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U.S. v. Norden Systems, Inc.

United States District Court, D. Connecticut
Aug 24, 2000
No. 3:94-cv-963(EBB) (D. Conn. Aug. 24, 2000)

Opinion

No. 3:94-cv-963(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 Walter M. Drake ("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 depreciation costs charged to the government unallowable, Relator has properly stated cognizable claims under FCA § 3729(a)(1), (2)(7) against NSI, but has failed to state a claim against UTC, 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. 53] (Dec. 17, 1997).

This ruling 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 thee 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.

In addition to the FAR, the CAS specify other factors that pertain to the andowability of certain types of indirect costs such as capitalization and depreciation. For example, capitalization must be based on a consistently-applied, written policy. See CAS § 9904.404-40(a) ("Capitalization shall be based upon a written policy that is reasonable and consistently applied."). That written capitalization policy must provide for the "identification of asset accounting units to the maximum extent practical," CAS § 9904.404-40(b)(3), and the separate capitalization of fixed assets at the time they are acquired. See id. at § 9904.404-50(f). When any such asset is disposed of, the contractor must remove it from the asset account and must capitalize any replacement. See id. The CAS also forbid charging the government for depreciation on an item unrelated to a government contract. See CAS § 9904.409-40(b). In addition to the CAS requirements, the FAR disallow charges for taxes paid on real property not used in connection with work on government contracts. See FAR § 31.205-41(b)(5).

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 ("Disclosure Statement") revealing its cost accounting practices and procedures, see FAR § 9903.202-1; the contractor remains "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 PRAs, 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. ¶¶ 56-58.

B. Drake Action

In June 1994, Relator, who was NSI's Supervisor of Facilities Accounting, 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 Notice [Doc. No. 27] (June 2, 1997). Relator has twice amended his complaint.See Am. Compl. [Doc. No. 29] (July 7, 1997); Sec. Am. Compl. [Doc. No. 53] (Dec. 17, 1997) . Defendants now move to dismiss the second of these two amended complaints. See Defs.' Mot. to Dismiss [Doc. No. 621 and Mem. in Supp. [Doc. No. 63] (Jan. 27, 1998); Defs.' Reply [Doc. No. 91] (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 a amicus curiae. See Gov't Br.[Doc. No. 80] and App. [Doc. No. 81] (August 3, 1998).

Relator alleges that from 1987 to 1994 NSI, a government contractor subject to the CAS, included improper depreciation costs in the Progress Bills it sent to the United States.See Sec. Am. Compl. ¶¶ 5-7. In accordance with CAS § 9904.404-40, NSI's parent company, UTC, adopted a Finance Manual ("Manual") setting forth policies and procedures to be followed by NSI and its other subsidiaries in contracting matters. Section 9.1-IV of the Manual purportedly required NSI to create and maintain a separate property and depreciation record for each asset being capitalized. To facilitate the identification process of its fixed assets, the Manual allegedly compelled NSI to utilize a sequentially numbered tagging system, maintain a current record of each item's location, conduct a complete physical inventory on a regular basis and verify at least 80% of the assets cataloged on NSI's general ledger and master list. Section 29 of the Manual, as alleged, provided that no modifications to NSI's fixed asset depreciation practices could be made without advance notice and submission of appropriate cost impact proposals to the government. See id. at ¶¶ 8-10(f).

Relator alleges that NSI knowingly overstated the allowable depreciation costs in its Progress Bills through several different channels. First, he accuses NSI of charging the government for depreciation costs on non-existent assets and not following the disclosed, government-approved procedures for identifying, capitalizing and depreciating tangible assets. Relator claims that in 1986 he determined that NSI had not complied with the compulsory fixed asset procedures listed in the Manual. Upon conducting a physical inventory of NSI's plant, Relator purportedly discovered that almost half of NSI's approximately $100 million of fixed assets remained untagged and/or unverified, and that millions of dollars in claimed fixed assets did not even exist. Furthermore, he contends that NSI removed, relocated or abandoned fixed assets without performing the paperwork required by the Manual. Relator names numerous members of NSI's Finance Department and several managers responsible for NSI's fixed asset procedures, whom he purportedly made aware of the discrepancies and non-compliance. See id. at ¶¶ 28-32.

Second, Relator maintains that NSI improperly claimed depreciation in 1988 and thereafter for over $27 million of assets, which it allegedly wrote off of its financial statements and hid by establishing undisclosed "contra" accounts. NSI supposedly implemented the contra accounts methodology without submitting a cost impact analysis to the United States, or updating its Disclosure Statements to reveal the new practice. The utilization of this practice contradicted the information provided by the Disclosure Statements, which reported that NSI used the same method of calculating depreciation in its government cost submissions as it did in its financial statements. The contra accounts also allegedly were not in accordance with the policies enumerated in the Manual. Relator claims to have informed NSI's management that the implementation of contra accounts violated the FAR, but management did not respond. See id. at ¶¶ 35-44.

Third, Relator asserts that between 1984 and 1991 NSI, acting through its Chief Financial Officer, sought and obtained payment of unallowable depreciation based on the improper capitalization of at least one MilVax I computer and a PDP 11/70 system. The MilVax I was allegedly improperly depreciated after it had been sold. The MilVax I depreciation charges also purportedly included the costs of contract losses sustained by NSI for the manufacture of a PDP 11/70 system built under a nongovernment contract.See id. at ¶ 45.

Aside from his accusations regarding depreciation costs, Relator also accuses NSI's Data Systems Division of improperly charging the costs of developing product lines required under its MilVax I contracts to Independent Research and Development, in order to obtain costs that would have otherwise remained unrecoverable. See id. at ¶ 46. Relator also claims to have determined that, while NSI maintained roughly $9 million of non-existent fixed assets that had been fully depreciated on its "Master List," it still billed the government for the superfluous property tax it was paying on those assets as part of its general overhead expenses. NSI removed the non-existent assets from the list once Relator brought the matter to management's attention, but did not refund the surplus tax payments to the government and continued to include such property tax costs in the final indirect cost rates and Progress Bills.See id. at ¶¶ 47-49.

Relator contends that in 1991 he contacted UTC's Director of Internal Audit and Director of Compliance Audit to request an inquiry into NSI's alleged misconduct. He claims that the investigation proved ineffective, and NSI allegedly continued, with UTC's knowledge, to improperly bill the government for fixed asset depreciation. See id. at ¶¶ 50-55.

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. 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 depreciation costs. See id. at ¶¶ 67-72.

The Second Amended Complaint makes four general allegations. First, NSI's yearly proposals to establish final indirect cost rates included farse Certificates attesting that the indirect costs submitted in the proposal were allowable. Second, all of NSI's contracts contained a false certification that it would comply fully with the CAS and make complete and accurate disclosures of all cost accounting practices. Third, NSI's Progress Bills seeking interim payment on its contracts from the government contained false certifications. Fourth, Defendants failed to report their contracting misconduct as required by the PRAs. See id. ¶¶ 60-72.

Based on these allegations, Relator pleads the following four claims against Defendants, the first two of which are asserted against NSI, the third against UTC and the fourth against both Defendants:

(1) From 1987 through 1994, NSI knowingly presented to the United States Government fraudulent periodic Progress Bills and Certificates in order to obtain payment on its contracts in violation of FCA § 3729(a)(1) . This claim also maintains that NSI 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) From 1987 through 1994, NSI knowingly made or used, or caused to be made or used, false statements in its Progress Bills, Certificates, 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) From 1987 through 1994, UTC knowingly made or used, or caused to be made or used, false statements or omissions in its reports to the government pursuant to its PRAs to conceal, avoid, or decrease an obligation to pay the government in violation of FCA § 3729(a)(7) (2); and

(4) As of January 1992, 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 ¶¶ 73-76.

The paragraphs for each of the last three claims are apparently misnumbered. The reference is to all paragraphs on pages 24-26 of the Second Amended Complaint.

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) (quoting Conley 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 thg 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 four claims. Count one alleges a violation of subsections (a)(1)(2) against NSI. Counts two and three allege reverse false claims against NSI and UTC respectively for violating subsections (a)(7)(2). Count four 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 Against NSI

Relator's first claim alleges that NSI 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 several regulatory violations 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.").

Compliance with the CAS is the crucial determinant in verifying cost allowability and, hence, in ascertaining the falsity of a claim. See FAR § 31.201-2(a)(3). The CAS mandate that a contractor base its capitalization upon a consistently — applied written policy that, among other provisions, directs the contractor to separately identify asset accountability units. See CAS § 9904.404 — 40(b)(3) — 50(f). NSI's policy, as alleged, required the company to create a tagging system for identifying fixed assets, maintain a current record for locating fixed assets, and verify over 80% of the fixed assets by conducting regular inventory reviews. See Sec. Am. Compl. ¶ 8. The Second Amended Complaint amply alleges that NSI did not follow these CAS-mandated policies, thereby pleading an FCA violation because regulatory noncompliance would have rendered the costs claimed in the Progress Bills unallowable. See id. at ¶¶ 28-32.

NSI's capitalization policy also provided that no change in NSI's fixed asset depreciation practices could be made without advance notification to the government. The Second Amended Complaint alleges that, by implementing undisclosed "contra" accounts to conceal NSI's write-off of $27.5 million of fixed assets, NSI failed to act in accordance with its CAS-mandated policies and thereby sought the payment of false claims in violation of the FCA. This allegation further supports an actionable claim under subsection (a)(1). See id. at ¶¶ 35 — 44.

The CAS further require a contractor to separately capitalize its fixed assets and to remove those items from its asset accounts once they are disposed of. See CAS § 9904.404-50(f) ("Asset accountability units shall be identified and separately capitalized at the time the assets are acquired. However, whether or not the contractor identifies and separately capitalizes a unit initially, the contractor shall remove the unit from the asset accounts when it is disposed of . . .. ") . By purportedly including at least one MilVax I computer on its list of fixed assets after that computer had been sold, NSI allegedly charged the United States an unallowable cost for which there may be FCA liability. Although Relator bears the burden of ultimately showing that NSI did not credit the unallowable portion of the MilVax I costs back to the government, for the purposes of pleading, he need only allege the violation notwithstanding potential exceptions. See FAR § 31.201-5. His Second Amended Complaint sufficiently accomplishes this task. Id. at ¶ 45.

Contrary to Defendants' contention, Relator alleged the MilVax I violations with the requisite specificity for pleading fraud under Rule 9(b). Relator identified each member of NSI's Finance Department who was aware of the error, states that the fraudulent activity was committed after he conducted the 1987 inventory, and explains that the inclusion of the MilVax I was fraudulent because it had been sold to a third party and was thus not properly capitalized or depreciable. See Sec. Am. Compl. 45.

Relator also pleads that NSI further violated CAS § 9904.404-50(f) in connection with the manufacture of the PDP 11/70 system. By allegedly including charges within its MilVax I account for contract losses sustained by the manufacture of the PDP 11/70, NSI may have failed to separately capitalize this asset in violation of CAS subsection 50(f) . In addition to subsection 50(f), NSI is alleged to have violated another regulatory provision because the PDP 11/70 system was allegedly built under a non-government contract in violation of the CAS, which forbids charging the government for depreciation on an item unrelated to a government contract. See CAS § 9904.409-40(b) (stating that the depreciation cost of a fixed asset "may be charged directly to cost objectives only if such charges are made on the basis of usage"). The Second Amended Complaint thus pleads an actionable claim for costs associated with the PDP 11/70 by alleging Two violations of CAS, § 9904.404 — 50(f) and § 9909.404 — 40(b). See Sec. Am. Compl. at ¶ 45.

In addition to CAS, the FAR explicitly identify certain types of costs that are unallowable as well. One of these unallowable charges is for "taxes . . . on real or personal property . . . which is used solely in connection with work other than on Government contracts." FAR § 31.205 — 41(b)(5). The $9 million in property taxes NSI allegedly paid on non-existent (ergo, non-contract) fixed assets for which it subsequently charged the government would, if true, qualify as this type of unallowable expenditure. See Sec. Am. Compl. ¶¶ 47- 49. Relator's FCA claim under subsection (a)(1) is thus cognizable for alleging violations of both CAS and FAR.

The only allegedly unallowable costs for which Relator has failed to state a claim are those related to Independent Research and Development. See Sec. Am. Compl. ¶ 47. This general allegation does not provide the requisite detail under Rule 9(b) to indicate why NSI could not charge MilVax I costs to the Independent Research and Development account or when it allegedly did so. To the extent count one relies on Independent Research and Development costs, that claim is dismissed without 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 UTC's fixed asset policies, the use of "contra" accounts, the improper depreciation of the MilVax I computers and PDP 11/70 system, and the inapplicable charges for property taxes, as alleged, could have lead to the submission of unallowable costs in NSI's Progress Bills, which, if true, would violate the FCA. Therefore, except as it pertains to the Independent Research and Development charges, the court finds that the Second Amended Complaint states a cognizable claim that NSI 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 1372r 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.g., United States ex rel. Thompson v. Columbia/HCA Healthcare 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. Therefore, only Certificates and Progress Bills are actionable under 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 NSI submitted false Certificates knowing that the disclosure of CAS and FAR violations 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).

The same rationale applies to the certification included with NSI's Progress Bills. This 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). Like Certificates, the certifications in Progress Bills are prerequisites to payment, cognizable under FCA § 3729(a)(2) as false statements made in order to get fraudulent claims paid.

Non-compliance with the contract itself, however, may 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.")

In addition, Disclosure Statements, though mandatory for all CAS-covered contracts, are not a cost accounting standard, and therefore play no role in determining allowability. See FAR § 31.201 — 2(a)(3). This provision only considers "standards promulgated by the CAS Board" when deciding the allowability of a cost; it does not examine the reporting methods required of the contractors. Id. (emphasis added); but see United States ex rel. Schumer v. Hughes Aircraft Co., 63 F.3d 1512, 1525 (9th Cir. 1995) (finding false Disclosure Statement actionable for failing to accurately disclose practice of accumulating costs), vacated, 520 U.S. 939, 117 S.Ct. 1871, 138 L.Ed.2d 135 (1997).

As for the PRA reports, Relator claims only that Defendants knowingly submitted false reports pursuant to the Present Responsibility Agreements; he does not allege that such reports induced the payment of a false claim. See Sec. Am. Compl. ¶¶ 56 58. Because neither Disclosure Statements nor PRA reports were necessary antecedents to a claim for payment, and because the contracts did not certify that costs billed were allowable, alleged falsity contained in these documents is not actionable under FCA § 3729(a)(2). Therefore, only Progress Bills and Certificates may support a subsection (a)(2) claim.

B. Section 3729(a)(7)(2) Claims Against NSI and UTC

Relator's second and third claims for relief allege reverse false claims against NSI and UTC, respectively, in violation of FCA § 3729(a)(7)(2). Having determined that only Certificates and Progress Bills are actionable under subsection(a)(2), see section III.A.2, supra, at pp. 20-25, 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 of False Claims Act, 162 A.L.R. Fed. 147 (2000) (reviewing recent subsection (a)(7) rulings) . The court holds that Relator sufficiently pleads a cognizable subsection (a)(7) claim against NSI but not against UTC.

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, United States v. Pemco Aeroplex, Inc., 195 F.3d 1234, 1236 — 38 (11th Cir. 1999); United States v. 0 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.g., 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.2d 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 O 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 Oui 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.")

Relator in the present case has detailed enough facts to plead a subsection (a)(7) cause of action against NSI. NSI's Certificates and Progress Bill certifications were allegedly submitted for the purpose of concealing an obligation to repay depreciation costs to the government. See Sec. Am. Compl. ¶ 71. The FAR requires the contractor to place the following clause in each contract:

The Contractor . . . shall . . . [a]gree to an adjustment of the contract price or cost allowance, as appropriate, if the Contractor or subcontractor fails to comply with the applicable CAS or to follow any cost accounting practice, and such failure results in any increased costs paid by the United States.

FAR § 52.230-3(a). Although Relator did not specify this provision of the FAR in the complaint, he enumerates several alleged regulatory violations throughout the Second Amended Complaint. By alleging that NSI failed to comply with the CAS, Relator sufficiently pleads an actionable (a)(7) claim that NSI's regulatory noncompliance breached of its existing contractual obligations, resulting in reimbursable costs billed to the government.

Relator's reverse false claim against UTC, by contrast, cannot allege regulatory violations of the CAS because, unlike the contract-based claim against NSI, the subsection (a)(7) allegations pertaining to UTC are predicated solely on the PRAs. Unlike NSI's contract, which contains the above-quoted clause prescribed by FAR, the PRAs do not contain any language prescribed by regulation that would make disallowed costs automatically reimbursable. NSI's contract incorporates regulatory compliance as a condition or term, the breach of which would result in liability to the government for cost adjustments under the clause required by FAR § 52.230-3. Unlike NSI's contract, UTC's PRAs do not embody a similar FAR-mandated contractual provision, which would result in an automatic price adjustment for regulatory noncompliance. Consequently the PRA reports — even if false — would not incur an obligation for UTC to reimburse the government for disallowed costs. Relator's third claim for relief, the reverse false claim against UTC, is therefore dismissed with prejudice.

C. § 3729(a)(3) Claim Against both Defendants

Relator's fourth claim for relief maintains that UTC and NSI 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. ¶¶ 51 — 55, 59.

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 fourth 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 June 14, 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 Polymer, Ltd., 6 F. Supp. 2 d 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 June 14, 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. 62] is GRANTED in part and DENIED in part. As to counts one and two alleging violations of FCA § 3729(a)(1),(2)(7) against NSI, 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 fraudulent charging of MilVax I costs to the Independent Research and Development account is pleaded to support a claim, it is dismissed without prejudice. As to count three asserted under subsection (a)(7) against UTC, the motion is granted and the claim dismissed with prejudice. As to count four 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.


Summaries of

U.S. v. Norden Systems, Inc.

United States District Court, D. Connecticut
Aug 24, 2000
No. 3:94-cv-963(EBB) (D. Conn. Aug. 24, 2000)
Case details for

U.S. v. Norden Systems, Inc.

Case Details

Full title:UNITED STATES OF AMERICA, ex rel. WALTER M. DRAKE, Plaintiff, v. NORDEN…

Court:United States District Court, D. Connecticut

Date published: Aug 24, 2000

Citations

No. 3:94-cv-963(EBB) (D. Conn. Aug. 24, 2000)