Opinion
No. 3:94-cv-2063 (EBB)
August 24, 2000
Ruling on Defendants' Motion to Dismiss
Defendants United Technologies Corporation ("UTC") and Norden Systems, Inc. ("NSI") move pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) to dismiss the independent qui tam action raised on behalf of the United States by relator David J. Capella ("Relator") under the False Claims Act ("FCA"), 31 U.S.C. § 3729-3731 (2000). Based on the alleged regulatory noncompliance that would have made certain insurance costs charged to the government unallowable, Relator has properly stated cognizable claims under FCA § 3729(a)(1)(2) but fails to state a claim under FCA § 3729(a)(7)(2), and has not sufficiently pleaded facts that would constitute a conspiracy in violation of FCA § 3729(a)(3). The motion is therefore granted in part and denied in part.
I. Background
The following facts are culled from the Federal Acquisition Regulations ("FAR"), 48 C.F.R. § 1.000-9905.506 (West 1994), and Relator's Second Amended Complaint. See Sec. Am. Compl. [Doc. No. 52] (Jan. 13, 1998).
This decision relies on the regulations as they read in 1994, the year in which Relator filed his initial complaint. Accordingly, all references to the C.F.R. are to the 1994 version.
A. Government Defense Contracts
Progress bills ("Progress Bills") submitted by government contractors to the United States for interim payments may include charges for indirect costs, expenditures generally identified with multiple objectives, so long as those costs are allowable in accordance with the FAR and, if applicable, the FAR's Cost Accounting Standards ("CAS"), 48 C.F.R. § 9904.400-9904.420-63. In order to verify that all expenses are legitimate, a contractor must submit a Certificate of Indirect Cost ("Certificate") with its pricing proposals to an Administrative Contracting Officer ("ACO"). See FAR § 242.770-4. The Certificate is essential because the ACO excludes any unallowable cost from the proposal. See 10 U.S.C. § 2324 (a)(h) (1994). Any contractor that knowingly submits an unallowable charge with a proposal is subject to the provisions of the False Claims Act. See id. at § 2324(i).
Generally, the government evaluates several factors when determining whether or not to allow a cost, including "[s]tandards promulgated by the CAS Board . . . ." FAR § 31.201-2 (a)(3). The regulations further require contractors who have received at least $25 million in net CAS-covered awards to comply with all CAS. See FAR § 9903.201-2.
Insurance expenditures are an indirect cost. Both the FAR and CAS specify factors that determine the allowability of these indirect insurance costs. The FAR permit a contractor to self-insure or to use captive insurance, a type of self-insurance by which the contractor procures insurance from a company it owns. See FAR § 31.2O5-19(c). That provision of the FAR provides that self-insurance costs are allowable so long as "[clontractors operating under a program of self-insurance obtain approval of the program when required by [section] 28.308(a)." FAR § 31.205-19(a) (2)(v). FAR section 28.308(a), in turn, mandates the disclosure of the following information in order to obtain approval of the self-insurance program:
(1) A complete and accurate description of the program, including any resolution of the board of directors authorizing and adopting coverage, including types of risks, limits of coverage, assignments of safety and loss control, and legal service responsibilities;
(2) If available, the corporate insurance manual and organization chart detailing fiscal responsibilities for insurance;
(3) The terms regarding insurance coverage for any Government property;
(4) The contractor's latest financial statements;
(5) Any self-insurance feasibility studies or insurance market surveys reporting comparative alternatives;
(6) Loss history, premiums history, and industry ratios;
(7) A formula for establishing reserves, including percentage variations between losses paid and losses reserved;
(8) Claims administration policy, practices, and procedures;
(9) The method of calculating the projected average loss; and
(10)A disclosure of all captive insurance company and reinsurance agreements, including methods of computing cost.
FAR § 28.308(a). In addition to the FAR's disclosure requirements for approval of self-insurance costs, the CAS also require that, except for programs for retired persons, insurance costs be based on a projected average loss, not actual losses, unless it is probable that actual losses will not differ significantly from the projected average loss. See CAS § 9904.416-50(a)(2)(i)-(iii).
On a motion to dismiss, the court may reasonably infer the applicability of this provision without an affirmative pleading that the threshold requirements — at least 50% of self-insurance costs totaling at least $200,000/year are allocable to government contracts — have been met. Just as the parties have assumed Defendants are subject to GAS, notwithstanding Relator's failure to plead that they have contracts in excess of $25 million, see FAR § 9903.201-2, so too will the court infer that the Defendants' self-insurance programs would be subject to section 28.308.
The FAR also direct how a CAS-covered contractor must negotiate contract prices and bill the United States for indirect costs. Before negotiations even begin, the contractor must submit to the government a Disclosure Statement revealing its cost accounting practices and procedures, see FAR § 9903.202-1; contractors remain "responsible for maintaining accurate Disclosure Statements and complying with disclosed practices." Id. at § 9903.202-3. Although it "does not determine the allowability of particular items of cost . . . the individual Disclosure Statement may be used in audits of contracts or in negotiation of prices leading to contracts." FAR § 9903.303(a) (b).
Once the parties begin negotiating, they establish a final indirect cost rate that is used in "determining progress payments under fixed price contracts." FAR § 42.703. The proposal for final indirect cost rates is accompanied by the Certificate of Indirect Costs, which serves as a precondition to payment. See 10 U.S.C. § 2324 (h); FAR § 242.770-4. The Certificate verifies that, "to the best of the contractor's knowledge and belief, all indirect costs included in the proposal are allowable in accordance with the requirements of the contracts to which they apply and with the cost principles of the Department of Defense applicable to-those contracts." FAR § 252.242-7001. After the ACO receives a proposal for the settlement of indirect costs and the accompanying Certificate, he examines the costs and disallows any he deems unallowable. See 10 U.S.C. § 2324 (a).
All contracts must include a clause requiring the contractor to "comply with all CAS." FAR § 52.230-2(a)(3). With the agreement in place, a contractor may submit a claim for indirect costs to the United States. The FAR permit a contractor to deliver Progress Bills to the government as work costs accrue. See FAR § 52.232-16. Attached to every Progress Bill is a certificate acknowledging that "the work reflected [in the Progress Bill] has been performed, [and] the quantities and amounts involved are consistent with the requirements of the contract." FAR § 53.301-1443.
In addition to their obligation to comply with the FAR and CAS, Defendants were also allegedly compelled to adhere to Present Responsibility Agreements ("PRA"s), which they signed with the Department of Defense on April 22, 1991, and September 29, 1992, in the aftermath of criminally fraudulent activity. Through these Agreements, Defendants represented that in future contracts with the government they would follow all federal procurement laws and regulations, carefully monitor their contracting practices, and report and rectify any potential violations. See Sec. Am. Compl. ¶¶ 55-61.
B. Capella Action
In December 1994, Relator, who was NSI's Supervisor of Audit Compliance, brought this action under seal on behalf of the United States pursuant to the qui tam provisions of the False Claims Act. The government declined to formally intervene here, and the court unsealed the case. See Order [Doc. No. 27] (June 5, 1997). Relator has twice amended his complaint. See Am. Compl. [Doc. No. 28] (July 17, 1997); Sec. Am. Compl. [Doc. No. 52] (Jan. 12, 1998). Defendants now move to dismiss the second of these two amended complaints. See Defs.' Mot. to Dismiss [Doc. No. 55] and Mem. in Supp. [Doc. No. 56] (Feb. 19, 1998); Defs.' Reply [Doc. No. 89] (Nov. 13, 1998).
FCA § 3730(b) authorizes a private individual, the relator, to "bring a civil action for a violation of section 3729. for the United States Government." The government may intervene in the action, but if it chooses not to do so, the relator bringing the action may proceed on his own. See FCA § 3730(b)(2). Regardless of whether the government intervenes, the relator may receive a portion of any settlement, damages or civil penalty, although his share decreases if the government formally enters the suit. See FCA § 3730(d); see also Vermont Agency of Natural Resources v. United States ex rel. Stevens, ___ U.S. ___, 120 S. Ct. 1958, 146 L.Ed.2d 836 (2000) (holding that relators have standing to bring suit in federal court on behalf of the United States under the FCA).
Although the United States has not formally intervened, it was granted leave to file a brief as amicus curiae. See Gov't Br. [Doc. No. 77] and App. [Doc. No. 78] (June 16, 1998).
The gravamen of Relator's complaint is that Defendants improperly billed the government for purchased insurance costs while it was self-insured. He alleges that from 1989 to 1994, UTC maintained self-insurance coverage for several risks, including: automobile collision and liability, environmental pollution, workers' compensation, health and welfare benefits, and comprehensive general liability. NSI also allegedly held captive insurance, a type of self-insurance, for aircraft products, property, and group reinsurance. See Sec. Am. Compl. ¶¶ 45-47.
Despite self-insuring many of their risks, Defendants allegedly reported on their Disclosure Statements from 1987 to 1994 that they did not maintain any self-insurance programs whose costs were charged to the government. Instead, they allegedly reported that their insurance coverage was purchased from an outside insurer. Relator alleges that Defendants wrongfully charged the government for non-existent insurance premium costs while it was actually self-insured. He asserts that requests for payment of these false insurance costs were submitted to the government as part of Defendants' periodic Progress Bills and Certificates, which accompanied their indirect cost billing rate proposals, both of which falsely certified the allowability of these ersatz insurance costs. See id. at ¶¶ 26-36.
The Second Amended Complaint further alleges that in May 1990 and again in October 1992, Relator audited NSI's cost accounting practices, and determined that the insurance information supplied to NSI by UTC for inclusion in NSI's Disclosure Statements falsely stated that UTC had purchased all of its insurance when it was actually self-insured. Relator claims to have reported the discrepancy to the management of both UTC and NSI, who allegedly instructed him not to include the inaccuracies in his audit report. Defendants thereafter allegedly refused to correct, and continued to submit, Disclosure Statements with the erroneous insurance information. See id. ¶¶ 37-44.
Relator asserts that each of the allegedly false documents was submitted for the purpose of, and as a prerequisite to, receiving payment. Each document also allegedly had the purpose and effect of concealing Defendants' improper receipt of payment for insurance costs and their obligation to repay such amounts to the government. Defendants also allegedly failed to report their contracting misconduct as required by their respective contracts and PRAs. Relator further contends that absent the false certifications contained in these documents, Defendants would not have been entitled to charge the government for the unallowable insurance costs. See id. at ¶¶ 51-54.
The Second Amended Complaint makes four general allegations. First, each Disclosure Statement submitted to the government from 1989 to 1994 and authorized by Defendants' management, asserted that their insurance coverage was purchased when they were actually self-insured. Second, each defense contract executed by Defendants contained a false certification of compliance with the CAS because Defendants failed to completely and accurately disclose all of the cost accounting practices that formed the basis of calculating their insurance costs. Third, each Certificate of Indirect Cost submitted to the government and authorized by Defendants' management falsely certified that the insurance costs included in their indirect cost billing proposals and pricing rates were allowable. Fourth, each Progress Bill submitted to the government and authorized by Defendants' management included unallowable charges for insurance costs based on false certifications of compliance with the contract and CAS.See id. at ¶¶ 48-50.
Based on these allegations, Relator asserts the following three claims, pleaded in five counts, against the Defendants:
(1) Counts one and three against UTC and NSI, respectively, allege that from 1987 to 1994, Defendants knowingly presented to the United States Government fraudulent periodic Progress Bills and Certificates of Indirect Cost, which contained false claims in order to obtain payment on its contracts in violation of FCA § 3729(a)(1). These claims also maintain that Defendants knowingly made or used, or caused to be made or used, the false records or statements in the Progress Bills and Certificates, as well as in Disclosure Statements, contracts and PRA reports, to get a false claim paid by the government in violation of FCA § 3729(a)(2).
(2) Counts two and four against UTC and NSI, respectively, allege that from 1987-94, Defendants knowingly made or used, or caused to be made or used, false statements in their Progress Bills, Certificates of Indirect Cost, Disclosure Statements, contracts and PRA reports in order to conceal, avoid, or decrease their obligations to the government in violation of FCA § 3729(a)(7) (2).
(3) Count five alleges that as of May 1990, UTC knowingly conspired with NSI to defraud the government by purporting to investigate NSI's alleged violations, but instead entered into an unlawful agreement with NSI to conceal the wrongdoings from the government and to allow NSI to continue the misconduct in violation of FCA § 3729(a)(3). See id. at ¶¶ 62-65.
The paragraphs for each of the last four claims are apparently misnumbered. The reference is to all paragraphs in part IV of the Second Amended Complaint, pages 23-27.
II. Legal Standards
A. Dismissal for Failure to State a Claim
A complaint may not be dismissed under Fed.R.Civ.P. 12(b)(6) for failure to state a claim unless it "`appears beyond doubt that the plaintiff [or relator] can prove no set of facts in support of his claim which would entitle him to relief.'"MacDonald v. Safir, 206 F.3d 183, 190 (2d Cir. 2000) (quotingConley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)). In deciding a motion to dismiss, the court accepts all well-pleaded factual allegations as true, and draws all reasonable inferences in a light most favorable to the relator. See id. The issue at this stage of litigation is not whether a relator might ultimately prevail on his claim, but whether he is entitled to offer evidence in support of the allegations in the complaint. See Scheur v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974), overruled on other grounds, Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012, 82 L.Ed.2d 139 (1984). "While the pleading standard is a liberal one, bald assertions and conclusions of law will not suffice." Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996)
B. Dismissal for Failure to Plead Fraud with Particularity
When a party asserts fraud in its complaint, "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). FCA claims must comply with Rule 9(b). See Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1477 (2d Cir. 1995) (collecting cases). In order to satisfy Rule 9(b), a complaint must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Antian v. Coutts Bank (Switzerland) Ltd. 193 F.3d 85, 88 (2d Cir. 1999) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994)). The purpose of the specificity requirement is to ensure that the complaint provides a defendant with fair notice of a plaintiff's claim and adequate information to frame a response. See O'Brien v. Nat'l Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). The general rule that pleadings are to be construed in the light most favorable to the pleader and accepted as true applies to the Rule 9(b) particularity requirements. See Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990)
Despite the requirement that fraud be pleaded with particularity, fraud "allegations may be based on information and belief when facts are peculiarly within the opposing party's knowledge." Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). However, "where pleading is permitted on information and belief, a complaint must adduce specific facts supporting a strong inference of fraud" in order to satisfy the Rule 9(b) standard. Id. Failure to satisfy Rule 9(b) generally results in dismissal of the complaint without prejudice. See In re Time Warner Sec. Litig., 9 F.3d 259, 266 (2d Cir. 1993) ("dismissal under Rule 9(b) is usually without prejudice") (citing Luce v. Edelstein, 802 F.2d 49, 56-57 (2d Cir. 1986)).
III. Discussion
The FCA provides a remedy for "all fraudulent attempts to cause the Government to pay out sums of money." United States v. Neifert-White Co., 390 U.S. 228, 233, 88 S.Ct. 959, 19 L.Ed.2d 1061 (1968). Though initially the FCA only covered fraudfeasors who presented actual claims for payment to the United States, Congress broadened the scope of the Act in 1986 by adding several provisions, three of which are relevant here. First, by adding subsection (a)-(2), the FCA was expanded to include false records or statements used to get a claim paid. Second, by adding subsection (a)(3), the FCA made conspiracies to defraud the government actionable. Third, by adding subsection (a)(7), the FCA was extended to cover reverse false claims, in which an obligation owed to the government is concealed, avoided or decreased. See FCA § 3729(a)(2), (3) (7) (adopted 1986). Today, the statute reads in pertinent part:
Any person who —
(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government a false or fraudulent claim for approval;
(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;
(3) conspires to defraud the Government by getting a false or fraudulent claim paid or approved by the Government; [or] . .
(7) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government; is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person
FCA § 3729(a) (2000)
Relator pleads three claims enumerated in five counts. Counts one and three allege violations of subsections (a)(1)(2) against UTC and NSI respectively. Counts two and four allege reverse false claims against UTC and NSI respectively for violating subsections (a)(7) (2). Count five alleges a conspiracy in violation of subsection (a)(3) against both Defendants. Each of these is addressed in turn.
A. Section 3729(a)(1)(2) Claim
Relator's first claim alleges that Defendants violated § 3729(a)(1)(2) of the FCA. He maintains that five types of documents submitted to the government, Progress Bills, Certificates Disclosure Statements, contracts, and PRA reports, constituted false claims or incorporated false records or statements in violation of subsections (a)(1) (2). Each of the documents is examined individually to determine whether Relator has sufficiently pleaded a false claim.
Although Relator contends that the Certificates were false claims within the meaning of subsection (a)(1), the court considers these documents, along with the other allegedly false statements, under subsection (a)(2) because the potential liability is now identical under both statutory provisions.
1. False Claims
The FCA defines a claim as "any request or demand . . . 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. . .." FCA § 3729(c). Because they were the only documents that requested payment, the Progress Bills sent to the government are the only claims that fall within the statutory definition of a claim. The analysis under subsection (a)(1), therefore, is limited to whether the Progress Bills are sufficiently alleged to have been false. The court finds that Relator pleads one regulatory violation that, if true, would have made certain costs charged unallowable, thereby rendering the Progress Bills false claims. See 10 U.S.C. § 2324 (i) ("The submission to an agency of a proposal for settlement of costs . . . that includes a cost that is expressly specified by statute or regulation as being unallowable, with the knowledge that such cost is unallowable, shall be subject to the provisions of . . . section 3729 of title 31.")
Regulatory compliance is the crucial determinant in verifying cost allowability and, hence, in ascertaining the falsity of a claim. See FAR § 31.205-19. The court finds Relator's allegation of FAR noncompliance actionable, but holds that CAS noncompliance, as alleged, is not.
The FAR specify that self-insurance costs are allowable so long as the contractor's self-insurance program is approved in accordance with § 28.308(a). See FAR § 31.2O5-19(a)(2)(v) Section 28.308(a), in turn, mandates the disclosure of certain information in order to obtain approval of the self-insurance program, including the method of calculating the projected average loss and disclosure of any captive insurance agreements.See FAR § 28.308(a). Relator alleges that Defendants falsely billed the government for self-insurance costs that were unallowable because they did not make the requisite disclosures or obtain approval of their self-insurance programs in violation of FAR § 28.308(a). See Sec. Am. Compl. 66 26-36.
Although not cited in the complaint, the applicability of section 28.308(a) is reasonably inferred from Relator's pleading that Defendants were "required to obtain advance approval from the Government" of its self-insurance program. Id. at ¶ 27. If, as alleged, Defendants' Progress Bills charged the government for self-insurance costs that were unallowable because the self-insurance program had not been approved in accordance with section 28.308(a), then Relator has pleaded a claim under FCA § 3729(a)(1).
Unlike the allegation of noncompliance with FAR, Defendants' alleged noncompliance with CAS fails to state a claim upon which relief can be granted. The only CAS self-insurance provision cited by Relator requires that, except for programs for retired persons, insurance costs be based on a projected average loss, not actual losses, "unless it is probable that actual losses will not differ significantly from the projected average loss. See CAS § 9904.416-50(a)(2)(i)-(iii). Relator's sole reference to this CAS provision erroneously states: "any contractor that selfinsures (or insures through a captive insurance company) may not charge its actual losses to government contracts." Sec. Am. Compl. ¶ 27. As Relator acknowledges in his memorandum, this allegation misstates the regulation. See Opp'n [Doc. No. 76] at 55 n. 40 (June 15, 1998) ("CAS 416-50 permits charging actual losses where a contractor maintains an approved and disclosed program of self-insurance"). Not only is the allegation wrong as a matter of law, it is also redundant, reiterating in the wrong regulatory context the cognizable claim that Defendants sought unallowable insurance costs by failing to disclose and obtain approval for their self-insurance program. This is not the type of pleading deficiency that could be remedied with more factual embellishment because it merely parrots Relator's primary allegation that self-insurance costs are "unallowable when charged under an undisclosed and unapproved program." Id. Therefore, to the extent Relator seeks to rely on CAS subsection 416-50 in support of his claim, it is dismissed with prejudice.
The court finds that Relator has sufficiently pleaded an FCA subsection (a)(1) violation because the Progress Bills contained costs that, as alleged in the Second Amended Complaint, were not allowable. The purported non-compliance with FAR section 28.308(a), as alleged, could have lead to the submission of unallowable costs in Defendants' Progress Bills, which, if true, would violate the FCA. Therefore, except as it pertains to the nonactionable CAS section 416-50, the court holds that the Second Amended Complaint states a cognizable claim that Defendants submitted false Progress Bills to the government for payment in violation of FCA § 3729(a)(1).
2. False Statements
In addition to the Progress Bills, Relator alleges that falsity was contained in other documents, which were prerequisites to the payment of false claims contained in the Progress Bills. Although these supporting documents — Certificates, Disclosure Statements, contracts and PRA reports — cannot be classified as claims under subsection (a)(1), they may be actionable under subsection (a)(2).
In order for a false statement to raise FCA liability under subsection (a)(2), it must serve as a prerequisite to payment by the government. See FCA § 3729(a)(2). Every circuit that has addressed the issue agrees that a violation of a statute or regulation does not, by itself, trigger FCA liability because "it is the false certification of compliance which creates liability when certification is a prerequisite to obtaining a government benefit." United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) ("Violations of laws, rules, or regulations alone do not create a cause of action under the FCA."); accord United States ex rel. Siewick v. Jamieson Science Eng'g, Inc., 214 F.3d 1372, 1375 (D.C. Cir. 2000) ("A false certification of compliance with a statute or regulation cannot serve as the basis for a qui tam action under the FCA unless payment is conditioned on that certification."); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786 (4th Cir. 1999).
Courts have recognized a wide variety of claims under the FCA based on a contractor's false certification of regulatory or statutory compliance. See, e.q., United States ex rel. Thompson v. Columbia/HCA Healtheare Corp., 125 F.3d 899, 902 (5th Cir. 1997) (holding that false certifications of compliance with Medicare statutes were actionable under the FCA); Ab-Tech Constr., Inc. v. United States, 31 Fed. Cl. 429 (1994), aff'd, 57 F.3d 1084 (Fed. Cir. 1995) (finding FCA liability for false certifications of compliance with the requirements of a Small Business Administration minority contracting program); United States v. Incorporated Village of Island Park, 888 F. Supp. 419, 434-36, 440-41 (E.D.N.Y. 1995) (deciding that false certifications of non-compliance with the Fair Housing Act and with affirmative action policies constituted FCA violations).
Relator alleges that the false records or statements contained in the supporting documents were used to facilitate false claims in violation of FCA § 3729(a)(2). of these five types of documents, only the first two — the Certificates and Progress Bills — verify compliance with regulatory provisions and, hence, function as prerequisites for payment. Because only the Certificates certify compliance with the FAR provision that Defendants allegedly violated, only Certificates are actionable under FCA subsection (a)(2) for falsely certifying regulatory compliance in order to get a claim paid.
The FAR explicitly preclude the government from accepting any proposal to establish billing rates or final indirect cost rates "unless the costs have been certified by the contractor using the certificate of indirect costs." FAR § 242.770-2. Without a certification that the cost billed is allowable, the government's ACO must excise the cost from the proposal. See 10 U.S.C. § 2324 (a). By certifying its allowability, the Certificate thus serves as a precondition to the payment of an indirect cost. Relator contends that Defendants submitted false Certificates knowing that the disclosure of a FAR violation would render those costs unallowable. Hence, the alleged falsity contained in the Certificates would constitute a false statement made to receive a fraudulent payment in violation of FCA § 3729(a)(2).
Like Certificates, the certifications in Progress Bills are prerequisites to payment. The Progress Bill certification assures the government that the costs included on the bill are consistent with the requirements of the contract." FAR § 53.301-1443. Although a Progress Bill does not certify compliance with any particular regulation, it effectively certifies adherence to the CAS because the contract to which it certified its consistency must include a clause requiring the contractor to "comply with all CAS." FAR § 52.230-2(a)(3); see also § 31.201-2(a). Unlike Certificates, however, Progress Bills are not actionable in this case under FCA subsection (a)(2) because the certification included with Progress Bills only certifies compliance with CAS, not FAR. Having determined that only alleged noncompliance with FAR section 28.308 states a valid claim, Progress Bills cannot be cognizable in this case under FCA § 3729(a)(2) as false statements made in order to get fraudulent claims paid.
Alleged non-compliance with the contract itself does not constitute a false statement under FCA § 3729(a)(2) because it does not contain a certification that is a prerequisite to payment of a claim. The FCA does not provide a remedy for contractual noncompliance where payment is not conditioned upon compliance with the terms of the contract. Here, the contract is not alleged to contain any certification that the costs billed are allowable, and therefore cannot be considered a false statement in order to get a false claim paid. Relator's subsection (a)(2) claim is consequently not cognizable based on the contract absent the requisite certification.
Nor does Relator provide any indication as to how the Disclosure Statements or PRA reports were fraudulently used to obtain payment from the government. The Disclosure Statements may be used in the negotiation of prices leading to contracts, but are not a prerequisite to obtaining payment. See FAR § 9903.303. Although contractors must submit complete and accurate Disclosure Statements, a mistaken disclosure — even one made knowingly — does not trigger FCA liability because payment of a claim is not conditioned on the accuracy of a Disclosure Statement. See id.; see also Thompson, 125 F.3d at 902 ("where the government has conditioned payment of a claim upon a claimant's certification of compliance with, for example, a statute or regulation, a claimant submits a false or fraudulent claim when he or she falsely certifies compliance with that statute or regulation."); Hopper, 91 F.3d at 1267 ("Mere regulatory violations do not give rise to a viable FCA action.").
As for the PRA reports, Relator claims only that Defendants knowingly submitted false reports pursuant to the PRAs; he does not allege that such reports induced the payment of a false claim. See Sec. Am. Compl. ¶¶ 55-61. Because neither Disclosure Statements nor PRA reports were necessary antecedents to a claim for payment, and because neither the Progress Bills nor contracts falsely certified that costs billed were allowable, alleged falsity contained in these documents is not actionable under FCA § 3729(a)(2). Therefore, just as the subsection (a)(1) claim is limited to Progress Bills, only Certificates may support a subsection (a)(2) claim. Because counts one and three each allege combined violations of subsections (a)(1) and (a)(2), both Progress Bills and Certificates are actionable to support these claims in tandem.
B. Section 3729(a)(7)(2) Claims
Relator's third and fourth claims for relief allege reverse false claims against UTC and NSI, respectively, in violation of FCA § 3729(a)(7)(2). Having determined that only Certificates are actionable under subsection (a)(2), see section III.A.2, supra, at pp. 18-22, only those documents will be considered in support of the reverse false claims.
Subsection (a)(7) is known as the "reverse false claims" provision because it covers claims of money owed to the government, rather than payments made by the government as in subsection (a)(1). See generally Seena Foster, Annotation,Construction and Application of "Reverse False Claim Provision" of False Claims Act, 162 A.L.R. Fed. 147 (2000) (reviewing recent subsection (a)(7) rulings). The court holds that Relator has failed to plead actionable reverse false claims against Defendants.
In order to state a claim under subsection (a)(7), one must allege that a false statement made for the purpose of decreasing, concealing, or avoiding an obligation to the government incurred a loss to the United States. See FCA § 3729(a)(7). The dispositive element is a presently existing obligation to pay the government. See, e.q. United States v. Pemco Aeroplex, Inc., 195 F.3d 1234, 1236-38 (11th Cir. 1999); United States v. p Int'l Courier, Inc., 131 F.3d 770, 773 (8th Cir. 1997). The payment obligation may arise under a contract or may be created by statute or regulation. See, e.q., Pemco, 195 F.3d at 1238 (finding violation of subsection (a)(7) where defendant breached its contractual obligation to submit an inventory of excess property); United States v. Raymond Whitcomb Co., 53 F. Supp. 2 d 436, 445-46 (S.D.N.Y. 1999) (holding that postal rate rules created an obligation to pay the government for any underpayment arising from the defendant's improper use of the rates)
A potential penalty, however, does not suffice to state a subsection (a)(7) claim because such potential penalties do not constitute an existing obligation. See Int'l Courier, 131 F.3d at 773 ("A defendant must have had a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness."); American Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190 F.3d 729, 736 (6th Cir. 1999) ("A reverse false claim action cannot proceed without proof that the defendant made a false record or statement at a time that the defendant owed to the government an obligation sufficiently certain to give rise to an action of debt at common law."); United States ex rel. Lamers v. City of Green Bay, 998 F. Supp. 971 (E.D. Wis. 1998), aff'd, 168 F.3d 1013 (7th Cir. 1999); but see Pickens v. Kanawha River Towing, 916 F. Supp. 702, 707 (S.D. Ohio 1996) (holding that allegation of failure to record an illegal oil spill in order to avoid a potential fine stated a claim under § 3729(a)(7)). Accordingly, the court does not construe the penalty provisions of the FCA and 10 U.S.C. § 2324 (b) as cognizable under subsection (a)(7) as these penalties are only potential, not existing, obligations.
The FCA does not define the term "obligation" and its legislative history sheds little light on the intended meaning. Although the Senate may have contemplated potential claims to be actionable under subsection (a)(7), it did not equate potential claims with potential penalties or obligations. See S. Rep. No. 99-345, at 14, reprinted in, 6 U.S.C.C.A.N. 5266, 5283 (1986) ("The question of whether the False Claims Act covers situations where, by means of false financial statements or accounting reports, a person attempts to defeat or reduce the amount of a claim or potential claim by the United States against him, has been the subject of differing judicial interpretations.") (emphasis added); see also United States v. McNinch, 356 U.S. 595, 599, 78 S.Ct. 950, 2 L.Ed.2d 1001 (1958) ("[T]he False Claims Act was not designed to reach every kind of fraud practiced on the Government."); John T. Boese, Civil False Claims and Qui Tam Actions 2-39 (1999 Supp.) ("[an] expansive interpretation of Section (a)(7), if adopted broadly, would have had the potential to significantly expand False Claims Act jurisdiction into areas not involving the expenditure of Federal funds.")
Although Certificates and Progress Bills were allegedly submitted for the purpose of concealing an obligation to repay insurance costs to the government, see Sec. Am. Compl. ¶ 53, these documents only certified compliance with CAS, not FAR. Having determined that only alleged noncompliance with FAR, not CAS, states a valid claim, alleged false certifications of regulatory compliance with the CAS are not cognizable in this case under FCA subsection (a)(7). Although all contracts must contain a clause whereby the contractor agrees to an automatic cost allowance adjustment if it fails to comply with CAS, see FAR § 52.230-3(a), there is no analogous automatic reimbursement provision predicated on compliance with the self-insurance approval provision; FAR § 28.308(a). Relator's third and fourth claims for relief are therefore dismissed with prejudice.
C. § 3729(a)(3) Claim
Relator's fifth claim for relief maintains that Defendants knowingly conspired to defraud the government in violation of FCA § 3729(a)(3). He alleges that UTC purported to undertake an independent investigation of NSI's misconduct reported by Relator, but instead of correcting the wrongdoings, UTC entered into an unlawful understanding and agreement with NSI to conceal the fraud from the government and continue the improper activity.See Sec. Am. Compl. at 26-27.
There are three elements to an FCA conspiracy claim: (1) a conspiracy with one or more persons to get a false claim paid by the United States, or to conceal, avoid, or decrease an obligation owed to the government; (2) an act in furtherance of the conspiracy by one of the conspirators; and (3) damages suffered as a result of the false claim. See FCA § 3729(3);Blusal Meats, Inc. v. United States, 638 F. Supp. 824, 828 (S.D.N.Y. 1986), aff'd, 817 F.2d 1007 (2d Cir. 1987). Although Relator adequately alleges the third element, that the United States suffered damages as a consequence of paying a false claim, he fails to provide sufficient facts to plead the first two elements of a conspiracy. The complaint merely alludes to an agreement between Defendants and does not specify the particulars of how and when that alleged conspiracy arose, who entered into it, or what act was committed in furtherance of the conspiracy. Such general allegations of conspiracy do not meet the particularity standards required by Fed.R.Civ.P. 9(b). See Center Cadillac, Inc. v. Bank Leumi Trust Co. of New York, 808 F. Supp. 213, 230 (S.D.N.Y. 1992) ("General allegations that defendants "conspired' in alleged scheme to defraud do not sufficiently attribute fraud to each individual defendant and do not satisfy requirements of pleading fraud with particularity."), aff'd, 99 F.3d 401 (2d Cir. 1995). Consequently, Relator's fifth claim alleging an FCA § 3729(a)(3) conspiracy is dismissed without prejudice pursuant to Fed.R.Civ.P. 9(b).
D. Statute of Limitations
Defendants argue that Relator's allegations relate to conduct which occurred prior to December 5, 1988, exactly six years before the first complaint was filed, and are therefore barred by the applicable statute of limitations. See FCA § 3731(b). That provision reads:
(b) A civil action under section 3730 may not be brought —
(1) more than 6 years after the date on which the violation of section 3729 is committed, or (2) more than 3 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.
FCA § 3731(b) (2000).
Because the language of subsection (b)(2) applies only to qui tam actions in which the government intervenes, the court need only consider the six-year limitation period of subsection (b)(1) in this case. See United States ex rel. El Amin v. George Washington Univ., 26 F. Supp.2d 162, 172 (D.D.C. 1998) ("The plain language of the statute implies that 31 U.S.C. § 3731 (b)(2) only applies to an action in which the government decides to intervene."); United States ex. rel. Thistlethwaite v. Dowty Woodville Polvmer, Ltd., 6 F. Supp.2d 263, 265 (S.D.N.Y. 1998). This six-year period "begins to run on the date the claim is made, or, if the claim is paid, on the date of payment." United States ex rel.. Kreindler Kreindler v. United Technologies Corp., 985 F.2d 1148, 1157 (2d Cir. 1993).
Accordingly, Relator may only adduce evidence of falsity for claims submitted after December 5, 1988, six years before the filing of the first complaint. Alleged false claims submitted prior to that date, or other documents offered in support of such untimely claims, are time-barred. Documents that predate the complaint by more than six years but relate to claims submitted within the six-year limitations period may be offered to show the falsity of those claims not barred by FCA § 3731(b)(1).
IV. Conclusion
For the foregoing reasons, Defendants' Motion to Dismiss [Doc. No. 52] is GRANTED in part and DENIED in part. As to the first and third counts alleging violations of FCA § 3729(a)(1) (2), the motion is denied except as those claims rely on Disclosure Statements, contracts or PRA reports, which are dismissed with prejudice. To the extent the alleged noncompliance with GAS section 416-50 is pleaded to support a claim, it is dismissed with prejudice. As to counts two and four asserted under subsection (a)(7), the motion is granted and the claims dismissed with prejudice. As to count five purporting to allege a conspiracy between NSI and UTC, the motion is granted and the claim dismissed without prejudice. Relator shall file within 60 days a final amended complaint to conform the pleadings to this ruling within the confines of Fed.R.Civ.P. 15(c).
So ordered.