United States Ex Rel. Sansbury v. LB & B Associates, Inc.

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
UNITED STATES OF AMERICA, )
ex rel. )
STEVEN O. SANSBURY, et al. )
)
Plaintiffs, ) Civ. Action No. 07-251 (EGS)
)
v. )
)
LB&B ASSOCIATES, INC., et al. )
)
Defendants. )
)
MEMORANDUM OPINION
Pending before the Court are two motions to dismiss filed
by Defendants Edward Brandon, Lily Brandon, and LB&B Associates,
Inc. (hereinafter, “LB&B”) (collectively, “LB&B Defendants”).
Relators brought this action against the LB&B Defendants, as
well as Bering Straits AKI, Chilkat Services, Inc., and two
individual representatives of those companies pursuant to the
qui tam provision of the False Claims Act (“FCA”), 31 U.S.C. §
3730(b). Relators allege that Defendants violated the FCA with
respect to their participation in the Small Business
Association’s (hereinafter “SBA”) Section 8(a) program and 8(a)
Mentor Protégé program. On April 14, 2011, the Government filed
its notice of election to intervene in part, electing to
intervene in Relators’ claims only insofar as they relate to the
LB&B Defendants’ participation in the Section 8(a) program, but
1
not the Mentor-Protégé program. The Government subsequently
filed its complaint in intervention on August 19, 2011. The
Government’s complaint in intervention asserts two additional
causes of action against LB&B Defendants for common law
negligent misrepresentation and fraud against the LB&B
Defendants. Pending before the Court are the LB&B Defendants’
motions to dismiss both complaints, pursuant to Rules 9(b) and
12(b)(6) of the Federal Rules of Civil Procedure.1 Having
carefully considered Defendants’ motions to dismiss, the
responses and replies thereto, the applicable law, and the
record as a whole, Defendants’ Motion to Dismiss Relators’
complaint is DENIED and Defendants’ Motion to Dismiss the
Government’s complaint in intervention is GRANTED IN PART AND
DENIED IN PART.
I. Background
A. Statutory Framework
1. The Section 8(a) Program
The SBA’s Section 8(a) program is a business development
program for small businesses owned by individuals who are
socially and economically disadvantaged. See 15 U.S.C. §
637(a); 13 C.F.R. § 124.1. Qualifying small businesses that are
1
Because a number of the arguments made in both motions to
dismiss overlap, the Court will address the motions together.
Further, because only the LB&B Defendants have responded to the
complaint, this opinion refers to them throughout as
“Defendants.”
2
owned or controlled by socially or economically disadvantaged
individuals may apply to the SBA, and if accepted into the
program, they are eligible to receive preferential treatment in
the form of “set aside” contracts. They are also eligible to
receive technological, financial, and practical assistance.
Relators’ Compl. ¶ 15; Gov’t Compl. ¶¶ 19-21.
In order for a small business to participate in the
program, it must apply to and be certified by the SBA. It must
first meet certain size requirements, see 13 C.F.R. Part 21, and
it must also be “disadvantaged,” which requires that at least
fifty one percent of the business is owned and controlled by one
or more individuals who are socially and economically
disadvantaged. See 15 U.S.C. § 637(a)(4)(A)-(B); 13 C.F.R. §
124.105. The program defines socially “disadvantaged
individuals” as those who have been “subjected to racial or
ethnic prejudice or cultural bias within American society
because of their identities as members of groups and without
regard to their individual qualities.” 13 C.F.R. § 124.103(a);
see also 15 U.S.C. § 637(a)(5). “Economically disadvantaged”
individuals are those socially disadvantaged individuals “whose
ability to compete in the free enterprise system has been
impaired due to diminished capital and credit opportunities as
compared to others in the same or similar line of business who
are not socially disadvantaged.” 13 C.F.R. § 124.104(a); see
3
also 15 U.S.C. § 637(a)(6)(A). A company selected for the
program must annually certify its continued eligibility for the
Section 8(a) program and must provide financial and other
information to the SBA. See 13 C.F.R. §§ 124.112(b),
124.509(c), 124.601, 124.602. A company may remain in the
program for a maximum of nine years if it continues to meet the
eligibility requirements throughout the period, and it may
participate in the program only once. See 13 C.F.R. §§ 124.2,
124.108(b).
Individuals who are members of certain racial and ethnic
groups are considered to be presumptively socially
disadvantaged. See 13 C.F.R. § 124.103(b)(1); see also 15
U.S.C. § 631(f)(1)(B)-(C) (explaining that socially
disadvantaged individuals include “members of certain groups
that have suffered the effects of discriminatory practices or
similar invidious circumstances over which they have no
control,” including, but not limited to “Black Americans,
Hispanic Americans, Native Americans, Indian tribes, Asian
Pacific Americans, Native Hawaiian Organizations, and other
minorities”). This presumption is rebuttable, and may be
overcome by credible evidence to the contrary. See 13 C.F.R. §
124.103(b)(3). An individual who is not a member of one of
these groups may nonetheless gain admission into the Section
8(a) program by establishing by a preponderance of the evidence
4
that he or she is socially disadvantaged under criteria set
forth in 13 C.F.R. § 124.103(c).
In the context of the Section 8(a) program, “control”
requires that “both that disadvantaged persons have the power to
control the company and that such persons actually exercise
their authority to control the company.” Gov’t Compl. ¶ 26; see
also 13 C.F.R. § 124.106. Although a non-disadvantaged
individual may be involved in the management of a company that
participates in the Section 8(a) program, that individual may
not, inter alia, exercise actual control of the company or
receive compensation that exceeds that of the socially or
economically disadvantaged person who controls the company. See
13 C.F.R. § 124.106(e). Further, non-disadvantaged individuals
who “transfer majority stock ownership or control of the firm to
an immediate family member within two years prior to the
application and remain involved in the firm as a stockholder,
officer, director, or key employee of the firm” are subject to a
rebuttable presumption that they actually control the firm. Id.§ 124.106(f).
2. Mentor Protégé Program
In addition to the Section 8(a) program, the SBA also
administers a Mentor-Protégé program, which allows a non-Section
8(a) company to form a joint venture with a Section 8(a)
eligible company. The program is designed to encourage an
5
approved mentor, that is not a Section 8(a) concern, to provide
managerial, financial, and technical assistance in order to
improve a protégé’s ability to bid on and compete for government
contracts. See 13 C.F.R. § 124.520(a)-(b). The protégé must be
in the development stage of participation in the Section 8(a)
program, have never received an 8(a) contract, or have a size
that is half the size of the corresponding NAICS code. Id. §
124.520(c).
In order to participate in the program, a mentor and
protégé must submit their joint venture agreement to the SBA for
approval. Id. § 124.513(a)(1). The Section 8(a) participant
must be the “managing venturer” of the joint venture, and an
employee of the Section 8(a) concern must be designated as the
project manager responsible for overall contract performance.
Id. § 124.513(c)(2). Where the “8(a) concern brings very little
to the joint venture relationship in terms of resources and
expertise other than its 8(a) status, SBA will not approve the
joint venture agreement.” Id. § 124.513(a)(2). The applicable
regulations specifically provide that “[n]o determination of
affiliation or control may be found between a protégé firm and
its mentor based on the mentor/protégé agreement or any
assistance provided pursuant to the agreement.” Id. §
124.520(d)(4).
B. Factual Background
6
LB&B is a North Carolina company that has its principal
place of business in Columbia, Maryland. It was certified by
the SBA as a Section 8(a) concern on April 6, 1995. This
certification was based on the status of President Lily Brandon,
who is an Asian Pacific American. Relators’ Compl. ¶¶ 7, 29;
Gov’t Compl. ¶ 12. Both Relators were employed at LB&B --
Steven O. Sansbury was employed as an Operations and Maintenance
Institutional Planner from 2000 until his separation from the
company in 2003, Relators’ Compl. ¶ 4; James Buechler was
employed as an Assistant Project Manager at the FDA from July
2003 until August 2005, Id. ¶ 5.
1. Allegations in the Government’s Complaint in
Intervention2
LB&B was incorporated in 1992. Govt. Compl. ¶ 28.
Initially, the Board of Directors of the company had six
members, only two of whom were socially and economically
disadvantaged: Ms. Brandon and her son, F. Edward Brandon Jr.
Relators and the Government allege that neither possessed
sufficient skills or experience to run a company engaged in
LB&B’s main lines of business -- government contracts,
manufacturing, facilities management, and government services.
Id. ¶¶ 29-30. Three of the other directors, including Defendant
2
These allegations relate to claims made in both the Relators’
complaint as well as in the United States’ complaint in
intervention.
7
F. Edward Brandon, Ms. Brandon’s husband, had extensive
experience in government contracting and the other lines of
business. Id. ¶ 31. Despite her alleged lack of experience,
Ms. Brandon was selected as the president of the company.
Moreover, though she contributed substantially the same amount
as the other directors, Ms. Brandon’s financial contribution was
treated as equity and she was given 51 percent of the company’s
stock. Id. ¶¶ 33-34.
In 1994, prior to applying for Section 8(a) certification,
all of the directors of the company except for Ms. Brandon
officially resigned, though they stayed on as employees with the
same titles and salaries as before their resignations. Id. ¶¶
35-37. The Government alleges that two of the original
directors sold their stock to Ms. Brandon at this time at the
share price set at the time of the company’s formation despite
the fact that the company had grown in the interim. As a result
of this sale, Ms. Brandon acquired an 81 percent interest in the
company. Id. ¶ 39.
On December 28, 1994, LB&B initially applied for Section
8(a) certification. The Government alleges that there were a
number of misrepresentations on the initial application. For
instance, Ms. Brandon’s salary was listed as $64,000 and Mr.
Brandon’s total compensation was listed at $42,500. According
to the Government, Ms. Brandon’s salary was actually $13,692.16
8
while Mr. Brandon’s total compensation was $18,126.60. Because
Mr. Brandon’s salary allegedly exceeded that of Ms. Brandon,
LB&B would have been ineligible to participate in the Section
8(a) program. Id. ¶¶ 43-47.
Further, on its application, LB&B represented that Ms.
Brandon would be responsible for the day-to-day operation of the
company and described Mr. Brandon’s role as limited to assisting
the president. Id. ¶¶ 48-49. However, the Government alleges
that Ms. Brandon had “no meaningful substantive role” in the
daily operations of the company, and did not:
(i) make specific decisions regarding bidding on new
business; (ii) oversee [LB&B’s] performance of its
government contracts . . . ; (iii) play any
substantive role in the negotiation and formulation of
[LB&B’s] government contracts; (iv) set and enforce
expectations for the company’s general managers; (v)
formulate specific company practices regarding
collective bargaining and interactions with unions; or
(vi) oversee the financial performance of [LB&B] on
its government contracts.
Id. ¶ 50. Those functions were instead overseen by Mr. Brandon
and others. Id. ¶ 51. Thus, the Government alleges that Ms.
Brandon’s actual role at the company “failed to satisfy the
statutory and regulatory requirements of control sufficient to
participate in the Section 8(a) business development program.”
Id. ¶ 52.
After receiving LB&B’s initial application for
certification, the SBA requested additional materials from the
9
company. The SBA specifically noted that Ms. Brandon’s résumé
did not appear to indicate that she had the necessary skills to
manage and operate the company. The SBA asked LB&B to provide a
fuller explanation of who had such skills at the company. Id. ¶
54. The Government alleges that in responding to this request
for information, Defendants further misrepresented Ms. Brandon’s
skills and role by stating that she had prior management
experience in the manufacturing industry, that she had direct
control over daily operations, that only she could sign company
commitments and checks, and that she controlled the finances of
the company. Id. ¶¶ 56-60.
The Government alleges that on the basis of these
misrepresentations, the SBA certified LB&B as a Section 8(a)
concern on April 6, 1995 for a period of nine years to conclude
in April 2004. Id. ¶ 61. On the basis of this certification,
LB&B was able to market itself as a Section 8(a) program
participant and bid on “set-aside” contracts, which the
Government contends it began to actively and aggressively do
after February 1, 1997. Id. ¶¶ 62-67; 82-84. Moreover, on the
yearly certifications that it submitted after April 1995, the
Government alleges that LB&B continued to falsely certify, as it
had on its original application, that Ms. Brandon controlled the
company and that she was the only person at the company who
could commit monies and sign company checks. Id. ¶¶ 68-81. For
10
instance, during this period, the Government alleges that at
least five additional people at the company had the authority to
sign company checks and make commitments. Id. According to the
Government, that Ms. Brandon did not actually control the
company is further evidenced by the numerous company memoranda
issued by Mr. Brandon between 1996 and 2004 on the full range of
company operations. Id. ¶¶ 80-81.
After LB&B “graduated” from the Section 8(a) program in
2004, the Government alleges that Ms. Brandon resigned as
president and Mr. Brandon officially took on the role he had
been performing for years. Id. ¶¶ 85-86. Nevertheless, LB&B
purportedly continued to represent itself as a woman-owned and –
operated business until at least 2007. Id. ¶ 88.
2. Allegations in Relators’ Complaint
In addition to the allegations above, Relators also allege
that Defendants engaged in fraud in two joint ventures that LB&B
entered into with Section 8(a) concerns under the SBA Mentor
Protégé program. Relators allege that in late 2003 and early
2004, prior to its “graduation” from the Section 8(a) program,
LB&B began to search for protégé companies “so that it could
continue to illegally benefit from the 8(a) programs’ [sic]
advantages on bids on government contracts.” Relators’ Compl. ¶
50. To that end, Relators claim that LB&B entered into
discussions with Bering Straits Aki, LLC (hereinafter “BSA”), an
11
Alaskan, Inuit company owned by Defendant Gail Schuber,
regarding a proposed mentor-protégé relationship. Id. ¶¶ 50-
52. On August 16, 2004, a little over four months after LB&B
exited the Section 8(a) program, the SBA approved a joint
venture agreement between LB&B and BSA, pursuant to which the
joint venture was able to secure several government contracts,
including contracts with the Centers for Medicare & Medicaid
Services, the General Services Administration Public Buildings
Services, the Federal Emergency Management Agency, and the
United States Air Force. Id. ¶¶ 52-53. Relators allege that
the project managers for these contracts were LB&B employees
until January 2005, which was after the joint venture was
approved by the SBA. Id. ¶ 55. These project managers
purportedly did not switch their employment to BSA until January
2005, when they were instructed to do so by a senior vice
president at LB&B. Id. ¶ 56.
LB&B also entered into a mentor-protégé relationship with
Ckilkat Services, an Alaskan corporation, at some point in 2006.
Id. ¶ 64. Also in 2006, LB&B hired Sheldon L. Jahn as a senior
vice president. Relators allege that Mr. Jahn’s employment was
transferred from LB&B to Chilkat in late 2006 or early 2007,
after the SBA had already approved the joint venture, so that he
could serve as the general manager of the joint venture. Id.
C. Procedural History
12
On or about December 27, 2004, Relators filed an action
alleging similar claims relating to Defendants’ participation in
the Section 8(a) program in the United States District Court for
the District of Maryland. See United States ex rel. Sansbury v.
LB&B Associates, Inc., No. 04-4018. On May 5, 2006, the
Government filed a notice of its election not to intervene.
After the Government declined to intervene in the District
of Maryland action, Relators filed a sealed qui tam complaint in
this court on February 1, 2007, alleging violations of the FCA.
The United States was contemporaneously served with the
Complaint. The Government filed several motions for an
extension of time to determine whether it would intervene in the
claims raised in Relators’ complaint. During this time, the
Government met with both Relators and Defendants and attempted
to resolve the matter short of continued litigation. On April
14, 2011, the Government filed a notice of election to
intervene; it elected to intervene in that part of the action
that relates to Defendants’ participation in the Section 8(a)
program and declined to intervene in the remaining claims
relating to participation in the Mentor-Protégé program. Upon
the unsealing of the action before this Court on June 29, 2011,
Defendants moved to unseal the District of Maryland action,
which was eventually unsealed on October 13, 2011. On August
19, 2011, after Defendants were served with Relators’ complaint,
13
the Government filed its complaint in intervention. Defendants
filed motions to dismiss both the Relators’ complaint and the
Government’s complaint in intervention. Those motions are now
ripe for determination by this Court.
II. Standard of Review
A. Rule 12(b)(6)
A motion to dismiss pursuant to Rule 12(b)(6) tests the
legal sufficiency of the complaint. See Browning v. Clinton,
292 F.3d 235, 242 (D.C. Cir. 2002). In order to be viable, a
complaint must contain “a short and plain statement of the claim
showing that the pleader is entitled to relief, in order to give
the defendant fair notice of what the . . . claim is and the
grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007) (internal quotation marks and citations
omitted). The plaintiff need not plead all of the elements of a
prima facie case in complaint, Swierkiewicz v. Sorema N.A., 534
U.S. 506, 511-14 (2002), nor must the plaintiff plead facts or
law that match every element of a legal theory. See Krieger v.
Fadely et al., 211 F.3d 134, 136 (D.C. Cir. 2000).
However, despite these liberal pleading standards, to
survive a motion to dismiss, “a complaint must contain
sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (internal quotation marks omitted);
14
Twombly, 550 U.S. at 562. A claim is facially plausible when
the facts plead in the complaint allow “the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly,
550 U.S. at 556). While this standard does not amount to a
“probability requirement,” it does require more than a “sheer
possibility that a defendant has acted unlawfully.” Id. (citing
Twombly, 550 U.S. at 556).
“[W]hen ruling on a defendant’s motion to dismiss [pursuant
to Rule 12(b)(6)], a judge must accept as true all of the
factual allegations contained in the complaint.” Atherton v.
D.C. Office of the Mayor et al., 567 F.3d 672, 681 (D.C. Cir.
2009) (quoting Erickson v. Pardus, 551 U.S. 89, 94 (2007)). The
court must also give the plaintiff “the benefit of all
inferences that can be derived from the facts alleged.” Kowal
v. MCI Commc’ns Corp., 16 F.3d 1271, 1276 (D.C. Cir.
1994)(internal citation omitted). Despite this, a court need
not “accept inferences drawn by plaintiffs if such inferences
are unsupported by the facts set out in the complaint. Id.Further, “[t]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements” are not
sufficient to state a claim. Iqbal, 556 U.S. at 678 (internal
citation omitted).
B. Rule 9(b)
15
This Circuit has held that complaints brought under the
False Claims Act are subject to the heightened pleading
requirements of Fed. R. Civ. P. 9(b). See United States ex rel.
Totten v. Bombardier Corp. and Envirovac, Inc., 286 F.3d 542,
551-52 (D.C. Cir. 2002) (“Every circuit to consider the issue
has held that, because the False Claims Act is self-evidently an
anti-fraud statute, complaints brought under it must comply with
Rule 9(b).”). Rule 9(b) requires that “in all averments of
fraud or mistake, the circumstances constituting fraud or
mistake shall be stated with particularity.” Fed. R. Civ. P.
9(b). This specificity requirement “normally . . . means that
the pleader must state the time, place and content of the false
misrepresentations, the fact misrepresented and what was
obtained or given up as a consequence of the fraud.” United
States ex rel. Joel D. Joseph v. Cannon, 642 F.2d 1373, 1385
(D.C. Cir. 1981) (internal quotation marks omitted).
Likewise, in the context of the FCA, “the circumstances
that must be pleaded with specificity are matters such as the
time, place, and contents of the false representations, such
representation being the element of fraud about which the rule
is chiefly concerned.” Totten, 286 F.3d at 552 (internal
citation omitted) (emphasis in original); Shekoyan v. Sibley
Int’l. Corp., 217 F. Supp. 2d 59, 73 (D.D.C. 2002) (noting that
in the FCA context, “a claimant must typically allege the
16
identity of the person who made the fraudulent statement, the
time, place and content of the misrepresentation, the resulting
injury, and the method by which the misrepresentation was
communicated”) (internal citation omitted).
C. False Claims Act
The FCA provides a civil penalty and treble damages against
any individual who: (1) knowingly presents or causes to be
presented a false or fraudulent claim for payment or approval by
the United States, 31 U.S.C. § 3729(a)(1); (2) knowingly makes,
uses, or causes to be made or used, a false record or statement
material to getting a false or fraudulent claim paid or approved
by the Government, id. § 3729(a)(2); or (3) conspires to defraud
the United States by getting a false or fraudulent claim allowed
or paid, id. § 3729 (a)(3). To enforce these and other
provisions of the FCA, a private person, known as a “relator,”
may bring a civil or qui tam action in the government’s name.
31 U.S.C. § 3730(b)(1). If the government elects to intervene,
it shall then have the primary responsibility for prosecuting
the action, although the relator may continue as a party to the
action, subject to certain limitations enumerated in the
statute. Id. § 3730(c)(1).
III. Discussion
A. Relators’ Standing to Bring FCA Claims Related to
Participation in 8(a) Program
17
Defendants first argue that, because the Government has
intervened in this action with respect to the claims regarding
their participation in the 8(a) program, those claims have been
rendered impermissibly duplicative, and Relators thus lack
standing to bring them. See Defs.’ MTD Relators’ Compl. at 19-
20. Relators argue that Defendants cannot seek to dismiss the
portions of their complaint in which the Government has
intervened. Rather, they argue that the only way for Defendants
to limit their participation is to file a motion pursuant to 31
U.S.C. § 3730(c)(2)(D), which states that “[u]pon a showing by
the defendant that unrestricted participation during the course
of the litigation by the person initiating the action would be
for purposes of harassment or would cause the defendant undue
burden or unnecessary expense, the court may limit the
participation by the person in the litigation.” Relators’ Opp’n
at 17 (quoting 31 U.S.C. § 3730(c)(2)(D)). The Government
agrees that its complaint in intervention is the operative
complaint as to all claims in which it has intervened. However,
the Government notes that Relators also still have the right to
continue in the action as parties with respect to those
intervened claims. The Government therefore recommends that the
Court deny as moot Defendants’ motion to dismiss the Section
8(a) claims in Relators’ initial complaint. See Gov’t’s Opp’n
at 5 n.1.
18
The FCA states that “[a] person may bring a civil action
for a violation of section 3729 for the person and for the
United States government.” 31 U.S.C. §3730(b)(1). Thus, the
statute explicitly gives a relator the right to proceed as a
real party in interest in a qui tam action. The statute does
not indicate that a relator does not retain standing after the
government intervenes. In fact, the statute provides for the
opposite, stating: “If the Government proceeds with the action,
it shall have the primary responsibility for prosecuting the
action, and shall not be bound by an act of the person bringing
the action. Such person shall have the right to continue as a
party to the action . . . .” 31 U.S.C. § 3730(c)(1) (emphasis
added). Thus, by automatic operation of the statute, the
Government’s complaint in intervention becomes the operative
complaint as to all claims in which the government has
intervened. See United States ex rel. Feldman v. City of New
York, 808 F. Supp. 2d 641, 648-49 (S.D.N.Y. 2011)). However, a
relator’s initial complaint continues to be the operative
complaint for all non-intervened claims and relators remain a
party to the Government’s intervened claims and continue to have
rights to participate in those claims under 31 U.S.C. §
3730(c)(1) and to receive any relator’s recovery permitted by 31
U.S.C. § 3730(d), subject to the limitations of the FCA and the
facts and circumstances a particular case. Defendants can only
19
seek to have the Court limit relators’ participation pursuant to
31 U.S.C. § 3730(c)(2)(D).
Most other courts that have addressed this issue have
dismissed relators’ superseded claims. See, e.g. Feldman, 808
F. Supp. 2d at 649 (dismissing relator’s amended complaint for
lack of standing because it was “superseded in its entirety by
the Government’s Amended Complaint”); United States ex rel Magee
v. Lockheed Martin Corp., No. 09-324, 2010 U.S. Dist. LEXIS
23295, at *8-*9 (S.D. Miss. Mar. 12, 2010) (same); United States
ex rel. Becker v. Tools & Metals, Inc., No. 3:05-CV-0627, 2009
U.S. Dist. LEXIS 27507, at *6, *17-*19 (N.D. Tex. March 31,
2009); In re Pharm. Indus. Average Wholesale Price Litig., No.
01-12257, 2007 U.S. Dist. LEXIS 89835, at *17 (D. Mass. Dec. 6,
2007) (“[O]nce the government has intervened, the relator has no
separate free-standing FCA cause of action.”) (citing United
States ex rel. Barajas v. Northrop Corp., 147 F.3d 905, 910 (9th
Cir. 1998))); but see United States ex rel. Landis v. Tailwind
Sports Corp., No. 10-cv-976, 2014 U.S. Dist. LEXIS 83313 (D.D.C.
June 19, 2014), at *23-*28 (refusing to dismiss relators’
intervened claims on the basis that they no longer had standing
because the text of the FCA does not require it).
However, dismissal is by no means required especially
where, as here, Defendants have made no showing that the
Relators’ participation during the course of the litigation will
20
cause them undue burden or expense that would justify limiting
their participation. Therefore, because the Government’s
complaint in intervention supersedes Relators’ complaint with
respect to the intervened claims, and because Relators have the
right to continue as parties to this action, the Court will deny
Defendants’ motion to dismiss Relators’ claims, to the extent
that they are duplicative of the Government’s claims, as moot.
B. Statute of Limitations
1. Government’s FCA Claims pre-February 2001
Defendants argue that all of the Government’s FCA claims
that predate February 1, 2001 are barred by the statute of
limitations. The FCA provides that:
A civil action under section 3730 may not be brought--
(1) more than six years after the date on which
the violation of section 3729 is committed, or
(2) more than three years after the date when
facts material to the right of action are known
or reasonably should have been known by the
official of the United States charged with
responsibility to act in the circumstances, but
in no event more than 10 years after the date on
which the violation is committed,
whichever occurs last.
31 U.S.C. § 3731(b). The Act further states that “[f]or statute
of limitations purposes, any . . . Government pleading shall
relate back to the filing date of the complaint of the person
who originally brought the action, to the extent that the claim
21
of the Government arises out of the conduct, transactions, or
occurrences set forth, or attempted to be set forth, in the
prior complaint of that person.” Id. § 3731(c).3
Neither party disputes that the Government’s claims arise
out of the conduct, transactions, and occurrences set forth in
Relators’ complaint, and that the Government’s complaint thus
“relates back” to the date of the filing of Relators’ complaint.
Defs.’ MTD Govt.'s Compl. at 15-16; Govt.’s Opp’n at 11.
Defendants argue that because the Government did not file its
complaint in intervention within three years of the date when it
should have known of any potential claims – that is, February 1,
2007, the date on which Relators filed their initial complaint –
the Government cannot avail itself of the ten-year statute of
limitations in section 3731(b)(2), and thus only a six-year
statute of limitations applies. Therefore, according to
Defendants, the Government may only maintain claims for
violations that are alleged to have occurred after February 1,
3
Section 3731(c) was added as an amendment as part of the Fraud
Enforcement and Recovery Act of 2009. As the D.C. Circuit held
in United States ex rel. Miller v. Bill Harbert International
Construction, Inc., 608 F.3d 871, 879-80 (D.C. Cir. 2010), the
2009 amendments to Section 3731 apply to this matter as “the
provision permitting relation back was made expressly
‘applicable to cases pending on the date of enactment.’”
Miller, 608 F.3d at 878 (quoting Fraud Enforcement and Recovery
Act of 2009, Pub. L. No. 111-21, § 4(f)(2), 123 Stat. 1617,
1625).
22
2001, six years prior to the filing of Relators’ complaint. MTD
Govt.'s Compl. at 16.
The Government argues that Defendants ignore a fundamental
principle of the qui tam mechanism: “that for statute of
limitations purposes, the Government stands in the shoes of the
relator.” Govt.’s Opp’n at 9. Thus, if a relator’s claim is
timely, so too will a government complaint in intervention
alleging the same wrongdoing be timely, regardless of when it is
filed. Id. The Government admits that it was aware of
Relators’ claims beginning on or around December 27, 2004, when
the same Relators filed a qui tam action in the United States
District Court for the District of Maryland. Id. at 5, 12-14.
The Government argues that because the initial complaint in this
action was filed by Relators on February 1, 2007, within three
years of the date when U.S. officials became aware of the claims
on December 27, 2004, the Government’s complaint in intervention
can apply to claims as far back as February 1, 1997, even though
the Government did not file its complaint in intervention until
August 19, 2011. Id. at 12-14. The Government’s theory then
is that it can avail itself of the ten year statute of
limitations in section 3731(b)(2) by operation of section
3731(c)’s relation-back provision.
The Government provides no support for its theory that if
the Relator files its initial complaint within three years of
23
when the Government should have been aware of certain claims,
the relation-back provision allows for the Government to take
advantage of the ten-year statute of limitations, starting from
the date of filing of the Relators’ initial complaint. Indeed,
the only case cited by the Government, United States ex rel.
Serrano v. Oaks Diagnostics Inc., 568 F. Supp. 2d 1136 (C.D. Cal
2008), is entirely irrelevant. There, in a pre-FERA case, the
court addressed the question of whether the government’s
complaint in intervention related back to relator’s complaint,
which was filed almost five years prior to the complaint in
intervention. The court ruled that the government’s complaint
did relate back to the relator’s complaint after conducting an
exhaustive analysis of relation-back principles under Fed. R.
Civ. P. 15. Id. at 1139-42. Because relator had filed the
original complaint within three years of the alleged conduct,
the court did not address which statute of limitations would
apply. Id. at 1142. Here, in a case to which the FERA
amendments apply, Relators did not file their original complaint
within three years of the alleged conduct, which spans as far
back as 1994, when Defendants first applied for the Section 8(a)
program. Even accepting that the Relators’ District of Maryland
action is relevant here, that action was not filed until
December 2004.
24
Similarly, the cases on which Defendants rely also do not
address the precise issue presented here as most of them predate
the 2009 amendments. See United States ex rel. Frascella v.
Oracle Corp., 751 F. Supp. 2d 842 (E.D. Va. 2010); United States
ex rel. Purcell v. MWI Corp., 520 F. Supp. 2d 159 (D.D.C. 2007);
United States v. Intrados/Int’l Mgmt. Group, 265 F. Supp. 2d 1(D.D.C. 2002). Indeed, all of these cases hold that the
relation-back provision allows the government to take advantage
of the six-year statute of limitations from the date of the
filing of the relator’s initial complaint, a point that is not
in dispute here.
For instance, in Frascella, defendants, like Defendants
here, argued that many of the government’s claims were barred by
the applicable statute of limitations. 751 F. Supp. 2d at 848.
There, relator filed his sealed complaint on May 29, 2007 and
the government filed its complaint in intervention on July 29,
2010, more than three years after relator’s initial complaint.
Id. The Frascella court, however, did not reach the precise
question raised here - whether the Government can avail itself
of the ten-year statute of limitations even where it failed to
file a complaint in intervention within three years of Relator’s
complaint - because the government conceded that it should have
known of any potential claims against defendant when relator
filed his complaint. Id. at 849 n.3. Instead, the government
25
argued that claims based on alleged false statements made
thirteen years prior to the filing of relator’s complaint were
timely because the U.S. officials charged with responsibility to
act could not reasonably have known of those claims prior to the
filing of relator’s complaint. Id. at 849. The Frascella court
found the government’s argument unavailing because a 1998 audit
by the GSA had uncovered some of the same false statements
alleged in relator’s complaint. The government, the court held,
was thus on inquiry notice of these statements such that a
reasonable person would investigate. Id. at 851-853. Despite
Defendants’ contention that the facts of Frascella are identical
to those here, there was no earlier filed qui tam action at
issue in Frascella that the government claimed was the specific
starting date for statute of limitations purposes. See Defs.’
MTD Govt.’s Compl. at 17.
Similarly, the issue before the court in Purcell was
analytically distinct. There, in a pre-FERA case, defendants
argued that the government’s claims against the president of the
company, who was not named as a defendant in relator’s
complaint, were time barred because they were not filed within
three years of the date that a relevant government official
became aware of them. 520 F. Supp. 2d at 169. In ruling on a
prior motion to dismiss, the Purcell court denied defendant’s
motion on the grounds that it did not have enough information,
26
at that state in the litigation, to assess whether the claims
were timely. Id.; see also United States ex rel Purcell v. MWI
Corp., 254 F. Supp. 2d 69, 78 (D.D.C. 2003). After discovery,
defendants reiterated their arguments regarding the timeliness
of the government’s claim during summary judgment proceedings
and the court agreed. 520 F. Supp. 2d at 169-170. The court
applied the “discovery-due diligence” standard, under which “a
plaintiff is deemed to have sufficient notice of critical facts
to set the statute of limitations running if the plaintiff has
inquiry notice of the injury and its cause.” Id. at 170 (citing
United States v. Kubrick, 444 U.S. 111, 120 (1979). Because the
relator’s complaint, filed more than three years prior to the
government’s complaint in intervention, did provide the
government with evidence supporting its case against defendants,
the government’s claims were time barred. Id. at 170-72. The
Court again did not consider the impact of a previously filed
qui tam action, and the government did not attempt to avail
itself of the ten-year limitations period.
Finally, Defendants cite to Intrados, which is also
inapposite. That case, while brought under the FCA, was not a
qui tam action. Instead, the United States directly sued
defendants under the Act. In doing so, the government argued
that claims based on conduct that occurred more than six years
prior to the filing of its complaint were timely because
27
defendants had concealed the alleged fraud. 265 F. Supp. 2d at
10. The court ruled that the government “did not exercise due
diligence in uncovering the fraud,” especially because a
relevant audit of the alleged fraudulent conduct was completed
more than three years before the filing of the government’s
complaint. Id. at 11. Thus, claims relating to invoices
submitted more than six years before the filing of the
government’s complaint were time barred. Id. at 10-11.
The plain text of section 3731(b)(2) appears to only relate
to the government. However, several courts, including one in
this District, have concluded that where the government does not
intervene, the relator can take advantage of the tolling
provision in section 3731(b)(2). See, e.g., U.S. ex rel. Pogue
v. Diabetes Treatment Ctrs. of Am., Inc., 474 F. Supp. 2d 75,
82-89 (D.D.C. 2007) (collecting cases evidencing a three-way
split among jurisdictions about whether and when relators may
invoke the tolling provision, and holding that relators may take
advantage of the tolling provision even where the government
does not intervene and that the limitations period is measured
by the knowledge of the relevant government official); see also
U.S. ex rel. Malloy v. Telephonics Corp., 68 Fed. App’x 270, 273
(3d Cir. 2003) (holding that relators may invoke the tolling
provision and basing the tolling period’s start on the relator’s
own knowledge); U.S. ex rel. Ven-A-Care of the Fla. Keys, Inc.
28
v. Actavis Mid Atlantic LLC, 659 F. Supp. 2d 262, 273-74 (D.
Mass. 2009) (concluding that relators may invoke the tolling
provision and basing the beginning of the period on the
knowledge of the relevant government official). This view,
while not a majority view, does offer some support for the
Government’s theory – if the Relators here can take advantage of
3731(b)(2), their initial complaint was filed within three years
of the date when the Government first became aware of the
claims. And if the Government’s complaint in intervention
relates back to the date the Relators’ complaint was filed, then
the Government’s claims can span as far back as February 1,
1997.
As explained above, none of the cases cited by either party
adequately describe the situation currently before the Court,
where Relator filed a second suit in a different court within
three years of the relevant U.S. official learning of the
alleged fraud through the filing of the first suit. Nor is the
Court aware of any such cases. Thus the court must look to the
text of the statute for guidance. See Murphy Exploration &
Prod. Co. v. United States DOI, 252 F.3d 473, 480 (D.C. Cir.
2001) (citing Carter v. United States, 530 US. 255, 271 (2000)).
By its express terms, section 3731(b)(2) is silent as to whether
it applies to Relators. However, subsection (b) of section 3731
begins by stating that it applies to “civil action[s] under
29
section 3730,” which includes actions brought by both the
Government and Relators.4 That prohibition, however, does not
apply here as Relators are proceeding pursuant to section
3730(b). Section 3731(b) concludes with “whichever occurs
last.” This language is not included in subsections (a) or (b),
but rather is offset in the same way as the introductory
4
The Supreme Court has held that the limitations period in
Section 3731(b) applies only to actions brought pursuant to
Sections 3730(a) and (b), but not to retaliation actions brought
by qui tam plaintiffs pursuant to Section 3730(h). See Graham
County Soil & Water Conservation Dist. v. United States ex rel.
Wilson, 545 U.S. 409, 415-422 (2005).
Another court in this District, relying on Graham, has found
that section 3731(b)(2) does not apply to Relators. See Landis,
2014 U.S. Dist. LEXIS 83313 at *44-*53. There, in determining
whether a relator could take advantage of section 3731(b)(2)’s
tolling provision in an action in which the Government had
intervened, the court declined to follow Pogue and held that “it
is not reasonable to construe Section 3731(b)(2) to mean that
the application of tolling to relator’s lawsuit turns on the
knowledge of the responsible United States government official,
when the government has in fact declined to prosecute the claims
brought by the relator and the government has not intervened or
become a party to the relator’s lawsuit.” Id. at 51. The court
reasoned that the “most reasonable and intuitive construction of
section 3731(b)(2) is that ‘a civil action under section 3730’
does not apply to all actions under section 3730, but only as to
those actions in which the United States has ‘acted,’ by seeking
to participate.” Id. Thus, the court held that with respect to
Relators claims against non-intervened defendants, the six year
statute of limitations in section 3731(a) applied. This
holding, however, does not in any way impact the effect of the
tolling provision on claims for which the government has
intervened and whether those claims are timely if a relator
files suit within three years of the relevant government
official’s knowledge.
30
language. This indicates that the two subsections are to be
read together. See Pogue, 474 F. Supp. 2d at 85.
Thus, looking at the language of section 3731(b) as a
whole, it seems clear that it includes Relators, at least in
actions in which the Government has intervened, and there is
nothing in section (b)(2) to suggest that Relators are excluded.
See Pogue, 474 F. Supp. 2d at 84; see also Landis, 2014 U.S.
Dist. LEXIS 83313 at *51. This reading of Section 3731(b) is
also consistent with Graham, in which the Supreme Court did not
differentiate between relators and the government with respect
to actions brought under section 3730(b). 545 U.S. at 415.
The legislative history of section 3731(b) also supports
this interpretation of the statute. The Senate report on the
1986 amendments to the FCA states that section 3731(b)(2)’s
tolling provision means that the “statute of limitations does
not begin to run until the material facts are known by an
official within the Department of Justice with the authority to
act in the circumstances.” S. Rep. No. 345, 99th Cong., 2d
Sess., 30 (July 28, 1986), reprinted in 1986 U.S.C.C.A.N. 5266.
Similarly, the House report noted that fraud was often difficult
to detect, thus the statute extended the statute of limitations.
However, the House Report also explained that “the Committee did
not intend to allow the Government to bring fraud actions ad
infintum [sic], and therefore imposed the strict 10 year limit
31
on False Claims Act cases.” H. Rep. No. 660, 99th Cong., 2d
Sess., 25 (June 26, 1986). This legislative history indicates
that Congress intended the limitations period to run based on
the knowledge of the government.
Following the reasoning of Pogue, which allows relators to
take advantage of the tolling provision of section 3731(b)(2) if
they file a complaint within three years of the relevant
government official learning of the fraud, which they did here,
the Court finds that the government’s claims dating back to
February 1, 1997 are timely. As the Pogue court noted,
“[m]easuring (b)(2)’s limitations period by the government’s
knowledge, and never the relator’s, makes sense because it means
that . . . the government will be able to recover upon the
maximum amount of claims within the overall ten-year repose
period.” 474 F. Supp. 2d at 88.
2. The Government’s Remaining Tort Claims
In addition to its claims pursuant to the FCA, the
Government has also brought claims for common law fraud and
negligent misrepresentation. These claims are governed by 28
U.S.C. § 2415, the general federal statute of limitations, which
provides that “every action for money damages brought by the
United States or an officer or agency thereof which is founded
upon a tort shall be barred unless the complaint is filed within
three years after the right of action first accrues.” 28 U.S.C.
32
§ 2415(b). Because claims of negligent misrepresentation and
fraud sound in tort, they are governed by this three year
statute of limitations, Intrados, 265 F. Supp. 2d at 14, subject
to tolling where “facts material to the right of action are not
known and reasonably could not have been known by an official of
the United States charged with the responsibility to act in the
circumstances.” 28 U.S.C. § 2416(c).
Defendants argue that because the Government’s common law
claims were brought more than three years after the date the
relevant Government official could reasonably have known of
them, i.e., February 1, 2007, they are time-barred and must be
dismissed. Defs.’ MTD Govt.’s Compl. at 25. The Government
argues to the contrary that its fraud claims are also subject to
section 3731(c)’s relation back provision because it provides
that if the Government elects to intervene in a qui tam action,
it may file its own complaint to “clarify or add detail to the
claims in which the Government is intervening and to add any
additional claims with respect to which the Government contends
it is entitled to relief.” Govt.’s Opp’n at 17 (quoting 31
U.S.C. § 3731(c)) (emphasis in original). Thus, the Government
argues that the tolling provision of section 3731(b)(2) applies
to its common law claims and that its claims relating to conduct
after February 1, 1997 are timely. Id. at 18 n.8.
33
The Government is correct that its complaint in
intervention relates back to the filing of Relator’s complaint,
because it arises out of the same conduct, transaction, or
occurrence. Frascella, 751 F. Supp. 2d at 854. However, it
does not then follow that the ten-year statute of limitations in
section 3731(b)(2) applies to the Government’s common law
claims; the statute of limitations in 28 U.S.C. § 2415(b) still
applies. Thus, the Court must count back from February 1, 2007
to determine which claims are timely. Accordingly, to the
extent that the Government’s fraud and negligent
misrepresentation claims arise out of factual allegations that
predate February 1, 2004, they are time-barred.
C. Relators’ and Government’s Failure to State a Claim
It is axiomatic that a plaintiff bringing an action for
fraud under the FCA must, first and foremost, allege that an
actual false claim or statement was presented to the government.
See Totten, 286 F.3d at 551; U.S. ex rel. Head v. Kane Co., 798
F. Supp. 2d 186, 195-96 (D.D.C. 2011). The FCA defines “claims”
to include “any request or demand, whether under a contract or
otherwise, for money or property which is made to a contractor,
grantee, or other recipient if the United States Government
provides any portion of the money or property which is requested
or demanded.” 31 U.S.C. § 3729(c). Congress has emphasized
that the FCA should be broadly interpreted “to reach all types
34
of fraud . . . that might result in financial loss to the
Government.” United States v. Neifert-White Co., 390 U.S. 228,
232 (1968). Accordingly, “[f]alse claims under the FCA take a
variety of forms.” United States v. Sci. Applications Int’l
Corp., 626 F.3d 1257, 1266 (D.C. Cir. 2010). These include: (1)
presentment claims; (2) fraudulent inducement claims; and (3)
false certification (express or implied) claims. See id.(endorsing implied false certification theory as basis for FCA
claims in D.C. Circuit); U.S. ex rel. Bettis v. Odebrecht
Contractors of Cal., Inc., 393 F.3d 1321, 1326 (D.C. Cir. 2005)
(recognizing that claims based upon fraudulent inducement are
actionable under the FCA).
To state a claim for a false claim under the FCA, a
plaintiff must show that “(1) the defendant submitted a claim to
the government, (2) the claim was false, and (3) defendant knew
the claim was false.” United States ex rel. Harris v. Bernard,
275 F. Supp. 2d 1, 6 (D.D.C. 2003). The FCA does not require
proof of specific intent to deceive when a defendant presents
false or fraudulent claims to the government. 31 U.S.C. §
3729(b); United States v. TDC Mgmt. Corp., Inc., 24 F.3d 292,
296 (D.C. Cir. 1994).
An FCA plaintiff may also plead a claim under 31 U.S.C. §
3729(a)(1)(B), which provides a cause of action against anyone
who “knowingly makes, uses, or causes to be made or used, a
35
false record or statement material to a false or fraudulent
claim.” Section 3729 (a)(1)(B) attaches FCA liability to a
defendant who prepares in support of a claim a statement that it
knows to be a misrepresentation. United States ex rel. Totten
v. Bombardier Corp., 380 F.3d 488, 500-01 (D.C. Cir. 2004).
1. Relators Have Stated a Mentor-Protégé Program
Claim
According to Defendants, Relators’ sole allegation that
Defendants violated the FCA with regard to its participation in
the Mentor-Protégé program is that Defendants “falsely certified
in the joint venture agreements submitted to SBA for approval .
. . that the joint venture employed general managers who were
from 8(a), Alaskan, Intuit companies.” Defs.’ MTD Relators’
Compl. at 22 (citing Compl. ¶ 71). As such, Defendants argue
that Relators have failed to state a claim under the FCA
regarding their participation in the Mentor-Protégé program.
Defendants make three arguments in support of dismissal. First,
they argue that there are no requirements in the SBA regulations
regarding the general manager of a mentor-protégé joint venture,
as opposed to project managers. Therefore, according to
Defendants, Relators’ allegations regarding John Krulic and
Sheldon Jahn, who are described in the complaint as “general
managers,” are completely irrelevant. Second, Defendants argue
that Relators’ own complaint demonstrates that the alleged
36
representations regarding Mr. Krulic’s and Mr. Jahn’s employment
were true. In their complaint, Relators allege that these two
individuals “switched” employment, but they provide no factual
allegations in support of their speculation. Indeed, as
Defendants note, Relator Sansbury was no longer employed during
the relevant time period, and Relator Buechler did not work at
any of the relevant job site locations. Finally, Defendants
argue that any alleged “switch” in employment is not a violation
of the relevant SBA regulations.
According to the applicable SBA regulations, when a mentor
and protégé partner for the purpose of an 8(a) contract, they
must submit a joint venture agreement to the SBA for approval.
13 C.F.R. § 124.513. The agreement must contain, inter alia, “a
provision . . . [d]esignating an 8(a) Participant as the
managing venturer of the joint venture,” and an employee of the
managing venturer as the project manager responsible for
performance of the 8(a) contract. Id. § 124.513(c)(2). Here,
Relators have alleged that Defendants made false representations
regarding the employment of several project managers of the
relevant joint ventures. According to Relators’ complaint,
which must be taken as true at this stage in the litigation,
James Krulic was listed as the general manager of the BSA-LB&B
joint venture on the joint venture agreement approved by the SBA
on August 16, 2004 despite the fact that he was an LB&B employee
37
at the time. Relators’ Compl. ¶ 52. Relators further allege
that Mr. Krulic did not become a BSA employee until January
2005, well after the joint venture was approved and even then
only at the direction of senior employees at LB&B. Id. ¶¶ 53-
56. With respect to the Chilkat joint venture, Relators allege
that Mr. Jahn was a senior vice president at LB&B during 2006,
and that LB&B and Chilkat entered into a joint venture agreement
in which he was listed as the project manager. Id. ¶¶ 63-64.
Relators allege that in late 2006 or early 2007, Mr. Jahn’s
employment was switched to Chilkat for the purposes of the joint
venture agreement. Id. ¶ 64. Relators do not provide a
specific date for the approval of the joint venture, noting only
that it was approved “in or about 2006.” Id. ¶ 64. Relators
also contend that Relator Buechler did in fact work with the
BSA/LB&B joint venture. See Relators’ Opp’n at 22 n.6 (citing
Compl. ¶¶ 61-62).
Relators additionally allege that although Mr. Krulic and
Mr. Jahn were listed as “general managers” by defendants, they
were, in actuality, project managers. According to Relators,
they were employees of LB&B and then moved over to the joint
venture, such that the relevant “project manager” was not from
an 8(a) protégé company. See id. at 20-21. Relators also
contend that they should be allowed to conduct discovery on the
work these men performed to see if Defendants were in
38
contravention of the applicable regulations. See id. at 21; see
also Allen v. Beta Constr., 309 F. Supp. 2d 42, 47 (D.D.C. 2004)
(“[W]hile significant details [] will be necessary . . . these
details are not necessary at this very preliminary stage of
litigation.”).
Further, Relators also allege that Defendants listed Andrew
F. Van Der Stuyf, Edward J. Keenan, Donald Wilson, and Donald
Krauth as project managers on contracts secured pursuant to the
mentor-protégé relationship. These contracts were entered into
in October, November, and December 2004. At the time of
contracting, Mr. Van Der Stuyf, Mr. Keenan, Mr. Wilson, and Mr.
Krauth were purportedly employees of LB&B, despite the fact that
they were listed as project managers. See Relators’ Compl. ¶¶
53-55. Relators allege that they did not “switch” their
employment to BSA until the end of January 2005. Id. ¶ 57.
According to Relators, all four were only employees of BSA on
paper. Id.
Relators have provided more than the requisite “short and
plain statement of the claim showing that [they are] entitled to
relief.” Twombly, 550 U.S. at 555 (internal quotation marks and
citations omitted). They have also stated more than just one
false claim or statement in the relevant joint venture
agreements. As such, Defendants cannot credibly argue that they
are not on notice of the claims against them with respect to
39
their joint ventures with BSA and Chilkat or the false claims or
statements they allegedly made in connection with those joint
ventures. While Relators may not have pled sufficient facts to
ultimately succeed on the merits of their claim, that is not
required at this stage in the litigation. “Indeed, [Relators],
having first stated a claim with sufficient specificity,” which
the Court finds that they have for the reasons stated in Section
III.B.2 supra, “must be allowed to fill in those details through
the discovery process, especially because these details are in
defendants’ possession and will be identified when produced in
discovery.” Allen, 309 F. Supp. 2d at 47.
2. Relators and the Government Have Stated Their
Claims with Adequate Particularity
Defendants argue that the Government’s Section 8(a) claims
and Relators’ claims relating to their participation in the
Mentor-Protégé program fail because they have failed to plead
those claims with the particularity required by Fed. R. Civ. P.
5
9(b). Defendants argue that the “Government has failed to
sufficiently identify what was given up as a consequence of the
alleged fraud” because it has not “identified a single specific
false claim or invoice for payment or the date(s) or cost(s) of
5
The Court need not analyze Defendants’ arguments with respect
to Relators’ Section 8(a) claims because the Government’s
Complaint in Intervention supersedes those claims and is the
operative complaint with respect to those claims. See Section
III.A infra.
40
any such claims.” Defs.’ MTD Gov’t Compl. at 21. According to
Defendants, the Government has provided only two examples of
contracts that were allegedly fraudulently obtained. Id.Further, Defendants argue that both the Government and Relators
have alleged an open-ended time frame for their claims. Id.;
Defs.’ MTD Relators’ Compl. at 25-26. With respect to Relators’
claims, Defendants argue that they consist of nothing more than
allegations that “all defendants” obtained “approval of joint
ventures under the SBA’s 8(a) Mentor-Protégé Program through
misrepresentation, and that LB&B subsequently obtained contracts
and payments based on those misrepresentations.” Defs.’ MTD
Relators’ Compl. at 25. Additionally, Defendants argue that
Relators claims are deficient because they “(a) do not specify
particular claims or payments made in relation to the alleged
fraudulent activity; (b) do not allege any fraudulent activity
on the part of Lily Brandon or Ed Brandon; (c) make allegations
‘upon information and belief;’ [and] (d) make general
allegations against all Defendants in their Complaint.” Id. at
26.
It is well established in this Circuit that “the simplicity
and flexibility contemplated by the rules must be taken into
account” when reviewing a complaint under Rule 9(b). United
States ex rel. McCready v. Columbia/HCA Healthcare, 251 F. Supp.
2d 114, 116 (D.D.C. 2003). Most importantly, Rule 9(b)’s
41
particularity requirement must be read in concert with Rule 8,
which requires only that a complaint contain a “short and plain
statement” of the claim. See Cannon, 642 F.2d at 1386 (holding
that “[t]he requirement of particularly does not abrogate Rule
8, and it should be harmonized with the general directives . . .
of Rule 8 . . . ”) (internal citations and quotation marks
omitted); Allen, 309 F. Supp. 2d at 46.
Defendants’ narrow reading of Rule 9(b) would essentially
eviscerate this standard and require claimants to provide
detailed proof of their allegations at this early stage in the
litigation. That is simply not what is required on a motion to
dismiss pursuant to Rule 9(b). Pogue, 238 F. Supp. 2d at 269.
Rather, at this stage in the litigation, an FCA “plaintiff need
not allege with specificity every element of its cause of action
if the complaint contains allegations from which an inference
may be drawn that the plaintiff will produce evidence on the
essential elements.” Intrados, 265 F. Supp. 2d at 7. Indeed,
the language of Rule 9(b) makes clear that “particularity [must
be pled] only with respect to the circumstances constituting
fraud. . . .” United States ex rel. Folliard v. CDW Tech.
Servs., Inc., 722 F. Supp. 2d 20, 27 (D.D.C. 2010). This is
especially true where, as here, the Government’s FCA claims are
based on a fraudulent “scheme,” in which the circumstances make
it likely that the alleged fraud was “consummated through the
42
presentment of false claims.” United States ex rel. Head v.
Kane, 798 F. Supp. 2d 186, 203 (D.D.C. 2011) (quoting United
States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir.
2009)).
The Government argues that it has pled its FCA “false
claim” and “false statement” claims with particularity.
Specifically, the Government contends that it is has set forth:
(1) the who (the LB&B Defendants); (2) the what (express and
implied representations regarding the extent of Ms. Brandon’s
control of LB&B and its eligibility for the Section 8(a)
program); (3) the when (on or after February 1, 1997 in
certifications to the SBA and in set-aside contracts, and until
LB&B’s graduation from the 8(a) program); (4) the where or with
whom (the SBA and Government agencies that award set-aside
contracts); (5) the how (claims for payment submitted pursuant
to set-aside contracts that were obtained based on a fraudulent
8(a) certification, statements in annual 8(a) certifications,
and contract materials submitted by the SBA to Government
agencies to secure 8(a) contracts); and (6) damages (Section
8(a) contracts and modifications/extensions to those contracts,
and payments on invoices made pursuant to those contracts).
Gov’t’s Opp’n at 22.
Similarly, Relators argue that their claims relating to
Defendants’ participation in the SBA Mentor-Protégé program
43
survive a Rule 9(b) challenge. According to Relators, they have
alleged a claim of fraud in the inducement. Relators’ Opp’n at
24-26. They also contend that they have not alleged an open
ended time frame – they have stated that the LB&B/BSA joint
venture was approved in 2004 and that the LB&B/Chilkat joint
venture was approved in 2006. They argue that these facts are
sufficient at this stage in the litigation.
Both the Government’s and Relators’ allegations relating to
Defendants’ participation in the Section 8(a) program and the
Mentor-Protégé program plainly meet Rule 9(b)’s pleading
requirements. They have both detailed the circumstances of the
fraudulent schemes relating to both programs, and they have
identified which defendants were involved in those schemes.
They have provided specific time frames – the Government alleges
that LB&B’s fraud began in approximately 1994 and continued
throughout the time that the company participated in the Section
8(a) program; Relators allege that LB&B’s fraud began in August
2004 with respect to the BSA joint venture and in 2006 with
respect to the Chilkat joint venture. That neither the
Government nor Relators provide a precise end date for the fraud
does not defeat their claims. See Kane, 798 F. Supp. 2d at 204(finding that relator’s allegations that a fraudulent plan began
in 1999 and continued to “the present time” was “sufficient in a
case involving a complex, fraud scheme”); United States ex rel.
44
Harris v. Bernad, 275 F. Supp. 2d 1, 8 (D.D.C. 2003) (holding
that in a case involving a complex fraud scheme that lasted for
a number of years, an allegation that the fraud was perpetrated
from 1993 to the present was sufficient); Pogue, 238 F. Supp. 2d
at 268 (concluding that allegations that a complex fraud scheme
occurred over a twelve-year period satisfied Rule 9(b)).
The Government also clearly links Defendants’ false claims
and statements to payments made by various Government agencies.
See Govt.’s Compl. ¶ 66 (noting that in March 1998 LB&B was
awarded a set aside contract with the U.S. Army Operational Test
and Evaluation Command and in March 1999 it was awarded a
contract with the U.S. Army Material Command Acquisition
Center). Those allegations are sufficient; the Government is
not required to plead specific dates, invoices, or payment
amounts pursuant to a Section 8(a) scheme that spanned many
years. Folliard, 722 F. Supp. 2d at 31 (“Although defendants
argue that relator must provide ‘transaction dates’ on which
individual claims were submitted, this is incorrect.”). Indeed,
this court has routinely held that “‘while Rule 9(b)’s
particularity requirement applies to the [contention] that the
request was fraudulent,’ Rule 12(b)(6)’s ‘general standards
apply to the . . . existence of a request for payment.’” Kane,
798 F. Supp. 2d at 205 (quoting Folliard, 722 F. Supp. 2d at
27).
45
Relators have also provided sufficient details, including
the specific joint venture agreements and the fact that project
managers listed on the agreements as being employees of the
protégé companies were actually LB&B employees at the time those
representations were made. Relators have further alleged that
LB&B employees were aware of those facts and directed the
relevant employees to switch their employment to the protégé
companies. They need not allege more at this stage. See Allen,
309 F. Supp. 2d at 46; see also United States ex rel. Westrick
v. Second Chance Body Armor, Inc., 685 F. Supp. 2d 129, 137
(D.D.C. 2010) (holding that the government had alleged enough on
a motion to dismiss by alleging the defendant had predicated
each sale with a fraudulent representation).
Thus, the Court finds that both the Government and Relators
have provided more than enough detail to satisfy Rule 9(b)’s
purpose of guaranteeing Defendants have “‘sufficient information
to allow for preparation of a response.’” United States ex rel.
Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1256 (D.C.
Cir. 2004) (quoting Cannon, 642 F.2d at 1385). “While
significant details which will be necessary for plaintiff[s] to
succeed on the merits of the case are indeed absent, these
details are not necessary at this very preliminary stage of
litigation.” Allen, 309 F. Supp. 2d at 47. Relators and the
Government must be allowed the opportunity to fill in these
46
details through the discovery process. See id. Accordingly,
Defendants’ motions to dismiss the Government’s and Relators’
claims for failure to plead them with sufficient particularity
are denied.
3. Relators’ and Government’s False Claims Act
Conspiracy Claims
Defendants also move to dismiss the Government and Relators
FCA conspiracy claims pursuant to Rule 12(b)(6) because they
have not pled any agreement or overt act. Defendants
additionally argue that the FCA conspiracy claims are barred by
the intra-corporate conspiracy doctrine.
Section 3729(a)(3) of the FCA attaches liability to anyone
who “conspires to defraud the Government by getting a false or
fraudulent claim allowed or paid.” The FCA does not define
“conspiracy,” but “courts have held that general civil
conspiracy principles apply to FCA conspiracy claims.”
Westrick, 685 F. Supp. 2d at 140. Thus, the intra-corporate
conspiracy doctrine, a principle of civil conspiracy law,
applies to FCA conspiracies as well. Under this doctrine, “a
corporation cannot conspire with its employees, and its
employees, when acting in the scope of their employment, cannot
conspire among themselves.” United States ex rel. Fago v. M&T
Mortg. Corp., 518 F. Supp. 2d 108, 117 (D.D.C. 2007).
47
There is no dispute that Defendants Edward Brandon and Lily
Brandon are or were employees of Defendant LB&B. Thus, any
conspiracy claims between these individual Defendants and LB&B
fail pursuant to the intra-corporate conspiracy doctrine. See
Kane, 798 F. Supp. 2d at 201-02 (dismissing an FCA conspiracy
claim where plaintiffs had alleged a conspiracy between
employees of the corporation and the corporation itself). Thus,
the Government’s conspiracy claims fail to state a claim.
However, to the extent that Relators have alleged a
conspiracy between employees of LB&B, LB&B itself, BSA, and/or
Chilkat, those claims are not barred under that doctrine. In
order to state a claim for conspiracy pursuant to the FCA,
Relators must show “(1) that defendant[s] conspired with one or
more persons to have a fraudulent claim paid by the United
States, (2) that one or more of the conspirators performed any
act to have such claim paid by the United States, and (3) that
the United States suffered damages as a result of the claim.”
United States v. Bouchey, 860 F. Supp. 890, 893 (D.D.C. 1994).
Here, Relators have alleged that LB&B conspired with BSA and
Chilkat to form a joint venture that did not meet the applicable
requirements; that the project managers listed on the joint
venture agreements were LB&B employees, not employees of the
protégé companies, as required; that at some point after the
joint ventures were approved, the relevant employees switched
48
their employment from LB&B to the protégé companies; and that
the joint ventures were able to secure set aside contracts as a
result of the misrepresentation. At this stage in the
litigation, Relators have alleged sufficient facts to survive a
motion to dismiss. See Westrick, 685 F. Supp. 2d at 141(finding that assertions of meetings between employees of two
companies were sufficient to state a claim for conspiracy).
D. Relators’ Claims Against Remaining Defendants
Relators did not serve Bering Straits AKI, Chilkat
Services, or the individual named Defendants from those
companies. Thus, the Court will sua sponte dismiss their claims
against those Defendants pursuant to Fed. R. Civ. P. 4(m), which
provides that “[i]f a defendant is not served within 120 after
the complaint is filed, the court . . . must dismiss the action
without prejudice against that defendant.”
IV. Conclusion
For the reasons stated above, the Court DENIES Defendants’
Motion to Dismiss Relators’ complaint and GRANTS IN PART AND
DENIES IN PART Defendants’ Motion to Dismiss the Government’s
complaint in intervention.
SO ORDERED.
Signed: Emmet G. Sullivan
United States District Judge
July 16, 2014
49