Opinion
No. C-95-1825-VRW.
March 20, 1998
ORDER.
Baker Taylor is a book wholesaler and distributor. W.R. Grace Co owned Baker Taylor from 1970 to 1992. Robert Costa, the former City Librarian of Richmond, Virginia, and Richard Thornburg, a Virginia resident, brought this qui tam action against Baker Taylor and W.R. Grace Co to recoup monies purportedly obtained through a fraudulent billing scheme. Plaintiffs United States of America and State of California (all plaintiffs hereinafter referred to as "governments" or "plaintiffs") have intervened in this action and are now the real parties in interest.
Baker Taylor entered into contracts with various libraries and educational institutions in which Baker Taylor agreed to sell books at various discounts. The levels of discount were keyed to the discounts which prevail for certain kinds of books. In general, publishers sell distributors "trade books" at a so-called "deep discount" of 46 percent or more. Textbooks and other non-trade publications sell at "short discounts" or no discount ("net").
According to the third amended complaint, Baker Taylor deliberately overcharged "for trade books that it believed its library and educational institution customers could be deceived into believing were non-trade publications and by otherwise manipulating discount levels in ways inconsistent with Baker Taylor's representations and contractual obligations." 3d Am Compl at 7. Baker Taylor allegedly carried out this scheme by reprogramming its computers to deprive plaintiffs of discounts promised them in their contracts with Baker Taylor. Defendants purportedly did this by changing their system of "price key" codes for three categories of trade books and manipulating the discounts associated with them.
Prior to 1980, all trade books were assigned to the "T" Key. Thereafter, defendants began assigning certain trade books to the "K", "A" and "R" Keys. They defined these keys as "institutional trade books", "hardcover university press books" and "reinforced trade juvenile books" and gave these books only short discounts. Id at 8-12.
Baker Taylor also assigned books for which it received no discount from the publisher to the "Y" Key. Defendants then allegedly instructed their employees to add improper hidden charges to these books when they were sold to the libraries and educational institutions. Retailers supposedly received their agreed upon contractual discounts. Plaintiffs claim this discrepancy violates their "most favored customer" clause which provided that defendants would charge the libraries and educational institutions no more for a book than the lowest price other customers were charged.
Whenever a library or educational institution discovered instances in which it received a smaller discount than had been contracted for, defendants' employees allegedly represented that these were isolated mistakes. Then, defendants would adjust their computers to avoid overcharging the complaining library or educational institution in the future. In this way, defendants prevented plaintiffs from discovering the alleged fraud being perpetrated upon them. Id at 16-17.
Thornburg worked for Baker Taylor for seventeen years. In 1989, Baker Taylor discharged him. In both the original and first-amended complaints at ¶ 6, plaintiffs allege that during his employment Thornburg became "aware of Baker and Taylor's fraud." In March 1992, W.R. Grace Co sold Baker Taylor to the Carlyle Group. Id at 3. According to plaintiffs, W.R. Grace Co was notified of Baker Taylor's fraud and worked in concert with them to conceal it even after Baker Taylor was sold. Id at 19.
On June 1, 1995, Costa and Thornburg filed this action alleging multiple violations of the federal and California False Claims Act, see 31 USC § 3729 and Cal Govt Code § 12650, or in the alternative, seeking payment under the equitable doctrines of unjust enrichment and payment by mistake. Until January 16, 1997, the complaint remained sealed as plaintiffs conducted further discovery. On January 31, 1997, plaintiffs served defendants. Plaintiffs filed a second-amended complaint on April 30, 1997, and a third-amended complaint on August 22, 1997.
Baker and Taylor, whom W.R. Grace Co joins, moves that the court dismiss plaintiffs' third-amended complaint pursuant to FRCP 12(b)(6) and (b)(1). W.R. Grace Co, whom Baker Taylor joins, requests that the court dismiss (1) claims barred by the False Claims Acts' statutes of limitations; (2) counts III and IV for failure to state a claim for conspiracy; and (3) claims based on sales of books to Baker Taylor's library customers.
I
A FRCP 12(b)(6) motion to dismiss tests the legal sufficiency of the claim or claims stated in the complaint. The complaint must be construed in the light most favorable to plaintiff.Russell v. Landrieu, 621 F2d 1037, 1039 (9th Cir 1980). The court must accept as true all material allegations in the complaint, as well as all reasonable inferences to be drawn from these facts. NL Indus, Inc v. Kaplan, 792 F2d 896, 898 (9th Cir 1986). Material allegations must be accepted as true no matter how improbable they may seem and without regard to any potential difficulties in proof. Allison v. California Adult Authority, 419 F2d 822, 823 (9th 1969). The court need not, however, accept as true allegations that contradict matters properly subject to judicial notice, Mullis v. United States Bankruptcy Court, 828 F2d 1385, 1388 (9th Cir 1987), cert denied, 486 US 1040 (1988), that are conclusory or mere legal conclusions, that are unwarranted deductions of fact or unreasonable inferences, Clegg v. Cult Awareness Network, 18 F3d 752, 754-55 (9th Cir 1994);Western Mining Council v. Watt, 643 F2d 618, 624 (9th Cir 1981), cert denied, 454 US 1031 (1981), or that are contradicted by exhibits to the complaint, Durning v. First Boston Corp, 815 F2d 1265, 1267 (9th Cir 1987), cert denied, 484 US 944 (1987). Even so, the motion may not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 US 41, 45-46 (1957); Moore v. City of Costa Mesa, 886 F2d 260, 262 (9th Cir 1989), cert denied, 496 US 906 (1990).
II
Defendants urge that the court find that the statutes of limitations for the federal and California False Claims Acts continued to run in this action until they were served with the complaint on January 31, 1997. Plaintiffs respond that the court must follow the express language of FRCP 3 and Cal Govt Code § 12654 and conclude that the statutes of limitations were tolled on June 1, 1995.
Under FRCP 3, the filing of a complaint commences an action and tolls the applicable statute of limitations. "Limitation is superseded by the filing of suit because the suit warns the defendant[s] to collect and preserve evidence relating to it."Barthel v. Stamm 145 F2d 487, 491 (5th Cir 1944), cert denied, 324 US 878 (1945). Amendments to pleadings "relate back" to the date the original complaint was filed unless the original complaint gives no indication of the facts on which the claim for relief is based. See Baldwin County Welcome Center v. Brown, 466 US 147, 149-50 (1994); FRCP 15(c)(2); see also Hutnick v. US Fidelity and Guaranty Co, 47 Cal 3d 456, 462 (1988) ("Once an action has been timely commenced by the filing of a complaint, the filing of a supplemental or amended complaint which does not introduce a new cause of action is not subject to the statute of limitations.")
Defendants submit that the court should devise a new rule which would permit tolling and relation back only when a complaint is unsealed. Defendants offer no support for this suggestion, save some policy arguments regarding the purpose of statutes of limitations. Such policy arguments cannot prevail. Congress and the California legislature obviously knew when they provided for sealed complaints that defendants named in such complaints would not have notice of the instigation of an action. Still, neither Congress nor the Legislature differentiated between sealed and unsealed complaints. The court cannot substitute its judgment for that of these legislative bodies, no matter how reasonable or attractive are the arguments which defendants mount for their proposed rules.
Title 31 USC § 3731, the statute of limitations for the federal False Claims Act, speaks in terms of when an action is "brought." It gives plaintiffs six years from the time a violation occurs to bring suit. If the fraud is concealed, plaintiffs may bring an action within three years after the facts material to the action become known to the official charged with acting on the violation, subject to a ten-year statute of repose. Id at (2).
Similarly, Cal Govt Code § 12654(a) states that a claim under the California False Claims Act may not be filed more than three years after the date of discovery of the fraud by the official charged with acting upon it. This statute also provides for a ten-year statute of repose. Id.
The present case was brought and filed on June 1, 1995. On that date, the statutes of limitations were tolled. Defendants do not allege that the amended complaints contain causes of action which the first complaint did not reference. Unless the plaintiffs knew of the fraud underlying the allegations for more than three years before the filing of the complaint, plaintiffs may sue on all violations after June 1, 1985.
2
Defendants contend that because the original and first-amended complaints alleged that Thornburg knew of Baker Taylor's alleged fraud upon his termination in 1989, all of plaintiffs' claims after 1992 must be dismissed. Plaintiffs maintain that (1) merely knowing of fraud does not mean one knows all facts material to a cause of action for fraud and (2) a qui tam plaintiff's knowledge does not bind the governmental bodies on whose behalf the action is brought.
Defendants find support for their contentions that the post-1992 claims are barred in United States ex rel Hyatt v. Northrop Corp, 91 F3d 1211 (9th Cir 1996). Hyatt, 91 F3d at 1216-17, found that a qui tam plaintiff was "an official of the United States charged to act in the circumstances," and was hence entitled to the three year extension of the statute of limitations available under § 3731(b) (2). "Thus, as to the qui tam plaintiff, the three year extension of the statute of limitations begins once the qui tam plaintiff knows or reasonably should have known the facts material to his right of action." Id.
Hyatt has only limited application to the case at bar.Hyatt 91 F3d at 1217, focused on the qui tam plaintiff and noted that "his duty to act must be triggered by his own knowledge not by the knowledge of others." Cases applying Hyatt emphasize that its findings apply to the qui tam plaintiff and the knowledge he himself possesses of the fraud. See United States ex rel Saaf v. Lehman Brothers, 123 F3d 1307, 1308 (9th Cir 1997). Defendants do not allege that Costa had knowledge of Baker Taylor's alleged fraud for more than three years prior to the date he filed this action. Nothing in Hyatt prevents Costa from proceeding as a qui tam plaintiff and the governments from intervening in his timely action.
Moreover, in the instant case, the governments have chosen to intervene. In light of this intervention it is only logical that they are "the officials charged to act under the circumstances" pursuant to § 3731(b). To find otherwise would mean hinging the governments' right to protect their fiscs on the whims of a qui tam plaintiff. The Hyatt court gives no indication that it sought to work such a fundamental change in the law. Without more, the court will not read Hyatt as stating the law beyond its facts.
In light of Hyatt, however, whether Thornburg should remain a plaintiff in this action seems doubtful. There is no question that Thornburg admitted that he knew of Baker Taylor's fraud in 1989. See Compl and 1st Amended Compl at ¶ 6. The six year general statute of limitations applicable to violations of § 3729 has expired and this suit was filed more than three years after Thornburg knew of the alleged wrong. Because the action was filed more than three years after Thornburg discovered the violations, it also runs afoul of § 12654(a).
The governments suggest that the court should not dismiss Thornburg because it does not know exactly what Thornburg knew in 1989. This argument misses the point. Although a plaintiff must plead fraud with particularity pursuant to FRCP 9(b), Thornburg had three years to find the further facts necessary to state a claim. He chose to wait six and one-half years, making his claims untimely. Thornburg is, therefore, dismissed from this action; this case may proceed with Costa and the governments as intervenors. Costa and the governments may use any information they received from Thornburg regarding defendants' violations after June 1, 1985, to prosecute this action.
III
Defendants argue that claims III and IV of the third amended complaint fail to state a claim because a parent corporation cannot conspire with its own corporate division. Plaintiffs concede that no conspiracy could exist prior to March 1992. Plaintiffs contend, however, that they have alleged a conspiracy based on conduct after that date; namely, that W.R. Grace Co and Baker Taylor worked together to conceal prior misconduct from federal authorities.
In Copperweld Corp v. Independence Tube Corp, 467 US 752, 770 (1984), the United States Supreme Court stated that "the operations of a corporate enterprise must be judged as the conduct of a single corporation." California courts also find that "a corporation cannot conspire with itself anymore than an individual can, and it is the general rule that the acts of the agent are the acts of the corporation." Black v. Bank of Am, 30 Cal App 4th 1, 6 (1894).
W.R. Grace Co and Baker Taylor were essentially one and the same corporation prior to the sale to the Carlyle Group in March 1992. Thus, the two defendants could not have conspired with each other prior to that date.
To state a claim for conspiracy under the federal False Claims Act, plaintiffs must show that: (1) defendants conspired with one or more persons to induce the United States to allow or pay a false claim; (2) one or more of the conspirators performed any act to effect the object of the conspiracy and (3) the United States suffered damages as a result of the false or fraudulent claim. United States ex rel Stinson, Lyons, Gerlin Bustamante v. Provident Life Accident Ins Co, 721 F. Supp. 1247, 1258 (SD Fla 1989). The court found no cases analyzing the elements needed to state a claim for conspiracy under § 12651 of the California False Claims Act, but will assume it requires similar elements. See Biljac Associates v. First Interstate Bank, 218 Cal App 3d 1410, 1420 (1990) ("[c]omparative sparsity in state-court precedent often means that [California courts] rely heavily on federal cases for guidance.")
The conspiracy allegations at bar center around conduct occurring in the wake of certain letters received from a disgruntled former Baker Taylor employee in 1992. The employee, Joseph DeMarco, wrote W.R. Grace Co's general counsel alleging that Baker Taylor had "systematically bilked and defrauded its library customers out of millions of dollars as a result of its pricing practices." 3d Am Compl, Exh H. DeMarco followed up with a letter to Baker Taylor and the United States Attorney in Charlotte, North Carolina. Id at Exhs I J.W.R. Grace and Baker Taylor jointly hired the Latham Watkins law firm which wrote a letter to the United States Attorney stating that an investigation had proved DeMarco's allegations groundless. Id at Exh K.
From these facts, plaintiffs allege that "[a]lthough Baker Taylor knew, and ultimately acknowledged that its pricing practices with respect to the "K" Key were not valid, Baker Taylor conspired with W.R. Grace Co to mislead the government into abandoning a 1992 inquiry on the subject." Essentially, plaintiffs assert that W.R. Grace Co and Baker Taylor represented to the governments that their law firm had conducted an inquiry into the pricing practices and found them not to violate state or federal law. Id at ¶ 39.
The complaint does not allege that Latham Watkins was a co-conspirator, so it may be read as alleging that W.R. Grace Co and Baker Taylor, by September 1992 separate entities, lulled their law firm into making false representations to a federal prosecutor. As evidence, the DeMarco and Latham Watkins letters are extremely thin for such serious charges. Furthermore, the court is troubled that the governments would construe an attorney's denial of wrongdoing on his clients' part as evidence of a conspiracy and a double barreled one at that: a conspiracy to mislead Latham Watkins so that it in turn, would mislead the United States Attorney.
No matter how implausible and troubling, such allegations suffice to state a claim for conspiracy under the False Claims Acts. Plaintiffs allege that defendants conspired to conceal their wrongdoing so that the governments would continue to pay inflated prices. They maintain that defendants misled Latham Watkins unwittingly to attempt to induce the governments to halt their investigation. Plaintiffs claim that the resulting failure to discover these overpayments caused them damage in an amount yet to be determined.
Defendants insist that the Latham Watkins letter cannot be used as evidence of a conspiracy because it invited the governments to refer the allegations to the Federal Bureau of Investigations for review. Also, the letter stated that Baker Taylor stood ready to cooperate in any investigation.
Whether the letter evidences a conspiracy is a matter that cannot be decided on a pleadings motion. Plaintiffs do not contend that the letter was uncooperative but that the letter itself, written by a reputable law firm, was meant to mislead the governments.
United States ex rel Prawer Co v. Verrill Dana, 982 F. Supp. 206 (D Me 1997), is not to the contrary. In Prawer, 982 F. Supp. at 208, the court dismissed a claim of conspiracy because the now repealed Maine Bulk Sales Act did not create an existing legal obligation to give rise to reverse false claim liability.Prawer's analysis focused on the requirement in § 3729(a)(7) that the defendants have "an obligation to pay or transmit money or property to the Government." In particular, the Prawer court found that the attorneys' alleged cover-up did not create such an obligation to pay or transmit money but were at most "possible contingent future * * * liabilities." Id at 208. Because the present case concerns § 3729(a)(2) which does not require that defendants have an obligation of any sort, Prawer is inapposite.
All § 3729(a)(2) requires is that defendants "knowingly made or used a false record or statement to get a false or fraudulent claim paid or approved by the Government." Plaintiffs allege exactly that scenario; defendants purportedly used misleading statements of their counsel to overcharge the governments.
The conspiracy allegations at bar raise far more questions than they answer. Not least among these is how the plaintiffs intend to prove a conspiracy between W.R. Grace Co and Baker Taylor that involves communications with a law firm which presumably are privileged. Still, these questions do not suffice to prevent plaintiffs from proceeding with their conspiracy claim at this stage. The gravity of plaintiffs' allegations, implicating possible criminal activity, appears to call for some extraordinary steps to get to the bottom of those charges.
To accomplish that objective, the court is considering a stay of proceedings on all claims except the conspiracy allegations. Discovery would proceed promptly on the conspiracy claims and be concluded to allow the parties to make whatever motions they deem appropriate. In proposing to so focus the litigation, the court notes that Latham Watkins is presently serving as counsel for Baker Taylor. If the conspiracy allegations survive summary judgment, Latham Watkins would hardly seem in a position to continue its representation of Baker Taylor. These circumstances lead the court to believe that it is imperative to deal first with the conspiracy claims before all others. Nevertheless, in the interest of disposing of the present motions, the court turns to the motions dealing with defendants' alleged direct violations of the False Claims Acts.
IV
Defendants next claim that the United States may not recover under the federal False Claims Act for any alleged overcharging of libraries. They assert that these library customers do not have claims under the Acts because: (1) their claims did not cause the federal government to disburse funds; (2) the United States did not exercise control, discretion or supervision over the expenditure of federal funds and (3) plaintiffs fail to allege that Baker Taylor's statements were material to the expenditure of federal funds. Plaintiffs maintain that these claims: (1) fall within the plain meaning of 31 USC § 3729(c); (2) the United States exercises significant control over grants made under Title I of the Library Act, 20 USC § 351 et seq; and (3) there is no separate materiality requirement in the federal False Claims Act, but Baker Taylor's statements were material.A
For purposes of the federal False Claims Act, 31 USC § 3929 (c), a "claim" includes:
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 or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the property requested or demanded.
Notwithstanding this broad definition, defendants urge the court to find that the system of funding under the Library Act fails to demonstrate the required nexus between the fraud and federal funding. They assert that the court ought to read § 3729(c) as simply overruling United States v. Azzarelli Construction Co, 647 F2d 757 (7th Cir 1981). In Azzarelli, 647 F2d at 762, the Seventh Circuit refused to allow the United States to proceed under the federal False Claims Act because the grants it had given Illinois were fixed and hence the alleged overcharging did not cause it to disburse federal funds.
It is true that Congress passed § 3729(c) in part to overturnAzzarelli, see 1986 USCCAN at 5287, but the language Congress used was far-reaching. Courts engaged in statutory interpretation should presume that "if the language of a statute is clear and there is no ambiguity, then there is no need to 'interpret' the statute by resorting to legislative history." Church of Scientology v. US Dept of Justice, 612 F2d 417, 421 (9th Cir 1979). The reasoning behind this so-called "plain meaning rule" is that "in the vast majority of its legislation Congress means what it says and thus the statutory language is normally the best evidence of congressional intent." Id.
Given that the plain meaning of the statute allows the United States to recoup monies it granted to states which were then subject to fraudulent overcharging, the court will not exempt the Library Act from the federal False Claims Act. Defendants' policy arguments regarding the potentially limitless reach of the False Claims Act under this reading of § 3729(c) should be addressed to Congress, not the court.
B
Defendants insist that Congress intended that the False Claims Act applies only to programs and grants over which the United States exercised substantial control and cites Wilkins v Ohio, 885 F. Supp. 1055 (SD Ohio 1995), to support this contention. Wilkins, 885 F. Supp. at 1063, explicitly noted, however, that the definition of a claim in § 3729(c) "was broad enough to include any funds provided directly or indirectly by the United States, regardless whether the grant was a fixed amount or open-ended." It mentioned that the government exercised "significant control" over the program at issue in order to distinguish Azzarelli, not to graft a requirement onto the statute. Defendants also cite United States ex rel Davis v. Long's Drugs, Inc, 411 F. Supp. 1144, 1146 (SD Cal 1976) as imposing a "substantial contacts" requirement. Given that this case was decided prior to the adoption of § 3729(c), it cannot be deemed the current law.
Moreover, a brief review of the requirements a state must meet to obtain and maintain a grant under the Library Act demonstrates that the United States exercises significant control over these funds. In order to receive such a grant, a state must: (1) establish a state-advisory council on libraries; (2) establish a state plan and (3) have the Secretary of Education approve all parts of the plan. See 34 CFR § 770.20. A necessary component of a state plan is keeping records for the Secretary to check that the funds are being used only for the purpose for which they were appropriated. See 34 CFR 770.22. The state must also give priority to certain federally mandated objectives. See id at (b)(3).
It is not necessary to list the multitude of other conditions a state must meet to conclude as the court does that the federal government does not relinquish control over its library grants when it gives them to the states. Indeed, courts have long found that federal grant money remains the property of the United States until it is actually expended. See e.g., In re Joliet-Will County Comm Action Agency, 847 F2d 430 (9th Cir 1988) (stating that federal monies deposited in a fund for state uses remain the property of the federal government until expended by the state).
C
Defendants maintain that the United States has failed to plead that W.R. Grace Co and Baker Taylor's allegedly fraudulent statements were material. Plaintiffs deny that any explicit allegation of materiality is required by the federal False Claims Act, but argue that their proffered statements are material in any event.
In United States ex rel Berge v. Bd of Trustees, 104 F3d 1453, 1459 (4th Cir), cert denied, 118 SCt 301 (1997), the Fourth Circuit decided that the False Claims Act imposes a materiality requirement. The Ninth Circuit has not yet addressed the materiality issue.
Assuming without deciding that the Ninth Circuit would require materiality, the court finds plaintiffs' allegations to be material. Under Berge, 104 F3d at 1460, a statement is material if it has a natural tendency to influence government action or is capable of influencing agency action. Materiality is a question for the court. Id. Plaintiffs allege that Baker Taylor devised a false billing scheme and routinely misled libraries into accepting discounts that breached their contracts.
Defendants' contention that there was no agency action is nothing more than a regurgitation of their argument that there is no causal link between federal funds and these purchases. When a state uses a federal library grant, it acts on behalf of the federal government. Thus, any statements which caused the state to use grant monies to overpay for books are indisputably material.
Defendants point out that plaintiffs have alleged that only a majority of the libraries used federal funds to buy books. The court understands defendants' argument to be that if a library or educational institution did not expend federal funds to purchase its books, there can be no violation of the federal False Claim Act. The determination of which libraries and institutions spent federal funds need only come into play when and if damages need be awarded and, therefore, do not prevent the United States from establishing liability.
V A
Defendants next contend that plaintiffs fail to state a claim under either the California or federal False Claims Act because all the pricing information was disclosed on the invoices. Specifically, defendants maintain that because they disclosed the list price for purchased books, the discount applied and the prices ultimately charged for the books, plaintiffs cannot prove defendants possessed the intent to deceive. Plaintiffs respond that the claims are premised on the idea that the information on the invoices were false because defendants classified trade books as non-trade publications.
In United States ex rel Butler v. Hughes Helicopters, Inc, 71 F3d 321, 327 (9th Cir 1995), the court noted that its prior decisions in Wang v. FMC Corp, 975 F2d 1412 (9th Cir 1992), andUnited States ex rel Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir 1991), established that if the government knows all the facts underlying an alleged fraud, intent to deceive may not be established. Butler, 71 F2d at 327, notes, however, that a determination of the governments' knowledge cannot be made from the face of the complaint; "[o]nly at the stage of trial or summary judgement will it be possible for a court to say [what the government knew.]" Defendants' argument is, therefore, premature.
Even if defendants' contention were timely, cases such asWang address factual situations not present here. Wang and its progeny address situations in which the government possesses the information which it then claims is the subject of a false claim. In the present case, plaintiffs claim that defendants submitted false invoices. Put otherwise, the governments challenge the veracity of the very information disclosed to them. Assuming that the defendants did assign non-trade keys to trade books as the court must on a motion to dismiss, the governments could not have discovered defendants' fraud from a review of the invoices.
B
Defendants assert that the court should find as a matter of law that because "juvenile reinforced books" were priced as a separate category, it is reasonable to assume that these discounts were not fraudulent. Plaintiffs contend that they have alleged a fraudulent scheme which does not require an intent to deceive.
At the onset, the court notes that because the defendants' argument is based upon contracts or receipts for books which the governments claim are false, it is doubtful that the court could use them to determine whether defendants were truthful as a matter of law. Assuming arguendo that the separate pricing might lead the court to conclude that defendants believed they were acting truthfully, the court still could not dismiss the governments' claims. Although United States v. Race, 632 F2d 1114, 1120 (4th Cir 1980), did state that "one cannot be found guilty of a false statement beyond a reasonable doubt when his statement is within a reasonable construction of the contract," its reasoning has no application to the present case. Race 632 F2d at 1120, involved a prosecution for making a false statement under 18 USC § 1001; it spoke to the government's burden in a criminal case in which the result turns on the knowing falsity of the statements.
Courts state that defendants may be found civilly liable under the False Claims Acts if they submitted either false or fraudulent claims to the government. See United States v. TDC Management Corp, 24 F3d 292, 297 (DC Cir 1994). Intent to deceive is only required if the government asserts that defendants submitted false claims, not fraudulent ones. Id. Moreover, inWang, 975 F2d at 1420, the court noted that "what constitutes an offense is not intent to deceive but the knowing presentation of a claim that is either 'fraudulent' or simply 'false'." (quoting Hagood, 929 F2d at 1421).
In the third amended complaint at ¶ 17, plaintiffs allege that Baker Taylor devised a scheme to submit false bills to the libraries and educational institutions funded by the governments. This allegation falls squarely within the definition contemplated by Wang. Determining whether defendants believed their records conformed to the terms of the contract is a factual question, not a question of contract interpretation.
C
Defendants request that the court dismiss any claims based on Baker Taylor's promise to give "short discounts" commensurate with the discounts it received from the customers. Defendants maintain that because short discounted books had ranges in which that could fall, e.g., five to ten percent, Baker Taylor's discounts were not false nor fraudulent. Moreover, defendants argue that the allegedly fraudulent scheme applies only to trade books, not short discounted ones.Paragraph 32 of the third amended complaint alleges that the "commensurate with" provisions of Baker Taylor's contracts were false because Baker Taylor received full trade discounts on some books but offered the governments only "short" discounts on those books. Due to this discrepancy books given short discounts were not "commensurate with" Baker Taylor's discounts from the publisher since Baker Taylor received a full trade discount on them but allegedly did not pass the full discount on to its library and educational institution customers. This pricing practice, if true, is part of the overall fraudulent pricing scheme alleged elsewhere in the complaint and, hence, states a claim under the California and federal False Claims Acts. The range of discounts available for short discounted books under the contract is also irrelevant because plaintiffs allege that the books were misclassified. The discount for short discounted books is simply not in issue.
Defendants' contention that such claims must fail because the allegedly false discounts were included in only some of the contracts at issue speaks to damages, not liability. The time for distinguishing among the millions of contracts will come if damages are awarded and need not be done now.
D
Defendants ask the court to dismiss all claims for breach of the FedLink contract. Specifically, defendants contend that FedLink's "most favored customer" clause was not breached because Baker Taylor's pricing practices were consistent with a specific qualification to that clause in the contract. Plaintiffs respond that the qualification to which defendants refer does not cover books. They also argue that their claims under the FedLink contract are not limited to the "most favored customer" clause but extend to the broader false pricing scheme.
Under the heading "Certification of Commercial Pricing For Parts or Components" in the FedLink Contract, section 1.4 at I-6, the following language appears:
Please Note: Baker Taylor Books has terms and conditions of sale that offer prices lower than those offered in this proposal, but only where specific dollar amounts are guaranteed. [FedLink] does not commit to any specific dollar amount, and as such receives an offer not less than any made under similar conditions.
Directly above that language, the contract states that the term
Part or component as used in this clause [of the contract] means any individual part component, subassembly, assembly, or subsystem integral to a major system and other property that may be replaced during the life of the system but does not include packaging or labeling associated with shipment or identification of a part or component. See 1.4 (a)(3) at I-5.
Twenty-four pages from the end of section 1.4 is the "most favored customer" clause. This clause has its own heading, section k.27, and provides:
The Offeror warrants and agrees that the prices charged FEDLINK users under this agreement will not exceed prices charged by the vendor to its most favored customer for the same services in like or comparable quantities, and further agrees, that any payments received for charges made in excess of prices by such most favored customers will be returned to the Government.
Since contract interpretation is a matter of law, see United States v. Sacramento Municipal Utility District, 652 F2d 1341, 1343-44 (9th Cir 1981), it is for the court to determine what these provisions mean. The court finds that a logical reading of the contract taken as a whole supports the conclusion that the qualification Baker Taylor included in section 1.4 refers only to the parts and components covered in that section. Accordingly, the qualification does not cover what the contract refers to as "publications." Given that plaintiffs' complaint covers the fraudulent pricing of publications, the pricing of parts and components is irrelevant.
The court realizes that the contract may have an ambiguity because the qualification in section 1.4 does not expressly exclude publications from the definition of components or parts. The rule of contra proferentum, adopted as part of federal common law, see Everson v. Blue Cross Blue Shield, 898 F. Supp. 532, 538 (ND Ohio 1994), provides that if an author of a contract creates an ambiguity it must be construed against him. Defendants assert that they should not be considered the authors of the FedLink contract because the contract is based on model federal contracts.
Even if defendants used language the federal government wrote in the provisions of the FedLink contract, they cannot argue that the United States drafted the qualification that creates the ambiguity. Baker Taylor separately typed in the qualification on component pricing; they are its authors and, therefore, the qualification must be construed as not covering books.
Plaintiffs argue that the FedLink contract was subject to the same misclassification scheme for "A," "R" and "Y" Key books. This claim is contradicted by the complaint itself. At ¶ 21 the third-amended complaint says that the allegations of "K" Key fraud apply to all contracts "other than the United States Government 'FedLink' contract." In addition at ¶ 29, plaintiffs allege that the representations vis-a-vis the "K," "A," and "R" Keys do not apply to the FedLink contract.
If as plaintiffs contend, the exclusions of the FedLink contract from the allegations of "A" and "R" Key fraud are merely the result of sloppy draftsmanship, the remedy is to amend the complaint. The court will not, however, take it upon itself to do that.
E 1
Defendants maintain that plaintiffs cannot include claims based on unjust enrichment or payment by mistake because plaintiffs concede that a valid contract exists. Plaintiffs contend that they have pled the common law claims only as an alternative.
It is well established that if a valid as opposed to a supposed or nonexistent contract exists, the common law theories of unjust enrichment and payment by mistake are not available. SeePracor Finance v. General Electric Capital Corp, 96 F2d 1151 (9th Cir 1996) (unjust enrichment); United States v. Systron-Donner Corp, 486 F2d 249, 252 (9th Cir 1973) (payment by mistake).
In the present case, plaintiffs believe that their contracts with defendants are valid. In the unlikely event that the court should find these contracts invalid, however, plaintiffs have included claims for unjust enrichment and payment by mistake. This pleading practice serves judicial economy and hence will not be discouraged by the court. Of course, the common law claims will not come into play as long as the court deems the contract valid. Defendants cannot seriously argue that should the court disregard the contracts, plaintiffs could not state a claim under common law. Indeed, under that scenario, no valid contract would bind the parties. To require plaintiffs to wait until contracts are disregarded to bring quasi-contract claims would only prolong this litigation.
2
Defendants contend that the Contract Disputes Act, 41 USC § 605, deprives the court of subject matter jurisdiction over plaintiffs' common law claims. Plaintiffs contend that the anti-fraud provision of the Act applies because the common law claims are based entirely on the fraud which supports their claims under the federal False Claims Act.
a
In considering a motion concerning subject matter jurisdiction, a court will ordinarily address the jurisdictional issues prior to considering other claims. Thornhill Publishing Co, Inc v. General Telephone Electronics Corp, 594 F2d 730, 733-34 (9th Cir 1979). The party asserting subject matter jurisdiction in federal court bears the burden of establishing that jurisdiction. Kokkonen v. Guardian Life Ins Co of America, 114 S Ct 1673, 1675 (1994). There are two types of motions to dismiss under FRCP 12(b)(1), so-called "facial attacks," which assert the inadequacy of the jurisdictional allegations in the complaint, and "factual attacks," which seek to introduce extrinsic evidence to prove a lack of subject matter jurisdiction. See Meliezer v. Resolution Trust Co, 952 F2d 879, 881 (5th Cir 1992). In a facial attack, such as the one presented in this case, the court will accept as true the allegations in the complaint for the purpose of deciding the FRCP 12(b)(1) motion. Mortensen v. First Fed Sav Loan Ass'n, 549 F2d 884, 891 (3d Cir 1977).
b
Under the Contract Disputes Act, 41 USC § 605(a), "all claims by the government against a contractor relating to a contract shall be the subject of a decision by the contracting officer. The Act does not authorize any agency head to settle, compromise, pay or otherwise adjust any claim involving fraud." Id.
In United State ex rel O'Keefe v. McDonnell Douglas Corp, 918 F. Supp. 1338, 1343-44 (ED Mo 1996), the court faced a situation in which the government brought claims for unjust enrichment and payment by mistake contemporaneously with a claim under the federal False Claims Act. The court found that the common law claims came within the purview of the anti-fraud exception because fraud was "an integral part of" these common law claims which were merely alternative theories for recovery. Id at 1344. Moreover, inMartin J. Simko Construction, Inc v. United States, 882 F2d 540, 546 (Fed Cir 1988), the Federal Circuit noted that Congress intended that contract claims associated with fraud be heard by the courts. See also Joseph Morton Co, Inc v. United States, 757 F2d 1273, 1281 (Fed Cir 1985) ("Those claims which are not inextricably linked with liability for fraud must first be the 'subject of a decision by the contracting officer.'")
In support of their contention that the court should disregard the reasoning of the aforementioned courts, defendants direct the court's attention to United States v. Hughes Aircraft Co, 1991 US Dist Lexis 21639. In Hughes at 1, the court found that common law claims for unjust enrichment and payment by mistake were not subject to the fraud exception. The court expressly stated, however, that its decision was compelled by prior holdings in the case; it noted that the government had previously requested a strict construction of § 605(a). No such considerations apply in the instant case and the court, therefore, declines to follow Hughes.
There is no question that plaintiffs' common law claims are bound up in their claims under the False Claims Acts. As noted above, the common law claims serve as alternate theories of recovery for the alleged fraudulent pricing scheme engaged in by defendants. Since these claims involve fraud, the anti-fraud exception applies and the court has jurisdiction to hear these claims.
VI
Pursuant to the foregoing, the court ORDERS as follows:
(1) defendants' motion to dismiss claims barred by the statute of limitations (Doc # 103, pt 1) is GRANTED IN PART and DENIED IN PART. Thornburg is dismissed as a plaintiff in the action;
(2) defendants' motion to dismiss counts III and IV for failure to state a claim for conspiracy (Doc # 96, pt 1) is GRANTED to the extent it relies on acts occurring prior to March 1992 and DENIED as to acts allegedly occurring thereafter.
(3) defendants' motion to dismiss claims based on Baker and Taylor's sales to library customers (Doc # 99, pt 1) is DENIED;
(4) defendants' motion to dismiss plaintiffs' third amended complaint (Doc # 108, pt 1) is GRANTED IN PART and DENIED IN PART. Claims related to the FedLink contract are confined to breach of the "most favored customer" clause. Plaintiffs may amend their complaint to include the FedLink contract in their allegations of "A" and "R" Key fraud no later than April 17, 1998, and
(5) The court schedules a case management conference for April 17, 1998 at 10:30 am. At that conference, the parties should be prepared to discuss the following issues:
(a) Whether the court should stay all proceedings except as to claims III and IV of the third-amended complaint;
(b) If such a stay is adopted by the court, the length of time the parties will need for discovery on the conspiracy allegations; and
(c) If such a stay is adopted by the court, when the parties would be ready to serve and file motions directed to the conspiracy allegations.
IT IS SO ORDERED.