Curtis Lusby v. Rolls Royce ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-3593
U NITED S TATES OF A MERICA
on the relation of C URTIS J. L USBY,
Plaintiff-Appellant,
v.
R OLLS-R OYCE C ORPORATION,
Defendant-Appellee.
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:03-CV-0680-SEB/WGH—Sarah Evans Barker, Judge.
A RGUED M AY 6, 2009—D ECIDED JUNE 30, 2009
Before E ASTERBROOK, Chief Judge, and P OSNER and
W OOD , Circuit Judges.
E ASTERBROOK, Chief Judge. Curtis Lusby was an
engineer for Rolls-Royce from 1992 through 2001. (He
started at Allison Engine Co., which Rolls-Royce acquired
in 1995.) Lusby worked on the T56 turboprop engine,
which Rolls-Royce has sold to both military and civilian
2 No. 08-3593
customers since 1954. He came to believe that Rolls-Royce
was not making the parts properly and was falsely telling
the United States that the engines conformed to the gov-
ernment’s specifications. The Air Force rejected some T56
turbine blades in 1991 as substandard; Lusby concluded
that Rolls-Royce had not fixed the problem. He raised
this subject within the corporate hierarchy—which re-
sponded by firing him. (This is Lusby’s version; Rolls-
Royce sees matters otherwise.)
Lusby filed suit in 2002, contending that his discharge
violated 31 U.S.C. §3730(h), part of the False Claims Act,
because Rolls-Royce had penalized him for preparing to
bring or support litigation under that statute. The next
year Lusby and Rolls-Royce filed a joint stipulation for
dismissal. In May 2003, two months before dismissing
the first suit, Lusby filed another—this one a qui tam
action on behalf of the United States. As §3730(b)(2)
requires, that filing was under seal. After considering its
options for 27 months, the United States declined to
intervene in the qui tam action, which was unsealed and
served on Rolls-Royce in December 2006, after a further
16 months had passed. (The record does not reveal a
justification for that additional delay, but Rolls-Royce
does not contend that it requires the complaint’s dis-
missal.)
Unhappy that Lusby was still its adversary, Rolls-Royce
moved to dismiss the qui tam action. The district court
granted this motion on the ground that the complaint
did not plead fraud with the particularity required by
Fed. R. Civ. P. 9(b). 2007 U.S. Dist. L EXIS 94144 (S.D. Ind.
No. 08-3593 3
Dec. 20, 2007). Lusby’s lawyer drafted a new complaint
in an attempt to supply the information that the judge
thought necessary. But the court declined to allow the
complaint’s amendment, ruling that the qui tam action
is barred by the claim preclusion (res judicata) effect
of Lusby’s employment suit. 2008 U.S. Dist. L EXIS 69300
(S.D. Ind. Sept. 10, 2008). The judge added that the
revised complaint also flunked the test of particularity,
so an amendment would have been futile.
The district court’s ruling on preclusion has the
support of Cole v. University of Illinois, 497 F.3d 770 (7th
Cir. 2007). Cole filed suit under Title VII of the Civil
Rights Act of 1964 and state law, alleging that her race
and whistleblowing jointly led to her discharge. After
that suit was dismissed with prejudice, Cole tried again
under the False Claims Act, presenting both a personal
claim under §3730(h) and a qui tam claim. We con-
cluded that the first and second suits arose from the
same “nucleus of operative fact” (the catchphrase for
claim preclusion under federal law). Accord, Ragsdale v.
Rubbermaid, Inc., 193 F.3d 1235 (11th Cir. 1999). Rolls-
Royce contends that the same result is appropriate here.
Things are not quite so simple, however. Lusby denies
a crucial point that Cole conceded: that the two suits
involve the same litigants. Claim preclusion under
federal law has three ingredients: a final decision in the
first suit; a dispute arising from the same transaction
(identified by its “operative facts,” see Herrmann v. Cencom
Cable Associates, Inc., 999 F.2d 223 (7th Cir. 1993)); and the
same litigants (directly or through privity of interest). See
4 No. 08-3593
Taylor v. Sturgell, 128 S. Ct. 2161 (2008); cf. Bobby v. Bies,
129 S. Ct. 2145 (2009) (defining the elements of issue
preclusion in federal litigation). Cole does not discuss
the “same party” requirement; given Cole’s concession,
there was no need to. Nor does Cole mention United
States ex rel. Laird v. Lockheed Martin Engineering & Science
Services Co., 336 F.3d 346, 357–60 (5th Cir. 2003), which
noted the difference in the real parties in interest
when holding that a personal employment suit does not
preclude qui tam litigation. Ragsdale is the same as Cole
in this respect: neither our court nor the eleventh
circuit discussed the effect of the United States’ financial
interest.
Now that the question has been squarely presented,
we join the fifth circuit in concluding that the resolution
of personal employment litigation does not preclude a
qui tam action, in which the relator acts as a representa-
tive of the public. The special status of the United States
counsels against reflexive transfer of rules of preclusion
from private to public litigation. See United States v.
Mendoza, 464 U.S. 154 (1984) (non-mutual issue preclu-
sion does not apply to suits involving the United States).
Cf. EEOC v. Waffle House, Inc., 534 U.S. 279 (2002) (an
employee’s private disposition, via arbitration, of a
claim against an employer does not diminish the
federal government’s ability to pursue judicial relief
independently); EEOC v. Sidley Austin LLP, 437 F.3d 695(7th Cir. 2006) (employee’s failure to make a timely
charge of discrimination does not prevent EEOC from
suing to vindicate interest in law enforcement).
No. 08-3593 5
Two principal considerations influence our decision.
First, although the United States is not a “party” to a
qui tam suit unless it intervenes, it is nonetheless a real
party in interest—which is to say that its financial
interests are at stake. See United States ex rel. Eisenstein
v. New York City, No. 08-660 (U.S. June 8, 2009), slip op.
6–7. The United States is entitled to at least 70% of any
recovery, even when it does not intervene. 31 U.S.C.
§3730(d)(2). It would be inappropriate to snuff out
that federal interest just because a potential relator
thoughtlessly omitted a qui tam claim from a personal suit.
Second, qui tam litigation is subject to requirements
that make combining it with a personal damages suit
awkward. As we have mentioned, a qui tam proceeding
begins in camera and cannot be served on the defendant
until the United States has decided whether to inter-
vene. A personal suit, by contrast, must be served on the
defendant within 120 days. See Fed. R. Civ. P. 4(m). If the
United States does intervene, it may settle or dismiss the
action notwithstanding the relator’s objection, see
§3730(c)(2). Whether or not the United States intervenes,
the relator can’t dismiss the suit without permission of
the United States and the court, see §3730(b)(1).
These rules reflect a legislative view that the United
States needs protection from bumbling relators. In an
employment suit under Title VII or §3730(h), by contrast,
the aggrieved employee is in charge and may pursue,
settle, or dismiss the litigation; the plaintiff’s errors
affect only himself. An ex-employee is free to represent
himself in retaliatory-discharge litigation, 28 U.S.C. §1654,
6 No. 08-3593
but a relator in a qui tam action may proceed only through
counsel. See United States ex rel. Lu v. Ou, 368 F.3d 773(7th Cir. 2004). Again this difference reflects the need to
protect the interests of the United States. And the United
States needs protection not only from pro se litigants
but also from lawyers whose expertise lies in employ-
ment cases, and who without thinking omit qui tam
claims from their clients’ personal suits.
The procedural differences between personal and qui tam
litigation are so great that it is often impractical to pursue
both claims in one suit—and sometimes impossible, as
when the United States takes more than 120 days to
decide whether to intervene, or the plaintiff wants to
proceed pro se. As the fifth circuit put it in Laird, 336 F.3d
at 360, “we do not see convenience in trying the two
[claims] together”. If joined in a single complaint, they
often should be severed under Fed. R. Civ. P. 20(b). And
a conclusion that the personal and representative
actions ought to be conducted separately means that a
voluntary decision to file separate suits, as Lusby did,
should be respected. Claim preclusion is, after all, a
doctrine that has the effect of compelling joinder. A
conclusion that joinder usually is not sensible implies a
lack of preclusion with respect to claims omitted from
the first suit.
The district court sought to protect the public’s interest
in a different way. After holding that Lusby is precluded
from pursuing a qui tam action, the court entered an
order stating that the dismissal, though with prejudice
to Lusby, is without prejudice to the United States. In
No. 08-3593 7
other words, the district court held, the United States
may pursue a suit under the False Claims Act even if a
qui tam suit has been filed and lost, and even if that loss
blocks actions by other relators (who might have been
able to sue as original sources of the information, see
31 U.S.C. §3730(e)(4)(a)). The Supreme Court thought
otherwise in Eisenstein. The Justices stated that “the
United States is bound by the judgment in all FCA
actions regardless of its participation in the case.” Slip
op. 8.
That the United States is bound is why it is a real party
in interest. If Lusby had litigated a qui tam action to the
gills and lost, neither another relator nor the United States
could start afresh. The district court deemed this action
precluded because, on its view, Lusby’s first action pre-
sented the same claim as this qui tam suit—so, when the
judge dismissed the qui tam suit with prejudice, Lusby,
the United States, and all other potential relators were
bound. The United States must protect its interest by
intervening in a qui tam action rather than by asserting
a right to file a False Claims Act suit after the defendant
has prevailed. But the United States could not have
intervened in Lusby’s personal employment suit; it
didn’t get the statutory notice, and the suit after all
did not advance a qui tam claim. This is why we think
it best to hold that a private employment suit under
§3730(h) does not preclude a suit under §3730(a) or (b);
then the options of all potential relators and the
United States are protected.
This conclusion does not technically overrule Cole,
which considered only whether a personal and a qui tam
8 No. 08-3593
claim arise from the same transaction. But as a practical
matter our decision means that the outcome of a private
employment suit never precludes a qui tam action (or a
False Claims Act suit directly by the United States).
We therefore circulated this opinion before release to all
active judges under Circuit Rule 40(e). No judge favored
a hearing en banc.
Thus we arrive at the question whether Lusby’s latest
proposed complaint alleged fraud with particular-
ity—which “means the who, what, when, where, and how:
the first paragraph of any newspaper story.” DiLeo v.
Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). See also
United States ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d
374 (7th Cir. 2003). Lusby contends that Rolls-Royce
defrauded the United States about the quality of the
turbine blades in the T56 engine. The complaint alleges
that five contracts between Rolls-Royce and the United
States require all of the engine’s parts to meet particular
specifications; that the parts did not do so (and the com-
plaint describes tests said to prove this deficiency); that
Rolls-Royce knew that the parts were non-compliant (not
only because Lusby told his supervisors this but also
because audits by Rolls-Royce’s design and quality-assur-
ance departments confirmed Lusby’s conclusions); and
that Rolls-Royce nonetheless certified that the parts met
the contracts’ specifications. The complaint names
specific parts shipped on specific dates, and it relates
details of payment. Simple breach of contract is not fraud,
but making a promise while planning not to keep it is
fraud, see Wharf (Holdings) Ltd. v. United Int’l Holdings,
Inc., 532 U.S. 588 (2001), and this complaint alleges the
No. 08-3593 9
promise, the intent not to keep that promise, and the
details of non-conformity. What else might be required
to narrate, with particularity, the circumstances that
violate 31 U.S.C. §3729(a)(1)?
Rolls-Royce’s answer is: the specific request for pay-
ment. Lusby has not seen any of the invoices and represen-
tations that Rolls-Royce submitted to its customers. He
knows about shipments and payments, but he does not
have access to the paperwork. The district court held
that, unless Lusby has at least one of Rolls-Royce’s billing
packages, he lacks the required particularity. Since a
relator is unlikely to have those documents unless he
works in the defendant’s accounting department, the
district court’s ruling takes a big bite out of qui tam litiga-
tion.
We don’t think it essential for a relator to produce the
invoices (and accompanying representations) at the
outset of the suit. True, it is essential to show a false
statement. But much knowledge is inferential—people
are convicted beyond a reasonable doubt of conspiracy
without a written contract to commit a future crime—
and the inference that Lusby proposes is a plausible one.
Rolls-Royce’s contracts with the United States require
the firm to submit, with each request for payment, a
form specified by Federal Acquisition Regulation 246–15.
The certificate called for by FAR 246–15(d) reads:
I certify that on [date], the [Contractor’s name]
furnished the supplies or services called for by
Contract No. [number] via [carrier] on [bill of
lading] in accordance with all applicable require-
10 No. 08-3593
ments. I further certify that the supplies or
services are of the quality specified and conform
in all respects with the contract requirements,
including specifications, drawings, preservation,
packaging, packing, marking requirements, and
physical item identification (part number), and are
in the quantity shown on this or on the
attached acceptance document.
If Rolls-Royce submitted such a certificate, knowing the
representations to be false, then it committed fraud. See
Hefferman v. Bass, 467 F.3d 596, 601–02 (7th Cir. 2006);
United States ex rel. Harrison v. Westinghouse Savannah
River Co., 176 F.3d 776, 785 (4th Cir. 1999). Lusby contends
that Rolls-Royce must have submitted at least one such
certificate, or the military services would not have paid
for the goods, given the contractual (and regulatory)
requirement that the FAR 246–15 certificate accompany
every invoice.
The district court thought it possible that military
procurement officers accepted and paid for the turbine
blades without this certificate. That certainly is a possi-
bility—though a remote one. Rolls-Royce submitted lots
of invoices. Suppose there were 50, and federal procure-
ment officers overlook the absence of a certificate half
the time. The probability that the military would accept
50 shipments in a row without a certificate is 0.5 to the
50th power, a number that has 15 zeros before the first
significant digit. The probability that Rolls-Royce never
signed a false certificate would be greater if a single
slapdash procurement officer handled all of its invoices;
No. 08-3593 11
then the errors would not be independent. But even a
requirement of proof beyond a reasonable doubt need
not exclude all possibility of innocence; nor need a
pleading exclude all possibility of honesty in order to
give the particulars of fraud. It is enough to show, in
detail, the nature of the charge, so that vague and unsub-
stantiated accusations of fraud do not lead to costly
discovery and public obloquy. See United States ex rel.
Clausen v. Laboratory Corp. of America, 290 F.3d 1301, 1310
(11th Cir. 2002). Cf. Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009);
Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Lusby’s
accusations are not vague. Rolls-Royce has been told
exactly what the fraud entails.
To say that fraud has been pleaded with particularity
is not to say that it has been proved (nor is proof part of
the pleading requirement). Lusby’s complaint may be
wrong. Perhaps the parts did comply (Lusby may have
been fired for blowing events out of proportion rather
than for blowing the whistle on a fraud), or at least Rolls-
Royce may have thought that the parts complied.
Perhaps Rolls-Royce told the military about the prob-
lems independently of the formal certificates. Extended
discussions between the military and its suppliers are
common. If the military services knew what they were
getting and decided to accept blades that Lusby deems
“inferior” rather than pay a higher price, then Rolls-
Royce will prevail on the merits. No complaint needs to
rule out all possible defenses.
One final issue. Lusby argues that Rolls-Royce violated
not only §3729(a)(1), which covers false and fraudulent
12 No. 08-3593
claims, but also §3729(a)(7), which covers a person who
“knowingly makes, uses, or causes to be made or used, a
false record or statement to conceal, avoid, or decrease
an obligation to pay or transmit money or property to
the Government”.Œ After the Air Force detected problems
in 1991, it negotiated at length with Rolls-Royce, which
in 1999 reimbursed the military for a portion of the pur-
chase price of the defective parts. Lusby’s theory is that
all of the parts were substandard, that Rolls-Royce there-
fore had an “obligation” to repay everything it had re-
ceived, and that by keeping even a penny Rolls-Royce
violated §3729(a)(7). The district court doubted that Rolls-
Royce had a concrete “obligation to pay or transmit
money or property to the Government”. A dissatisfied
customer is a business problem, but how much money
changes hands is a matter for negotiation; a federal court
ought not step in, declare that there is an “obligation”
to rebate some particular amount, and use that as the
basis of a penalty under §3729(a)(7). But, like the district
Œ
An amendment effective May 20, 2009, redesignated
§3729(a)(7) as §3729(a)(1)(G) and made some changes to the
language. Pub. L. 111-21, 123 Stat. 1621. Section 3729(a)(1), cited
earlier, became §3729(a)(1)(A), and §3730(h) became §3730(h)(1).
The amendment also adds a definition of the word “obligation.”
We use the versions that were in force when the events at
issue in this suit occurred. Pub. L. 111-21 §4(f) provides that
the changes to §3729(a) apply only to conduct after May 20,
2009. (There is an exception for the changes to §3729(a)(1)(B),
but that does not affect Lusby’s action.) Cf. Landgraf v. USI
Film Products, 511 U.S. 244 (1994).
No. 08-3593 13
court, we need not decide which situations create “obliga-
tions” for the purpose of §3729(a)(7), because Lusby does
not know what the military and Rolls-Royce said to
each other during the eight years of negotiations. The
complaint does not offer any reason to think that Rolls-
Royce committed fraud during those negotiations. With
respect to this claim, therefore, the complaint does not
satisfy Rule 9(b).
The judgment of the district court is affirmed with
respect to the claim under §3729(a)(7) and otherwise
reversed. The case is remanded for a decision on the
merits.
6-30-09