Category: Rule 9(b)

U.S. ex rel. SNAPP, Inc. v. Ford Motor Company, 532 F.3d 496 (6th Cir. 2008)

Once again, the stubborn judicial insistence on the magical “claim” to satisfy the requirements of Rule 9(b) has felled another detailed complaint.  In this instance, despite a detailed exposé of a fraud by one of the participants, the relator’s inability to produce a claim led to dismissal under Rule 9(b).  The Sixth Circuit then remanded for further consideration under its ruling in

United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 502 (6th Cir. 2007) (“Bledsoe II”) as to whether an amended complaint should be permitted under Rule 59.

Relator SNAPP, Inc. (“SNAPP”) brought a qui tam action under the False Claims Act alleging that Defendant Ford Motor Company (“Ford”) fraudulently induced the federal government to contract with Ford by inflating, in official reports to the government, the extent of Ford’s dealings with small and minority-owned businesses.  If true, SNAPP’s allegations show that it was an insider to Ford’s fraud.  The scheme called for Ford to subcontract with large, majority-owned businesses but then launder its payments to that large, majority-owned business through SNAPP, allegedly a small, minority owned business.  Under this scheme, SNAPP received payments only for the purpose of passing them through, while Ford reported these transactions to the government as a subcontract with a small, minority-owned business.

Moreover, SNAPP contends that it did not actually qualify as a small, minority-owned business during the operative timeframe.  The suit alleged that from 1991 until 1999, although SNAPP was nominally owned and managed by a person of color, SNAPP maintains that this nominal control was a sham.  According to SNAPP, it was controlled entirely by Ford during this eight-year period. Ford nominated the majority of Relator’s board members, its organization charts included Relator and its employees, and Ford had full control over its dealings with Relator. Moreover, SNAPP alleges that from 1995 until 1999, Relator had too many employees to qualify as a small business.

The Southern District of Ohio dismissed SNAPP’s complaint for failure to comply with Fed. R. Civ. P. 9(b), and the Sixth Circuit affirmed in the instant opinion.  The Sixth Circuit remanded, however, to enable the district court to consider the Sixth’s decision in Bledsoe II before denying Relator’s motion to file an amended complaint.

In reiterating the pleading standard of Rule 9(b) with respect to FCA actions, the Sixth Circuit repeated its maxim from Bledsoe II that a relator must provide sufficient details regarding the time, place and content of alleged false statements, claim for payment from the federal government, and the manner in which the false statements induced the government to make a claimed payment to allow defendant to adequately prepare a responsive pleading.  Pleading with particularity as to the other elements of the cause of action is not required.  Although it found sufficient particularity as to the time, place and content of alleged false statements and as to the inducement to the government, SNAPP’s claims failed because it was unable to provide a “representative” claim for payment made by Ford.

The Sixth Circuit did vacate and remand denial of SNAPP’s motion to file an amended complaint that apparently included “numerous claims for payment Ford submitted to the federal government,” which the district court had denied, ruling amendment would be futile because Relator “has simply been unable to frame its allegations within the confines of the FCA.”  The Court instructed that in reconsidering Relator’s motion in light of Bledsoe II, the “governing principle” guiding the district court’s consideration should be “whether vacating its order dismissing Relator’s complaint, and allowing the amended complaint, is required in order to prevent an injustice; and where an injustice will otherwise result, the trial judge has the duty as well as the power to order a new trial.” (citing Davis by Davis v. Jellico Community Hospital, Inc., 912 F.2d 129, 133 (1990)).

Today, an unpublished opinion by the Eleventh Circuit was picked up and electronically circulated by LexisNexis.  In the case, Mitchell v. Beverly Enterprises, Inc., Civil Action N0. 07-12055, 2007 U.S. App. Lexis 21794 (11th Cir. Sept. 7, 2007), there is a very short per curiam affirmance of a lower court’s dismissal on Rule 9(b).

Citing to its own breathtakingly bizarre precedents introducing the substantive Rule 9(b) to the FCA context, Clausen and Corsello, the Eleventh Circuit summarily affirms the lower court’s decision.  Even though the complaint alleges that the Relator observed and participated in the billing process, even though the complaint alleges billing procedures that take the information and pass it thorugh to bills to Medicare without alteration, and even though in Clausenwhere this entire mess began the Court said that this type of indicia of reliability of the claim that bills were submitted would be enough (and specifically mentioned billing policies), this case was summarily dismissed.

The disingenuous nature of the substantive Rule 9(b) cases as applied to the various complaints is found in the final paragraph of the opinion.  “[W]e agree with the district court that Mitchell did not assert that Beverly actually submitted false clalims to Medicare with sufficient particularity and the required reliability to meet the standard under Rule 9(b) for complaints under the False Claims Act.”  (emphasis added).  In other words, because the plaintiff failed to present proof of the “assertion” in the complaint, it wasn’t “specific” enough.  For fifty years, plaintiffs were expressly protected from having to prove their case at the pleading stage.  Now, without proof of the most elusive allegation in the complaint, they are summarily discharged.

Our firm recently had a huge victory in the battle to have FCA cases decided on their merits.  Up to this point, courts had been more and more tightly focusing on form over substance and, in our estimation, turning 50 years of American jurisprudence on its head.  Courts are demanding “proof” at the pleading stage and asking for “evidence” of things that whistleblowers usually do not have access to, thus dismissing countless meritorious cases, undermining Congressional intent in amending the FCA in 1986, and letting legions of people and companies who have cheated U.S. taxpayers keep their ill-gotten gains.

The underlying premise of the overreaching Rule 9(b) analysis comes from the Clausen case where the Court boldly stated that the presentment of a claim was the “sine qua non” of an FCA action.  One glaring problem with this analysis is that the submission of a claim is only required for a claim under 31 U.S.C. 3729(a)(1) and there are six other subsections.  In the Sanders case in the Sixth Circuit, this distinction was laid bare.  Therefore, our firm argued that for any claims under 3729(a)(2) or (a)(3), the Rule 9(b) analysis requiring proof of a claim did not apply.

The case is a very substantial case against the largest government contractor in the United States for what was the largest government contract–the Lockheed Martin F-22 fighter jet.  The opinion in U.S. ex rel. Howard v. Lockheed Martin Corp., Civil Action No. 1:99-CV-285 (S.D. Oh. June 28, 2007) can be found at 2007 WL 1893215 and 2007 U.S. Dist. Lexis 47029.  In following our firm’s argument, the Court held that as to the (a)(1) claims, those would be dismissed with the expectation that they would be renewed as soon as discovery provided a claim and as to the (a)(2) and (a) (3) claims, they would not be dismissed.

It is time for courts across the nation to get back to the roots of American jurisprudence in the era of the Federal Rules of Civil Procedure as identified in cases such as Conley v. Gibson, 355 U.S. 41 (1957) and Foman v. Davis, 371 U.S. 178 (1962).  As the Supreme Court said in Rotella v. Wood, 528 U.S. 549, 560 (2000), in interpreting Rule 9(b) on a motion to dismiss, we cannot ignore “the flexibility provided by Rule 11(b)(3), allowing pleadings based on evidence reasonably anticipated  after further investigation or discovery.”  There should be no more FCA cases thrown out on Rule 9(b) grounds if the pleadings are based on evidence reasonably anticipated after discovery, and, the issue of whether or not the defendant actually submitted a claim to the government is easily determined in discovery.  If the defendant did not submit any claims, there will be no (a)(1) liability.  If they did, it does not make sense to dismiss the case simply because the third-party whistleblower did not get a copy before filing the case.