Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-5-2009

Arnold v. CMC Engineering
Precedential or Non-Precedential: Precedential

Docket No. 07-1617




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Recommended Citation
"Arnold v. CMC Engineering" (2009). 2009 Decisions. Paper 1280.
http://digitalcommons.law.villanova.edu/thirdcircuit_2009/1280


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                                          PRECEDENTIAL

       UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT
                 _____________

                     No. 07-1617
                    _____________

     THE UNITED STATES DEPARTMENT OF
  TRANSPORTATION, ex rel. AUGUST W. ARNOLD,
                 an individual


                            v.

CMC ENGINEERING; ERDMAN ANTHONY ASSOCIATES,
     INC.; L. ROBERT KIMBALL & ASSOCIATES;
   M.A. BEECH; MACKIN ENGINEERING; MCTISH,
 KUNKEL & ASSOCIATES; MICHAEL BAKER, JR., INC;
        SAI CONSULTING ENGINEERS, INC;
                VE ENGINEERING, INC.

                               August W. Arnold,
                                       Appellant
                    _____________

     On Appeal from the United States District Court
        for the Western District of Pennsylvania
               (D.C. Civ. No. 03-cv-1580)
      District Judge: Honorable Gary L. Lancaster
                    _____________

                 Argued January 6, 2009




                           -1-
Before: FUENTES and FISHER, Circuit Judges and PADOVA,*
                     District Judge

                  (Opinion Filed: May 5, 2009 )

Jon Pushinsky (Argued)
1808 Law & Finance Building
Pittsburgh, PA 15219
       Attorney for Appellant

Efrem M. Grail (Argued)
Colin E. Wrabley
Reed Smith LLP
435 Sixth Avenue
Pittsburgh, PA 15219
       Attorneys for Appellee Michael Baker, Jr., Inc.

John G. Ebken (Argued)
Eugene A. Giotto
John R. Leathers
Buchanan, Ingersoll, & Rooney PC
One Oxford Centre
40 th Floor
Pittsburgh, PA 15219
        Attorneys for Appellee L. Robert Kimball & Associates,
Inc.

Jonathan K. Hollin (Argued)
Paul A. Logan
Powell, Trachtman, Logan, Carrle and Lombardo, P.C.
475 Allendale Road
King of Prussia, PA 19406
      Attorneys for CMC Engineering and Erdman Anthony
Associates, Inc.




*
 Honorable John R. Padova, District Judge for the United States
District Court for the Eastern District of Pennsylvania, sitting by
designation.

                                -2-
Ira L. Podheiser
Burns, White & Hickton, LLC
Four Northshore Center
106 Isabella Street
Pittsburgh, PA 15212
        Attorneys for Mackin Engineering, Inc.

Bradford Dorrance
Keefer Wood Allen & Rahal, LLP
210 Walnut Street
P.O. Box 11963
Harrisburg, PA 17108-1963
       Attorney for VE Engineering, Inc.

Steven D. Irwin
David V. Weicht
Leech Tishman Fiscaldo & Lampl, LLC
Citizens Bank Building, 30th Floor
525 William Penn Place
Pittsburgh, PA 15219
       Attorneys for McTish, Kunkel & Associates

James R. Hanke
Beverly A. Block
Sherrard, German & Kelly, P.C.
28th Floor, Two PNC Plaza
620 Liberty Avenue
Pittsburgh, PA 15222
       Attorneys for SAI Consulting Engineers, Inc.

Jason M. Yarbrough
Thomas A. Berret
Jessica R. Quinn-Hogan
Meyer, Unkovic & Scott
1300 Oliver Building
Pittsburgh, PA 15222
       Attorneys for M.A. Beech

Charles W. Scarborough (Argued)
Thomas M. Bondy

                               -3-
Amy Easton
Department of Justice
Civil Division, Room 7244
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530-3001
       Amicus Curiae for the Court


                   OPINION OF THE COURT


FUENTES, Circuit Judge:

        In this qui tam action, filed by August Arnold, the Relator
alleges that the Defendants, consultants who provided services to
the Pennsylvania Department of Transportation (“PennDOT”),
falsified their credentials to qualify for higher pay rates. Arnold
contends that, as a result, the consultants defrauded the federal
government, which funded the contracts at issue, in violation of the
False Claims Act (“FCA”), 31 U.S.C. § 3729. On motions to
dismiss, the District Court concluded that claims presented to state
agencies that disburse federal funds are not actionable under the
FCA, and because Arnold failed to allege that the consultants’ false
claims were presented to or approved by the federal government,
as opposed to the state agency, they were not actionable.

        While this appeal was pending, the United States Supreme
Court decided Allison Engine Co. v. United States ex rel. Sanders,

(2008), which held that the method by which
federal funds are disbursed by federal grantees is relevant to
determining whether a defendant possessed the requisite intent to
defraud the federal government as required by the FCA. Because
the District Court did not have the benefit of Allison Engine when
it ruled on the instant matter, we will vacate and remand for further
proceedings.




                                 I.


                                -4-
        August Arnold is a retired PennDOT employee. While at
PennDOT, one of Arnold’s duties was to conduct field audits of
consultants who provided engineering and inspection services on
road and bridge projects for PennDOT. Defendants Michael
Baker, Jr., Inc.; L. Robert Kimball & Associates, Inc.; CMC
Engineering; and Erdman Anthony Associates, Inc. (collectively
“consultants”) were among the engineering consultants subject to
the audit, which spanned from 2000 until 2002. The audits
uncovered significant overcharges to PennDOT for services
performed by individuals who worked on behalf of the consultants.
Specifically, the audits disclosed that the consultants submitted
bills for services by individuals who did not possess the requisite
credentials to justify their hourly pay rates under the consulting
contracts at issue. Arnold alleges that PennDOT officials
knowingly overpaid the consultants because of systemic corruption,
which included prohibited gift-giving in exchange for the hiring
and payment of unqualified contract personnel. At least eighty
percent of PennDOT’s funding for the contracts originated from
the Federal Highway Administration, which is a branch of the
United States Department of Transportation (“U.S. DOT”).

       Arnold’s disclosure of the overpayment ultimately led to an
independent review, which revealed that over twenty percent of the
consultants examined during the review had flawed credentials. As
a result, some of the consultants returned a portion of the
overpayments to PennDOT.

       In October 2003, Arnold, as the Relator on behalf of the
federal government, filed a qui tam complaint in the United States
District Court for the Western District of Pennsylvania, asserting
claims against the six consultants under the FCA. The complaint
alleged that the consultants were engaged in a fraudulent scheme
to obtain overpayments for engineering, inspection, and consultant
services on federally-funded highway projects administered by
PennDOT. The United States declined to intervene.

       The consultants moved to dismiss, arguing, among other
things, that Arnold had insufficiently alleged that the consultants
had presented false claims to the federal government. As the real
party in interest, the federal government filed two Statements of

                                -5-
Interest in the District Court opposing the consultants’ motions to
dismiss. The District Court granted Arnold leave to amend his
complaint twice, and each time the consultants renewed their
motions to dismiss.

       On February 7, 2007, the District Court granted the
consultants’ motion to dismiss the Second Amended Complaint.
The District Court stated that the FCA imposes liability only on
those who defraud the federal government, further noting that
“[t]he sine qua non of [the FCA] is Federal government
involvement in paying, approving, or allowing false claims.” U.S.
Dep’t of Transp. ex rel. Arnold v. CMC Eng’g, No. 03-1580, 

, at *4 (W.D. Pa. Feb. 7, 2007). The District Court
concluded that Arnold “ha[d] not established that any defendant
presented a false claim to the [f]ederal government, made a false
statement in order to get a false claim paid or allowed by the
[f]ederal government, or conspired to get a false claim paid or
allowed by the [f]ederal government.” 

The District
Court further held that because the FCA requires that the fraudulent
claim be presented to the federal government, not a grantee of
federal funds, it was irrelevant that PennDOT receives substantial
funding from U.S. DOT. 

The District Court similarly
ruled that Arnold’s allegation that PennDOT is an agent of U.S.
DOT was insufficient, as was his allegation that the false claims
were presented to the federal government when Federal Highway
Administration inspectors reviewed PennDOT project sites and
logs. 

a timely Notice of Appeal.

       As we previously noted, while this appeal was pending the
United States Supreme Court decided Allison Engine Co. v. United
States ex rel. Sanders, 

(2008), in which a
unanimous Court held that the funding mechanism by which
fraudulent claims prompt the disbursement of federal funds via a
federal grantee is instructive in determining whether a relator has
stated a claim under the FCA. Following this decision, the
consultants asked this Court to summarily affirm the District
Court’s dismissal of this case. We denied the motion.

                                II.



                                -6-
      The District Court had subject matter jurisdiction under
28 U.S.C. § 1331. We have jurisdiction under 28 U.S.C. § 1291.

        We exercise plenary review of the District Court’s order
granting the consultants’ motion to dismiss. Santiago v. GMAC
Mortgage Group, Inc., 

, 386 (3d Cir. 2005). When
reviewing a motion to dismiss for failure to state a claim under
Federal Rule of Civil Procedure 12(b)(6), we accept as true all
well-pled factual allegations in the complaint and all reasonable
inferences that can be drawn from them, and we affirm the order of
dismissal only if the pleading does not plausibly suggest an
entitlement to relief. Wilkerson v. New Media Tech. Charter Sch.,
Inc., 

, 321-22 (3d Cir. 2008).

                                III.

        Originally enacted in 1863, the FCA is the most frequently
used of a handful of current laws creating a form of civil action
known as “qui tam.” Vt. Agency of Natural Res. v. United States
ex rel. Stevens, 

, 768 (2000). “Qui tam is short for the
Latin phrase qui tam pro domino rege quam pro se ipso in hac parte
sequitur, which means ‘who pursues this action on our Lord the
King’s behalf as well as his own.’” 

n.1. In modern
practice, “qui tam actions are brought by private plaintiffs on
behalf of the Government in exchange for some portion of any
resulting damages award.” Rodriguez v. Our Lady of Lourdes
Med. Ctr., 

, 299 n.1 (3d Cir. 2008). Those private
plaintiffs are referred to as “relators.” United States ex rel.
Schmidt v. Zimmer, Inc., 

, 242 (3d Cir. 2004).

      Under the False Claims Act, any person is liable to the
United States government for a civil penalty who:

       (1) knowingly presents, or causes to be presented, to
       an officer or employee of the United States
       Government or a member of the Armed Forces of the
       United States a false or fraudulent claim for payment
       or approval;

       (2) knowingly makes, uses, or causes to be made or

                                -7-
       used, a false record or statement to get a false or
       fraudulent claim paid or approved by the
       Government;

       (3) conspires to defraud the Government by getting
       a false or fraudulent claim allowed or paid . . . .

31 U.S.C. § 3729(a) (emphasis added).

        Because the word “presents” is missing from §§ 3729(a)(2)
and (a)(3), there has been significant debate about whether there is
a “presentment” requirement in those subsections. For example, in
United States ex rel. Totten v. Bombardier Corp., the D.C. Circuit
held that §§ 3729(a)(2) and (a)(3) do require direct presentment to
the federal government. 

(D.C. Cir. 2004); see also
United States ex rel. DRC, Inc. v. Custer Battles, LLC, 472 F.
Supp. 2d 787, 790 (E.D. Va. 2007) (endorsing Totten’s holding
that § 3729(a)(2) requires presentment); United States ex rel.
Atkins v. McInteer, 

, 1304-05 (N.D. Ala.
2004) (holding that § 3729(a)(3) requires presentment). However,
in United States ex rel. Sanders v. Allison Engine Co., the Sixth
Circuit held that §§ 3729(a)(2) and (a)(3) do not require direct
presentment. 

, 614-15 (6th Cir. 2006), vacated by 

(2008); see also United States ex rel. Mikes v. Straus,

, 432 (S.D.N.Y. 1999) (excluding the
“presentment” requirement from the elements of §§ 3729(a)(2) and
(a)(3)). See generally United States ex rel. Farmer v. City of
Houston, 

, 338 (5th Cir. 2008) (discussing the
unsettled nature of whether there is a presentment requirement in
§ 3729(a)(2) but deciding the case on other grounds). The
“presentment” requirement compels the relator to establish that the
defendants presented the false claim to the federal government to
induce payment based on that fraudulent claim. To resolve the
conflict between the Courts of Appeals, the Supreme Court granted
certiorari in Allison Engine.

       In Allison Engine, the United States Navy had contracted
with two shipbuilders, both private companies, to build destroyers.
The shipyards then subcontracted with a company, Allison Engine,
to build the generators for the ships. Allison Engine then

                                -8-
subcontracted with various other companies to build and assemble
component parts of the generators. Employees of one of the
subcontractors sued under the FCA, alleging that the invoices
submitted by the subcontractors to the shipyards were fraudulent.
However, the relator did not establish at trial that the invoices had
been submitted to the Navy (i.e., the federal government).
Therefore, the issue in Allison Engine was whether it was
sufficient for an FCA claim that government funds, given to the
shipyards by the Navy in advance and disbursed by the shipyards
at their discretion without further federal government involvement,
were used to pay fraudulent claims. See 128 S. Ct at 2126-27.

        The Supreme Court first examined the statutory language
and noted that § 3729(a)(2) requires that the defendant make a false
statement “to get” a fraudulent claim paid by the government. The
Court found that “to get” denoted intent to induce the federal
government to pay a false claim. Moreover, the Court noted that
getting a fraudulent claim “paid by the government” is not the same
as getting a fraudulent claim “paid by government funds.” 

The Court specifically stated that “[e]liminating th[e]
element of intent . . . would expand the FCA well beyond its
intended role of combating ‘fraud against the Government.’” 

v. United States, 

, 592 (1958)).
If the scope of the FCA was not limited in this manner, the Court
speculated that liability under the FCA could attach to fraud against
any institution that receives at least some federal grants. 

3729(a)(3) makes liable any person who
“conspires to defraud the Government by getting a false or
fraudulent claim” paid. Like § 3729(a)(2), the Supreme Court read
this subsection to require that the conspirators intend to defraud the
federal government, rather than conspiring to defraud another
entity which uses or disburses government funds. 

Again, the Court noted that it was not implying a “presentment”
requirement into § 3729(a)(3), but rather requiring that a relator
establish that the conspirators agreed that the false statement
“would have a material effect on the [federal] Government’s
decision to pay the false or fraudulent claim.” 

       Although the Court held that there is no direct presentment

                                 -9-
requirement in §§ 3729(a)(2) and (a)(3), the Court described
indirect methods of federal government involvement in the
payment of fraudulent claims that could still meet the requirements
of the FCA. Without question, Allison Engine categorically
precludes liability under the FCA when fraudulent claims induce
private entities to disburse federal funds over which the private
entity has complete control. In other words, if the federal
government provides money in a lump sum to a grantee, and is
thereafter uninvolved in the disbursement of the funds, the FCA
does not apply. However, the Court left open the possibility that,
if the federal government is somehow involved in the grantee’s
disbursement of federal money, FCA liability may exist. The Court
used the following hypothetical to explain: a subcontractor creates
an invoice that relies on a false statement, and the subcontractor
submits that invoice to the prime contractor; the prime contractor
relies on the subcontractor’s invoice to generate its own invoice,
which the prime contractor submits to the federal government.
Under this scenario, the subcontractor intentionally used a false
claim to induce payment by the federal government, albeit
indirectly. 

Therefore, the subcontractor’s actions
would fall within the ambit of the FCA.

        Of particular note is the manner with which the Court
distinguished the facts of Allison Engine, emphasizing that the
grantee of federal funds was a private, not public, entity. For
example, the Court stated, “[i]f a subcontractor or another
defendant makes a false statement to a private entity and does not
intend the Government to rely on that false statement as a condition
of payment, the statement is not made with the purpose of inducing
payment of a false claim ‘by the Government.’” 

(emphasis added). Similarly, the Court noted, “[r]ecognizing a
cause of action under the FCA for fraud directed at private entities
would threaten to transform the FCA into an all-purpose anti fraud
statute.” 

With regard to the conspiracy
prong of the FCA, the Court stated that “[u]nder [§ 3729(a)(3)], it
is not enough for a plaintiff to show that the alleged conspirators
agreed upon a fraud scheme that had the effect of causing a private
entity to make payments using money obtained from the
Government. Instead, it must be shown that the conspirators
intended ‘to defraud the Government.’” 

In

                               -10-
other words, it is not sufficient for a plaintiff to allege merely that
the false statement’s use resulted in getting paid with funds
traceable to the Government. Rather, a plaintiff asserting a claim
under §§ 3729(a)(2) and (a)(3) must allege that the defendant
intended to use the false record or statement to be paid by the
government, not by any other party.

       It is unclear how much, if at all, the difference between
public grantee versus private grantee should drive a court’s
analysis. Regardless, we believe that this distinction further
supports our holding that Allison Engine casts doubt on the District
Court’s decision to categorically exclude false claims made to state
transportation agencies, which are funded in large part by the
federal government, from the purview of the FCA.

        Allison Engine does not conclusively determine the outcome
of Arnold’s case, but it is instructive. Examining Arnold’s claims
under the rubric of Allison Engine, it is clear that the mechanism
of the funding scheme by which PennDOT pays its contractors is
determinative of whether the District Court’s dismissal of the
claims was appropriate. If the Federal Highway Administration
was involved in the disbursement of funds from PennDOT to the
consultants upon submission of the fraudulent claims in any way,
Arnold’s claims may be actionable under the FCA and it is possible
the consultants’ motion to dismiss should have been denied. In
light of Allison Engine, the District Court should reconsider its
view that a relator can never successfully allege violations of the
FCA as they pertain to state transportation agencies.

                                 IV.

      For the reasons stated, we will vacate and remand for further
proceedings consistent with this opinion.




                                 -11-