noted in Erickson, the Supreme Court has consistently
interpreted the Rule 12(b)(6) standard to require a district court
to “accept as true all of the factual allegations contained in the
31
complaint.”
127 S. Ct. at 2200 (quoting Twombly, 127 S. Ct. at
1965); see also S.C. Dep’t of Health & Envtl. Control v. Commerce
& Indus. Ins. Co., 372 F.3d 245, 255 (4th Cir. 2004) (quoting
Franks v. Ross, 313 F.3d 184, 192 (4th Cir. 2002)).
The court is
additionally required to “draw[] all reasonable . . . inferences
from those facts in the plaintiff’s favor.”
Edwards v. City of
Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).
V. Discussion
A. Persons under the False Claims Act
The State Employees first argue that as employees of the
state and state agencies, they are not “persons” under the False
Claims Act, and that they are therefore not subject to liability
under it.
They contend that although they are named in the
complaint individually, the specific allegations in the complaint
refer to the state and the West Virginia Executive Office, “[i]n
an attempt to circumvent its inability to sue the State of West
Virginia pursuant to the FCA.”
Mot. to Dismiss at 6.
State Employees’ Memo. in Supp. of
Although they are named individually in the
complaint, the State Employees further contend that as state
officials, the allegations against them must be for individual or
32
“unofficial” activity, and Citynet has not alleged that they have
acted outside of their official duties.
Id. at 7.
In support of this argument, the State Employees cite to
Will v. Michigan Department of State Police, 491 U.S. 58 (1989),
for the proposition that state officials acting in their official
capacities “are not ‘persons’ for the purposes of law suits
brought pursuant to federal statutes.”
Supp. of Mot. to Dismiss at 7.
State Employees’ Memo. in
They also cite to the Eighth
Circuit case of United States ex rel. Gaudineer & Comito LLP v.
Iowa, 269 F.3d 932 (8th Cir. 2001), where the court determined
that a state employee, sued in his individual capacity, was not a
person subject to suit under the FCA when the plaintiff failed to
allege that the employee was not acting outside of their official
duties.
The State Employees contend that here, Citynet has
similarly failed to allege that they acted outside of their
official duties and that they are therefore not persons under the
FCA.
State Employees’ Memo. in Supp. of Mot. to Dismiss at 8-9.
In response, Citynet states that it has very explicitly
sued the State Employees in their individual, not official,
capacities because the State Employees “acted outside of their
statutory authority when they engaged in the fraudulent activity
set forth in the First Amended Complaint.”
33
Citynet Resp. to State
Employees’ Mot. to Dismiss at 3.
As a result, Citynet contends
that it is suing the State Employees in only their individual
capacities.
Id. at 7.
As Citynet noted in its response, its claims against the
state employees are in their individual, not official capacity.
Under the FCA, “any person who . . . knowingly presents, or causes
to be presented, a false or fraudulent claim for payment or
approval . . . is liable to the United States Government.”
U.S.C. § 3729.
31
In Vermont Agency of Natural Resources v. United
States ex rel. Stevens, the Supreme Court determined that state
and state agencies were not persons within the meaning of the FCA,
and therefore were not subject to liability under it.
765, 781 (2000).
529 U.S.
The Court did not address whether state
employees, sued either in their individual or official capacity,
are persons under the FCA.
The Fourth Circuit has not addressed whether a state
official sued in his individual capacity is a person subject to
liability under the FCA.
As the state employees note, in
Gaudineer, the Eighth Circuit determined, in a 2-1 panel decision,
that in order to state a claim against a state employee in his
individual capacity, the alleged conduct of the defendant must be
“outside of [his] official duties.”
34
269 F.3d at 937 (citing Bly-
Magee v. California, 236 F.3d 1014, 1016 (9th Cir. 2001)).
According to the court, because the plaintiff did not allege “the
extent and nature of [the state employee’s] duties, the mere
assertion that he issued standards that conflicted with state law
does not allege actions outside his official duties.”
Id.
As a
result, the plaintiff failed to state a FCA claim against the
state employee. 1
Id.
In dissent, Judge Gibson stated that he would hold “that
state officials may be sued in their individual capacity under the
False Claims Act.”
Id. at 939.
He made this determination based
on the decision of the Supreme Court in Hafer v. Melo, where the
Court ruled that “state officials, sued in their individual
capacities, are ‘persons’ within the meaning of § 1983.”
938 (quoting Hafer v. Melo, 502 U.S. 21, 31 (1991)).
Id. at
Judge Gibson
found it persuasive that the Court “expressly rejected any
distinction based on whether the actions at issue were within the
scope of the official’s authority,” reasoning that to rule
1
Some courts permit a plaintiff alternatively to allege that the
state official personally benefited from the conduct in order to
be liable under the FCA. See Alexander v. Gilmore, 202 F. Supp.
2d 478 (E.D. Va. 2002) (citing, inter alia, Smith v. United
States, 287 F.2d 299 (5th Cir. 1961) (finding that plaintiff
failed to state a FCA claim because it contained no claims that
the state employees were acting outside their official capacities
or that they were converting funds for their personal use).
35
otherwise would “absolutely immunize state officials from personal
liability for acts within their authority . . . .
Yet our cases
do not extend absolute immunity to all officers who engage in
necessary official acts.”
Id. (quoting Hafer 502 U.S. at 28).
In
light of the Court’s decision in Hafer, Judge Gibson would
similarly permit FCA claims against state officials in their
individual capacity irrespective of whether those acts occurred
within their official duties.
The Ninth Circuit followed the approach of Judge
Gibson’s dissent in confronting the same issue.
In Stoner v.
Santa Clara County Office of Education, the Ninth Circuit reversed
the decision of the district court, which found that plaintiff
failed to state a FCA claim against state employee defendants sued
in their official capacities because the plaintiff could not
allege that their actions were outside of their official duties.
502 F.3d 1116, 1123 (9th Cir. 2007). 2
The court concluded that
because the Supreme Court has defined “persons” to include
“natural persons,” state employees sued within their personal
2
Although facially at odds, the Ninth Circuit’s decision in
Stoner is consistent with its decision in Bly-Magee. In BlyMagee, the defendants sued in their individual capacities under
the FCA were otherwise shielded by absolute prosecutorial
immunity. See 236 F.3d at 1018. Consequently, the Bly-Magee
defendants’ conduct must have been outside their official duties
in order to defeat their absolute immunity. See id.
36
capacities were persons under the FCA.
See id. at 1124 (citing
Cook Cty. v. United States ex rel. Chandler, 538 U.S. 119, 125
(2003)).
The plaintiff “need not allege that the individual
defendants personally profited from such false submissions.
Nothing in § 3729(a)(1) requires the person knowingly making a
false submission to obtain a personal benefit from the wrongful
act.”
Id.
The court stated that it disagreed with “Gaudineer to
the extent the reasoning of [the case] cannot be reconciled with
the plain language of the statute.”
Id.
The court finds the rationale of the Ninth Circuit and
Judge Gibson in Gaudineer to be more persuasive.
The text of the
FCA contains no indication that a plaintiff must state more in
pleading a FCA claim against a state official sued in his personal
capacity.
Guidance from the Supreme Court in the context of §
1983 claims similarly advises that state officials can be sued in
their individual capacities for activities during the course of
their official duties.
Finally, requiring a state official to
take action outside of his official capacity would “absolutely
immune state officials from personal liability for acts within
their authority and necessary to fulfilling government
responsibilities,” which is “contrary to the principles of the
Supreme Court’s well-established public employee immunity
37
jurisprudence.”
See Hafer, 502 U.S. at 28; see also Stoner, 502
F.3d at 1125 (citing Harlow v. Fitzgerald, 457 U.S. 800, 807
(1982)).
Accordingly, the state employees sued in their
individual capacities are persons under the FCA, and as such, are
subject to liability under it.
This determination does not affect
the entitlement of the State Employees to qualified immunity,
discussed below.
B. Eleventh Amendment Immunity
The State Employees next argue that the Eleventh
Amendment bars the plaintiff’s suit against them, insisting that
although the State is not a named party in the complaint, the
allegations refer directly to the State or an agency of the state.
Memo. in Supp. of Mot. to Dismiss at 9.
The State Employees argue
that because the allegations in the complaint refer to official
actions taken by them, or allegations against the State directly,
sovereign immunity bars the FCA claims.
Id. at 9.
In response,
Citynet contends that because it has decided to sue the state
employees in their individual capacities and because it is not
seeking damages or any relief from the State, the claims are not
38
barred by the Eleventh Amendment.
Citynet Resp. to State
Employees’ Mot. to Dismiss at 3-4. 3
The Eleventh Amendment “bars ‘citizens from bringing
suits in federal court against their own states.’”
Bragg v. W.
Va. Coal Ass'n, 248 F.3d 275, 291 (4th Cir. 2001) (internal
citations omitted).
The Amendment further acts as a bar where the
suit is against a state official but the State is the real party
in interest.
Id.
Eleventh Amendment immunity is “an essential
element of the constitutional design” inasmuch as it “accords the
States the respect owed them as members of the federation” and
“protects the States' ability to govern in accordance with the
will of their citizens.”
Id. (internal citations omitted).
As
noted by our court of appeals, Eleventh Amendment immunity is not
absolute: “A State's immunity to suit in federal court is subject
to well established and important exceptions.”
Id. (citing S.C.
State Ports Auth. v. Fed. Maritime Comm'n, 243 F.3d 165 (4th Cir.
2001)) (enumerating six exceptions to Eleventh Amendment
immunity).
3
Citynet alternatively argues that the State has waived its
Eleventh Amendment immunity protections. Citynet Resp. to State
Employees’ Mot. to Dismiss at 4. Because the court has determined
that the allegations against the State Employees in their
individual capacity does not invoke the Eleventh Amendment, the
court need not reach this argument.
39
“An individual capacity suit for damages against state
officials alleged to have personally violated § 3729 does not
implicate the principles of state sovereignty protected by Stevens
and our Eleventh Amendment jurisprudence because such an action
seeks damage from the individual defendants rather than the state
treasury.”
Stoner, 502 F.3d at 1125 (citing Alden v. Maine, 527
U.S. 757 (1999)).
“Where a plaintiff seeks to hold individual employees
personally liable for their knowing participation in the
submission of false or fraudulent claims to the United States
government, the state is not the real party in interest, and the
Eleventh Amendment poses no barrier to such a suit.”
Stoner, 502
F.3d at 1125 (citing Pennhurst State Sch. & Hosp. v. Halderman,
465 U.S. 89, 101 (1984) and Hafer, 502 U.S. at 30-31) (internal
citations omitted).
Accordingly, because here, plaintiff has sued
the State Employees in their individual capacity and is not
seeking damages from the state, the Eleventh Amendment does not
bar its claims against them.
C. Qualified Immunity
The doctrine of qualified immunity protects government
officials from actions for civil damages to the extent that the
40
officials do not violate clearly established constitutional
rights.
See Harlow, 457 U.S. at 818.
Because it is an immunity,
and not merely a defense, it shields government officials from not
only liability but also from the burdens of trial and preparing,
and so it is to be addressed by the court at an early stage of the
litigation.
Hunter v. Bryant, 502 U.S. 224, 227 (1991); Mitchell
v. Forsyth, 472 U.S. 511, 526 (1985).
“[I]t is effectively lost
if a case is erroneously permitted to go to trial.”
Mitchell, 472
U.S. at 526.
In general, government officials are entitled to
qualified immunity from liability for discretionary actions unless
a claim against an official satisfies a two-prong test: “(1) the
allegations underlying the claim, if true, substantiate the
violation of a federal statutory or constitutional right; and (2)
this violation was of a clearly established right of which a
reasonable person would have known.”
Ridpath v. Bd. of Governors
Marshall Univ., 447 F.3d 292, 306 (4th Cir. 2006) (internal
citations and quotations omitted).
As for the first prong, the court discusses below
Citynet’s FCA claims against the State Employees that survive the
State Employees’ Rule 12(b)(6) motion to dismiss.
Consistent with
that discussion, the court finds that Citynet has alleged that the
41
State Employees violated the FCA to the extent detailed below.
The first prong is thus satisfied.
Conversely, the court finds that it cannot conclude
whether Citynet’s claims satisfy the second prong.
As a
consequence, despite the principles urging the court to make as
early decision as feasible on the issue of qualified immunity, the
determination of whether the State Employees are entitled to the
defense must be deferred until a later time in light of
evidentiary development, such as at the summary judgment stage.
Under the second prong, a government official is not
entitled to qualified immunity “if the contours of the right [are]
sufficiently clear so that a reasonable [government official]
would have understood, under the circumstances at hand, that his
behavior violated the right.”
Bailey v. Kennedy, 349 F.3d 731,
741 (4th Cir. 2003) (internal quotation marks omitted and
alteration in original).
“The ‘salient question’ is whether the
state of the law at the time of the events in question gave the
officials ‘fair warning’ that their conduct was un[lawful].”
Ridpath, 447 F.3d at 313 (quoting Hope v. Pelzer, 536 U.S. 730,
741 (2002)).
Even in areas where the law provides only general
statements as to conduct prohibited, “officials can still be on
notice that their conduct violates established law even in novel
42
factual circumstances” if the general statement of law applies to
the conduct with “obvious clarity.”
Id. (quoting Hope, 536 U.S.
at 741).
The applicable law here is the FCA, 31 U.S.C. §
3729(a)(1)(A) to (C).
The Fourth Circuit holds that “[t]he test
for [FCA] liability . . . is (1) whether 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.”
Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788
(4th Cir. 1999).
Regarding the second element, the requisite
scienter, the FCA employs the term “knowingly.”
3729(a)(1)(A).
See, e.g., §
A defendant acts “knowingly” in three separate
circumstances: the defendant either “(i) has actual knowledge of
the information; (ii) acts in deliberate ignorance of the truth or
falsity of the information; or (iii) acts in reckless disregard of
the truth or falsity of the information.”
§ 3729 (b)(1)(A)(i) to
(iii).
The FCA is clearly established inasmuch as the FCA was
enacted in 1863 to prevent fraud by contractors who were providing
the Union Army with supplies during the Civil War, see Vt. Agency
of Nat. Res., 529 U.S. at 768; the federal courts are replete with
43
cases considering the FCA; and the conduct underlying any FCA
claim is essentially the same, namely, a fraud.
Thus, the
question at the second prong of the qualified immunity analysis
becomes whether a reasonable person would have recognized that he
knowingly perpetrated a material fraud and received government
money as a result of doing so.
That question interplays with the
scienter element already embedded within the FCA.
At one end, a
reasonable person with “actual knowledge” of his fraud would
doubtlessly know that the fraud he perpetrates is wrong.
At the
other end, whether a reasonable person “act[ing] in reckless
disregard of the truth” would recognize that his actions
constitute a fraud under the FCA is a much closer issue.
While the complaint sufficiently alleges that the
defendants acted with the requisite scienter, the court cannot at
this juncture decide the level of scienter with which the State
Employees acted in allegedly violating the FCA.
That obfuscates
the qualified immunity analysis as set forth above, and the
qualified immunity decision consequently must be deferred until a
time when the court can make an informed decision based upon the
evidence.
44
D. Public-Disclosure Bar
The State Employees contend that Citynet is prohibited
from pursuing all nine counts contained in the complaint due to
the public-disclosure bar contained in the FCA.
The Frontier
Defendants contend that, as to them, Counts I and V only are
barred by this provision.
1. Applicable Law
The public-disclosure bar is a limit on qui tam suits
that “disqualifies private suits based on fraud already disclosed
in particular settings – such as hearings, government reports or
news reports – unless the relator meets the definition of an
‘original source’ under the FCA.”
United States ex rel. Beauchamp
v. Academi Training Ctr., LLC, 816 F.3d 37, 39 (4th Cir. 2016)
(citing 31 U.S.C. § 3730(e)(4)).
Prior to 2010, the public-disclosure bar read as
follows:
No court shall have jurisdiction over an action under this
section based upon the public disclosure of allegations or
transactions in a criminal, civil, or administrative hearing,
in a congressional, administrative, or Government Accounting
Office report, hearing, audit, or investigation, or from the
news media, unless the action is brought by the Attorney
General or the Person bringing the action is an original
source of the information.
45
31 U.S.C. § 3730(e)(4)(A)(2005).
Our court of appeals has
interpreted this version of the public-disclosure bar as a
“jurisdictional limitation, . . . [which] if applicable, divest[s]
the district court of subject-matter jurisdiction over the
action.”
United States ex rel. May v. Purdue Pharma L.P., 737
F.3d 908, 916 (4th Cir. 2013).
Effective March 23, 2010, Congress amended the FCA,
revising the public-disclosure bar.
This provision now provides:
The court shall dismiss an action or claim under this
section, unless opposed by the Government, if substantially
the same allegations or transactions as alleged in the action
or claim were publicly disclosed—
(i) in a Federal criminal, civil, or administrative
hearing in which the Government or its agent is a party;
(ii) in a congressional, Government Accountability
Office, or other Federal Report, hearing, audit, or
investigation; or
(iii) from the news media,
unless the action is brought by the Attorney General or the
person bringing the action is an original source of the
information.
31 U.S.C. § 3730(e)(4)(A) (2010).
As discussed by our court of
appeals, the 2010 FCA amendments “significantly chang[ed] the
scope of the public disclosure bar,” by, among other things,
deleting the “jurisdiction-removing language previously contained
in § 3730(e)(4) and replac[ing] it with a generic, not-obviously-
46
jurisdictional phrase, making it clear that the public-disclosure
bar is no longer a jurisdiction-removing provision.”
States ex rel. Beauchamp, 816 F.3d at 39.
United
Pre-amendment,
determining whether the public-disclosure bar precludes a
plaintiff’s claims is decided under Rule 12(b)(1) for lack of
subject matter jurisdiction; post-amendment, it is treated as a
motion to dismiss pursuant to Rule 12(b)(6). 4
Id. at 40 (citing
United States ex rel. Osheroff, 776 F.3d at 810).
In addition to the deletion of the jurisdiction-removing
language, the 2010 amendments
also changed the required connection between the plaintiff's
claims and the public disclosure. Under the prior version, a
qui tam action was barred only if it was “based upon” a
qualifying public disclosure, a standard [our court of
appeals] interpreted to mean that the plaintiff must have
“actually derived” his knowledge of the fraud from the public
disclosure. United States ex rel. Siller v. Becton Dickinson
& Co., 21 F.3d 1339, 1348 (4th Cir. 1994), superseded on
other grounds as recognized in May, 737 F.3d at 917. “As
amended, however, the public-disclosure bar no longer
requires actual knowledge of the public disclosure, but
instead applies if substantially the same allegations or
transactions were publicly disclosed.” May, 737 F.3d at 917.
4
In determining whether the claims in the complaint are publicly
disclosed, the parties cite to a number of exhibits not contained
in the complaint. The court may consider documents attached to
the complaint, and may take judicial notice of the newspaper
articles and matters of public records in order to determine
whether the allegations in the complaint were publicly disclosed
in those documents. See United States ex rel. Osheroff v. Humana
Inc., 776 F.3d 805, 811 (11th Cir. 2015).
47
United States ex rel. Beauchamp, 816 F.3d at 40.
Our court of appeals has additionally instructed that
the 2010 FCA amendments do not apply retroactively to causes of
action that arose before March 23, 2010, the effective date of the
2010 amendments.
See United States ex rel. May, 737 F.3d at 918.
In this case, the complaint contains allegations that
span from 2009 to 2014.
In its motion to dismiss, the Frontier
Defendants use the 2010 FCA amendments to argue that Citynet’s
claims contain “substantially the same allegations” as those in
the purported public disclosures.
in Supp. of Mot. to Dismiss at 18.
See Frontier Defendants’ Memo.
The State Employees appear to
assert that the pre-2010 version of the public-disclosure bar
applies to Citynet’s claims.
See State Employees Memo. in Supp.
of Mot. to Dismiss at 12-13 (stating that Citynet’s claims are
“jurisdictionally barred” pursuant to the public-disclosure bar).
Citynet contends that the 2010 amendments apply to its claims.
See Citynet Resp. to Frontier Defendants’ Mot. to Dismiss at 7;
Citynet Resp. to State Employees’ Mot. to Dismiss at 12.
In the
briefing on the motion to dismiss, none of the parties has given a
rationale for the application of one version of the statute over
another, given that the allegations in the complaint span from
2009 to 2014.
48
Our court of appeals has not instructed district courts
how to analyze the public-disclosure bar when conduct alleged in a
complaint spans the pre- and post-amendment effective date.
See
United States ex rel. Beauchamp, 816 F.3d at 39-40 (stating that
“[t]wo versions of the public-disclosure bar are relevant to this
appeal given the timeframe of the alleged underlying fraud” which
began in 2007 and extended through 2010, but declining to address
whether the public-disclosure analysis should be split between the
current and former versions of the statute depending on when the
conduct occurred because the distinction did not affect the
outcome of the case).
But see United States ex rel. Saunders v.
Unisys Corp., No. 1:12-cv-00379 (GBL/TCB), 2014 WL 1165869, at *4
(E.D. Va. Mar. 21, 2014) (applying the 2010 FCA amendments when
the purported public disclosures were made after the effective
date of the amendments even though part of the alleged underlying
fraud took place prior to the effective date of the amendments).
Because the 2010 amendments are not retroactive, the court applies
the pre-2010 version of the statute to the conduct alleged that
occurred prior to March 23, 2010 and the 2010 amendments to the
conduct that occurred after March 23, 2010.
49
2. Application
The Frontier Defendants cite to a number of newspaper
articles relating to the NTIA project as well as Citynet’s formal
protest of the grant award.
See Exs. C, D, E, F, G, H to Frontier
Defs.’ Mot. to Dismiss; Ex. 17 to Qui Tam Compl.; Exs. I, J, K to
Frontier Defs.’ Reply.
The State Employees cite to the following:
NTIA’s response letter to Citynet’s formal protest; a letter from
Mr. Gianato to John Shimkus, the Chairman of the Subcommittee on
Environment and Economy Committee on Energy and Commerce in the
United States House of Representatives; a Legislative Audit
regarding the failure of the State to comply with purchasing laws
in the BTOP tower project; and a case study report of the social
and economic impacts of the BTOP project.
Employees’ Mot. to Dismiss.
See Exs. A-D to State
The State Employees additionally
contend that the exhibits to the amended complaint ”consist of
public documents, which were submitted to State and Federal
governmental bodies, or were otherwise made available to the
public.”
See State Employees’ Memo. in Supp. of Mot. to Dismiss
at 12-13.
The court must first determine whether the documents to
which the defendants cite are public disclosures within the
meaning of the FCA.
As noted by our court of appeals,
50
Under the prior version of the statute, disclosures in
federal and state trials and hearings qualify as public
disclosures, see, e.g., McElmurray v. Consol. Gov't of
Augusta–Richmond Cty., 501 F.3d 1244, 1252 (11th Cir. 2007),
and disclosures in federal and state reports, audits, or
investigations likewise constitute public disclosures, see
Graham Cty. Soil & Water Conservation Dist. v. United States
ex rel. Wilson, 559 U.S. 280, 301 (2010). After the
amendments, however, only disclosures in federal trials and
hearings and in federal reports and investigations qualify as
public disclosures. See 31 U.S.C. §§ 3730(e)(4)(A)(i) & (ii)
(2010).
United States ex rel. May, 737 F.3d at 917 (emphasis in original
and second full citation added).
Second, the disclosure must have
been made public prior to the filing of the complaint. 5
See
United States ex rel. Wilson v. Graham Cty. Soil & Water
Conservation Dist., 528 F.3d 292, 299 (4th Cir. 2008), overruled
on other grounds by Graham Cty., 559 U.S. 280.
Finally, to
qualify under either version of the FCA, the disclosure must
reveal “allegations or transactions” of fraud, or “a false state
of facts and a true state of facts from which fraudulent activity
may be inferred.”
United States ex rel. Springfield Terminal Ry.
Co. v. Quinn, 14 F.3d 645, 653-54 (D.C. Cir. 1994); United States
ex rel. Davis v. Prince, 753 F. Supp. 2d. 569, 582 (E.D. Va. 2011)
Courts have interpreted “publicly disclosed” to mean the
documents are “generally available to public” or placed “in the
public domain.” See Graham Cty., 528 F.3d at 307; United States
ex rel. Poteet v. Bahler Med., Inc., 619 F.3d 104, 110 (1st Cir.
2010); United States ex rel. Feingold v. AdminaStar Fed., Inc.,
324 F.3d 492, 495 (7th Cir. 2003); Springfield, 14 F.3d at 654.
5
51
(“[T]o qualify as a ‘public disclosure,’ a disclosure must reveal
an allegation of fraud, or a false and true state of facts from
which fraud may be inferred.”).
Under both versions of the FCA, the newspaper articles
submitted by the Frontier Defendants qualify as “news media.”
Accordingly, the documents put forward by the Frontier Defendants
qualify as public disclosures under both versions of the FCA.
In
addition, Citynet concedes that its formal protest of the BTOP
grant award qualifies as a federal administrative hearing.
As to the documents provided by the State Employees,
Citynet additionally concedes that Exhibit A, the letter from Mr.
Strickling of the United States DOC, and Exhibit D, the Broadband
Technology Opportunities Program Evaluation Study, are public
disclosures because they were generated by the federal government.
See Citynet’s Resp. to Frontier Defs. at 13.
Because of this,
they qualify as public disclosures under both versions of the FCA.
Citynet contends that Exhibits B and C provided by the
State Employees are not public disclosures under the post-2010
version of the FCA because they were generated from state
agencies.
Id.
Although the State Employees’ Exhibit B is a
letter written by Mr. Gianato, who is a state employee, it was
52
written to the U.S. House of Representatives Chairman of the
Subcommittee on Communications and Technology and to the Chairman
of the Subcommittee on Environment and Economy Committee on Energy
and Commerce, about the West Virginia Broadband Infrastructure
Project.
Because it was in response to questions posed about the
project by members of these committees, it qualifies as a federal
hearing or investigation under the post-2010 amendments and
additionally as a state report under the pre-2010 version of the
FCA.
Exhibit C is a Special Audit Report from the West
Virginia Legislature.
Because it was generated by the West
Virginia Auditor, it is a public disclosure under the pre-2010
version of the FCA, but not the post-2010 version of the FCA.
Exhibit D is a BTOP Evaluation Study, which was submitted to the
Department of the Interior.
It is a public disclosure under both
versions of the FCA.
Although Exhibits B, C, and D are public disclosures
under one or both versions of the FCA, they need not be discussed
further inasmuch as they do not contain any allegations or
transactions of fraud contained in the complaint.
Exhibit B,
which is a letter from Mr. Gianato to Chairmen Walden and Shimkus
of the United States House of Representatives, supplements earlier
53
responses regarding the purchase of routers for the West Virginia
Statewide Broadband Infrastructure Project.
While a portion of
the grant funds were used to purchase routers for CAIs, no fraud
alleged in the complaint relates to that portion of the project.
Exhibit C is a state legislative audit relating to the failure of
the state to comply with purchasing laws when it constructed 17
microwave towers under the grant project.
Like the router portion
of the grant project, none of the allegations of fraud contained
in the complaint relate to the building of microwave towers.
Exhibit D is a case study report that examined the
social and economic impacts of the BTOP grant funds in West
Virginia and was “not an evaluation of the Executive Office of the
State of West Virginia, its partners, or its subgrantees.”
Ex. D to State Employees’ Mot. to Dismiss at 2.
See
The three
purposes of the study were to: (1) identify how the grantee
maximized the impact of the BTOP investment; (2) identify
successful techniques, tools, materials and strategies used to
implement the project; and (3) identify any best practices and
gather evidence from third parties, such as consumers and anchor
institutions as to the impact of the project.
Id.
The study does
not address any of the allegations of fraud contained in the
complaint.
54
As noted, the State Employees additionally contend that
all exhibits attached to the complaint “consist of public
documents, which were submitted to State and Federal governmental
bodies, or were otherwise made available to the public.”
Employees’ Mem. at 13.
State
The State Employees do not further explain
which exhibits to the complaint they allege are public
disclosures, or explain how they qualify as hearings, reports,
investigations or news media under either version of the FCA.
The
State Employees appear to assert that any documents that were
available to the public qualify as a public disclosure under the
FCA.
This is not the case; as noted, the documents must fall into
one of the categories previously discussed under the pre-amendment
or post-amendment FCA.
As a result, the argument that many of
these documents qualify as public disclosures can be dismissed
summarily because they do not meet the requirements for a public
disclosure.
As noted, under the pre-2010 FCA, disclosures in
reports, hearings, audits or investigations by a state or a state
agency qualify as a public disclosure.
Under the post-2010 FCA,
the disclosures must be made in a federal forum to constitute a
public disclosure.
See 31 U.S.C. 3730(e)(4)(A).
Accordingly, of
the documents attached to Citynet’s complaint, only Exhibit 14,
55
which is a documents containing the Comments of Frontier before
the FCC, and Exhibit 23, a news article titled “Let’s bring
broadband to all West Virginians,” qualify as public disclosures.
Under the pre-2010 FCA, the remaining exhibits attached
to the complaint must meet the requirements of administrative
reports in order to qualify as a public disclosure because they do
not qualify as a hearing or news media.
See Graham Cty., 559 U.S.
280 (finding that “administrative” in the pre-2010 FCA is not
limited to only federal governmental agencies).
The Supreme
Court, in Schindler Elevator Corp. v. United States ex rel. Kirk,
interpreted “report” in the FCA broadly to its ordinary meaning,
to mean “something that gives information” or a “notification,” or
“an official or formal statement of facts or proceedings.”
U.S. 401, 407 (2011).
563
Even when applying this broad definition,
many of the exhibits which the State Employees argue qualify as
public disclosures must be eliminated because they are not
documents created by a (state or federal) governmental agency that
meet the definition of “report.”
The court will address the
documents that may fit this definition within the context of the
specific Counts of the complaint.
56
a. Counts I and V: Last Mile Project
In Counts I and V of the complaint, Citynet alleges that
the state’s BTOP grant application represented that it would build
a middle mile network where Frontier was to construct fiber from
Central Office to Central Office or from the CAI back to the
Central Office, so that other providers could connect into the
network, but instead Frontier “merely constructed fiber from the
CAI to Frontier’s nearest utility pole (i.e., driveways to local
streets) which rendered it useless to other providers.
i. Public Disclosures
As discussed, in order to qualify as a public
disclosure, the documents in question must fit into one of the
categories listed in section 3730(e)(4)(A), must be publicly
disclosed, and must disclose allegations or transactions of fraud,
or contain information from which the fraud can be inferred.
As noted, a number of newspaper articles to which the
Frontier Defendants cite as well as Citynet’s formal protest of
the grant award qualify as public disclosures under both versions
of the FCA as “news media” and as a federal administrative
hearing.
See Exs. C, D, E, F, G, H to Frontier Defs.’ Mot. to
57
Dismiss; Ex. 17 to Qui Tam Compl.; Exs. I, J, K to Frontier Defs.’
Reply.
It is also clear that at least some of these documents
contain the allegations or transactions of fraud alleged in the
complaint regarding the building of a middle mile network.
The
Frontier Defendants’ Exhibits C and D only allege that Frontier
will own the network once built, not that they are building a last
mile network instead of the middle mile network provided for in
the State’s grant application.
See Frontier Defs.’ Ex. C, D.
However, other articles to which the Frontier Defendants cite
contain allegations regarding Frontier’s intent to or their later
actions to create a last mile instead of a middle mile network.
Most tellingly, Citynet’s formal protest of the BTOP award to the
NTIA dated September 9, 2010 states that
Secretary Goes has advised Citynet that approximately $40
million of the BTOP funds will be given to Frontier
Communications (as the successor-in-interest to Verizon) to
construct “tails” to government facilities only from the
nearest Frontier hub or similar facility. The “tails” will
be “last mile” fiber facilities, not middle mile fiber
facilities, and will constitute the full extent of fiber
construction under the EOWV’s [sic] plan. Once constructed,
the government agencies will have the ability to order
services from Frontier, and only Frontier pursuant to the
already existing [Multiprotocol Label Switching] contract
between the State of West Virginia and Frontier.
. . . .
58
The NOFA also requires that the network resulting from the
expenditure of BTOP funds be “open.” This requirement is
highly problematic in this situation on at least two
fronts. First, given that Frontier will only be
constructing “tails” or last mile facilities, there are no
facilities for other carriers to connect to as the result
of this purported “middle mile” project in violation of the
scalability requirement of the NOFA.
Second, and more troubling, is the EOWV’s [sic] position that
the network is “open” simply because Frontier will permit
other entities to use the resulting facilities pursuant to
the terms of existing interconnection agreements. . . .
[O]ther potential competitors such as cable companies will
have no ability to access the fiber since they do not have
interconnection agreements with Frontier.
Ex. 17 to Qui Tam Compl. at 2, 4; see also Frontier Defs.’ Ex. G
(United States DOC Response to Martin’s Letter dated November 29,
2010).
Newspaper articles provided by Frontier contain similar
statements.
Exhibit E, an October 15, 2010 article in the
Charleston Daily Mail, reported on Martin’s sending of the
aforementioned formal protest of the grant award and stated
“Martin claimed that although the state said it would use the
federal money to build a ‘middle-mile’ fiber optic network
competitors could connect to, it actually plans to award about $40
million to Frontier Communications Corp. to build ‘last mile’
fiber facilities.”
See also Frontier Defs.’ Ex. F (October 14,
2010 Charleston Gazette article reporting on same); Frontier
Defs.’ Ex. H (December 2, 2010 Charleston Daily Mail article
reporting on the U.S. Dep. of Commerce’s Response to Martin).
59
Newspaper articles presented by the Frontier Defendants
after the broadband expansion had been completed contain similar
allegations pertaining to the network as built.
Exhibit I, a
March 22, 2013 Charleston Gazette article states that a consulting
firm hired by West Virginia Governor Tomblin’s administration
found that the broadband expansion project created an “unintended
monopoly” for Frontier and stated that the “fragmented ‘last-mile’
network runs fiber ‘tails’ from public facilities to street-corner
telephone poles.
The network doesn’t connect the public buildings
to each other, or back to Frontier’s ‘central offices,’
telecommunication hubs where other broadband providers could
access the network.”
See also Frontier’s Ex. J (December 10, 2013
Charleston Gazette article) and Frontier’s Ex. K (March 13, 2014
The Pocahontas Times article) (both containing Martin’s critique
of the broadband expansion project as building a last mile instead
of a middle mile network). 6
The court thus finds that the
6
As discussed, the court has reviewed the documents alleged by
the State Employees to constitute public disclosures that allege
the fraud contained in Counts I and V. With the exception of
Exhibit A, which is the same as the Frontier Defendants’ Exhibit G
(Response to Martin’s Formal Protest of Grant Award), none of
those that qualify as public disclosures contain the allegations
regarding the building of a last mile network instead of a middle
mile network. Accordingly, the court need not further discuss the
documents alleged by them to be public disclosures pertaining to
these counts.
60
abovementioned exhibits contain the allegations of fraud contained
in the complaint. 7
ii. “Based Upon” / “Substantially the Same Allegations or
Transactions”
The court next must determine whether, under the pre2010 version of the FCA, the allegations regarding the building of
the last mile network are “based upon” the public disclosures, and
under the current version of the FCA, whether “substantially the
same allegations or transactions” are publicly disclosed.
Pre-2010 FCA
As discussed, under the pre-2010 version of the FCA, our
court of appeals has interpreted “based upon” to mean that the
relator has actually derived the allegations in the complaint from
the public disclosure.
United States ex rel. Beauchamp, 816 F.3d
at 40.
Citynet does not allege that the mentioned documents have not
been disclosed to the public. Inasmuch as the newspaper articles
were published in three separate newspapers and Citynet’s Formal
Protest and the Response were described in those articles, the
court finds that they were “generally available to the public” and
were placed “in the public domain” so that they were sufficiently
publicly disclosed within the meaning of the FCA.
7
61
In its response to the motions to dismiss, Citynet
attached an affidavit of Christopher G. Morris, which explains how
Citynet uncovered the allegations contained in the complaint.
Ex. 2 to Citynet’s Resp. to Frontier Defs.’ Mot. to Dismiss.
See
The
court will refer to the affidavit in determining whether Citynet’s
allegations are “based upon” the public disclosures to which the
defendants cite.
It is clear from the Morris affidavit as well as the
public disclosures themselves that have been discussed that
Citynet had independent knowledge of the allegations pertaining to
the building of a last mile network.
Citynet itself alleges that
its knowledge was obtained “from a grueling multi-year independent
investigation of the Defendants’ fraud that cost it countless man
hours and tens of thousands of dollars.”
Frontier Defs.’ at 12.
Citynet’s Resp. to
The Morris affidavit states that Citynet
interviewed a member of the Grant Implementation team “who
confirmed [that] the original plan of construction following the
submission of the [“WVEO”] application was to build fiber from the
Frontier Central Offices to the Community Anchor Institutions.”
Morris Aff., ¶ 5.
The Morris affidavit also states that “Citynet
reviewed a portion of Frontier’s proprietary route and plate maps
62
as [sic] Frontier’s corporate headquarters . . . to identify
specifically what Frontier built with BTOP funds.”
Id. ¶ 15.
That Citynet had independent knowledge of the
allegations pertaining to defendants’ building of a last mile
network is further evidenced by the fact that all the exhibits the
court has determined contained allegations of fraud relating to
Counts I and IV contain information from Martin, Citynet’s CEO.
Since Martin provided the information in the articles and formal
protest, it is abundantly clear that Citynet had independent
knowledge of these allegations of fraud.
Accordingly, the court
finds that Citynet has met its burden in establishing that the
allegations in Counts I and V are not based upon public
disclosures and are not barred under the pre-2010 version of the
FCA.
Post-2010 FCA
Under the post-2010 FCA, the court must determine
whether “substantially the same allegations or transactions as
alleged in the action” were publicly disclosed.
3730(e)(4)(A) (2010).
See 31 U.S.C. §
The Fourth Circuit has not had occasion to
interpret the “substantially the same” language.
Inasmuch as
other circuits interpreted the pre-2010 FCA language to mean
“substantially the same,” the court can look to other circuit
63
authority under either version of the FCA to understand the
meaning of this phrase.
In making this inquiry, other circuits
look to whether the disclosures provide enough information so that
the government could “investigate the case and . . . make a
decision whether to prosecute” or so that the information would
“alert[] law-enforcement authorities to the likelihood of
wrongdoing.”
United States ex rel. Davis v. District of Columbia,
679 F.3d 832, 836 (D.C. Cir. 2012) (internal citations and
quotations omitted); see United States ex rel. Advocates for Basic
Legal Equal., Inc. v. U.S. Bank, N.A., 816 F.3d 428, 431 (6th Cir.
2016) (“If the disclosure puts the government on notice of the
possibility of fraud surrounding the . . . transaction, the prior
disclosure is sufficient.”) (internal citations and quotations
omitted); United States v. Alcan Elec. & Eng’g, Inc., 197 F.3d
1014, 1019 (9th Cir. 1999) (stating that the public disclosure bar
was triggered when the public disclosures “contained enough
information to enable the government to pursue an investigation
against [the defendant]”).
The court finds that the newspaper articles and
Citynet’s formal protest of the grant award contain sufficient
detail from which the government could investigate and make a
decision whether to prosecute defendants for their alleged
64
building of a last mile network.
The public disclosures state
that persons at Frontier, who helped write the grant proposal,
planned to build and indeed did build a last mile network to which
competitors were unable to connect instead of the middle mile
network they purportedly alleged they would build in the grant
application.
Citynet argues that at least some of the public
disclosures cannot contain substantially the same allegations of
fraud because they pre-dated the building under the grant project.
Citynet’s Resp. to Frontier Defs.’ at 11-12.
To the extent those
public disclosures are predictions, that Citynet itself alleges
came true, they may qualify under the “substantially the same”
test.
The government had enough information to determine whether
defendants built the last mile network Citynet claimed it would
build, or the middle mile network allegedly provided in the WVEO
grant application.
Moreover, as discussed above, allegations
contained in public disclosures after the grant project was
completed contained similar allegations that Frontier indeed built
a last mile network.
Accordingly, the public disclosures put the
government on notice as to the allegations of fraud and required
no more detail for them to investigate and decide whether to
prosecute defendants.
65
iii. Original Source Exception
Citynet argues that even if substantially the same
allegations are alleged in the complaint as in the public
disclosures, it is an original source of the information contained
in Counts I and V, so that the public disclosure bar is
inapplicable.
See Citynet’s Resp. to Frontier Defs.’ at 12.
As
defined in the post-2010 FCA, an “original source” is an
individual who either “(i) prior to a public disclosure under
subsection (e)(4)(a), has voluntarily disclosed to the Government
the information on which allegations or transactions in a claim
are based, or (2) who has knowledge that is independent of and
materially adds to the publicly disclosed allegations or
transactions, and who has voluntarily provided the information to
the Government before filing an action under this section.” 8
31
U.S.C. § 3730(e)(4)(B).
Citynet argues that it is an original source under both
exceptions contained in Section 3730(e)(4)(B).
However, as noted
by the Frontier Defendants, Citynet cannot claim that it meets the
first original source definition inasmuch as it has not alleged
that it has “voluntarily disclosed to the Government the
8
The observably incorrect sequence of numbering in (i) and (2)
appears in the statute. See 31 U.S.C. § 3730(e)(4)(B).
66
information on which the allegations or transactions in a claim
are based . . . prior to a public disclosure.”
added).
Id. (emphasis
Citynet only alleges that it voluntarily provided its
information to the government before it filed suit, not before the
public disclosures were made.
15.
Citynet Resp. to Frontier Defs.’ at
Therefore, although it appears that Citynet was the source of
some of the public disclosures, because such information was not
provided to the government before the disclosures were made,
Citynet is not an original source under 31 U.S.C. §
3730(e)(4)(B)(i).
Citynet asserts that it has knowledge that is
“independent of” and “materially adds to” the public disclosures
under Section 3730(e)(4)(B)(2).
As discussed, Citynet alleges
that its knowledge of the alleged fraud came from a “grueling
multi-year independent investigation” that is outlined in the
complaint. 9
Citynet has thus adequately alleged that it has
knowledge “independent of” the public disclosures previously
discussed.
9
Citynet’s investigation is also outlined in the Morris
affidavit. However, the court may not rely on this document in
ruling on the post-2010 FCA public disclosure bar, as it is
treated as a motion to dismiss pursuant to Rule 12(b)(6). United
States ex rel. Beauchamp, 816 F.3d at 39.
67
Citynet also maintains that it has added to the public
disclosures by “materially contribut[ing]” the “who, what, when,
where and how of the events at issue.”
Citynet Resp. to Frontier
Defs.’ at 13 (citing United States ex rel. Paulos v. Stryker
Corp., 762 F.3d 688, 694 (8th Cir. 2014) and United States ex rel.
Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294,
304-06 (3rd. Cir. 2016)).
However, in listing what it has
materially contributed to the public disclosures, Citynet lists
items such as the providing of excessive maintenance coils and
charging of improper indirect costs, which are not contained in
Counts I and V.
Dismiss at 13-14.
See Citynet Resp. to Frontier Defs.’ Mot. to
The court cannot say that Citynet has
materially contributed to these public disclosures.
While Citynet
has made allegations pertaining to fraud relating to other parts
of the grant application and billing, these do not “materially
add” to the Count I and Count V allegations.
The public
disclosures described above contained information that Frontier
and its employees did not plan to build the middle mile network
contemplated in the WVEO grant application but instead intended to
build and indeed built a last mile network that was inaccessible
to competitors.
68
Citynet also maintains that it relied on more
information than that which was contained in the alleged public
disclosures in filing the complaint.
Defs.’ Mot. to Dismiss at 14.
Citynet Resp. to Frontier
However, that Citynet conducted its
own investigation to discover the information does not alter the
court’s analysis that it has not materially added to the public
disclosures.
Accordingly, Citynet’s Counts I and V must be
dismissed under the post-2010 FCA.
Inasmuch as Citynet’s last mile network claims are not
jurisdictionally barred under the pre-2010 FCA, but do not survive
the motion to dismiss under the post-2010 FCA, the court ORDERS
that Counts I and Counts V be, and they hereby are, dismissed with
respect to Citynet’s allegations of conduct occurring after the
2010 amendments to the FCA.
b. Counts II, III, VI, and VII: Billing of Prohibited Indirect
Costs
The State Employees contend that the allegations
contained in Counts II, III, VI, and VII were publicly disclosed. 10
10
Because the State Employees are not named in Counts IV and VIII
and because the Frontier Defendants do not argue that the
allegations in those counts were publicly disclosed, the court
will not evaluate whether the allegations contained in those
counts were publicly disclosed.
69
These Counts contain similar claims that defendants knowingly
billed the BTOP grant fund for costs that were prohibited under
the terms of the grant award.
Counts II and VI relate to the
billing for loadings costs which were for “allocated indirect
costs such as vehicles, accounting, administration, etc.”
Am. Qui Tam Compl. at ¶ 101.
First
Counts III and VII allege that
defendants billed for Facility Build Out and Invoice Fees that
were prohibited indirect costs under the terms of the grant award.
Id. at ¶¶ 148, 176.
The alleged FBO fee was the cost to construct
inside the CAI to “allow the facility to accept the newly placed
fiber.”
Id. at ¶ 108.
Citynet alleges that this fee was included
in the original invoice estimates under “DMAR Const. Cost” so that
Frontier double charged for this cost, which the State Employees
approved.
Id. at ¶ 111-112.
Frontier additionally billed for
significant “invoice processing fees” to each of the FBO invoices,
which is an indirect cost prohibited under the BTOP grant award.
Id. at ¶ 119.
As discussed previously, the State Employees provided
four documents (Exhibits A through D) which they contend publicly
disclose all allegations against them contained in the complaint.
They additionally argue that the newspaper articles proffered in
70
the Frontier Defendants’ memorandum in support of their motion to
dismiss and the exhibits attached to the complaint additionally
constitute public disclosures which bar Citynet’s claims.
The
court will analyze the documents to determine whether they: (1)
qualify as public disclosures under the pre-amendment and postamendment version of the FCA; (2) have been actually disclosed to
the public; and (3) contain allegations or transactions relating
to the fraud alleged in these four Counts or information from
which fraud may be inferred.
The court need not discuss the State Employees’ Exhibits
B, C, and D, because the court has already concluded that they do
not contain any allegations of fraud alleged by Citynet.
As noted, the State Employees’ Exhibit A qualifies as a
federal administrative hearing under both versions of the FCA, and
the newspaper articles provided by the Frontier Defendants in
their motion to dismiss qualify as “news media.”
But because none
of these documents contain allegations pertaining to defendants’
knowingly billing the grant fund for improper indirect costs or
loadings fees, they do not publicly disclose the allegations in
these Counts.
Exhibit A, which is the U.S. DOC’s response to
Martin’s formal protest of the grant award, responds only to
Martin’s assertions that defendants were planning to build a last
71
mile network that would not be accessible to other broadband
providers.
The news articles provided by Frontier similarly do
not discuss defendants’ billing for improper fees under the grant,
nor do they mention the grant billing process at all.
Many of the documents attached to Citynet’s complaint
clearly do not qualify as public disclosures or do not contain
allegations of fraud pertaining to these Counts in the complaint
so that they need not be discussed in detail.
Of the Exhibits
attached to the complaint, only Exhibits 12, 17, 18, 19, 20, 21,
and 22 will be discussed because they can be said to relate to
defendants’ alleged improper billing.
Exhibit 12 is a “working draft” for the WVEO’s BTOP
Budget Narrative Template.
Because it very clearly states that it
is a “working draft only,” the court cannot say that it qualifies
as a state administrative report under the pre-2010 FCA, and it
does not appear to meet any other category of public disclosures.
Exhibit 17 is a memorandum from Todorovich dated
February 14, 2012, which states, among other things, that
“indirect costs may not be reimbursed” under the BTOP grant.
This
memorandum qualifies as a public disclosure under the pre-2010 FCA
as an administrative report.
Although it does not contain an
72
allegation of fraud, it contains part of an inference of fraud —
the true state of facts, which is that indirect costs are not
properly reimbursable under the BTOP grant. 11
Exhibit 18 is a state of West Virginia invoice cover
sheet, which is attached to an invoice that the cover sheet
authorizes.
The attached invoice contains a loadings fee.
Exhibit 19 is a chart prepared by Citynet that details the
invoices submitted by Frontier containing loadings fees and
Exhibit 22 is a chart prepared by Citynet that details invoices
submitted by Frontier containing invoice processing fees.
Inasmuch as the invoice cover sheet authorizes the attached
invoice, it is a state administrative report under the pre-2010
FCA because it is “something that gives information” and serves as
a “notification” that the invoices were approved.
While Exhibits
19 and 22 themselves are not public disclosures, it is unclear
whether they were created using invoices attached to a similar
authorization for payment by the state which would likewise
qualify as administrative reports.
11
For the purposes of this section, the court assumes that the
Todorovich memorandum is publicly available, though the parties do
not state its origin. Whether it is publically available is
immaterial, because, as will discussed below, the State Employees
have failed to provide the missing piece required to create the
necessary inference of fraud for these claims.
73
However, the invoices do not meet the second requirement
of a public disclosure because it does not appear that they have
been publicly disclosed.
According to the Morris affidavit,
“Citynet . . . independently obtained copies of every Frontier
invoice submitted to the State for work it provided under the
fiber network component of the BTOP Grant.
Upon information and
belief, these invoices were not provided to any other entity other
than Citynet prior to the filing of this lawsuit.”
12.
Morris aff., ¶
From this statement, it can be inferred that Citynet obtained
the invoices from Frontier, and that the invoices are not
“generally available to the public” or have otherwise been placed
“in the public domain.”
contention.
Defendants have not disputed this
Because Citynet has made an unrebutted showing that
the invoices were not publicly available, at this stage, the court
finds that Citynet has met its burden in establishing that the
invoices, and therefore Exhibits 18, 19, and 22, are not public
disclosures under the pre-2010 version of the FCA. 12
12
Even if the invoices were publicly disclosed, the court finds
that Citynet has independent knowledge that materially adds to the
disclosures. Citynet has explained that, under the terms of the
grant, these indirect costs were not to be billed. It has
established that Frontier, as sub-grantee, was bound by these
terms, and has provided the motive for the improper billing: to
ensure that the entirety of the grant funds would be exhausted so
that none could be used by its competitors. Citynet has provided
74
Exhibit 20 is a letter written from McKenzie to Given
dated January 29, 2013.
processing costs.
The letter details Frontier’s invoice
Exhibit 21 is a letter written from Waldo to
Given that details invoicing under the grant for FBO fees.
Because the letters were written by persons at Frontier they
cannot qualify as a state administrative report under the pre-2010
FCA, and do not appear to otherwise fit into one of the public
disclosure categories.
Therefore, these letters do not qualify as
public disclosures.
Because none of the exhibits claimed by the State
Employees to publicly disclose the allegations in Counts II, III,
VI, and VII meet all three requirements to qualify as a public
disclosure under the pre-2010 or post-2010 version of the FCA, the
court need not determine whether the allegations contained therein
are based upon or are substantially similar to the allegations in
these claims. 13
Accordingly, the public disclosure bar does not
prevent Citynet from bringing these claims.
evidence that defendants had notice that Frontier was not to bill
the grant for indirect costs.
13 Because the billing under the BTOP project did not likely begin
until after March 23, 2010, the effective date of the 2010 FCA
amendments, it may be the case that the court need only examine
whether the allegations in these claims were publicly disclosed
pursuant to the post-2010 version of the FCA. Because the
pleadings do not disclose when the alleged improper billing began,
75
c. Count IX: Conspiracy
In Count IX, Citynet alleges that defendants conspired
to violate sections 3729(a)(1)(A) and (B) by engaging in conduct
including: “1) providing false records and information for use in
the State’s grant application and subsequent claims for payment;
2) falsifying the need for a Mitigation Plan; 3) engaging in
conduct to hide the fraudulent claims submitted to the United
States from being discovered; 4) assisting other Defendants in
submitting fraudulent claims; 5) agreeing to engage in a pattern
of conduct to allow the fraudulent claims to be submitted to, and
paid by, the United States; and 6) advising other Defendants on
how to submit fraudulent claims to be paid by the United States.”
First Am. Qui Tam Compl. at ¶ 190.
As with Counts II, III, VI, and VII, the disclosures
cited by the State Employees and the newspaper articles cited by
the Frontier Defendants in their motion to dismiss do not relate
the court analyzed the documents under both versions of the FCA.
With the exception of the newspaper articles and the State
Employee’s Exhibit A, which clearly do not disclose the
allegations of fraud in these claims, none of the other exhibits
claimed by the State Employees that pertain to these claims
qualify as a public disclosure under the post-2010 version of the
FCA because they were not disclosed in a federal forum, as is
required under the post-2010 version of the FCA. Accordingly,
these claims are not publicly disclosed pursuant to the post-2010
FCA.
76
to the conspiracy alleged in Count IX and need not be discussed
further.
As to the exhibits to the complaint, the court will only
discuss the ones that could be said to refer to the fraud
contained in Count IX.
Exhibits 1-3 are grant applications submitted by
Frontier, Citizens Telecommunications Company of West Virginia,
and the WVEO to the BTOP project.
While Exhibit 3, the WVEO grant
application, may qualify as a state administrative report under
the broad definition in the pre-2010 FCA, Exhibits 1 and 2 cannot
qualify as administrative reports because they were not created by
a state agency.
Citynet’s complaint alleges that the WVEO grant
application contains misrepresentations; but in order to qualify
as a public disclosure containing an inference of fraud, the State
Employees must point to an additional public disclosure that
contains the true statements from which the fraud may be inferred.
Exhibit 6, a sheet prepared by Goes, states the terms
that “All BTOP grant actions must adhere to.”
It qualifies as an
administrative report, but does not contain any allegations or
inferences of fraud.
Exhibits 4, 5, 7, and 11, are emails between Frontier
and State Employees, which Citynet acknowledges it obtained via
77
state FOIA requests. 14
Because they were obtained through a State
FOIA request, they qualify as a state administrative report, which
makes them public disclosures under the pre-2010 version of the
FCA only. 15
Because the emails are available pursuant to a state
FOIA request, they are publicly available.
However, the court
cannot say that the emails contain the same allegations or
transactions of fraud that is alleged in Count IX.
While the
emails contain information Citynet utilized in Count IX, they do
not contain information from which the government could
investigate and determine to prosecute the defendants.
14
The court has analyzed the emails obtained by Citynet via state
FOIA requests only under the conspiracy claim even though the
allegations can be said to be used in other claims in the
complaint. To the extent that the State Employees rely on the
emails to prove that the other Counts of the complaint were
publicly disclosed, the court finds that the emails alone do not
contain allegations of fraud. In addition, the State Employees
have failed to point to other public disclosures that contain the
missing link from which fraud may be inferred. Moreover, the
court has determined that the information Citynet has obtained
from its independent investigation materially adds to the public
disclosures such that it qualifies as an original source.
15
While the State Employees contend that many of the exhibits
attached to the complaint were obtained via a state FOIA request,
the Morris affidavit states that only the emails were obtained by
FOIA request “to various state agencies.” Morris aff., ¶¶ 10-11.
Inasmuch as the State Employees provide no evidence that other
exhibits were obtained by FOIA requests, the court concludes at
this juncture that only the emails are public disclosures under
the pre-2010 version of the FCA.
78
Exhibits 8, 9, 10, and 16 are various charts prepared by
Citynet.
Exhibit 8 lists fiber that was already built prior to
WVEO’s receiving of grant funds as well as fiber that was never
built with grant funds.
Exhibits 9 and 10 list projects where the
amount of fiber needed for some sites was double counted or
misrepresented.
Exhibit 16 lists projects where excessive
maintenance coils were used.
The Morris affidavit states that the
information regarding the actual amount of fiber built was gained
from reviewing Frontier’s “proprietary route and plate maps as
[sic] Frontier’s corporate headquarters in West Virginia on
February 24, 2014.”
Morris Aff., ¶ 15.
The maps, which were
reviewed at Frontier’s headquarters, do not fit into any of the
public disclosure categories under either version of the FCA and
additionally do not appear to have been disclosed to the public.
d. Conclusion
Accordingly, the court finds that Count I and Count V
are publicly disclosed under the post-2010 version of the FCA
only.
The court additionally has determined that Counts II, III,
VI, VII, and IX have not been publicly disclosed under either
version of the FCA.
79
E. Failure to State a Claim
The Frontier Defendants next argue that all nine Counts
of the complaint fail to state a claim upon which relief can be
granted pursuant to Fed. R. Civ. P. 12(b)(6).
The court will
first address each claim as it pertains to Frontier, and then
address the allegations as they relate to the Frontier employees,
McKenzie, Waldo and Arndt.
Finally, as was previously discussed,
because the court has declined to extend qualified immunity to the
State Employees, the court will analyze whether the complaint
states claims as to them, inasmuch as the State Employees argued
that the complaint does not allege that they violated the False
Claims Act.
1.
Claims Against Frontier
a. Counts I and V
As noted, Counts I and V pertain to the defendants’
alleged building of a last mile network instead of the middle mile
network that was proposed in the WVEO grant application. 16
16
The court has already determined that Counts I and V must be
dismissed with respect to allegations of conduct occurring after
the 2010 amendments to the FCA. Thus, the court analyzes Counts I
and V here in light of that decision.
80
The Frontier Defendants first allege that the NTIA and
the NOFA did not prohibit use of grant funds for last mile
connections and that Frontier’s work complied with the terms of
the BTOP grant.
Frontier Defs.’ Mem. at 24.
However, whether the
grant funds were permitted to be used to create a last mile
network is of no importance; Counts I and V allege that the WVEO
grant application, which was completed by defendants and approved
by the NTIA, claimed the grant money would be used to create a
middle mile network and that defendants instead used that money to
construct a last mile network.
133-139; 161-167.
See First Am. Qui Tam Compl. at ¶¶
Review of the WVEO grant application
demonstrates that the application mentions the term “middle-mile”
a number of times such that Citynet’s allegations that the network
was intended to be a middle mile network that other providers
could tap into and create their own service layer is credible at
this stage in the pleadings.
Moreover, although the Frontier
Defendants claim that the network they constructed fit within the
parameters of a “middle-mile network,” the complaint sufficiently
alleges that the network built was not the middle mile network
alleged in the WVEO application.
Whether this network was
actually built in accordance with the plan set forth in the WVEO
81
grant application is not appropriately determined at the motion to
dismiss phase.
The Frontier Defendants next contend that Citynet has
not alleged that “Frontier made or caused any misrepresentations
that would give rise to a claim under the False Claims Act.”
Frontier Defs.’ Mem. in Supp. of Mot. to Dismiss at 25.
In
support of this argument, the Frontier Defendants argue that the
complaint does not allege that Frontier misrepresented the type of
infrastructure it built, that the State directed and approved the
work completed by Frontier under the contract between the two
parties, and that Citynet did not allege that Frontier falsely
certified compliance with a contractual requirement related to the
middle mile network.
Id. at 25-26.
The Fourth Circuit has stated that “false claims” under
the FCA should be interpreted broadly.
See Harrison v.
Westinghouse Savannah River Cop., 176 F.3d 776 (4th Cir. 1998).
As noted by Citynet, a party who causes false claims to be
submitted may be liable under the FCA even if that party did not
itself submit the false claim.
See United States ex rel. Tran v.
Comput. Scis. Corp., 53 F. Supp. 3d 104 (D.D.C. 2014).
82
As argued by Citynet, the complaint alleges that as a
“sub-recipient” of the grant, the Frontier Defendants caused a
number of false statements in the grant application that “were
designed to insure the BTOP grant be awarded and the ultimate
beneficiary was Frontier.”
Mot. to Dismiss at 18.
Citynet’s Resp. to Frontier Defs.’
Contrary to the Frontier Defendants’
allegations, one misrepresentation alleged in the complaint was
that fiber would be built from the Central Offices of Frontier to
the CAIs, when instead Frontier built fiber from the CAI to the
nearest utility pole. 17
See First Am. Qui Tam Compl. at ¶¶ 78-83.
The complaint additionally alleges that the Frontier Defendants
caused the false statements contained in the WVEO application.
See id. at ¶ 38.
That the State approved Frontier’s work under
the grant does not affect the Frontier Defendants’ liability for
alleged misrepresentations regarding the middle mile network that
caused the grant to be awarded to the State, and Frontier as its
sub-recipient.
The court finds that Counts I and V sufficiently
allege that Frontier, by assisting in the WVEO grant application,
17
In their reply to Citynet’s response to their motion to
dismiss, the Frontier Defendants claim that Citynet is alleging a
new fraudulent inducement theory in its response. Frontier Defs.’
Reply at 5. However, the complaint specifically alleged that the
WVEO grant application contained misrepresentations pertaining to
the building of the middle mile network so that the funds would be
awarded to the WVEO and Frontier as its sub-recipient. First Am.
Qui Tam Compl. at ¶¶ 53-57,75-83.
83
made false statements that it would build a middle mile network
and, instead, built a last mile network, and that those statements
related to a claim for payment under the grant.
The Frontier Defendants next argue that Citynet has
failed to allege materiality.
Mot. to Dismiss at 26.
Frontier Defs.’ Mem. in Supp. of
According to them, because the NTIA paid
the grant invoices, despite the fact that Citynet raised its
allegations in a formal protest submitted to the NTIA on September
9, 2010, Citynet cannot allege that the misrepresentations
relating to the middle mile network were material.
Id. at 27.
Citynet argues that the formal protest could not have advised the
NTIA of the misrepresentations in the WVEO grant application
because Citynet’s Formal Protest letter challenged the WVEO grant
project as proposed, while the complaint challenges it as built.
See Citynet’s Resp. to Frontier Defs.’ at 20-21.
While Citynet’s formal protest letter certainly makes
the prediction that defendants would not spend the money in the
manner laid out in the WVEO grant application, the Frontier
Defendants cannot overcome the assertions in the complaint that
the NTIA was unaware that defendants built a last mile network
when the network had not yet been built.
In addition, as noted,
Citynet additionally asserts in the complaint that defendants
84
misrepresented that the project could not be built “but for”
federal funds, which certification was a requirement to be
eligible for the grant, when defendants knew that 90 percent of
the project would be built soon after the submission of the WVEO
application.
at 21.
Citynet’s Resp. to Frontier Defs.’ Mot. to Dismiss
The court agrees that these, among other
misrepresentations alleged in the complaint, are sufficient to
allege materiality.
Accordingly, Counts I and V sufficiently allege
violations of the FCA as to Frontier.
b. Counts II, III, VI, and VII
The Frontier Defendants next allege that Counts II, III,
VI, and VII of the complaint fail to state a claim for a number of
reasons.
First, the Frontier Defendants argue that Citynet’s
allegation that Frontier’s indirect costs were not reimbursable
under the BTOP grant is false.
Mot. to Dismiss at 28.
Frontier Defs.’ Mem. in Supp. of
They claim that as a commercial
organization, Frontier was permitted to recover its own indirect
costs.
Id.
In response, Citynet cites to the terms and
conditions applicable to the entity awarded the grant, including
85
the “DOC Assistance Standard Terms and Conditions” which state
“Indirect costs will not be allowable charges against the award
unless specifically included as a cost item in the approved budget
incorporated into the award.”
Ex. 3 to Citynet’s Resp. to
Frontier Defs.’ Mot. to Dismiss at 3.
Because the WVEO Budget
Narrative did not include indirect costs, Citynet alleges that
they were impermissible.
24-25.
Citynet’s Resp. to Frontier Defs.’ at
Citynet additionally contends that the Federal Acquisition
Regulations, to which the Frontier Defendants cite as permitting
Frontier to receive indirect costs, is not identified in the
applicable Award Grant Terms and Conditions and is not checked as
an applicable term and condition on the grant award.
Id. at 26.
The Frontier Defendants also attempt to argue that
Frontier’s indirect costs were negotiated with the State as set
forth in the Multiprotocol Label Switching Contract and the MOU
entered into with Frontier.
to Dismiss at 28-29.
Frontier Defs.’ Mem. in Supp. of Mot.
However, Citynet alleges that as a sub-
recipient of the grant award, Frontier agreed to comply with terms
and conditions that prohibit the reimbursement for indirect costs
that were not included in the State’s line-item budget.
The court
agrees that Citynet has adequately alleged that indirect costs
were not reimbursable under the terms that the grant recipient,
86
the WVEO, and the sub-recipient, Frontier, agreed to in accepting
the grant award.
Whether these costs were in fact reimbursable is
a question of fact not properly decided at this stage.
Citynet
has additionally alleged that despite the fact that indirect costs
were not reimbursable, defendants made false claims for payments
based upon them.
The Frontier Defendants also argue that despite whether
or not the indirect costs were ultimately reimbursable from the
grant award, Frontier “was entitled to invoice West Virginia for
the indirect costs, included as separate line items” on the
invoices.
n.20.
Frontier Defs.’ Mem. in Supp. of Mot. to Dismiss at 29,
While it may be true that the State could have paid
Frontier directly for its indirect costs and not sought
reimbursement from the grant funds for these fees, the complaint
alleges that Frontier billed for these fees so that the entire
amount of the grant funds would be expended and could not go to
other recipients.
From this it can be inferred that Frontier was
aware that grant funds were being used to pay these costs and not
the State itself.
The Frontier Defendants next assert that these claims
must be dismissed because Citynet does not allege that Frontier
misrepresented the costs included in its invoices.
87
According to
them, because the indirect costs were not concealed on the
invoices and Citynet has not alleged any “objective falsehoods” on
the Frontier Defendants’ part, Citynet cannot establish the
falsity required for a FCA violation.
Frontier Defs.’ Mem. in
Supp. of Mot. to Dismiss at 29-30; Frontier Defs.’ Reply at 8.
In response, Citynet asserts that the complaint sets
forth that the Frontier Defendants “engaged in a fraudulent course
of conduct in order for Frontier to get reimbursed for indirect
costs not reimbursable under the BTOP grant.”
Frontier Defs.’ at 27-28.
Citynet Resp.to
Indeed, the complaint alleges that
Frontier’s goal was to expend the entirety of the grant funds it
was awarded through the WVEO grant so that other grant applicants
would not receive any of the excess funds.
Compl. at ¶ 96.
First Am. Qui Tam
The complaint also alleges that Ms. Given began
knowingly approving improper loading fees and invoice processing
fees when she began working for the State even after defendants
were advised that indirect costs were not reimbursable under the
grant.
Id. at ¶¶ 96, 99, 106.
The court finds that these allegations sufficiently
allege that indirect costs were not reimbursable under the grant,
that Frontier knew that indirect costs were not reimbursable but
submitted invoices to the government that contained indirect costs
88
as a measure to ensure that there were no excess funds that
competing broadband companies could receive.
These allegations
amount to more than “a run-of-the-mill breach of contract action”
that the Frontier Defendants assert is alleged.
Defs.’ Mot. to Dismiss at 29.
See Frontier
That the indirect costs were listed
on the invoices and were not concealed does not change this
analysis; the complaint alleges that Frontier invoiced and
received from the government “money the government otherwise would
not have paid.”
See Chesbrough v. VPA, P.C., 655 F.3d 461, 467
(6th Cir. 2011).
The court accordingly finds that Counts II, III, VI, and
VII sufficiently allege violations of the FCA against Frontier.
c.
Counts IV and VIII
The Frontier Defendants next allege that Counts IV and
VIII must be dismissed because they fail to allege falsity.
Frontier Defs.’ Mot. to Dismiss at 30.
These claims relate to the
allegations that Frontier and Mark McKenzie billed for materials
and services that were not provided.
¶¶ 155, 183.
First Am. Qui Tam Compl. at
According to the Frontier Defendants, the location
construction requests were simply estimates and requests for
approval to begin work, and were not invoices.
89
Frontier Defs.’
Mem. in Supp. of Mot. to Dismiss at 30.
When Frontier billed the
State for the actual work performed, it explained differences
between the estimates in the LCRs.
Id.
The Frontier Defendants
also claim that Citynet has not alleged “a single instance where
Frontier billed the State for labor and materials that were not in
fact provided.”
Id. at 30-31.
Finally, the Frontier Defendants
contend that Citynet has failed to allege any misrepresentations
associated with its allegations that Frontier used excessive
maintenance coils on site or that it falsified the number of fiber
strands it provided on multiple jobs.
Id. at 31; id. at 31, n.
21.
In response, Citynet first contends that the Frontier
invoices do not show what Frontier billed for the actual work
performed because the invoices do not show how much fiber was
built on each project.
the Resp.).
Citynet Resp. at 30 (citing to Ex. 6 to
As a result, determining the amount of fiber built on
each project, requires looking to the LCR.
Id.
Moreover,
Frontier updated the LCRs to show how much fiber was built on each
project, so that the State could compare the invoice to the LCR to
ensure that the fiber amount matched, but Frontier did not always
explain the difference in the invoice when the amount of fiber was
modified.
Id.
90
Citynet also argues that the engineering maps (sometimes
referred to as route and plate maps) which it references do not
contain the same amounts of fiber built as is listed on the
invoices and LCRs.
Id.
Contrary to the Frontier Defendants’
assertions otherwise, Citynet does not contend that the LCRs
reflect the true amount of fiber built.
9.
Frontier Defs.’ Reply at
The complaint alleges that the engineering maps, which Citynet
was only able to examine and not make copies of, illustrate the
true amount of fiber that was built, and demonstrate that Frontier
built a lesser amount of fiber than it billed for on the LCRs and
invoices.
Id.
Citynet attached a chart to the complaint that
listed examples where Frontier charged for fiber that was not
built.
The court finds that, at this stage, Citynet has
sufficiently alleged that the LCRs with the invoices submitted to
the State misrepresented the amount of fiber Frontier built, as
compared to Frontier’s engineering maps, which stated the amount
of fiber that was actually built.
The Frontier Defendants also incorrectly asserts that
there are no misrepresentations pertaining to excessive
maintenance coils in the complaint.
The complaint alleges that
Frontier used excessive maintenance coils to inflate the number of
fiber miles it built and billed the grant for the excess fiber
91
coils as if it were building the fiber, not hanging it on utility
poles.
Citynet included as an exhibit a chart which identifies
thirty projects where excess maintenance coils were used.
The
allegations, if proven, would support a finding that Frontier did
not build the fiber it claimed it would build, and instead coiled
excessive fiber in maintenance coils in order to bill down the
grant funds.
See Ex. 16 to First Am. Qui Tam Compl.
The court
finds that on these facts, Counts IV and VIII allege violations of
the FCA by Frontier.
d. Count IX
The Frontier Defendants also argue that Citynet has
failed to plead that the Frontier Defendants conspired to violate
the FCA with particularity.
See Frontier Defs.’ Mem. in Supp. of
Mot. to Dismiss at 31.
The Frontier Defendants correctly point out that a
relator must allege when the conspiracy began, who entered into
it, and what overt acts were committed in furtherance of it.
See
United States ex rel. Ahumada v. Nish, 756 F.3d 268, 282 (4th Cir.
2014).
The Frontier Defendants first allege that Citynet cannot
plead a conspiracy because it has failed to demonstrate an
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underlying violation of the Act.
However, as is discussed above,
the court has found that Citynet has adequately alleged violations
of the FCA in other Counts in the complaint.
Next, the Frontier Defendants allege that Citynet has
failed to allege any facts in support of the conspiracy.
Defs’ Mem. in Supp. of Mot. to Dismiss at 32.
Frontier
According to them,
Citynet “never ties those misrepresentations to alleged violations
of the False Claims Act.”
The Frontier Defendants also argue that
the overt acts listed in the complaint “have nothing to do with
the claimed violations” of the FCA because they do not allege
materiality and are not supported by factual allegations.
Id. at
32-33.
In response, Citynet contends that the complaint
contains the following allegations that support its claim of
conspiracy to violate the FCA: “1) the defendants participated in
a scheme to defraud the NTIA by obtaining middle-mile funds to
build a last-mile network; 2) Frontier assisted the State in
identifying the CAIs to receive fiber under the grant as well as
the number of miles of fiber needed to reach the CAIs; 3)
Defendants Arndt, McKenzie, and Frontier caused numerous false
statements to be made in the Grant Application to ensure that the
NTIA awarded the State BTOP money[;] 4) Frontier devised a plan to
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expend all $42 [million] of the grant though fraudulent invoices
containing prohibited indirect costs, FBO charges and invoiceprocessing fees; and 5) Defendant Given assisted Frontier in its
scheme by processing Frontier’s fraudulent invoices with no
oversight.”
33.
Citynet Resp. to Frontier Defs.’ Mot. to Dismiss at
Citynet also argues that it identified the misrepresentations
made by defendants in the application, as is discussed more
thoroughly above.
The court agrees that Citynet has sufficiently set forth
the who, what, and when of the conspiracy with adequate
particularity.
The complaint alleges that defendants worked
together to prepare the WVEO grant and prepared it containing a
number of misrepresentations so that it would be awarded and with
the knowledge that Frontier would become a sub-recipient of the
grant.
Once awarded, it is alleged that the defendants did not
build the network that the grant stated they would build, but
built substantially less miles of fiber because the network was
already mostly built, and additionally worked together, with the
Frontier Defendants submitting and the State Employees approving
invoices containing impermissible invoice fees, so that the grant
money would be expended and not given to other applicants who
applied for grant funds.
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The court finds that these allegations, if proven, give
rise to the inference that defendants had an implied agreement to
violate the FCA, and that Citynet has alleged overt acts committed
in furtherance of the conspiracy.
2. Allegations against Arndt, Waldo and McKenzie
The Frontier Defendants argue that the allegations
contained in the complaint against Arndt, Waldo, and McKenzie “are
particularly weak.”
Dismiss at 33.
Frontier Defs.’ Mem. in Supp. of Mot. to
In response, Citynet focuses on overt acts in the
complaint that are alleged to be committed in furtherance of the
conspiracy to violate the FCA and do not focus on the other claims
against Arndt, Waldo, and McKenzie.
See Citynet Resp. to Frontier
Defs.’ Mot. to Dismiss at 34.
As to defendant McKenzie, the complaint alleges that he
assisted with the submission of the WVEO grant application with
the intent that Frontier be the actual recipient of the grant
funds awarded to the WVEO.
First Am. Qui Tam Compl. at ¶ 31.
The
complaint also alleges that McKenzie caused the false statements
in the WVEO grant application to ensure that the funds would be
awarded.
Id. at ¶ 38.
McKenzie also allegedly submitted false
invoices, signed the inaccurate LCRs, sought payments for services
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and materials not permitted under the grant award, and provided a
list of costs for processing each invoice.
Id. at ¶¶ 6, 88-91,
113.
As to defendant Arndt, the complaint alleges that Arndt
assisted in making false statements in the WVEO application to
ensure the funds would be awarded and that Arndt knew that 90
percent of the proposed WVEO project existed or would soon be
completed without the assistance of grant funds.
Id. at ¶¶ 38,
53.
The complaint alleges that defendant Waldo assisted with
the submission of the WVEO application, that Waldo assisted
McKenzie in negotiation of the improper invoice processing fees
that were ultimately contained in the invoices submitted to the
State for payment, and that Waldo misrepresented the amount of
fiber to the West Virginia legislature that was included in the
maintenance coils.
Id. at ¶¶ 2, 114, 115.
The court finds that the allegations state a claim
against McKenzie, Waldo, and Arndt as to Counts I and V of the
complaint.
As noted, the complaint alleges that Waldo and
McKenzie assisted with the submission of the WVEO grant
application, that Arndt and McKenzie caused the false statements
96
in the application pertaining to the building of a middle mile
network so that the funds would be awarded, and that Arndt was
aware that 90 percent of the stimulus project would be completed
shortly.
These facts sufficiently allege that Arndt, McKenzie,
and Waldo participated in the submission of the grant application,
and caused and were aware of misrepresentations that were made so
that Frontier would receive funds as a sub-recipient of the WVEO
grant award.
The court finds that Counts II and VI state a claim
against defendant McKenzie but not Waldo or Arndt.
The complaint
alleges that McKenzie sought payment for services and materials
not permissible under the grant award, which including the alleged
improper loading fees, but contains no similar allegations the
Waldo or Arndt sought payment for loadings fees that were not
reimbursable under the grant award.
Counts III and VII state a claim against McKenzie and
Waldo, but not Arndt.
The complaint contains allegations that
McKenzie and Waldo negotiated the improper invoice-processing fees
that were not added to the invoices until after defendant Goes
became employed by the State and that they billed for this fee
even though they were aware that a State employee stated that
indirect costs were not reimbursable under the grant award.
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Because no similar allegations are made against Arndt, the
complaint fails to state a claim against him as to Counts III and
VII.
Counts IV and VII state a claim against McKenzie.
The
complaint alleges that McKenzie submitted false invoices, signed
inaccurate LCRs and sought payment for services and materials not
permitted under the grant award, and provided a list of costs for
processing each invoice.
Id. at ¶¶ 6, 88-91, 113.
These
statements sufficiently allege that McKenzie billed for, among
other things, more fiber than was actually built, and excessive
maintenance coils.
The court additionally finds that Citynet has adequately
alleged each of McKenzie’s, Arndt’s, and Waldo’s role in the
conspiracy to violate the FCA and overt acts in furtherance of the
conspiracy.
3. Allegations against the State Employees
The court will consider the allegations pertaining to
each of the State Employees and determine whether the seven Counts
in the complaint state a claim against them.
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a. Counts I and V
The complaint alleges that Gianato and Goes, along with
others including McKenzie and Frontier participated in preparing
the WVEO grant application with the intention that Frontier be the
recipient of the grant funds.
First Am. Qui Tam Compl. at ¶ 31.
The WVEO, at the direction of Goes and with Frontier’s knowledge,
took Frontier’s last mile BTOP application and regenerated it as
their own to make it more attractive to the NTIA.
Id. at ¶ 30.
When asked by the NTIA, Gianato represented that the fiber
estimates included in the WVEO grant application was for new fiber
that did not already exist.
Id. at ¶ 32.
The WVEO, Goes,
Gianato, and Frontier were aware that middle mile projects
received special priority under the NOFA.
Id. at ¶ 34.
Goes,
Gianato, and others caused false statements in the WVEO
application, including: 1) a middle mile network would be built;
2) no part of the service layer would be funded by the grant; 3)
the CAIs did not already have fiber service; 4) no middle mile
network existed in West Virginia; 5) the number of fiber miles
needed for service and the distances to the CAIs; 6) the project
complied with NOFA because no private entity could afford to build
the network; and 7) broadband services purchased by the State
99
could be resold to individuals and private businesses.
Id. at ¶¶
38, 40-57.
While the grant application contemplated a middle mile
network, to which other competitors could connect, Gianato made
the unilateral determination to approve the decision not to build
the fiber back to the Central Offices.
Id. at ¶ 79.
The court finds that these allegations set forth claims
pursuant to Counts I and V that Gianato and Goes, but not Given,
violated the FCA.
These allegations set forth that Goes and
Gianato participated in applying for the BTOP grant, which they
knew contained misrepresentations.
While they planned to build a
last mile network to benefit Frontier, they submitted a grant
application for a middle mile project because they knew it would
be more favorable.
In addition, Gianato unilaterally permitted
Frontier not to build the fiber back to the Central Offices.
Accordingly, Citynet has alleged that Gianato and Goes presented
or caused to be presented, and used or caused to be used, false
records or statements pertaining to the building of a middle mile
network.
Because there are no allegations against Given that
pertain to the misrepresentations in the grant application
pertaining to the building of the middle mile network, these
claims must be dismissed against her.
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b.
Counts II, III, VI, and VII
The complaint alleges that Given and Gianato assisted in
the plan to ensure that all the grant funds were expended for
Frontier’s benefit so that its competitors could not utilize the
remaining funds by, inter alia,: knowingly approving improper
“loading” and “invoice processing fee” charges and purposefully
holding Frontier’s invoices for up to eighteen months at a time so
that other providers would not be able to determine whether
surplus funds would be available.
Id. at ¶ 94.
Most of these
changes occurred after Given became the Chief Technology Officer.
Id. at ¶ 94.
Gianato originally requested that Col. Todorovich
create a “bucket of money” that could be accessed without
oversight, but he refused to allow it.
Id. at ¶ 97.
However,
once Given became Chief Technology Officer, Given took exclusive
control over approving Frontier’s invoices.
Id. at ¶ 100.
Thereafter, Frontier began submitting, and Given began approving,
invoices with loadings charges, FBO charges, and significant
invoice processing fees.
Id. at ¶¶ 100-119.
These charges were
indirect costs which were not permitted under the grant and which
Col. Todorovich previously refused to approve.
Id. at ¶¶ 96, 106.
In addition, once Given arrived, she along with Gianato held
hundreds of invoices for months, which prevented other providers
101
from determining whether surplus funds would be available, and
caused the State to rush payment of Frontier’s invoices.
Id. at
¶¶ 120-122.
The court concludes from these facts that Citynet
adequately alleged that Gianato and Given accepted Frontier’s
invoices containing impermissible indirect costs, and billed them
to the grant fund knowing that they were impermissible.
Accordingly, the court finds that Counts II, III, VI, and VII
state a claim against Gianato and Given.
Because the complaint
does not likewise allege that Goes was involved in the billing
process, or was aware of the invoices containing the impermissible
indirect costs, these counts must be dismissed as to her.
c. Count IX
Count IX alleges that defendants conspired to violate
the FCA.
The complaint alleges acts committed by Gianato, Goes,
and Given in furtherance of the conspiracy, including their
inclusion of misrepresentations in the WVEO grant award so that
the funds could go to Frontier, and the billing of improper fees
after notice that they were impermissible in order to expend the
grant funds.
For these reasons, and the reasons set forth in the
court’s earlier discussion regarding the conspiracy claim, the
102
court finds that Count IX alleges a cause of action as to Gianato,
Goes, and Given.
4. Summation
Accordingly, the court finds that the complaint fails to
state a claim against Waldo in Counts II and VI; Arndt in Counts
II, III, VI, and VII, Given in Counts I and V; and Goes in Counts
II, III, VI, and VII.
VI. Conclusion
For the reasons set forth above, the court accordingly
ORDERS that:
1.
The motion to file a second surreply, filed by
Citynet on June 21, 2017 be, and it hereby is, denied;
2.
The Frontier Defendants’ motion to dismiss be, and
it hereby is, granted to the extent set forth below, and is
otherwise denied;
3.
The State Employees’ motion to dismiss be, and it
hereby is, granted to the extent set forth below, and is otherwise
denied;
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v.
Civil Action No. 15-14025
THE DOW CHEMICAL COMPANY LONG TERM DISABILITY PROGRAM,
an Employee Welfare Benefits Plan,
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON,
4.
a Massachusetts Counts I and V of the complaint be, and they hereby
Corporation, and
DOES 1 THROUGH 10, inclusive,
are, dismissed with respect to Citynet’s allegations of conduct
Defendants.
occurring after the 2010 amendments to the FCA;
ORDER AND NOTICE
5. Counts L.R. V of the complaint ORDERED that the
Pursuant to I and Civ. P. 16.1, it is be, and they hereby
following dates are hereby fixed as the time by or on which
are, dismissed as to defendant Given for failure to state a claim;
certain events must occur:
01/28/2016
Motions under F.R. Civ. P. 12(b), together with
6. supporting and VI be, and they affidavits, or other
Counts II briefs, memoranda, hereby are, dismissed
such matter in support thereof. (All motions
unsupported by memoranda will failure to state
as to defendants Waldo, Arndt, and Goes for be denied without a
prejudice pursuant to L.R. Civ. P. 7.1 (a)).
claim; and
02/08/2016
Last day for Rule 26(f) meeting.
02/15/2016
Last day to file Report of Parties= Planning
7. Meeting. See L.R. Civ. and 16.1. hereby are,
Counts III and VII be, P. they
dismissed as to defendants Arndt and Goes for failure to state a
02/22/2016
Scheduling conference at 4:30 p.m. at the Robert C.
Byrd United States Courthouse in Charleston, before
claim.
the undersigned, unless canceled. Lead counsel
directed to appear.
The Clerk is directed to transmit copies of this
02/29/2016
Entry of scheduling order.
memorandum
03/08/2016 opinion day to serve F.R. Civ. P record and any
Last and order to counsel of 26(a)(1) disclosures.
unrepresented parties.
The Clerk is requested to transmit this Order and
Notice to all counsel of record and to any unrepresented
parties.
ENTER: March 30, 2018
DATED: January 5, 2016
John T. Copenhaver, Jr.
United States District Judge
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