SAVAGE, District Judge.
In this qui tam action brought under the
In his second amended complaint,
After briefing on the summary judgment motion was completed, the government, although it has declined to intervene in this action, submitted a Statement of Interest describing its role in the procurement of the contracts at issue. Relying on the declaration of Maureen Regan, who manages the auditors and management analysts of the Office of Contract Review ("OCR") of VA's Office of Inspector General ("VAOIG"), the government represents that VA had complete, contractually required information regarding the two contracts that had been audited.
Despite the government's unequivocal statement that it was not defrauded, Thomas has cobbled together facts that he perceives as suspicious and probative of fraud. But, he has been unable to fit them together to prove that fraud occurred. He has failed to present facts controverting the government's own admission that it had not been misled and had not been harmed. Thomas could have conducted discovery of the government, but chose not to do so.
After reviewing the evidence in the light most favorable to Thomas and drawing all reasonable inferences in his favor, we conclude that SMS is entitled to judgment as
SMS manufactures and sells CME, such as ultrasound systems, computed-tomography ("CT") scanners, magnetic-resonance imaging ("MR") scanners, and nuclear medicine ("NM") equipment to private hospitals and educational institutions, directly and through hospital group-purchasing organizations ("GPOs"), and to governmental agencies. Acuson, which was acquired by SMS's parent and became an independent SMS affiliate in 2000, manufactured and sold ultrasound equipment. Acuson was merged into SMS in 2002. Before the acquisition, SMS and Acuson had done business independently with federal, state and local governments, and commercial customers. After becoming an affiliate of SMS and before merging into SMS, Acuson continued to administer its own contracts with the federal government.
Thomas began his career in the medical device industry at Acuson, selling cardiovascular ultrasound equipment from 1989 to 2000. He was a marketing manager for two years before becoming a district sales specialist. After leaving Acuson in 2000, he worked at Broadlane, Inc., a GPO for hospitals and healthcare organizations. There, as Vice President of Capital Medical Equipment Contracting Services, he provided purchasing services to groups of hospitals, clinics, outpatient centers and private healthcare offices. In early 2004, two years after Acuson had been merged into SMS, Thomas began working at SMS. As Senior National Accounts Manager for GPO contracts, he negotiated and managed diagnostic imaging contracts with Premier, a GPO. After notifying SMS in August of 2008 of his intention to pursue claims for violations of the FCA for its alleged unlawful pricing and discount practices with respect to the government,
The contracts at issue are direct-delivery, multiple award, fixed price, indefinite delivery/indefinite quantity ("IDIQ") contracts that were administered by VA's National Acquisition Center ("VANAC").
The process for awarding direct-delivery, multiple award, fixed price, IDIQ contracts is aimed at negotiating a fair and reasonable price, not the lowest price. After VANAC announces a solicitation for CME, vendors submit initial solicitation responses on required DPI forms.
The two levels of the process may be described as the initial "qualifying" or contract stage where the vendor qualifies to bid for future sales, and the later "transactional" stage where the vendor competes with other vendors in negotiating with VA for the sale.
In reviewing solicitation responses and making determinations for awarding direct delivery CME contracts, federal government contracting officers must follow the guidance and rules contained in the FAR, Title 48 of the Code of Federal Regulations, Chapter 1. To assist in obtaining a fair and reasonable price on CME from vendors, the FAR requires that the purchasing agency obtain information regarding discounts given to the vendor's other customers that result in lower net prices than those offered to the government. The information is obtained initially from the vendor's disclosures on the DPI form, which requires the vendor to state the percentage discount from the price list that it is offering the government. See DPI, ¶ 4.a. Then, the contractor must answer whether it has:
Id., ¶ 4.b.
The DPI sets out, by way of example, a non-exclusive list of these discounts: "rebates of any kind"; "multiple quantity unit pricing plan"; "cumulative discounts of any type"; "products that may be combined for maximum discounts"; and "other." Id., ¶ 4.b.
In addition, the vendor must report the "best discount" from its price list that it offers to private hospitals, educational institutions, governments, original equipment manufacturers, and buying groups in six different discount categories: regular discount; quantity discount; aggregate discounts; prompt payment; FOB point; and other. Id., ¶ 4.c.
The form contains no instructions on how to complete it. Nor does it define the terms it uses. It does not specify whether the government is seeking information regarding contract-level or transaction-level discounts.
The contracting officer is not required to obtain the best price the vendor offers any other customer. Nonetheless, when determining "price reasonableness" or a "fair and reasonable price" in negotiating these type of contracts, the contracting officer wants to know the discounts vendors are offering their commercial customers who have comparable contractual arrangements. At the same time, the contracting officer knows that the government does not enter contracts under the same terms and conditions that commercial customers do. For example, the government does not commit to purchase from a single vendor or for a minimum volume or quantity. Additionally, the government has an opportunity to get a greater discount at the second or transactional stage. Furthermore, it is more costly to prepare and
In making a price reasonableness determination, the contracting officer considers information other than the vendor's catalog/price list. He or she also takes into account the discount price information on the DPI; the vendor's prior pricing; a comparison of proposed prices for the same or similar items offered by other contractors, both in the current solicitation and in previous ones; and market research. He or she must also consider several contract-specific factors, such as speed of delivery, warranty terms, limitations of the vendor's liability, contract length, and expected quantities. 48 C.F.R. §§ 12.209, 13.106-3(a), 15.402(a).
If the contracting officer is unable to make a price reasonableness determination or reach his or her negotiation objectives on the basis of the vendor's DPI and the other information mentioned above, he or she must seek clarification or additional disclosures from the vendor. 48 C.F.R. § 15.403-3(a)(1).
During the time period in question, VA's policy was to refer for audit responses to a solicitation for a contract estimated at a value of at least $9 million. Consequently, vendors knew that there would be an audit of the solicitation responses where the contract exceeded $9 million. That is what happened here. The responses to VA's solicitations in 2001 for ultrasound CME and in 2002 for CT and MR CME were audited, and SMS and Acuson had received advance notice from VANAC that their solicitation responses would be audited.
The purpose of performing the price reasonableness analysis is "to develop a negotiation position that permits the contracting officer and the [vendor] an opportunity to reach agreement on a ... price
Before negotiating with the vendor, the contracting officer establishes objectives, such as price, warranty terms and quality, to assist him or her in setting the government's initial negotiation position. 48 C.F.R. § 15.406-1. To establish these objectives, the contracting officer analyzes the vendor's DPI disclosures, clarifications and supplemental submissions, and any OIG audit report. Id.
The contracting officer is vested with broad discretion to negotiate the terms of the contract. 48 C.F.R. § 15.405 ("[T]he contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement."). Id. The ultimately agreed-upon price need not be "within the contracting officer's initial negotiation position." Id. After analyzing and weighing the available information regarding price and other factors, he or she makes a final determination of whether the final negotiated price is fair and reasonable to the government and the vendor, and whether to recommend that the contract be awarded. Id. The contracting officer must document, in a Price Negotiation Memorandum, the principal elements of the negotiated agreement, including the most significant factors upon which the prenegotiation objectives and final negotiated agreement were based, and the source and type of data used to support the price reasonableness determination. 48 C.F.R. § 15.406-3(a).
In determining "best value" at the transactional stage, VA considers each vendor's product price, past performance, product quality, availability of required features, reliability of service, compliance with technical requirements and ability to meet delivery time requirements.
While many of these factors are also considered in a "price reasonableness" determination, the primary differences between the two analyses are when the particular determination is made and the type of competition the vendor faces. A "price reasonableness" determination is made at the first (qualifying) stage and sets a ceiling on prices for various CME. The "best value" determination is made later, at the second (transactional) stage when VA needs a particular item of CME. At the first stage, the contracts are awarded non-competitively to multiple vendors, and the contract prices ultimately awarded are based, in part, on information on the DPI about the vendor's commercial sales pricing.
At the second (transactional) stage, all of the vendors who were awarded an umbrella contract compete with one another to make the actual sale to VA. At this stage, the contracting officer knows what VA's needs are, and can select the vendor that best meets its needs in terms of price and other factors. Because the contracting officer
Thomas seeks to ignore the government's description of the contracting process, both generally and specifically in this case. He contends that Regan's declaration and the government's statement of interest based on the declaration are not admissible evidence because they are documents written by lawyers with no personal knowledge of the underlying facts in this case. He argues that the declaration is not based on personal knowledge of the specific representations, negotiations or events in this particular case. Yet, he concedes that Regan has personal knowledge about VA's general practices and negotiation objectives.
Regan's declaration is admissible. She has the requisite personal knowledge. Her job, both at the time the contracts at issue were audited and now, was and still is to manage the auditors who conduct pre-award reviews of contract proposals submitted to VA. When the CT/MR and Acuson ultrasound contracts were audited, she supervised or managed the auditors of those proposals.
Thomas also argues that SMS's expert, Nancy Darr, is not qualified to offer testimony in this action. Darr worked in healthcare contracting at VA for twenty-three years, including as a contracting officer and ultimately as Chief Operating Officer of VANAC from 1993 to 1997.
Thomas contends that because Darr was no longer employed by VA at the time SMS submitted proposals for the contracts at issue and never worked with DPI forms "directly" while she was at VA, she is not qualified to testify as to any issues in this case.
Thomas alleges that SMS was engaged in a "multi-tiered fraud." He claims that SMS, "[c]aught in a whirlpool of increasing discount pressure by its commercial customers," developed a system to sell its CME without constantly lowering its prices by "withholding discounting and low price information from customers until absolutely forced to disclose it, only then to rationalize why the newest lowest price was not available to the inquiring customer for some fictional reason or other."
Specifically with respect to the government, Thomas alleges that SMS either hid its lowest prices from the government, or, when "caught," often "justified" those prices with deceptive, after-the-fact "explanations" that were supposedly unique to the customer receiving the lower price. When, in pre-award audits, the government attempted to "test the candor of Siemens' price disclosures," SMS produced only select data that "understated the scope and magnitude of its discounting." Thomas further claims that "through a process of repeated delays," SMS "dragged out its compliance with Government requests" for specific pieces of information, impeding the government's ability to investigate SMS's disclosures.
SMS argues that the only claims remaining in this action are based on three contracts encompassing four modalities: (1) the 2001 ultrasound contract between Acuson and VA ("2001 Acuson U/S Contract")
Thomas argues that there are three additional contracts at issue: (1) the 2001 ultrasound contract between SMS and VA ("2001 SMS U/S Contract");
What contracts are at issue is important because it determines what allegedly false statements must be examined and the scope of any damages.
The three contracts the parties agree are at issue are the 2001 Acuson U/S Contract, the 2002 CT/MR Contract and the 2003 NM Contract (collectively, "agreed-upon contracts").
On October 23, 2000, VA issued a solicitation for ultrasound imaging equipment for the contract period from the later of April 1, 2001 or the date of the award until March 31, 2002, with the option to renew the contract for two additional one-year periods. Priscilla Ryland, who managed Acuson's contracts with the government for ultrasound products, submitted Acuson's DPI response to this solicitation on December 19, 2000. VA issued a pre-award audit engagement letter on January 18, 2001. The audit and negotiations between Acuson and VA took place between January and April of 2001. Acuson submitted an amended DPI on April 11, 2001, and the contract was awarded on May 2, 2001. The final audit report was issued on July 10, 2001. This contract originally expired on April 1, 2002. By agreement, the contract was renewed twice for additional one-year periods, extending the expiration date to March 31, 2004.
SMS submitted its DPI response to this solicitation on April 9, 2002. VA issued a pre-award audit engagement letter on April 25, 2002. The audit and negotiations between SMS and VA took place between April and September of 2002. VAOIG issued a final audit report on July 25, 2002.
SMS submitted its DPI response to the solicitation in January of 2003. The contract was awarded on April 1, 2003 without an audit. Originally due to expire on March 31, 2004, it was extended to August 31, 2006.
Thomas contends that the 2001 SMS U/S Contract, the DSCP Contract and the 2000 SMS NM Contract are at issue. SMS argues that they are not.
SMS's DPI response to this solicitation was submitted on December 21, 2000. The contract was awarded on March 5, 2001. The contract, originally set to expire on April 1, 2002, was extended to March 31, 2004.
Thomas argues that this contract between SMS and VA is at issue because the Acuson U/S Contract — which is undisputedly at issue — was "merged" into the SMS U/S Contract. He asserts that the Acuson U/S Contract "novated" to SMS's U/S Contract after Siemens acquired Acuson and Acuson changed its name to "Siemens Medical Solutions USA, Inc."
Thomas's position is baseless. First, the acquisition of a company does not mean the acquired company's contracts automatically "merge" into the acquiring company's existing contracts. Second, it is not accurate that Acuson changed its name to Siemens.
A "novation" is the "displacement and extinction of an existing valid contract" through the "substitution [of it with] a valid new contract." McCarl's, Inc. v. Beaver Falls Mun. Auth., 847 A.2d 180, 184 (Pa.Commw.Ct.2004) (citation omitted); Refuse Mgmt. Sys., Inc. v. Consol. Recycling and Transfer Sys., Inc., 448 Pa.Super. 402, 671 A.2d 1140, 1145 (1996). In other words, an old obligation or an original party is replaced by a new obligation or a new party. Id. See also Black's Law Dictionary 1091 (7th ed. 1999) (defining "novation" as the "act of substituting for an old obligation a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party"). Additionally, for a novation to occur, both contracting parties must intend to extinguish their obligations under original contract and assent to the substituted contract. McCarl's, 847 A.2d at 184; Paramount Aviation Corp. v. Agusta, 178 F.3d 132, 148 (3d Cir.1999); Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1071 (3d Cir.1979).
Similarly, the FAR defines a "novation agreement" as:
In the two pieces of evidence Thomas points to in support of his novation argument — a December 2002 letter from Jo Ann Brunetti
In the 2002 letter, Brunetti said:
The August 2003 email from Sweitzer stated:
Why Sweitzer, who was not speaking as an attorney or in a legal context, used the word "novated" is unknown. Nor is there evidence to suggest what she understood the term to mean. What is clear is that despite Sweitzer's use of the word "novated," neither a novation nor a merger of the Acuson and SMS ultrasound contracts occurred. The context of the rest of the language in the email and other undisputed evidence demonstrate that there was no novation. In the two sentences preceding her reference to "novated," Sweitzer clearly states that two separate ultrasound contracts still existed. Additionally, she has since clarified, in an affidavit, that VA did not want to combine the two contracts and they remained separated "for the life of the contracts."
Because the Acuson and SMS U/S Contracts originated from the same VA solicitation for ultrasound equipment (Solicitation No. M6-Q9-00), the two contracts ran simultaneously. Both contracts' original terms ended March 31, 2002, and both were renewed for two additional one-year terms expiring on March 31, 2004. The SMS U/S Contract had been awarded two
Importantly, the two contracts continued to exist and operate independently of each other and were administered separately until both expired in March of 2004. This separateness is confirmed by numerous undisputed sources:
SMS submitted its response to the DSCP solicitation on October 30, 2000. The contract was awarded on February 12, 2002. By agreement, the original expiration date of February 11, 2003 was extended by four years to February 11, 2007.
Thomas contends that this DSCP contract is at issue because when the 2001 Acuson U/S, 2002 CT/MR and 2003 NM Contracts (the agreed-upon contracts) expired, VA began purchasing the same CME that it had purchased under those three contracts solely under the DSCP contract. Asserting that "VA treated its own contracts and the DSCP contract as interchangeable," Thomas argues that the DSCP contract and the agreed-upon VA contracts were "integrated" because the terms and conditions of the expired contracts were applied to the DSCP contract.
SMS argues that only the three agreed-upon contracts are at issue because false claims based on all other contracts were dismissed. Additionally, although SMS concedes that discounts offered to VA were "generally" the same as those offered to DSCP, it disputes that the agreed-upon VA contracts were integrated into the DSCP contract. It argues that VA never treated the contracts as "interchangeable" and the contracts were never integrated. SMS points out that the DSCP Contract was negotiated and executed by a different, separate federal agency (the Department of Defense), negotiations took place before the 2002 CT/MR and 2003 NM Contracts were negotiated, and the DSCP and VA contracts were administered independently of each other.
Thomas argues that even though he neither identified the DSCP contract nor specified any false statements SMS had made in procuring it in his second amended complaint, he is not precluded from asserting new claims based on this contract because we did not specifically prohibit him from bringing claims based on it. In ruling on SMS's motion to dismiss, we examined allegations regarding SMS's false statements made in the procurement of the agreed-upon contracts, and we considered Thomas's references to a listing of numerous other contracts that we had presumed were listed in Exhibit 8 to the complaint.
Thomas is correct that we did not expressly preclude him from presenting claims based on contracts listed in Exhibit 3 to the second amended complaint and did not specifically prohibit him from asserting claims based on the DSCP contract. At the motion to dismiss stage, Thomas never referred to the DSCP contract and created the impression that Exhibit 8 listed all seventeen additional contracts. Because his merely listing a contract is insufficient to state a false claim under the FCA, and he did not specify any false statements SMS allegedly made in procuring the DSCP contract, he cannot now bring a claim based on that contract because it was listed in a different exhibit.
In order to bring a claim based on the DSCP contract, Thomas must prove that one or more of the agreed-upon contracts novated into the DSCP contract. In support of his position that the agreed-upon contracts became integrated with the DSCP contract, he points to the following evidence. On September 22, 2004, approximately six months after the Acuson and SMS U/S Contracts expired, DSCP wrote an amendment to its contract with SMS giving VA authority to purchase CME off the DSCP contract.
Regarding the 2002 CT/MR contract, Thomas cites a 2005 letter from VANAC
Thomas also points to the similarity of the terms and conditions applied to the CME ordered under the DSCP contract to the terms and conditions applicable to the expired ultrasound and CT/MR contracts. In its response to VA's ultrasound solicitation and DSCP's multi-modality solicitation, SMS stated that its discount policy is to offer both VANAC and DSCP "the same discounts for products under contract."
We conclude that the agreed-upon VA contracts are separate from and never merged with the DSCP contract. The amendment to the DSCP contract granting VA authority to purchase off the DSCP contract the same modalities that it had purchased under the VA contracts does not, by itself, amount to an extension or novation of the expired VA contracts.
The DSCP contract was negotiated and executed by the procurement arm for the Department of Defense. The three agreed-upon contracts were negotiated by VANAC, a different federal agency. The solicitation forms, products, modalities, and contracting officers who negotiated and awarded the DSCP contract were different from those connected to the agreed-upon VA contracts. Because the parties to the contracts and the negotiations leading up to the contract awards were different, and there is no evidence of coordination, the contracts did not "merge" or become "integrated."
Because the DSCP and VA contracts were negotiated at different times by different parties and covered different products and modalities, and SMS submitted different disclosures to different agencies, any reliance VANAC contracting officers had placed on SMS's disclosures cannot be imputed to DSCP's contracting officers. Nor could SMS's "knowing" disclosure of false information to VA's contracting officers be imputed to DSCP's contracting officers. The only way these elements could be imputed from one party to another party and from one time period to another is if the DSCP contract was a novation of, or substituted contract for, the other contracts. No novation of the three agreed-upon contracts happened here. Thus, Thomas cannot prove that, in connection
As explained earlier, for a novation to occur, the new contract must be substituted for an existing valid one. This can occur only when an old obligation is replaced by a new obligation or an original party by a new party.
With respect to the DSCP contract, no new obligations or new parties replaced existing ones. Just the opposite occurred. An amendment was made to the DSCP contract between SMS and DSCP, not to the agreed-upon contracts between SMS and VA. Specifically, on September 22, 2004, DSCP and SMS signed an amendment to the contract between DSCP and SMS giving VA authority to purchase CME off the DSCP contract. None of the obligations from the VA contracts, such as discount amount or terms and conditions, were transferred or substituted by way of this amendment. Additionally, because the agreed-upon contracts had expired, they were not valid, existing contracts at the time they purportedly were "extended," "novated," or "integrated" into the DSCP contract.
Thomas has not offered any evidence identifying what CME from the VA contracts were available and at what price on the DSCP contract. He does not identify what the actual prices on the DSCP contract were in comparison to the prices for the same CME under the agreed-upon contracts. Although its practice was to offer VA and DSCP discounts that were "generally the same" for the same CME, SMS was not required to give DSCP the same discounts. SMS made a voluntary business decision to do so in most cases. If anything, SMS lowered prices on CME on the DSCP contract to bring it down to the levels of the VA contract pricing.
Additionally, even if VA purchased the same CME off the DSCP contract at the same prices that it had under the expired contracts, this does not constitute an extension or integration of the old contracts into the DSCP contract, allowing Thomas to base an FCA claim on those purchases. Thomas's fraudulent inducement claim is predicated on SMS's knowing misrepresentation of information to DSCP that was material to DSCP's decision to enter into its contracts on specific terms. There is insufficient evidence showing how DSCP decided the pricing terms, including whether it relied on SMS's allegedly fraudulent disclosures, or that it would have not agreed to those terms had it known about SMS's alleged fraudulent disclosures in negotiating the agreed-upon VA contracts. If SMS's disclosures influenced VA's contracting officers in negotiating pricing terms, it does not mean they influenced DSCP's contracting officers. Nor can SMS's "knowing" disclosure of false information to VA's contracting officers be a "knowing" false disclosure to DSCP's contracting officers.
The only connection between the expired VA contracts and the DSCP contract provided by the September 2004 amendment to the DSCP contract was that VA, a party to the old contracts, was able to order CME off of the DSCP contract. Discounts offered to VA were "generally" the same as those offered to DSCP. Thus, because no obligations from the expired agreed-upon contracts were substituted, replaced or extended, the DSCP contract is not an extension of the VA contracts.
Even assuming the VA and DSCP contracts were "integrated" and the VA contract
Similarly, as SMS aptly points out, if Thomas were permitted to bring claims based on the DSCP contract, he would be precluded from seeking damages based on purchases made under the DSCP contract before the VA contracts expired. Before the VA contracts expired, they existed independently and simultaneously with the DSCP contract before any "integration" could have occurred.
This nuclear medicine imaging contract was awarded to SMS on May 8, 2000 and expired on March 31, 2001.
Even though Thomas does not assert that this contract is at issue, his expert includes this contract in his damages calculation.
In sum, the 2001 SMS U/S Contract, the DSCP Contract and the 2000 SMS NM Contract are not at issue. The 2001 SMS U/S Contract is not at issue because the 2001 Acuson U/S Contract never merged or novated into it. Nor may Thomas pursue a claim based on the DSCP Contract because the agreed-upon VA contracts were never integrated or merged into it. Thomas may not claim damages arising under the 2000 SMS NM Contract because it was negotiated three years earlier than the 2003 nuclear medicine imaging contract at issue. Therefore, the only contracts that are at issue in this action are the three "agreed-upon" VA contracts: the 2001 Acuson U/S Contract; the 2002 CT/MR Contract; and the 2003 NM Contract.
In addition to his claim that SMS failed to disclose to the government the highest discounts it was offering commercial customers, Thomas contends, for the first time in his summary judgment papers, that SMS also had an obligation to give the government its best discounts. Thomas bases this "best price" theory on: (1) SMS's use of the term "most-favored customer" in its correspondence to the government; and (2) references in SMS internal emails, pre-award audit letters, and Senate testimony given in 2005 by a manager of VAOIG indicating that the government should get the "best price."
At oral argument, Thomas's counsel backed off this theory, conceding that the government is not entitled to the best price. He characterized "most-favored customer status" as the "price that ... Siemens was required to disclose — not give."
Contrary to Thomas's argument, SMS did not have an obligation to give the government the highest discounts on the VA contracts at issue. First, "most-favored customer" language does not appear in any contract or response to solicitation, but only in cover-letters regarding delivery — not price — terms. Second, a "most-favored customer" or "best price" has no place in a contract governed by the FAR, which sets a "fair and reasonable" standard. Third, VA did not expect to receive "most-favored customer" treatment.
Thomas argues that SMS "agreed to confer most-favored customer status on the government," and represented that "the government would enjoy most favored customer pricing and discounts."
In supplemental briefing in opposition to SMS's motion for summary judgment, Thomas asserts that his "best price" theory is not based on SMS's contractual obligation to give the government its best price, but on its false promises to give the government its best price for the purpose of inducing the government to award it contracts.
In support of his contention that SMS was obligated to give the government its "best price" based on its having granted VA "most-favored customer status," Thomas points to letters that SMS sent to VA and DSCP in conjunction with its response to government solicitations and contract negotiations for various modalities of CME. Each of these letters contains the following language:
Additionally, Thomas relies upon SMS's December 10, 2001 response to the DSCP, the procurement arm for the Department of Defense, not the VA, in connection with the solicitation for the 2002 DSCP contract, where DSCP asked:
SMS argues that the language "Siemens is compliant with the Government's Most-Favored Customer Clause" in the referenced cover letters does not mean that it is an incorporated term of the contract imposing an obligation to give the government the highest discounts. It points out that no "most-favored customer" clause appears in any of the contracts at issue, nor in any other communications between SMS and VA. Additionally, direct delivery contracts, like the contracts at issue, do not contain "most-favored customer" clauses because such clauses are inconsistent with the FAR, where "fair and reasonable price" is the standard. See 48 C.F.R. §§ 15.402, 403-3, 404-1(a)-(d), 405, 406-1.
After the parties submitted their summary judgment briefs, the government filed a declaration asserting that in direct delivery, multiple award contracts like the ones at issue, vendors are not required to give the government the best price. They are only required to identify "most-favored customer" pricing, or the best price, offered to customers. The government explains that because VA direct delivery contracts are awarded non-competitively to multiple vendors, VA contracting officers make "price reasonableness" determinations by comparing the discounts the vendor offers its commercial customers to the discounts being offered to VA. Consequently, vendors must disclose on their DPI forms the best pricing they offer their commercial customers and state whether they are offering VA this best price. Although vendors are required to disclose to VA their "most-favored customer" pricing, "there is no law, regulation, or contract provision that requires vendors to offer MFC [most-favored customer] pricing to VA."
SMS's employee, JoAnn Sweitzer, explained that the "most-favored customer"
The Summary of Award documents "incorporate" the cover letters into the contracts.
Importantly, SMS uses the "most-favored customer" language in the context of describing delivery terms or administrative matters. It does not relate to pricing of CME.
SMS's statement in response to the 2002 DSCP solicitation that "DSCP is receiving our most favored pricing for like systems" applied to a contract that is not at issue. It did not apply to the contracts in dispute.
Because the language in the cover letters states that SMS is compliant with a clause that is not included in any contract document, including any other communications between SMS and VA, and because direct delivery contracts do not contain "most-favored customer" clauses, the "most-favored customer" language in the letters sent with the responses to the contract solicitations at issue did not impose an obligation on SMS to give VA the "best price." Furthermore, because the contracts were negotiated under the FAR, which does not use the "most-favored customer" standard, the contracting officers could not have been misled by the mention of "most-favored customer" in communications regarding delivery terms.
Thomas also claims that SMS employees "understood their obligation to accord the Government the best price."
This statement does not apply here. It was submitted in response to the solicitation for the DSCP contract, which is not at issue.
Second, Thomas also relies on three internal SMS documents in support of his "best price" claim. The first, a November 2005 email between SMS division managers, states that "[VA] should be at the best price compared to pricing offered other customers."
All three documents were created in, and pertain to, the period from 2005 to 2008, after the relevant time period in this case. More importantly, none of them demonstrates that SMS had a "contractual obligation" or was "contractually bound" to give the government the best price. They were not representations made to the government. At most, they reveal SMS's policy or business decision — not its obligation — to give the government the lowest price.
In support of his argument that the government communicated to SMS its "concern that it receive the best price," Thomas relies on two types of evidence. He cites the language in the pre-award audit letters for the Acuson ultrasound audit and the SMS CT/MR audit, in which VAOIG stated that the primary purpose of the audit was to determine whether the "proposed prices and discounts were equal to or better than those offered to the offeror's most-favored customers."
Neither the pre-award audit letters nor the Senate testimony supports Thomas's theory that the government communicated
The cited Senate testimony does not support the notion that SMS had an obligation to give VA the best price or that VA was entitled to the best price. Rather, it supports what SMS acknowledges is the standard — the government determines whether the prices offered are "fair and reasonable," and strives to get the best possible price for itself, taking into consideration factors other than price.
The application of Thomas's "best price" theory underscores its flaws. The vendor is already required to disclose its best price, which is the price the government would get under his theory. In his scheme, there would be no room for negotiations. In this case, SMS disclosed to VA numerous discounts it was giving to non-governmental customers that were greater than the discounts it was offering VA, negotiations ensued, and VA accepted SMS's lower discount offer. The negotiations involved numerous terms of the contract, not just price. The price may have been adjusted by more favorable other terms, such as delivery time, quality of product, and customized product features. In other words, VA did not insist on receiving a greater discount. If it had been entitled to or promised the "best price," VA would have awarded the contract based on SMS's highest commercial discount without engaging in any negotiations. Why would VA have gone through negotiations and accepted less than the lowest price if there was a best price obligation or promise? That VA awarded a contract based on the lower, offered discount demonstrates that SMS did not have a contractual obligation to give the government the best price.
We conclude that although it was required to disclose to VA the highest contract discounts that it gave to private customers, SMS had no obligation to offer VA the "best price" or greatest discount given to any customer. Thus, liability based on a best price or most-favored customer theory fails.
Summary judgment is appropriate if the movant shows "that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). Judgment will be entered against a party who fails to sufficiently establish any element essential to that party's case and who bears the ultimate burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In examining the motion, we must draw all reasonable inferences in the nonmovant's favor. InterVest, Inc. v. Bloomberg, L.P., 340 F.3d 144, 159-60 (3d Cir.2003).
The initial burden of demonstrating there are no genuine issues of material fact falls on the moving party. Fed. R.Civ.P. 56(a). Once the moving party has met its burden, the nonmoving party must counter with "`specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citation omitted). The nonmovant must show more than the "mere existence of a scintilla of evidence" for elements on which she bears the burden of production. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Bare assertions, conclusory allegations or suspicions are not sufficient to defeat summary judgment. Fireman's Ins. Co. v. DuFresne, 676 F.2d 965, 969 (3d Cir.1982). Thus, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'" Matsushita, 475 U.S. at 587, 106 S.Ct. 1348 (citation omitted).
Thomas asserts claims
To establish a prima facie case under the FCA, the relator must prove that the defendant made or submitted a materially false statement or claim to the government, and the defendant knew the statement or claim was false or fraudulent. United States ex rel. Hefner v. Hackensack Univ. Med. Ctr., 495 F.3d 103, 109 (3d Cir.2007); Harrison v. Westinghouse Savannah River Co. ("Harrison I"), 176 F.3d 776, 788 (4th Cir.1999). To constitute a "claim" under the Act, the fraudulent statement or action must "have the purpose and effect of causing the government to pay out money." Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 183 (3d Cir.2001) (citation omitted).
This is not a typical false claims action where the defendant is alleged to have given an inaccurate description of goods or services provided, or requested reimbursement for goods or services not provided. Indeed, Thomas acknowledges that on invoices to VA for payment for CME, SMS neither misidentified the CME actually provided to VA nor billed VA for equipment not supplied. Instead, Thomas pursues a fraudulent inducement theory, alleging that SMS made false representations and omitted pertinent information that fraudulently induced the government to enter into the contracts at issue.
A relator may bring an action under the FCA based on invoices submitted to the government which are deemed false claims because they were for payment pursuant to contracts that were fraudulently induced.
To survive summary judgment, Thomas must show that there are genuine issues of material fact regarding whether SMS made knowingly false statements or omissions. If he does, then he must demonstrate that there are factual disputes about the materiality of those statements and omissions, and whether they induced the government to enter into the contracts with SMS.
To establish knowledge under the FCA, a relator must prove that the defendant acted with actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of information. Hefner, 495 F.3d at 109 (quoting 31 U.S.C. § 3729(b)). Specific intent to defraud is not required. Id. Yet, Congress has expressed "`its intention that the [A]ct not punish honest mistakes or incorrect claims submitted through mere negligence.'" Id. (quoting United States ex rel. Hochman v. Nackman, 145 F.3d 1069, 1073 (9th Cir. 1998). Without more than a relator's subjective interpretation of an imprecise contractual provision, a defendant's reasonable interpretation of its legal obligation precludes a finding that the defendant had knowledge of its falsity. United States ex rel. K & R Ltd. P'ship v. Mass. Hous. Fin. Agency, 530 F.3d 980, 983-84 (D.C.Cir. 2008); Wilson, 525 F.3d at 378; United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir.1999). Further, if the defendant knew that despite the government's awareness of the statement's falsity it "was willing to pay anyway," the defendant "cannot be said to have knowingly presented a fraudulent or false claim." United States v. Southland Mgmt. Corp., 326 F.3d 669, 682 (5th Cir. 2003) (concurring opinion); United States ex rel. Marquis v. Northrop Grumman Corp., No. 09-7704, 2013 WL 951095, at *2 (N.D.Ill. Mar. 12, 2013) ("[T]he Government's knowledge and approval of the particulars of a claim for payment before that claim is presented ... effectively negates the fraud or falsity required by the FCA.") (citation omitted); United States v. Bollinger Shipyards, Inc., No. 12-920, 2013 WL 393037, at *6 (E.D.La. Jan. 30, 2013) (where government alleged the defendant knowingly misled the Coast Guard to enter into a contract for the lengthening of the Coast Guard cutters by falsifying data relating to the structural strength of the converted vessels, a "fraud in the inducement theory ... misses the mark" where "the government acknowledges that it knew" about the design specifications the defendant proposed to use to construct a vessel and proceeded with the contract with that understanding); United States Dep't of Transp. ex rel. Arnold v. CMC Eng'g, Inc., 947 F.Supp.2d 537, 545 (W.D.Pa.2013) ("`when the government knows and approves of the facts underlying an allegedly false claim prior to presentment, an inference arises that the claim was not knowingly submitted, regardless
"[The FCA] was not intended to impose liability for every false statement made to the government." Hutchins, 253 F.3d at 184 (citation omitted). The statute "`is only intended to cover instances of fraud that might result in financial loss to the Government.'" United States ex rel. Sanders v. American-Amicable Life Ins. Co. of Texas, 545 F.3d 256, 259 (3d Cir. 2008) (quoting Hutchins, 253 F.3d at 183). Thus, there is liability under the FCA only for fraudulent activity or claims that "`cause or would cause economic loss to the government.'" Id. (quoting Hutchins, 253 F.3d at 179).
A statement or omission is material if it has a "`natural tendency to influence or [was] capable of influencing the government's funding decision.'" See, e.g., United States ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Grp., Inc., 400 F.3d 428, 445 (6th Cir.2005) (citation omitted); United States ex rel. Berge v. Bd. of Trs. of the Univ. of Ala., 104 F.3d 1453, 1459 (4th Cir.1997). The materiality inquiry "`focuses on the potential effect of the false statement when it was made, not on its actual effect when it is discovered.'" A+ Homecare, 400 F.3d at 445 (quoting United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 916-17 (4th Cir.2003) ("Harrison II")); Longhi, 575 F.3d at 458 (to be material, the false or fraudulent statements need only have the "potential to influence the government's decisions."). Additionally, omitted information that a defendant had no obligation to disclose cannot be deemed material. Berge, 104 F.3d at 1461 (4th Cir.1997) ("There can only be liability under the [FCA] where the defendant has an obligation to disclose the omitted information.") (citation omitted). Thus, to survive summary judgment on materiality, Thomas must point to information omitted from the DPI that was capable of influencing VA in the negotiations and award of the contracts at issue.
To prevail under his fraudulent inducement theory, Thomas must prove not only that the omitted information was material but also that the government was induced by, or relied on, the fraudulent statement or omission when it awarded the contract. Hess, 317 U.S. at 543-44, 63 S.Ct. 379. In essence, the essential element of inducement or reliance is one of causation. Thomas must show that the false statements upon which VA relied, assuming he establishes that it did, caused VA to award the contract at the rate that it did.
In Hess, an FCA fraudulent inducement claim was established because the federal government would not have approved funding payments to the defendant electrical contractors pursuant to contracts they obtained with local municipalities had its agents known that the defendants obtained the contracts through fraudulent collusive bid-rigging. The Supreme Court held that because the contracts were awarded "as the result of the fraudulent bidding," the defendants "caused the government to pay claims" that were false. Id. at 543, 63 S.Ct. 379 (emphasis added). In other words, to establish FCA liability for fraudulent inducement, the false statement must have "caused" or "induced" the government to enter into a contract, such that but for the misrepresentation, the government would not have awarded the contract and would not have paid the claim. Harrison I, 176 F.3d at 794 (relator stated claim for fraud-in-the-inducement where he alleged the defendant made intentional misrepresentations to the government about matters material to the government's decision to grant a subcontract, and these false statements caused the government to pay
Once it is determined that a contract has been procured by fraud, then each claim — though not false on its face — that is submitted under the falsely procured contract constitutes a false claim. As stated in Hess, once it was shown that the government entered into the contract "because of" the collusive bidding, the:
Id. at 543-44, 63 S.Ct. 379.
Thomas argues that he need not prove that the government relied on the statement because the inducement or reliance element is duplicative of the materiality element. He states that it "would serve no purpose to require a relator to show that a statement has a natural tendency to influence or was capable of influencing the government if the relator also had to prove the government was in fact induced to act. The cases under the FCA don't require that."
Thomas is correct that in a typical FCA case, such as one based on government payment for goods or services not provided, there is no reliance or inducement requirement. In those cases, the "submitter of a `false claim' or `statement' is liable for a civil penalty, regardless of whether the submission of the claim actually causes the government any damages; even if the claim is rejected, its very submission is a basis for liability." Bettis, 393 F.3d at 1326 (citation omitted). But, for a claim based on the fraudulent inducement of a contract, a plaintiff is also required to show that the government relied on, or was induced by, a material false
As the Hess Court explained, FCA liability based on facially true claims submitted under the contract was predicated on the threshold showing that collusive bidding caused the government to award the contract. 317 U.S. at 543, 63 S.Ct. 379. Only then could the "taint" of the initial fraudulent action reach every subsequent claim submitted under the contract. Thus, before Thomas can claim that any purchase made pursuant to the contracts at issue constituted a false claim, he must first show that fraudulent statements made by SMS induced the government to enter into a contract that it would not have entered into but for the misrepresentations.
Requiring reliance in a fraudulent inducement case makes sense. In a typical FCA claim, the rationale for finding liability even in the absence of the government's actual loss of funds is that the FCA covers all fraudulent attempts to cause the government to pay money. United States ex rel. Quinn v. Omnicare, Inc., 382 F.3d 432, 438 (3d Cir.2004) (citing Harrison I, 176 F.3d at 788); United States v. Neifert-White Co., 390 U.S. 228, 232, 88 S.Ct. 959, 19 L.Ed.2d 1061 (1968). A claim for payment that is false on its face is a classic example of an attempt to cause the government to pay money based on false pretenses. In contrast, in a fraudulent inducement case each claim for payment is not false on its face. The liability in that instance attaches to the "facially true" claim for payment because it "derived from the original fraudulent misrepresentation." Longhi, 575 F.3d at 467-68. If a false statement did not actually cause the government to award the contract, then the claims paid under the contract did not derive from an original fraudulent misrepresentation. A false statement made in the process of procuring a contract is not the same as a false claim for payment submitted to the government. Thus, the FCA requires the plaintiff in a fraudulent inducement case to establish that the decision to award a contract was actually, not just potentially, based on a false statement.
Put another way, in an ordinary FCA case, a defendant who has merely attempted to obtain payment from the government by submitting a claim containing a materially false statement will be held liable under the FCA, even if the government rejects the claim and pays out no money. In contrast, in a fraudulent inducement case, a defendant who attempts to induce a contract award by making a materially false statement will not be held liable for making a false claim unless the government relied on and was induced by the false statement to award the contract. An attempted fraud is not enough — it must be an accomplished fraud.
In summary, materiality and inducement are separate and distinct elements. Proving materiality does not prove inducement or reliance. Even if the false statement is material, there is no violation unless the government relied on it. Thus, Thomas must prove both materiality and inducement to make out a fraudulent inducement claim under the FCA.
Thomas relies on United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir.2009), and United States v. Eghbal, 475 F.Supp.2d 1008
Eghbal is a false certification case
Finally, in addition to proving that SMS knowingly made a materially false statement that induced the government to award it a contract, in order to prevail on his claims under the FCA and recover damages, Thomas must show loss causation. He must establish that VA suffered damages because of SMS's false or fraudulent conduct. See Longhi, 575 F.3d at 467
SMS contends that Thomas must show both that a false statement or omission caused VA to award a contract at an inflated price and the contract price caused the invoices at the point of sale to be inflated. It argues that Thomas has no evidence that the government could or would have negotiated a higher contract discount had it seen the higher discounts that SMS purportedly omitted from its DPI forms and audit disclosures. It further asserts that because the government had an opportunity to negotiate additional, greater discounts at the transactional stage when purchasing an actual item of CME, and most, if not all, of the transactions had higher discounts than the contract rate, Thomas cannot show a causal link between the contract price and the final, actual price VA separately negotiated at the transactional level for each purchase order. Because individualized "best value" determinations determined the final prices for CME for each transaction, SMS contends that this is an intervening factor that breaks the chain of causation from a false statement to the ultimate claim for payment.
Thomas contends that competitive negotiation at the transactional level does not cure SMS's fraud. He argues that the "lower discounts in the contracts tainted the negotiated prices at the transaction level," and that one cannot determine what the best value at the transactional stage would have been because the price arrived at in the first stage was higher than it should have been.
Because a "best value" analysis, which the government applies at the transactional stage, necessarily starts from the contract price, it is possible that if a contract award contains lower discounts than the government would have obtained absent the fraud, this could affect the final, negotiated transactional price. However, before reaching this issue, Thomas must show that a knowingly false, material statement or omission caused VA to award a contract with a lower discount than it otherwise would have obtained.
Thomas alleges that in its DPI responses to VA solicitations for capital medical equipment contracts and in its responses to the audits of those solicitation responses, SMS made false representations by omitting greater discounts it had given to
Thomas alleges that SMS tried to hide information about higher discounts it had given to non-governmental customers by "engag[ing] in a studied practice of trip, stumble and delay in responding to the Government's inquiries regarding the sale of CME to commercial customers."
Thomas contends that once "caught" and forced to disclose the higher discounts during the audit process, both Acuson and SMS employed a scheme using pretextual codes in sales data to falsely justify, often after the fact, why the discounts to commercial customers were greater than those being offered to the government. At Acuson, the scheme used "Y Codes." At SMS, the vehicle was called "justifications."
Thomas also alleges that SMS falsely induced the government to enter into these contracts by calling the government its "most favored customer" and falsely promising to give the government its "best price." He asserts that his "best price" theory is not based on SMS's contractual obligation to give the government its best price, but on its false promise to give the government its best price in order to induce the government to award it contracts.
SMS counters that there are no facts from which one could reasonably infer that SMS knowingly submitted any false statements to the government. It contends that the undisputed facts show that the DPI did not have an unambiguous plain meaning and that VA accepted multiple interpretations of the disclosures required and did not require SMS, Acuson or any other vendor to complete the DPI in any particular manner. SMS argues that it completed the DPI with its understanding that the DPI required disclosure of the highest comparable contractual discounts, while Acuson interpreted the DPI as requiring disclosure of the highest comparable transactional discounts.
SMS explains that discounts given as part of group buys, which SMS entered into with Broadlane and other GPOs, are not comparable to the contractual or transactional discounts negotiated with the government and other non-GPO purchasers. Group buys are a means of aggregating buyers of CME in order to secure higher discounts from a vendor. These arrangements
SMS adds that because VA never informed SMS that it was completing the DPI incorrectly and still awarded it the three contracts after two full audits and one full review of its disclosures, incorporating the final DPI submission into the respective contracts, SMS could not have known that its DPI was false or incorrect. In other words, having learned during the audits how SMS treated the discounts for disclosure purposes, VA implicitly accepted SMS's interpretation of the DPI requirements.
SMS also contests each alleged false statement or omission that Thomas alleges was made. Alternatively, it argues that even if there is a factual issue as to the truth or falsity of any statements made or omitted, Thomas has not proffered sufficient evidence to show that any of the statements or omissions was material to VA's decision to award the contracts or that VA relied on, or was misled by, the purportedly missing or false information. Put another way, it contends that Thomas was required, but failed, to produce affirmative evidence to show that SMS's alleged promises to give the government the "best price" and its omissions of higher discounts actually induced VA to award the contracts at issue.
SMS argues that Thomas has introduced no evidence, fact or expert, showing that any purported false statements or omissions caused VA to enter into the contracts at inflated prices. Nor has he produced evidence that the contracts resulted in inflated prices at the point of sale of CME. VA applied an individualized "best value" determination when it separately negotiated the price on each CME purchase after the contract was awarded, that is, at the second tier, transactional stage. A "best value" determination involves consideration of many factors other than contract price. SMS contends that VA actually received discounts on CME that were greater than those in the contract. Because Thomas did not take discovery of the government on the relationship between the alleged false statements and the prices that the government would have negotiated had VA had the correct information,
In support of his allegation that SMS tried to keep damaging information about SMS from the government, Thomas points to two emails VAOIG sent to SMS in connection with two audits — one of the CT/MR contract and the other of a contract not at issue — and an email string between SMS employees regarding production of documents in connection with an audit of another contract not at issue. In the first email from VAOIG, sent on May 13, 2002 in connection with a solicitation not at issue (No. M6-Q1-01), Brenda Lindsey, a management analyst at VAOIG's Office of Contract Review, stated that she was "still awaiting the spreadsheet with the explanations for those discounts that are higher than what is offered to the government."
The emails from VAOIG show nothing more than a delay in responding. They do not establish, directly or indirectly, that SMS concealed or ultimately failed to produce information about CME sales. Nor is there any evidence that SMS withheld information from the government that was material to its decision to award a contract that it otherwise would not have awarded. The emails between Sasala and Friend were comments about documents pertaining to an X-Ray equipment audit of a proposal for a contract that is not at issue.
Indeed, it is undisputed that SMS sought to comply with VAOIG's request for information. Friend directed Sasala to provide copies of the GPO contracts to VAOIG, with confidential names redacted, obviating the need for VAOIG to have to issue a "friendly subpoena." Thus, any implication that SMS withheld the requested information is not supported by any evidence, direct or indirect.
According to Thomas, "Y Codes" were pretextual codes used by Acuson in its sales data to justify higher discounts given to certain customers rather than others, especially the government.
In the 1990's, Acuson faced "enormous pricing pressure" from the prevalence of discounting and increases in discount rates by competitors.
To support his Y Codes theory, Thomas relies on the following: (1) his own affidavit; (2) the Declaration of Don Birdsey, who, from 1989 to 2001, was a sales representative and regional sales manager for the sale of ultrasound equipment, first at Acuson and then at SMS; (3) the deposition testimony of Victoria Hibbits, a former Acuson employee; and (4) a fax from Ralph Gross.
According to Birdsey, in order to "make the sale," he and other salespersons were giving higher discounts to large commercial customers than to the government. Hibbits instructed them to use Y codes at Acuson, called "justifications" at SMS, to conceal from the government that private customers were getting better pricing. Sales personnel were directed — often after a sale was finalized and the equipment had been delivered — to ask Acuson's "Quote Department" to "create another, backdated quote ... that would include a specified `Y code.'"
Hibbits and Bertrand, SMS's 30(b)(6) witness, explained the evolution of Acuson's use of Y Codes. The practice was developed to explain to a third-party information vendor, MD Buyline, why the terms and conditions for CME sales to commercial and non-commercial customers were not identical. Third-party information vendors, like MD Buyline, provide to its subscribers, individual hospitals, information needed to purchase medical equipment meeting the buyer's particular technical, clinical, economic and other requirements at the best price. In exchange for its services, MD Buyline required its clients to provide it with the quote and final purchase order with respect to each purchase of CME. MD Buyline compiled and sold this data.
Acuson asked MD Buyline to stop reporting pricing information without sufficient detail to distinguish one discount from another. By late 1991, MD Buyline agreed to report why certain discounts were given as long as Acuson better detailed its transactions. Consequently, Acuson developed Y Codes in order to give MD Buyline more detailed pricing information to better understand Acuson's various discounts.
Y Codes identified the different types of customers and defined the differences between the terms of the various transactions. Eventually, they were used for both commercial and government accounts. According to Thomas and Birdsey, the Y Code system was used later at SMS, where they were called "justifications."
Thomas acknowledges that there is "nothing inherently improper about creating a system to categorize discount levels based on legitimate reasons" or "anything inherently wrong with having justifications for giving discounts."
Acuson used the following Y Codes to identify discounts: (1) Volume — purchasing more than one product and/or system; (2) Committed Compliance — large number of hospitals and facilities within a single medical system committed to buying the CME; (3) Group Buy — leader of an affiliation of hospitals enters into a contract with a CME manufacturer, which allows the affiliated hospitals to buy CME at discounted prices "loosely based on the terms negotiated at the group buy"; (4) Demonstration Site — customer agrees to provide on-site demonstrations for potential customers to observe how to use the equipment; (5) Customer Referral Site (Luminary) — large, nationally recognized customers with clinical expertise willing to discuss and recommend the CME to other at trade shows or educational programs; (6) Image Acquisition Site — customers
Thomas admits that while at Acuson, he offered customers discounts based on the first nine of these Y Codes, and that competitors in the industry offered discounts on the same basis.
Thomas acknowledges that he had occasionally "inadvertently neglected" to provide a Y Code for a transaction. Yet, he argues it is improper to correct an incomplete and misleading record of the transaction at a later time. He inexplicably claims it was wrong for the Quote Department to require him to provide a proper Y Code after the sale had been finalized, even where he had failed to provide one when he should have.
Nevertheless, despite his current position, Thomas admits having provided post-sale justifications for commercial transactions that received discounts higher than offered the government and other commercial customers. For example, in 2004, Thomas and Larry Hedgepeth were tasked with providing MD Buyline with actual post-sale explanations for certain high discounts SMS had provided to MD Buyline members. Specifically, Thomas had to determine whether discounts SMS had previously given to certain members of MD Buyline were justifiably higher than discounts being offered later to other MD Buyline members.
In support of his allegation that Y Codes were pretextual, post-sale explanations for giving non-governmental customers higher discounts, Thomas points to two circumstances where, in his view, employees of Acuson and SMS were unable to come up with a legitimate Y Code or justification for the higher discount. Specifically, he contends that in October of 2004, Kristy Carpenter, National Accounts Manager for SMS's Acuson Division, told Thomas that she was involved in a VA audit of the Division's ultrasound equipment sales and that she was "hard-pressed to explain to the government why over 85% of the division's sales to private customers contained discounts that exceeded those given to the government."
Even if Carpenter's statements related to a contract at issue, they do not show that Acuson made any false statements. Just because Carpenter may have been "hard pressed to explain" the higher discounts does not mean that there was no valid explanation for them. Nor does her "using the usual Y Codes" mean that they did not apply to each transaction to which she assigned them. Nothing in her comments can be construed as meaning that the codes did not accurately and truthfully explain the reason for each higher discount.
The second circumstance Thomas cites is in connection with the 2002 CT/MR audit, where, in response to VA's request for commercial CT transaction sales data, an SMS employee told another employee that he "would not be able to prove special conditions for every order."
This communication between two SMS employees does not prove that the discounts were unjustified or inexplicable. The employee was directed to examine notes on the purchase order in SMS's SAP data system to find the explanation for the discounts. He was not instructed to fabricate reasons for them. Additionally, there is no evidence that the information was not ultimately located and provided. Finally, there is no evidence that the codes used were fabrications.
We shall now address each of the false statements that Thomas alleges SMS and Acuson made in violation of the FCA.
Thomas contends that VAOIG's questioning several of Acuson's explanations for higher discounts given to certain customers in the course of the Acuson ultrasound audit proves that Y Code justifications were pretextual. He points to the DPI for the ultrasound solicitation in which Acuson offered VA a 43% discount on Sequoia and Aspen ultrasound equipment.
In its draft audit report, VAOIG concluded: "We believe that the programs mentioned above are sales strategies to increase the sales officials' accounts.... Based on our conversations with the [four] customers, we concluded that they were not performing any duties that would make them non-comparable to the Government."
The undisputed evidence demonstrates that VA could not have been misled by Acuson's allegedly inadequate disclosures in the DPI and the pre-award audit. The issues were fully reviewed by and resolved with the VA contracting officer prior to the contract award and after accepting Acuson's revised disclosures, which Thomas does not contend were deficient or false. On April 10, 2001, Ralph Gross, the VA contracting officer, faxed excerpts of VAOIG's draft audit report to Ryland, who managed Acuson's contracts with the government for ultrasound products and submitted Acuson's DPI response to VA's ultrasound solicitation. Gross characterized the auditor's findings as determining that the "Discount and Pricing Information [on] page 3 was not accurate[,] complete or current."
In the same fax, using the information in the draft audit report, Gross then negotiated with Ryland. Gross demanded greater discounts, stating: "Taking the middle of the discounts offered [to Acuson's commercial customers and the government, VA] needs to have the discounts for Sequoia increased to 48% and the Aspen to 50%."
When informed of VAOIG's findings about Acuson's commercial customers' denial of participation in the partnership programs, Acuson disputed VAOIG's conclusions. It explained to VAOIG that it had contacted the wrong people at the four customer sites. Acuson gave VAOIG different
Whether VAOIG contacted the four commercial customers using the new contact information is not relevant to our inquiry. If VAOIG contacted the four persons identified by SMS, it either did or did not confirm that the customers participated in the partnership program. If VAOIG did not contact them, Gross relied on the auditor's draft report, which concluded that the customers did not participate in the program. Either way, when Gross negotiated the contract, he had the information he considered necessary.
Basing his negotiating position on VAOIG's findings, Gross negotiated new discount terms in his letter to Acuson, which enclosed the draft auditor's report. Although Gross knew that the auditor had determined that the DPI was "not accurate, complete or current," and that, in the auditor's view, customers who were receiving higher discounts than the offer made to VA were not performing any duties that would make them non-comparable to the government, he still engaged in a typical post-audit negotiation. Knowing that Acuson had given a 56% discount on Sequoia products and 59% on Aspen products, as compared to the 43% discount offered VA in the initial DPI, Gross did not demand the highest discount rate Acuson had given other customers. Instead, he took the "middle of the discounts offered."
What Gross did was consistent with how the typical audit and negotiation process between VA and a commercial vendor works. As Regan explained:
As part of the process, OCR examines the vendor's disclosures of commercial sales transaction data to: (1) determine whether the DPI was accurate, current, and complete; (2) determine whether prices being offered are fair and reasonable; and (3) make recommendations to the contracting officer for negotiations to obtain a fair and reasonable price. That is precisely what Gross and the VAOIG auditor did. The fact that the auditor determined that the DPI was "not accurate, complete or current" does not render the vendor's disclosures false. Pursuing a typical
Regan confirmed that the negotiating process in which the government and Acuson engaged was typical with respect to the 2001 Acuson ultrasound pre-award audit. She stated that the transactional sales data Acuson produced in support of the offer to VA "showed that discounts offered to commercial customers were greater for all product lines than those being offered the Government."
Aware of all of the facts that Thomas asserts were fraudulent, the government has made it clear that VA had not been misled and cheated. Counsel for the government stated:
At the time it awarded the contract, VA was aware that the transactional sales data produced by Acuson in support of its offer to VA revealed higher discounts offered to commercial customers than were being offered the government.
Additionally, after conducting "an in-depth review and analysis of programs that Acuson represented distinguished VA from commercial customers who received larger discounts,"
Thomas's counsel further argued that even if the audit had been completed,
In sum, there is no evidence that any of Acuson's disclosures or omissions in its DPI or during the pre-award audit were false. Nor has Thomas produced any evidence that VA was misled into awarding Acuson the ultrasound contract. Although the record reveals that VAOIG initially questioned Acuson's explanations for why some commercial customers were receiving higher discounts than what Acuson offered VA, Thomas has adduced no evidence showing that the omitted information regarding the higher discounts on the DPI or Acuson's providing allegedly false reasons for the larger discounts had any effect on VA's ultimate decision to award the contract after additional facts became known. Without any testimonial or documentary evidence that VA's contracting officer was not provided the information he required and that additional disclosures would have affected his negotiating position and enabled him to have negotiated a higher contract discount than actually obtained, the original DPI alone cannot support a false claim under the FCA. On the contrary, the only evidence bearing on materiality and reliance is the Regan declaration that undisputedly establishes that VA neither relied on nor was misled by false information in the DPI or the audit. Thomas has not produced any evidence that disputes or tends to dispute Regan's statements. Thus, there is no genuine issue of fact from which a reasonable jury
Thomas asserts that SMS "lied" when it represented on its DPI for the NM solicitation that its highest discounts to non-governmental customers was a 56% "Regular Discount" because SMS had given Broadlane a 66% discount on the same equipment.
On its NM DPI, SMS identified its October 2002 "catalog/pricelist" as the basis for its offer to VA.
Ignoring SMS's answer that it had given the above discounts, Thomas attacks SMS's answer to Question 4.c, which asked:
A table of customer categories and types of discounts follows this question, where the applicant must report the "best discount" from its "price list" that it offers to private hospitals, educational institutions, governments, original equipment manufacturers and buying groups in six different discount categories: regular discount; quantity discount; aggregate discounts; prompt payment; FOB point; and other. In its response, SMS listed 56% as its highest "regular discount" to someone other than VA.
SMS properly did not list the 66% discount to Broadlane. SMS documents created at the time of the solicitation response indicate that the 60% contract discount offered to the VA was the highest comparable commercial discount SMS offered.
The only configuration for nuclear imaging CME that SMS sold to Broadlane that had an effective discount rate close to 66% was the configuration for the E. Com Variable Angle System, which had an effective discount rate of 64.69%. To account for these different configurations, SMS disclosed in answer to Question 4.b that it had "in effect, for any customer or any class, discounts, ... regardless of price list, which results in lower net prices than those offered the government in this offer." (emphasis added). Responding to question 4.c, which asks for the "best discount" "from the price list," SMS did not list the Broadlane discount because members of that group buy were not permitted to purchase CME off of SMS's full catalog/price list of NM CME. In other words, no percentage discounts were given off of a catalog/price list like they were for VA.
Thomas claims that SMS lied when it represented on its DPI for the 2002 CT/MR solicitation that its highest MR CME discount to a non-governmental customer was 35% when, in fact, Broadlane received a 50.5% discount on that same equipment.
Thomas claims that SMS lied when it disclosed on its DPI for the CT solicitation that the highest CT CME discount it was giving to a non-governmental customer was 32%. According to Thomas, SMS had given Broadlane a 42% discount on that equipment.
As explained earlier, the VA and the Broadlane contracts were not comparable and the pricing schemes were different. Broadlane's prices were part of a group buy and were fixed differently than VA's.
More importantly, the only Broadlane configuration that received a higher effective discount than 32% was for the Somatom Volume Zoom, which had an effective discount of approximately 42%.
In any event, the government was aware, at the time it negotiated the contract, that SMS gave discounts higher than 32% to commercial customers. In connection with the CT/MR pre-award audit, SMS disclosed that many of its discounts to commercial customers were higher than 32%.
Therefore, because there is no evidence that such a disclosure would have affected VA's negotiating position and its decision to award the contract, the failure to disclose a higher discount on non-comparable equipment does not constitute a false claim under the FCA.
Relying on his expert's opinion, Thomas asserts that during the CT/MR audit, SMS failed to disclose nine sales transactions in which SMS had provided discounts ranging from 35% to 43% on CT scanning equipment to non-governmental customers, all of which were higher than the 32% discount offered VA.
Assuming the expert is correct, these few omissions are insignificant. The discounts were not as great as many other discounts SMS disclosed to VA. During the CT/MR audit, SMS disclosed many transactions reflecting discounts much greater than 43%. Specifically, SMS disclosed more than 200 transactions for CT scanner equipment, more than half of which were greater than the 32% contract discount rate offered the government, and some were more than double. In the numerous communications between VAOIG and SMS personnel, the auditor expressly acknowledged the disclosed higher transactional discounts, including an 89% discount.
Because the nine allegedly omitted discounts were less than many disclosed discounts, they were not material to VA's decision to award the CT/MR contract. Indeed, Thomas has not shown that VA relied on the alleged omissions. There is no evidence that had VA known of the nine transactions reflecting discounts of 35% to 43%, it would have negotiated or insisted upon a lower price. Nor is there any evidence that VA was misled into awarding the CT/MR contract at the negotiated price. Therefore, because the discounts on the nine allegedly omitted transactions were lower than a multitude of other discounts SMS disclosed to VA and there is no evidence that the information would have affected VA's decision to award the contract at the negotiated prices,
Thomas claims that SMS employee Friend lied when, in response to Brenda Palmatier's
Palmatier's request to Friend was as follows:
Friend responded:
Friend made no false statements. He responded to Palmatier's question regarding the existence of a Broadlane/Tenet contract by differentiating between contracts and group buys. He described the deal with Broadlane as a group buy arrangement and explained how group buys work. See July 8, 2002 letter (describing group buys as when the "Seller provides designated Products to a defined group of participating members at additional discounts (over and above any established contract discounts) for a limited period of time ... [and] [t]ypically there is a minimum committed volume of business over the time period"). He did not deny that SMS had any deals with or sold CT/MR CME to Broadlane. On the contrary, he disclosed to VA that SMS sold products to Broadlane via group buys, and VA understood that SMS sold CME to Broadlane. Whether it is called a contract or a group buy arrangement is immaterial. Therefore, Friend's statement that "Broadlane/Tenet are not on contract" because SMS's products "are sold [to Broadlane] only through Group Buys" was not false.
The Broadlane spreadsheet that Thomas cites does not prove that SMS had any contracts with Broadlane for CT/MR CME that it did not disclose to VAOIG. The spreadsheet reflects one "group buy" between Broadlane and SMS for multiple modalities that included CT equipment in effect from March 1, 1996 through December 31, 2004.
Even if the statement was not correct, it was not material and the VA did not rely on it in awarding the contract. SMS expressed its view to VA that its group buy arrangements were not comparable to the contracts VA was seeking. The arrangements were not hidden. SMS informed VA about the existence of its group buy deals with Broadlane. VA could have required SMS to produce them. It did not.
Thomas claims that as part of its scheme to disclose only selective data, SMS omitted Broadlane's discounts from its response to the VA CT/MR audit and to the 2002 DSCP solicitation. He cites an email exchange between Sasala and Brenda Lindsey at VA and SMS's response to the 2002 DSCP solicitation.
Neither the documents nor the alleged statements made by SMS employees demonstrate that SMS omitted any material information during the CT/MR audit. The email exchange discusses information about Alliance, another GPO, not Broadlane. Alliance had no relationship to the CT/MR audit.
The second set of documents is SMS's response to the 2002 DSCP solicitation, in which SMS discloses sales of CME to two other GPOs, Premier and Shared Services. The DSCP contract is not at issue. But, even if it were, Thomas does not proffer any evidence that DSCP requested information about SMS's sales of CME to Broadlane or that such information was relevant or material to the 2002 DSCP solicitation.
In fact, in connection with the 2002 CT/MR audit, SMS disclosed five transactions in which it had given Broadlane group buy discounts on CT equipment that exceeded the discounts SMS was offering VA. In these disclosures, SMS explained why the transactional discounts were higher than the contract discount offered to VA.
Regarding the statements made to him during negotiations for group buy agreements, Thomas asserts that he "demanded" and "insisted" that SMS offer "the best possible discounts for Broadlane's customers" that were "greater than those offered to the Government" if it wanted "an opportunity to win Broadlane contracts."
In summary, the two documents and the statements by SMS representatives that Thomas cites do not provide a basis from which one could conclude that SMS failed to disclose information about Broadlane when it should have or that the information was material.
Thomas contends that on October 29, 2001, in connection with the 2002 DSCP Contract solicitation, SMS falsely represented to DSCP that the "majority of our commercial business comes from members of" two GPOs: Premier Purchasing Partners and Shared Services Healthcare, Inc.
The statements that Thomas is comparing relate to the 2002 DSCP contract and the 2002 X-Ray equipment audit. As we discussed earlier, neither of these contracts is at issue.
In any event, the October 29, 2001 statement in response to the 2002 DSCP Contract solicitation is not false. Contrary to Thomas's contention, the statement is not contradicted by the later "Top 10" list because the two do not relate to the same type of CME. Rather, each is a response about different and unrelated equipment.
The October 29, 2001 statement that the majority of SMS's GPO business came from Premier and Shared Services was made in connection with the October 2002 multi-modality DSCP contract solicitation. It describes SMS's top two GPO purchasers in five different modalities: X-Ray, ultrasound, CT, MR and nuclear imaging, and reflects data through only October 29, 2001. In contrast, the list of SMS's "Top 10 Commercial (GPO) Customers for the Period January 1, 2001-December 31, 2001" was produced on February 8, 2002 in connection with a 2002 X-Ray equipment audit.
Because the two statements pertain to different contracts, modalities and time periods, the statement made on October 29, 2001 in connection with the DSCP contract solicitation is not false. It cannot form the basis of a false claim relating to other contracts.
To show that SMS withheld higher GPO discounts from the government, Thomas points to an SMS internal comparative compilation of the largest discounts given during the 2005 SMS fiscal year.
Because it does not separate individual contract and transaction discounts, the chart does not show which GPO was given the highest contract or transactional discount. The entries on the chart reflect several pieces of data that have been averaged. Specifically, the right side of the chart shows the average contract discount awarded for each product modality for each GPO and the government. Multiple product lines and discounts from multiple contracts are included in the calculation. The chart reflects that the government received an average contract discount of 33% across all modalities and all product lines in fiscal year 2005 (October 1, 2004-September 30, 2005), and between 30% and 44% discounts on individual modalities and product lines. Three GPOs received higher average discounts: Novation, 34%; HPG, 35%; and Kaiser, 42%.
The left side of the chart lists the average transactional discounts across all modalities and all product lines. The average of these averaged discounts is 40%. The highest average transactional discount for a single modality is 58%, which is for ultrasound equipment. Additionally, the "Discount HI-LO Range" column on the chart reflects the highest to lowest transactional discount for each modality. The highest discount ranges from 75% for ultrasound CME to 48% for nuclear imaging CME.
Thomas is comparing the transactional discount figure of 75% for unspecified ultrasound CME to the government's average contract discount of 33% across all
Even if we assume the chart provided a basis for comparing commercial discounts to government discounts, there is no evidence that the government did not know about these larger discounts. To the contrary, the only evidence in the record is that SMS told VA that it offered higher discounts to non-governmental customers.
Even if the government did not know about the discounts listed in the chart, there is no evidence that this information was pertinent to, or even in existence at the time of, the negotiations of the contracts at issue. Those contracts were negotiated between April of 2001 through April of 2003. The chart reflects discount data from October 1, 2004 to September 30, 2005. Hence, the chart and the information cited in it could not have been used in the negotiations because the information in it did not exist.
Thomas's last false claim allegation relates to another contract that is not at issue. He argues that on its DPI submitted in response to the 2006 joint VA/DSCP multi-modality solicitation,
More than six months after VAOIG sent SMS its pre-award audit letter,
Thomas asserts that because SMS only offered discounts at the product level and not at the modality level, its explanation that it mistakenly thought that the DPI required reporting of modality level discounts was "a contrivance."
The joint VA/DSCP multi-modality solicitation is not at issue. Thomas does not assert that it is. Thus, it cannot form the basis of a false claim in this action.
There are no genuine issues of material fact as to whether any of the nine statements was false. SMS submitted unrefuted evidence that these statements were true and that SMS employees did not knowingly submit any false statements. Nor are there disputed issues as to whether any of alleged false statements was material to the government's decision-making. Most importantly, in this action based upon a theory of fraudulent inducement, Thomas has failed to adduce sufficient evidence showing a genuine issue for trial on whether the government was misled into awarding the contracts to SMS and Acuson because it relied on any false statement or omission. Without any evidence of inducement or reliance, Thomas cannot sustain a false claim cause of action based on a fraudulent inducement theory.
Thomas incorrectly contends that all he must do is to show that SMS submitted a false statement to VA. He insists he need not prove causation or inducement. He is incorrect.
In discovery, SMS produced evidence explaining how the contracting process for the sale of CME to the government worked, both generally and specifically with respect to the contracts at issue. Included in this discovery was undisputed evidence of what information the government expected and required to be disclosed on the DPI. Thomas made no attempt to dispute this evidence.
Specifically, the undisputed evidence shows that at the time it incorporated SMS and Acuson's final DPI submissions into the contracts at issue, VA accepted different interpretations of the DPI. This happened twice after full audits, and once after full review of the DPI disclosures, without complaint by VA that the methodology was wrong. SMS has presented uncontradicted evidence that VA did not expect all transactional discounts to be listed on the DPI.
In fact, as to the three contracts at issue, VA incorporated the final DPI into the respective contracts. As Regan declared, the government confirmed that it had complete, contractually required information and it had verified the information necessary to negotiate the contracts This evidence, which is fatal to Thomas's claim, has not been challenged and stands undisputed.
For whatever reason, Thomas took no discovery of the government. It appears his strategy was to proffer facts unrelated to the claims in this case to create a suspicion that SMS had acted in a fraudulent manner, without producing evidence that would prove or confirm his suspicion that the government was defrauded by any materially false statement or omission when it awarded the contracts at issue. He intentionally avoided gathering evidence from the government. If this was his strategy, it failed.
Thomas has not produced any evidence that the government relied upon or was misled by any material false statements or omissions made by SMS when it awarded the contracts at issue. Therefore, because there is insufficient evidence from which a reasonable fact finder could find that the government was defrauded, SMS is entitled to summary judgment on all of Thomas's claims.
If we accepted Thomas's theory that SMS also had a duty to offer the government its best price, Thomas would not be required to show what price the government would have negotiated had SMS properly disclosed the pricing information. In that case, VA would have been entitled to the best prices SMS had given to its non-governmental customers, and damages would be based on the difference between the best prices and the actual prices SMS charged VA. Thus, his "best price" theory would be relevant only with respect to calculating VA's damages.
This is not a false certification case. Vendors seeking contracts for CME are exempt from the requirement of providing certified cost or pricing data. See 48 C.F.R. §§ 15.402(a)(2),15.403-1(b), 15.403-3, 2.101(b). For the same reasons the standards for a typical FCA claim do not apply to a fraudulent inducement case, the standards for a false certification claim do not apply to this case. In a false certification case, an actionable certification is a "condition of payment," satisfying the requisite nexus between the false statement and false claim. See United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 309 (3d Cir.2011) ("[U]nder a false certification theory, either express or implied, a plaintiff must show that compliance with the regulation which the defendant allegedly violated was a condition of payment from the Government.").
Tr. of Hr'g on Order to Show Cause Why Thomas Should Not be Disqualified as a Relator (Dec. 14, 2010) at 227.
Whether Thomas is mistaken about when the negotiations took place goes to his credibility, which is a jury question. We do not take into consideration these discrepancies and self-contradictions.