ROBERT L. WILKINS, United States Circuit Judge (Sitting by designation in the United States District Court for the District of Columbia)
This is a civil action brought by the United States ("the government") and relator Floyd Landis under the False Claims Act ("FCA") against Lance Armstrong and several other defendants to recover damages and penalties because of alleged fraudulent claims and statements made by the defendants in connection with two sponsorship agreements between the United States Postal Service ("USPS" or "Postal Service") and the companies that owned and managed the professional cycling team on which Lance Armstrong was the lead rider. Both the government and the relator assert claims against Defendants Lance Armstrong, Johan Bruyneel, Tailwind Sports Corporation ("TS Corp") and Tailwind Sports, LLC ("TS LLC") (collectively, the "intervened defendants"). The relator also asserts claims against Defendants Thomas W. Weisel, Capital Sports and Entertainment Holdings, Inc. ("CSE"), William J. Stapleton, Barton B. Knaggs, Ross Investments, Inc. ("Ross Investments"), and Montgomery Sports, Inc. ("Montgomery Sports") (collectively, the "non-intervened defendants").
Pending before the Court are motions to dismiss by each defendant. For the reasons set forth below, the Court grants in part and denies in part the defendants' motions to dismiss.
From 1995 to 2004, the USPS sponsored a professional cycling team owned by
In 1995, the USPS entered into an agreement with Montgomery Sports and, under this agreement, the USPS agreed to pay Montgomery Sports "in exchange for certain promotional rights, including the prominent placement of the USPS logo on the cycling team's uniform and the provision of hospitality services in connection with team events." Gov't Compl. ¶ 15; Relator SAC ¶¶ 23-24. This agreement expired on December 31, 1996, but was "subject to automatic renewal on a year-to-year basis unless the Postal Service elected not to renew." Gov't Compl. ¶ 15; Relator SAC ¶¶ 23-24. The USPS allowed the agreement to renew each year through 2000. Gov't Compl. ¶ 15; Relator SAC ¶ 29. The agreement required the USPS to pay Montgomery Sports "a net sponsorship fee of $1 million in 1996, $1.5 million in 1997, and $2 million in 1998." Relator SAC ¶ 24. The parties made additional financial modifications to the agreement in subsequent years, and by the end of the first sponsorship agreement in 2000, the USPS had paid approximately $11 million to Montgomery Sports and its successor companies. Relator SAC ¶ 35.
Under the terms of the 1995 agreement,
1995 Agreement ¶ 13.
In December 2000, the USPS and TS LLC (then known as DFP Cycling) entered into a four-year sponsorship agreement, which commenced on January 1, 2001 and continued through December 31, 2004, unless terminated earlier by the parties. Gov't Compl. ¶ 18; Relator SAC ¶ 29. Prior to entering into the 2000 sponsorship agreement, in November 2000 "various media outlets reported that French authorities had begun an investigation into allegations that Armstrong and the USPS cycling team used banned substances in winning [that year's] Tour de France." Gov't Compl. ¶ 19.
Despite the defendants' "vehement[] deni[al] [of] the allegations," the USPS was "concerned" about the allegations and "consequently inserted into the [2000] sponsorship agreement several additional provisions relating to the use of banned substances and methods." Gov't Compl. ¶ 19. Specifically, the following clauses were included in the 2000 agreement as events of default: "The Company fails to take immediate action without notification by the Sponsor in a case of a rider or Team offense related to a morals or drug clause violation"; and/or "[t]here is negative publicity associated with an individual rider or team support personnel, either permanent or temporary, due to misconduct such as, but not limited to, failed drug or medical tests, alleged possession, use or sale of banned substances, or conviction of a crime." 2000 Agreement ¶ 8(a). The 2000 agreement also included a clause stating:
2000 Agreement ¶ 9(a). The 2000 sponsorship agreement also retained the requirement from the 1995 agreement that "the team adhere to the rules of the UCI, IOC, and the other bodies that govern international cycling." 2000 Agreement ¶ 12.
The USPS's payments to TS LLC increased significantly under the 2000 agreement, by more than $20 million. The 2000 agreement required the USPS to pay TS LLC approximately $31 million over its four-year term. Gov't Compl. ¶ 25; Relator
The plaintiffs allege that members of the cycling team, including Defendant Armstrong and the relator, used performance enhancing drugs and techniques that were banned by the governing cycling organizations. These performance enhancing drugs and techniques included "blood doping," as well as using human growth hormones ("HGH"), anabolic steroids, and corticosteroids.
Blood doping refers to extracting one's own blood, storing the blood for a certain period of time until the red blood cell count has been restored, and then re-injecting the blood back into the body just before or during competition. Gov't Compl. ¶ 28E; Relator SAC ¶ 61. This artificial means of increasing one's red blood cell count increases the oxygen carrying capacity of an individual's blood and thus enhances his endurance. Gov't Compl. ¶ 28E; Relator SAC ¶ 61. Blood doping may also involve the use of Erythropoietin ("EPO"). Gov't Compl. ¶ 28A; Relator SAC ¶ 61-62. EPO is a hormone that stimulates the production of red blood cells in the human body. Gov't Compl. ¶ 28E; Relator SAC ¶¶ 61-62. Although EPO is a naturally occurring hormone that is produced by the kidneys, it can also be produced in a lab and later ingested. Relator SAC ¶¶ 61-62.
The plaintiffs' complaints include numerous allegations of specific instances of doping
Plaintiffs allege that Defendant Armstrong doped throughout his tenure on the cycling team, including doping in connection with each Tour de France from 1999 through 2005. Gov't Compl. ¶ 35; Relator SAC ¶¶ 84-112. Specifically, for example, during the 1998 Vuelta a Espana race, Mr. Armstrong injected himself with EPO. Gov't Compl. ¶ 37. In May 1999, Mr. Armstrong gave EPO he had stored in his home to another rider on the team. Gov't Compl. ¶ 38. Later, during the 1999 Tour de France, Mr. Armstrong and other riders of the team "arrange[d] for an associate to follow the team on a motorcycle that contained their supply of EPO," and from "time to time throughout that year's Tour, the associate would deliver" the EPO to team personnel who would provide it to Mr. Armstrong and other riders. Gov't Compl. ¶ 40. Further, with the assistance and advice of sports doctor Michele Ferrari, members of the team often used a "mixture that consisted of testosterone dissolved in olive oil" — which some team members referred to as "the oil" — and Mr. Armstrong provided the oil to another
The following year, several weeks prior to the 2000 Tour de France, Mr. Armstrong and some other riders on the team traveled to Valencia, Spain to "have blood extracted for the purpose of having it transfused back into their bodies during the 2000 Tour de France." Gov't Compl. ¶ 44. In 2002, Mr. Landis traveled with Mr. Armstrong to Mr. Armstrong's apartment in St. Moritz, Switzerland, and upon arriving at his apartment, he gave Mr. Landis a 2.5 ml package of testosterone patches. Gov't Compl. ¶ 50; Relator SAC ¶ 84. About one week later, Mr. Landis met with Dr. Ferrari at Mr. Armstrong's apartment, at which time Dr. Ferrari extracted blood from Mr. Landis for later reinjection during that year's Tour de France. Gov't Compl. ¶ 51; Relator SAC ¶¶ 85-86, 88.
In or around May 2003, Mr. Landis traveled to Mr. Armstrong's apartment in Gerona, Spain, where Dr. Ferrari extracted "half a liter of blood and placed it in a refrigerator hidden in the closet of the master bedroom" that also contained "several other bags of blood." Relator SAC ¶ 92. Shortly thereafter, because Mr. Armstrong was going to leave his apartment for a few weeks to train, he asked Mr. Landis to stay at the apartment to "check the temperature of the blood each day and make sure there were no problems with the electricity or the refrigerator," which Mr. Landis agreed to do. Relator SAC ¶ 93. Later during that year's Tour de France, Mr. Landis received transfusions of previously extracted blood and witnessed other members of the team receiving transfusions. Relator SAC ¶¶ 96-99.
Prior to the 2004 Tour de France, Mr. Armstrong had his blood extracted by Dr. Dag Van Eslande in a hotel in Kortrijk, Belgium for later reinjection during that year's Tour de France. Gov't Compl. ¶ 59; Relator SAC ¶ 106. And on different occasions during the 2004 Tour de France, Mr. Armstrong and Mr. Landis received blood transfusions together. Gov't Compl. ¶ 60; Relator SAC ¶¶ 108-09.
Plaintiffs also allege that Defendant Bruyneel, the directeur sportif (i.e., manager) of the cycling team from approximately 1998 to 2004, was knowledgeable of the team's doping and facilitated the doping. Gov't Compl. ¶ 36; Relator SAC ¶ 81. For example, on one occasion in 1999, Mr. Bruyneel provided HGH directly to a rider on the team. Gov't Compl. ¶ 39. Also, during the 2000 Tour de France at a hotel near Mont Ventoux, France, Mr. Bruyneel witnessed Mr. Armstrong and other riders having refrigerated blood reinjected into their bodies. Gov't Compl. ¶ 45. And it was Mr. Bruyneel that instructed Mr. Landis to travel with Mr. Armstrong to Armstrong's apartment in St. Moritz, Switzerland to obtain the 2.5 ml package of testosterone patches. Gov't Compl. ¶¶ 49-50; Relator SAC ¶¶ 82-83. Specifically, Mr. Bruyneel told Mr. Landis that the testosterone patches "should be worn two out of three days after hard training for eight to ten hours at night, which would be relatively free of risk of detection." Relator SAC ¶ 83.
Later, around May or June of 2003, Mr. Bruyneel instructed Mr. Landis to go to Mr. Armstrong's apartment in Girona, Spain to have a half-liter his blood extracted by Dr. Ferrari. Gov't Compl. ¶ 55. Then, a few months after the 2003 Tour de France, Mr. Bruyneel asked Mr. Landis to ride in the Vuelta a Espana cycle race in September 2003; and, in preparation for the race, he asked Mr. Landis to have his blood drawn so that it could be reinjected during the race. Relator SAC ¶ 100. Mr. Landis agreed to do so. Id. And in 2004,
In addition to the intervened defendants (Lance Armstrong, Johan Bruyneel, TS Corp, and TS LLC), the relator separately raises allegations against Thomas W. Weisel, William J. Stapleton, Barton B. Knaggs, and certain companies that these individuals either owned, managed, or worked for as high-level officers.
During the time period relevant to the relator's complaint, Defendants Stapleton and Knaggs "owned and controlled, directly or indirectly" Capital Sports and Entertainment Holdings, Inc. ("CSE"). Relator SAC ¶ 11. And around May 2004, CSE became a part owner of TS LLC and TS Corp with "approximately a 12 percent stake in the company." Id. Relator alleges that around October 2002, he met with Mr. Stapleton at his office near the Four Seasons hotel in Austin, Texas to "discuss a renewal of his contract for the next two years." Id. ¶ 90. During this meeting, "Mr. Stapleton specifically referenced the fact that he was aware of the extent to which Mr. Landis had been doping, and commented on the fact that the Team could help him with further doping to help improve his performance further." Id.
With respect to Mr. Knaggs, the relator alleges that around April 2004, after the Paris-Roubaix race, the relator, Mr. Knaggs, Geert Dueffler
Mr. Weisel, a former cyclist, was a "founder of both [TS LLC and TS Corp,] chairman of the board, and the largest shareholder," as well as the President of its predecessor, Montgomery Sports. Id. ¶¶ 10, 131-32. Mr. Weisel also owned defendant Ross Investments during the period relevant to the relator's complaint. Id. ¶ 16. Relator alleges that Mr. Weisel was aware of the doping allegations against Mr. Armstrong, but failed to "take concrete steps to investigate and prevent any doping by the USPS Team consistent with the team's obligations under its contract with the Postal Service." Id. ¶ 149.
The plaintiffs' complaints include repeated instances of Mr. Armstrong, Mr. Bruyneel, and other members of the cycling team publicly and privately denying any use or involvement in doping. Gov't Compl. ¶¶ 62-73; Relator SAC ¶¶ 121-30. Defendant Armstrong was never caught doping, and he never failed any drug tests. Gov't Compl. ¶ 67D; Relator SAC ¶ 149. But in January 2013, during an interview with Oprah Winfrey, Defendant Armstrong admitted that he used banned substances and methods, starting in the mid-1990s up until his retirement in 2005. Gov't's Compl. ¶ 61; Relator SAC ¶ 225. In particular, he admitted having engaged in banned practices during each of the seven Tour de France races in which he competed from 1999 to 2005, including the six in which he competed and won as a USPS rider. Gov't Compl. ¶ 61; Relator SAC ¶ 225.
On June 10, 2010, the relator filed his initial complaint, alleging violations of the FCA on behalf of himself and the United States Government pursuant to the qui tam provisions of the FCA, 31 U.S.C. § 3730(b)(1). Relator amended his complaint on December 23, 2010, and again on February 22, 2013. Dkt. Nos. 10, 42. After completing its preliminary investigation, the government filed its complaint on April 23, 2013, intervening against Defendants Lance Armstrong, Johan Bruyneel, TS Corp and TS LLC. Dkt. No. 44.
The crux of the relator and government complaints is that the cycling team's doping and use of banned enhanced performance techniques breached the terms of two the sponsorship agreements. They contend that the defendants defrauded the government by either encouraging, allowing or participating in the doping, making false statements about the doping, failing to inform the USPS of the doping, and/or continuing to collect payments under the sponsorship agreement even while knowing of the breaches of contract.
The plaintiffs' complaints include four Counts under the FCA: (1) Presentation of False Claims; (2) Presentation of False Records or Statements; (3) Conspiracy to Present False Claims, Records, or Statements; and (4) "Reverse" False Claims. Gov't Compl. ¶¶ 74-85; Relator SAC ¶¶ 239-277. The claims asserted by the plaintiffs are brought under the versions of the FCA prior and subsequent to the May 2009 Fraud Enforcement and Recovery Act ("FERA") amendments, Pub. L. No. 111-21, 123 Stat. 1617 (2009). The government additionally asserts common law fraud claims against each intervened defendant, breach of contract against TS LLC and its predecessors, and an unjust enrichment claim against Defendants Armstrong and Bruyneel. Gov't Compl. ¶¶ 86-93.
All of the defendants raise several jurisdictional and procedural challenges to the plaintiffs' actions. In addition, Defendants Stapleton, Knaggs, and CSE ask that the court take judicial notice of certain allegations in the government's complaint against TS Corp, TS LLC, Lance Armstrong, and Johan Bruyneel. Finally, the relator objects to extrinsic evidence found in the Motion to Dismiss and supporting exhibits filed by Defendants Wiesel and Ross Investments. The Court will separately address each issue.
As part of their motion to dismiss the relator's second amended complaint, Defendants
Under Federal Rule of Evidence 201(b), courts may judicially notice facts that are not subject to reasonable dispute, and under subsection (c)(2), courts "must take judicial notice [of such facts] if a party requests it and the court is supplied with the necessary information." FED. R. EVID. 201(b), (c)(2). The government's complaint is part of the public record, and therefore the Court may judicially notice the undisputed factual allegations in the government's complaint. See Covad Comc'ns Co. v. Bell Atl. Corp., 407 F.3d 1220, 1222 (D.C.Cir.2005) (holding that courts may take "`judicial notice of facts on the public record'") (citing Marshall Cnty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1228 (D.C.Cir.1993)). The defendants' request is granted.
Relator objects to several statements and supporting exhibits found in a declaration by Robert Sacks that was filed by Defendants Weisel and Ross Investments. See Relator's Objection to Extrinsic Evidence in the Mot. to Dismiss by Thomas Weisel and Ross Investments and in the Decl. of Robert A. Sacks in Supp. Thereof ("Relator's Obj.") at 2-5 (Dkt. No. 107-1). These statements and exhibits primarily concern the relator's doping, Mr. Weisel and his business affairs, and the government's investigation prior to filing its complaint. See id. The relator first challenges this information as extrinsic evidence because it was not referenced in his complaint. See id. Next, the relator points out that some of these statements come from press releases, though the sources of other statements have not been cited. The relator argues that the Court is not authorized to take judicial notice of information from sources such as press releases, but in any event he asserts that the defendants have not requested that the Court take judicial notice. See id. Accordingly, pursuant to Federal Rule of Civil Procedure ("FRCP") 12(d), the relator asks the Court to exclude this information. Alternatively, if the Court is inclined to consider this information, the relator argues that the defendants' motion to dismiss should be converted to a motion for summary judgment, and the relator requests an opportunity for discovery pursuant to FRCP 56(d). See id. at 2.
Defendants respond that "[m]uch of the information is readily verifiable," but note that the "information also is far from essential to the motion." Weisel and Ross Investments' Reply to Realtor's Opp'n ("Weisel Reply") at 5 n.4. Defendants state that the Court can "exercise its discretion not to consider it, and need not convert the motion to dismiss into a motion for summary judgment." Id. (citing Feld Entm't Inc. v. Am. Soc'y for the Prevention of Cruelty to Animals, 873 F.Supp.2d 288, 323 (D.D.C.2012)).
The challenged information constitutes extrinsic evidence, and the defendants have not requested that the Court take judicial notice of such information. Furthermore, the defendants do not wish for their motions to be converted to motions for summary judgment. Therefore, the Court will not consider this extrinsic information.
Defendants make two challenges to the relator's participation in this litigation.
The FCA states that "[a] person may bring a civil action for a violation of section 3729 for the person and for the United States government." 31 U.S.C. § 3730(b)(1). Thus, the statute explicitly gives a person — i.e., a relator — a right to proceed as a real party in interest. Nothing in the text of section 3730 indicates that a relator no longer has standing following intervention by the Attorney General. To the contrary, section 3730(c)(1) states: "If the Government proceeds with the action, it shall have the primary responsibility for prosecuting the action, and shall not be bound by an act of the person bringing the action. Such person shall have the right to continue as a party to the action ...." 31 U.S.C. 3730(c)(1) (emphasis added). Indeed, after surveying this statutory landscape, the D.C Circuit stated (albeit in dictum) that "[t]he relator appears to remain a party whether or not the United States intervenes." United States ex rel. Long v. SCS Business & Technical Institute, Inc., 173 F.3d 870, 885 (D.C.Cir. 1999). Even if all of this were not sufficient, concluding that the relator continues to have standing even after the United States intervenes is consistent with the Supreme Court's observation that "the statute [section 3730(b)] gives the relator himself an interest in the lawsuit, and not merely the right to retain a fee out of the recovery." Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 772 (2000) (emphasis added, other emphasis omitted). Accord, Long, 173 F.3d at 884-85 (noting that the FCA gives the relator a "right" to enforce to statute). In sum, there is no merit in this contention of the Defendants.
Defendants next assert that the relator's "unrestricted participation during the course of the litigation ... would cause the defendant undue burden or unnecessary expense." Armstrong Mot. to Dismiss Relator SAC at 5 (Dkt. No. 92) (quoting 31 U.S.C. § 3730(c)(2)(D)). Thus, argue Defendants, as provided for in the FCA the Court should "limit the participation by the [relator] in th[is] litigation." Id. (citing 31 U.S.C. § 3730(c)(2)(D)).
This argument is unpersuasive. Because the FCA permits the government and a relator to simultaneously prosecute the action, there is no presumption under the statute against allowing both complaints to proceed. Instead, the Court must give meaning to the adjectives "undue" and "unnecessary," as they modify "burden" and "expense." And here, the similarity of the legal theories advanced by the government and the relator — as well as the similarity of the underlying factual
TS LLC and TS Corp (or "Tailwind defendants") argue that they cannot be sued because they no longer exist. Tailwind Mot. to Dismiss the United States' Compl. and Relator's SAC ("Tailwind Mot. to Dismiss") at 4-9 (Dkt. No. 91).
With respect to TS LLC, the Tailwind defendants state that it "merged with and into Tailwind Sports Corporation on July 16, 2002," pursuant to 8 Del. C. § 259(a), and therefore ceased to exist on that date. Tailwind Mot. to Dismiss at 5. The plaintiffs agree that TS LLC can be dismissed from this matter if the Tailwind defendants concede that TS Corp assumed TS LLC's liabilities.
With respect to TS Corp., the Tailwind defendants raise timeliness defenses against the complaints filed by both the relator and the government. As to the relator's complaint, the Tailwind defendants argue that they did not have timely notice of his complaint, as required by state law. The Tailwind defendants note that TS Corp. dissolved on December 31, 2007. Id. Pursuant to Delaware's corporate winding-up statute, they contend that TS Corp. "permanently ceased to exist for any purpose three years later," on December 31, 2010. Id. at 5 (citing 8 Del. C. § 278). The Tailwind defendants recognize that the relator filed his initial complaint on June 10, 2010 — before the three-year winding-up period ended on December
With respect to the government's complaint, the Tailwind defendants point out that it was filed long after the Landis complaint, and they argue that the government may not claim the date Landis filed his original Complaint as the date on which the government's action was "begun." Id. at 8. The Tailwind defendants argue that "§ 278 is not a statute of limitations — it is, rather, a corporate winding up statute — and, consequently, relation-back principles do not apply." Id. They add that section 3731(c) of the FCA "permits relation-back only `[f]or statute of limitations purposes.'" Id. at 8 (emphasis in original) (quoting 31 U.S.C. 3731(c)). "As a result," the Tailwind defendants contend, "even if this court were to find Landis's complaint not barred by section 278, the government could not save its own untimely complaint through the relation-back provision of the False Claims Act, 31 U.S.C. § 3731(c)." Id. at 8.
The Court finds these arguments unavailing, because ultimately federal law, not Delaware law, controls when the actions by the relator and government "commenced." And the relevant federal rule does not support the arguments of the Tailwind defendants.
Whether a corporation can be sued is determined by the law of the state of its incorporation. See FRCP 17(b)(2); Keeter Trading Co. v. United States, 79 Fed.Cl. 243, 250 (Fed.Cl.2007) ("There is no question that in all federal courts, including this one, a corporation's capacity to sue or be sued is to be determined by the law of the state of its incorporation." (citing FRCP 17(b)); CAROL A. JONES, 9 FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 4223, p. 30 (2008) [hereinafter FLETCHER CYCLOPEDIA]. But, as with a natural person as a defendant, questions regarding how to initiate a civil action against a corporation,
Rule 3 of the federal rules explicitly answers the question of how and when a lawsuit "begins" in federal court, as it provides that "[a] civil action is commenced by filing a complaint with the court," FRCP 3, and of course, "commence" and "begin" are synonymous. Webster's Third New International Dictionary, Unabridged, s.v. "begin," (last accessed June 11, 2014, http://unabridged.merriam-webster.com).
Accordingly, Rule 3 of the federal rules governs whether the relator had "begun" his action under Delaware's winding-up statute, 8 Del. C. § 278,
Thus, the Tailwind Defendants' reliance on Rule 3(a) of Delaware Superior Court rules of civil procedure
Perhaps anticipating that after the plaintiff served the Delaware Secretary of State, the defendants would argue that the plaintiff's suit still could not be maintained because service (and notice) would have occurred well beyond the three-year winding up period, the court preemptively addressed the issue of whether the plaintiff would be permitted to maintain its action after serving the Delaware Secretary of State. Citing Rule 3 of the federal rules, the court stated that
Id. at 749 (emphasis added). Accord, Int'l Pulp Equip. Co. II, 55 F.Supp. 860-61.
Thus, the relator's action commenced when he filed his complaint on June 10, 2010, six months before the running of the three-year winding-up period.
The issue remains whether the government's complaint was timely filed because it relates back to relator's complaint. The Tailwind defendants contend that "[a]llowing the government's complaint filed years later to relate back to the relator's complaint would defeat Section 278's fundamental purpose," which is to "provide stockholders repose and certainty with respect to litigation following the defined winding-up period." Tailwind Reply at 3. They argue that "[t]his is especially true in the instant case where the government's complaint asserts new common law claims that the relator did not and could not allege." Id. The Tailwind defendants also assert that the FCA permits relation back only for statute of limitations purposes, and that Delaware's winding-up statute is not a statute of limitations. The defendants argue further that, in any event, "courts have found relation back principles inapplicable to Section 278 and have been reluctant to find exceptions to the three-year winding-up period." Id. at 4.
This contention of the Tailwind defendants also fails to persuade. The cases cited concerning the Delaware statute are inapposite, and the relevant federal authority explicitly support relation back.
The operative federal rule provides that "[a]n amendment to a pleading relates back to the date of the original pleading when ... the law that provides the applicable statute of limitations allows relation back...." FRCP 15(c)(1)(A). Thus, the question becomes whether the FCA statute of limitations applicable to the government allows relation back, and it does.
The FCA was amended in May 2009 by the Fraud Enforcement and Recovery Act ("FERA"), Pub. L. No. 111-21, 123 Stat. 1617. Prior to FERA, the FCA was silent as to whether the government's complaint relates back to the relator's complaint, so courts had to make a judicial determination as to whether the FCA permitted relation back. FERA, however, specifically amended the FCA to provide
FERA, Pub. L. No. 111-21, § 4(b)(3), 123 Stat. 1617, 1623 (2009) (emphasis added) (codified at 31 U.S.C. § 3731(c)). Our Court of Appeals has explained that "[u]nder the new [FERA] provision, the Government's complaint can relate back to the original complaint only `to the extent that the claim of the Government arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the prior complaint.'" U.S. ex rel. Miller v. Bill Harbert Intern. Const., Inc., 608 F.3d 871, 879-880 (D.C.Cir.2010). The FERA amendment to section 3731(b) applies to all cases pending at the time of its enactment and to cases filed thereafter, id. at 878 (citing Pub. L. No. 111-21, § 4(f)(2)), so it applies to the government's complaint in this case.
Here, there is no question that all of the government's FCA and common law claims are based on the same transactions and occurrences as the relator's complaint — the alleged doping by the cycling team during the period in which the USPS sponsored the team, and the associated false statements, false claims and breaches of contract. Because the FCA and the relevant federal rules of civil procedure govern and are clearly applicable here, the Court is unpersuaded by the Tailwind defendants' hyper-technical attempts to distinguish the FERA amendments and rely upon the Delaware winding-up statute.
One final note: The government asserts that its complaint has superseded the relator's complaint with respect to its claims against the Tailwind defendants, and therefore, it asserts, the Court may deny Tailwind's motion to dismiss the relator's complaint as moot. Gov't Opp'n to Tailwind Mot. to Dismiss at 4 n.3.
The Tailwind defendants also challenge service of process as ineffective. First, in their view, service of process was ineffective because a "dissolved corporation may not be served through former agents, officers, or directors of the dissolved corporation." Tailwind Mot. to Dismiss at 9. Moreover, argue the defendants, plaintiffs did not serve the Delaware Secretary of State and, therefore, service was never effectuated. Id. at 9-10.
The Court concludes that the plaintiffs have properly served the Tailwind defendants. The government properly served the Delaware Secretary of State. See Dkt. No. 102. In addition, both the government and the relator properly served the corporate defendants through individuals authorized to accept service on behalf of the Tailwind defendants. See Gov't Opp'n to Tailwind Mot. to Dismiss at 15-18; Relator Opp'n to Tailwind Mot. to Dismiss at 4-8. As the plaintiffs correctly observed, Rule 4(h)(1), in conjunction with Rule 4(e)(1), provide for several ways to serve process on a domestic corporation in the United States: (1) "following state law for serving a summons in an action brought in courts of general jurisdiction in the state where the district court is located or where service is made"; (2) "delivering a copy of the summons and of the complaint to an officer, a managing or general agent, or any other agent authorized" to accept service of process; and (3) by mailing a copy to an agent that is authorized to accept service of process. FRCP 4(h)(1); FRCP 4(e)(1). These requirements were met here.
The parties dispute whether, and to what extent, the tolling provision of the FCA Statute of Limitations ("SOL") at 31 U.S.C. § 3731(b)(2) applies to relators. The parties also dispute whether the plaintiffs' FCA claims should be tolled under section 3731(b)(2), to the extent that it is applicable, and whether the government's common law claims should be tolled under the tolling provision generally applicable to government actions founded on tort or contracts. See 28 U.S.C. § 2416(c). Finally, the relator argues that the plaintiffs' claims are tolled by the Wartime Suspension of Limitations Act, ch. 645, 62 Stat 828 (1948) (codified as amended at 18 U.S.C. § 3287). The Court addresses separately each SOL and tolling issue.
The FCA SOL is found at 31 U.S.C. § 3731(b), and its tolling provision is found in subsection (b)(2). The FCA SOL reads:
31 U.S.C. § 3731(b).
The relator filed his initial complaint on June 10, 2010. If the Section 3731(b)(2) tolling provision does not apply to him, then the relator is subject to the six-year SOL in Section 3731(b)(1). As a result, the relator could not recover against any defendant on allegedly false claims for payment that were submitted by the defendants to the USPS prior to June 10, 2004.
Urging this Court to adopt what appears to be the majority approach among the federal courts of appeal, the defendants argue that section 3731(b)(2) applies only to FCA actions brought by the government. See, e.g., United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288, 296 (4th Cir.2008). Under this approach, the six-year SOL in Section 3731(b)(1) would apply to the relator's claims against all of the defendants. Alternatively, the defendants urge this Court should adopt the Ninth Circuit's approach in United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1218 (9th Cir.1996), which held not only that section 3731(b)(2) does apply to relators, but also that whether a civil action will be tolled is based on "when facts material to the right of action are known or reasonably should have been known by" the relator — not the government. Under the Hyatt approach, the relator (Floyd Landis) would not be able to satisfy the standard for tolling under Section 3731(b)(2) because he had first-hand knowledge of the alleged fraudulent conduct as it allegedly occurred.
By contrast, the relator asks this Court to adopt the approach in United States ex rel. Pogue v. Diabetes Treatment Centers of America, 474 F.Supp.2d 75, 85 (D.D.C. 2007), which held that section 3731(b)(2) applies to relators. However, in contrast to Hyatt, the court in Pogue held that whether a civil action will be tolled is based on "when facts material to the right of action are known or reasonably should have been known by" the relevant government official, rather than when such material facts were known by the relator. Id.
To solve this riddle, the Court must begin with a close examination of the statute's text. See Murphy Exploration & Prod. Co. v. U.S. Dep't of Interior, 252 F.3d 473, 480 (D.C.Cir.2001) (citing Carter v. United States, 530 U.S. 255, 271, 120 S.Ct. 2159, 147 L.Ed.2d 203 (2000)). By its express terms, Section 3731(b)(2) is silent as to whether it applies to relators. Some of the courts that have adopted the
The approach by the court in Pogue, though thoroughly reasoned, is difficult to square with the Supreme Court's decision in Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409, 125 S.Ct. 2444, 162 L.Ed.2d 390 (2005). The logic of Pogue rests largely upon the premise that the Section 3731(b) reference to "[a] civil action under section 3730" unequivocally encompasses all civil actions allowed under Section 3730, including actions brought by relators pursuant to Section 3730(c). But the Supreme Court rejected an analogous premise in Graham County. There, the relator argued that "[a] civil action under section 3730" in Section 3731(b) "unambiguously applies to FCA retaliation actions" because retaliation actions arise under Section 3730(h). Graham County, 545 U.S. at 415, 125 S.Ct. 2444, 162 L.Ed.2d 390. Rejecting this argument, the Court explained that "the statute is more complex than this argument supposes," and "§ 3731(b), read in its proper context, does not govern § 3730(h) actions for retaliation." Id. The Court noted, for example, that "[then-section] 3731(c)
Applying the reasoning in Graham County here, this Court similarly concludes that it is not reasonable to construe Section 3731(b)(2) to mean that the application of tolling to relator's lawsuit turns on the knowledge of the responsible United States government official, when the government has in fact declined to prosecute the claims brought by the relator and the government has not intervened or become a party to the relator's lawsuit. Just as the Supreme Court in Graham County
In conclusion, the Court holds that the six-year limitations period in section 3731(b)(1) applies to the relator's claims against all of the defendants. Accordingly, the relator's FCA claims based on alleged fraudulent payments or reverse false claims that occurred prior to June 10, 2004 are dismissed with prejudice.
The Court next addresses whether the government's FCA and common law claims should be tolled. As previously discussed, the tolling provision applicable to the government's FCA claims is Section 3731(b)(2), which provides for up to a ten year limitations period. The government's common law claims of fraud, unjust enrichment, and breach of contract are subject to the SOL generally applicable to government suits for money damages founded on contracts, 28 U.S.C. § 2415(a) (six-year SOL), and torts, 28 U.S.C. § 2415(b) (three-year SOL). The SOL under Section 2415 are subject to the tolling provisions in 28 U.S.C. § 2416, which allows for tolling in two instances that are relevant here:
28 U.S.C. §§ 2416(a), (c) (2012). The tolling provisions in sections 3731(b)(2) and 2416(c) are identical, except that the former refers to "the" official of the United States, while the latter refers to "an" official of the United States. The use of "an" in section 2416(c) suggests that there could be multiple responsible United States officials with respect to the government's tort and contract claims, but that issue need not be resolved at this juncture. Rather, the inquiry turns on identifying at least one relevant "official of the United States charged with responsibility to act," and determining when this official knew or reasonably
"The statute of limitations is an affirmative defense, FRCP 8(c), and need not be negatived by the language of the complaint." Jones v. Rogers Mem'l Hosp., 442 F.2d 773, 775 (D.C.Cir.1971). Thus, "[a]s [the D.C. Circuit has] repeatedly held, courts should hesitate to dismiss a complaint on statute of limitations grounds based solely on the face of the complaint." Firestone v. Firestone, 76 F.3d 1205, 1208-09 (D.C.Cir.1996) (citing Richards v. Mileski, 662 F.2d 65, 73 (D.C.Cir.1981)). However, as the Supreme Court has explained, "[i]f the allegations ... show that relief is barred by the applicable statute of limitations, the complaint is subject to dismissal for failure to state a claim...." Jones v. Bock, 549 U.S. 199, 215, 127 S.Ct. 910, 166 L.Ed.2d 798 (2007).
This is a tricky procedural situation, and the D.C. Circuit has observed that "[t]here is an inherent problem in using a motion to dismiss for purposes of raising a statute of limitations defense. Although it is true that a complaint sometimes discloses such defects on its face, it is more likely that the plaintiff can raise factual setoffs to such an affirmative defense." Richards v. Mileski, 662 F.2d at 73. Thus, while the Richards court "d[id] not hold that the use of a motion to dismiss is always improper to raise a statute of limitations defense," id., it cautioned that the district court should not grant such a motion without giving the plaintiff adequate opportunity to make a record and present any evidence to contradict the defense. Id. Accordingly, in order to balance these competing considerations, it would appear that a district court can certainly grant a motion to dismiss on statute of limitations grounds, but to do so, the factual allegations in the complaint must clearly demonstrate all elements of the statute of limitations defense and that the plaintiff has no viable response to the defense. See Nader v. Democratic National Committee, 567 F.3d 692, 699-702 (D.C.Cir.2009) (affirming motion to dismiss complaint where uncontested allegations clearly showed not only when cause of action arose, but also that fraudulent concealment could not apply, citing Richards).
Invoking Section 2416(a), the government argues that its common law fraud and unjust enrichment claims against Defendant Bruyneel were tolled during the periods he was allegedly outside the United States. Gov't Opp'n to Bruyneel Mot. to Dismiss at 2. The government alleges that "Bruyneel is a resident of the United Kingdom" and was the directeur sportif of the cycling team, which "would require his presence in Europe for the substantial majority of each year." Id. The government asserts, therefore, that its "complaint raises factual disputes about Bruyneel's absence from the United States that potentially provide an additional basis to toll the statute of limitations as to the Government's common law claims against him." Id. at 3.
Based on this record, the Court concludes that it cannot determine solely from the face of the complaint whether the government's common law claims against Defendant Bruyneel should be tolled under 28 U.S.C. § 2416(a) for the time periods he was allegedly outside the United States. See, Firestone v. Firestone, 76 F.3d at 1208-09. Further fact development through discovery is required before the
Invoking Section 2416(c), the government argues "facts material to the right of action" were not known and reasonably could not have been known by the responsible United States official because the government did not know that members of the cycling team were doping.
While there does not appear to be any case law from this circuit defining "facts material to the right of action," other courts have interpreted this phrase. In Phillips Petroleum Co. v. Lujan, 4 F.3d 858, 859 (10th Cir.1993), the issue before the Tenth Circuit was "at what point should the statute of limitations commence to run under section 2416(c) in an action by the government to recover underpaid royalties from an oil and gas lease." The court stated that a "fact material to the right of action" should be interpreted to "necessarily includ[e] the fact that gave rise to the right of action." Id. at 862 (citing United States v. Kass, 740 F.2d 1493, 1498 (11th Cir.1984)). Applying this standard, the court stated that "the deficient royalty payment constituted a breach of [the lessee's] contractual duty to the government and it is that fact which gave rise to the government's right of action; therefore, the deficient payment was clearly a material fact." Id. Therefore, the court held, the SOL should "have been tolled until such time as the government could reasonably have known about [the lessee's] breach." Id.
Similarly, in Kass, the Eleventh Circuit construed Section 2416 to mean that "the 6-year statute of limitations began to run, at the very latest, on September 4, 1974, when the Florida Medical Foundation notified Blue Shield of its finding that Kass had `overutilized' Medicare [many years before] in 1970 and 1971." 740 F.2d at 1497 (emphasis added). The court also suggested that the "facts making up the `essence' of the cause may have been reasonably knowable by the government before September, 1974," because "[w]hen Blue Shield first referred Kass' claims to the Florida Medical Foundation in February, 1974, it had already noted irregularities in his claims, sought and obtained records from him, and conducted a two-tier internal review of his claims." Id. at
Thus, the SOL does not commence upon notice of allegations of impropriety instead, it is when the impropriety itself is known or reasonably should have been known by the relevant official that he SOL commences. Indeed, where an investigation reveals there was no impropriety, no "right of action" accrues at all. In this case, as explained above, the contract required the cycling team to comply with various United States and international cycling regulations, so generally speaking, a breach would not occur unless and until there was a violation of one or more of those regulations.
Having established that the riders' doping — and not the investigation or media reports — was a fact material to the government's FCA and common law claims, the remaining issue is when the riders' doping was "known" or "reasonably should have been known" by the responsible government official.
As an initial matter, the defendants argue that because the government did not independently investigate the doping allegations, its claims cannot be tolled. See Armstrong Reply to Gov't Opp'n at 3-4. Specifically, the defendants contend that "[u]nder the `discovery-due diligence' standard, `a plaintiff's failure to exercise due diligence in discovering the material facts underlying the cause of action is fatal to those claims.'" Armstrong Reply to Gov't Opp'n at 4.
While defendants are correct that due diligence by the government is required, "Congress also intended that the government should not be penalized for excusable ignorance of such claims. Foremost in the enactment of § 2416(c) was the thought that the government should not be penalized if the fraud of an adverse party
The Court now turns to whether the riders' doping "reasonably should have been known" by the government. In making this determination, the findings (or lack thereof) of the investigation by the French authorities are significant. As the above cases demonstrate, an investigative body's uncovering of impropriety is a significant factor in determining if the facts material to the government's right of action reasonably should have been known. But the converse also must be true: an investigation that exonerated the defendants — or at the least was inconclusive as to whether there was any impropriety — has bearing on whether the government reasonably should have known of the facts material to its right of action. And here, it appears — at least on the record currently before the Court — that the investigation vindicated Mr. Armstrong and his fellow riders' claims that they were innocent of doping.
Of course, the government's reliance on a "failed" investigation does not preclude a court from concluding that the government still reasonably should have known of the facts material to its right of action. An investigation may result in findings that, for a variety of reasons, fail to provide a sufficient basis upon which the government may reasonably rely. But here, the defendants have not presented any reasons why the government should not have deferred to the French authorities in the first instance, or why the findings of the French investigation should have been discredited at the time, and no reason is apparent to the Court from the complaint. Moreover, it was not solely the findings of the French investigation that supported the government's decision to decline further investigation; the members of the cycling team made repeated representations that they were innocent during this same time period. See, e.g., Gov't Compl. ¶ 63E (In November 2000, Armstrong allegedly met with Postal Service officials to discuss the doping allegations, and he denied them and suggested through words and conduct that they were a "clean team").
There could possibly be documents in the government's possession suggesting that it had reason to know the cycling team was doping, despite the findings of the investigation by the French authorities, the drug tests the cycling team repeatedly passed, or any other public information tending to confirm the riders' claims that they never doped. If so, there may be force to the defendants' argument that the government should have conducted its own investigation sooner, and that if it had undertaken such an investigation, it would have uncovered doping. But the Court cannot make that determination based on the present record and based
Citing the war in Afghanistan, Relator argues on his own behalf, see Relator Opp'n to Weisel Mot. to Dismiss at 41-42, and on behalf of the government,
The WSLA reads in relevant part:
Wartime Suspension of Limitations Act, ch. 645, 62 Stat 828 (1948) (codified as amended at 18 U.S.C. § 3287).
However, the WSLA does not appear to apply. In Bridges v. United States, 346 U.S. 209, 73 S.Ct. 1055, 97 L.Ed. 1557 (1953), the Supreme Court held that the WSLA did not suspend, due to World War II, the SOL for the criminal offense of wilfully and knowingly making a false statement under oath in naturalization proceedings. In so holding, the Court observed that the "suspension prescribed by the Wartime Suspension of Limitations Act applies to offenses involving the defrauding of the United States or any agency thereof, whether by conspiracy or not, and in any manner, but only where the fraud is of a pecuniary nature or at least of a nature concerning property." Id. at 215, 73 S.Ct. 1055. Immediately thereafter, the Court explained Bridges as holding that the WLSA applies to offenses "which include fraud as an essential ingredient," meaning that a specific intent to defraud the government is an essential element of the offense or cause of action. United States v. Grainger, 346 U.S. 235, 242, 73 S.Ct. 1069,
Given Grainger's emphasis on offenses that "include fraud as an essential ingredient," the 1986 amendments to the FCA are significant. These amendments added definitions for the terms "knowing" and "knowingly," providing that "no proof of specific intent to defraud is required." Pub. L. No. 99-562, § 2(b), 100 Stat. 3153 (1986). Consistent with these amendments, Rule 9(b)'s pleading requirements, which apply to FCA actions, "specifically allow[] allegations of `intent, knowledge, and other condition of mind' to be averred generally." United States ex rel. Totten v. Bombardier Corp., 286 F.3d 542, 552 (D.C.Cir.2002) (emphasis added). See also, United States v. TDC Mgmt. Corp., 24 F.3d 292, 297 (D.C.Cir.1994) (FCA does not require proof that "the defendant acted with an intent to deceive," and "[t]he 1986 amendments expressly provided that `no proof of specific intent to defraud is required' to satisfy the Act's knowledge provisions) (quoting 31 U.S.C. § 3729(b)); United States v. Science Applications Int'l Corp., 626 F.3d 1257, 1274 (D.C.Cir.2010) (same, citing TDC Mgmt.).
Thus, as a result of the 1986 FCA amendments, it is clear in this Circuit that civil FCA actions under the modern version of the statute do not require proof of fraud as an "essential element," which is required by the holdings in Bridges and Grainger for the WSLA to apply. And the Relator has not contended that proof of specific intent to defraud is required for the FCA claims or any of the other claims at issue.
The analysis thus far has addressed the parties' procedural and jurisdictional arguments. The remaining discussion concerns the defendants' motions to dismiss
The relator has pled four FCA causes of action, but he pled each FCA cause of action both pre- and post-FERA, and therefore asserts eight Counts in his complaint. Specifically, his Counts are presenting false claims (Counts 1 and 5), presenting false records or statements material to a false claim (Counts 2 and 6), conspiracy to commit an FCA violation (Counts 3 and 7), and reverse false claims (Counts 4 and 8). Relator SAC ¶¶ 239-277. Counts 5 through 8 are the relator's post-FERA Counts. The government has also pled the same four FCA causes of action, but it decided to plead only Count 2 — presenting false records or statements material to a false claim — both pre- and post-FERA. Gov't Compl. ¶¶ 74-85; Gov't Opp'n to Armstrong Mot. to Dismiss at 20-23. The government's remaining FCA causes of action are pled only pre-FERA.
Recall that Congress passed FERA on May 20, 2009. In the law, Congress provided that "[t]he amendments made by this section shall take effect on the date of enactment of this Act and shall apply to conduct on or after the date of enactment...." Pub. L. No. 111-21, § 4(f), 123 Stat. 1617, 1625 (2009) (emphasis added). However, Congress also noted two exceptions, one of which is relevant to the present argument:
Id., § 4(f)(1) (emphasis added).
Thus, this exception, which applies only to post-FERA "false statements" FCA claims brought under the newly-designated 31 U.S.C. § 3729(a)(1)(B), potentially applies to the government's Count 2 and relator's Count 6.
The defendants first argue that the relator's post-FERA claims should be dismissed because he has not pled any actionable conduct occurring on or after May 20, 2009. Secondly, defendants argue that the exception should not be construed to permit the post-FERA false statement FCA claims to apply to conduct that occurred before May 20, 2009. The Court will address these arguments in turn.
Defendants argue that since "Relator alleges no conduct occurring after
The relator's response is entirely unacceptable. The relator cites only one paragraph of his complaint that specifically alleges conduct occurring after May 20, 2009: "[w]hen the relator's allegations regarding Mr. Armstrong were published in May 2010, defendant Armstrong once again publicly denied any involvement in doping." Relator SAC ¶ 129. None of the other paragraphs cited by relator as purportedly involving conduct occurring after May 20, 2009 include specific dates. Instead, those other cited paragraphs have an unspecified temporal scope, using phraseology such as "[d]uring the time period relevant to his complaint" or "[d]uring the time period relevant to his complaint and through the present." See, e.g. ¶¶ 57, 58, 197, 207, and 210. The Court finds that the single allegation of conduct in paragraph 129 is insufficient to state a claim, and that the remaining allegations are too vaguely pled to demonstrate that sufficient actionable conduct occurred on or after May 20, 2009 to state a claim under any of the relator's FCA theories of liability. The Court therefore dismisses the relator's Counts 5, 6, 7, and 8, without prejudice, but only to the extent that those claims purport to assert claims based on conduct occurring on or after May 20, 2009.
Now, the Court turns to the argument that the post-FERA "false statement" FCA claims of the government and relator cannot be construed to apply to conduct that occurred before May 20, 2009. As stated above, Congress specified that for FCA actions brought under Section 3729(a)(1)(B) [previously Section 3729(a)(2)], FERA "shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act ... that are pending on or after that date...." Pub. L. No. 111-21, § 4(f)(1), 123 Stat. 1617, 1625.
The parties dispute how the phrase "all claims under the False Claims Act" should be interpreted. The relator and the government argue that "all claims under the False Claims Act" means a civil action or legal claim brought pursuant to Section 3729(a)(1)(B) of the FCA. See Gov't Opp'n to Armstrong Mot. to Dismiss at 21. Citing the definitions section of the FCA, the defendants argue that "all claims under the False Claims Act" means a "request or demand" for payment under the sponsorship agreement. Armstrong Reply to Gov't Opp'n at 8. (quoting 31 U.S.C. § 3729(b)(2)(A) ("[T]he term `claim' means any request or demand, whether under a contract or otherwise, for money or property....")).
If, as plaintiffs contend, "claim under the False Claims Act" means a civil action or a legal claim pursuant to Section 3729(a)(1)(B), then the FERA amendments apply to the plaintiffs' FCA causes of action, because both of the plaintiffs' civil actions included such "claims" and each of their civil actions were "pending on or after [June 7, 2008]." Pub. L. No. 111-21, § 4(f)(1), 123 Stat. 1617, 1625. But if
The defendants appear to correctly state that their "request or demand" for payment interpretation has been adopted by every district court judge in this District to have considered the matter thus far. See, e.g., United States ex rel. Barko v. Halliburton Co., 952 F.Supp.2d 108, 118 n. 94 (D.D.C.2013) (citing other authorities); United States v. Toyobo Co., 811 F.Supp.2d 37, 48 n. 6 (D.D.C.2011); United States v. Sci. Applications Int'l Corp., 653 F.Supp.2d 87, 107 (D.D.C.2009), vacated in part and remanded on other grounds, 626 F.3d 1257 (D.C.Cir.2010). And the lone court in this District that had previously ruled the other way later reversed itself. See United States ex rel. Westrick v. Second Chance Body Armor, Inc., 709 F.Supp.2d 52, 55 (D.D.C.2010) ("[I]t was error to conclude that FERA's amended provisions applied retroactively to the claims at issue here."). Additionally, this "request or demand" for payment approach has also been followed by the Eleventh Circuit, see Hopper v. Solvay Pharm., Inc., 588 F.3d 1318, 1327 n. 3 (11th Cir.2009), cert. denied, 130 S.Ct. 3465 (2010), and the Ninth Circuit, U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1051 n. 1 (9th Cir.2011) (citing Hopper).
In contrast, the plaintiffs' view has been followed by a majority — four — of the circuit courts to have addressed the issue thus far. See Sanders v. Allison Engine Co., Inc., 703 F.3d 930, 938 (6th Cir.2012); United States ex rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 822 n. 2 (7th Cir.2011); United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 113 (2d Cir.2010), rev'd and remanded on other grounds, ___ U.S. ___, 131 S.Ct. 1885, 179 L.Ed.2d 825 (2011); United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 267 n.1 (5th Cir.2010).
The Court agrees with defendants that the analysis should begin with the statutory definition of "claims" under the FCA, as statutory definitions usually control the meaning of words in a statute. Burgess v. United States, 553 U.S. 124, 129, 128 S.Ct. 1572, 170 L.Ed.2d 478 (2008) ("Statutory definitions control the meaning of statutory words ... in the usual case.") (ellipses
The term "claim" is defined under the FCA as "any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property...." 31 U.S.C. § 3729(b)(2)(A). As the Sixth Circuit observed, inserting this statutory definition into the text of the FERA amendment leads to a "nonsensical result":
Sanders, 703 F.3d at 938 n. 4 (citations omitted; emphasis in original). Substituting the statutory definition of `claim' into the phrase `claims under the False Claims Act' makes little sense because the definition pertains to a request for payment made by the contractor, not the government, while a "claim under the False Claims Act" pertains to a demand by the government, rather than by the contractor under the FCA. Indeed, the defendants' briefing recognizes that requests or demands for payment made under the parties' sponsorship agreement, not to the government "under" the FCA: "the government admits that it paid its last claim to Tailwind on June 1, 2004[,]" pursuant to the 2000 sponsorship agreement. Armstrong Mot. to Dismiss at 14 (citing Gov't Compl. ¶¶ 69-72; Attachment B, Ex. A, § 3). It is only the ensuing legal action, if any, by the government that is made "under the FCA." See Sanders, 703 F.3d at 938. The Court therefore finds that the statutory definition is not dispositive in this instance, because utilizing the statutory definition creates an absurd result.
The defendants' other argument — that Congress's use of "cases pending" in § 4(f)(2) of the FERA demonstrates that Congress knew how to refer to "cases" when it wanted to — is also unpersuasive. First, the original FCA statute uses the words "cases" and "claims" interchangeably to refer to civil causes of action. Compare, e.g., 31 U.S.C. § 3731(c) (utilizing "claim" to refer to the government's right to bring its own civil action or intervene in a relator's civil action), and 31 U.S.C. § 3732(b) (under this provision — entitled "Claims under state law" — district courts have jurisdiction over any action brought under state law for the recovery of state or local government funds if the "action arises from the same transaction or occurrence" as an action under § 3730), with 31 U.S.C. § 3730(c)(2)(C) (addressing ways in which a court may limit a relator's participation once the government has intervened if participation "would interfere with or unduly delay the Government's prosecution of the case") (emphasis added), and 31 U.S.C. § 3733(i)(3) ("Whenever any attorney of the Department of Justice has been designated to appear before any
Secondly, the effective date selected by Congress in the § 4(f)(1) FERA amendment undermines defendants' contention that the use of the term "cases" in § 4(f)(2) only supports their side of the argument. The effective date in § 4(f)(1) — June 7, 2008 — is highly significant, because that date immediately precedes the Supreme Court's June 9, 2008 decision in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 128 S.Ct. 2123, 170 L.Ed.2d 1030 (2008), which narrowed the construction of a false statements FCA cause of action. It is beyond dispute that with the FERA amendments, Congress intended to overrule the Supreme Court's narrow interpretation the false statements FCA theory of liability announced in Allison Engine. "Although the 2009 amendments to the FCA generally apply only to conduct on or after May 20, 2009, § 3729(a)(1)(B) [the FCA theory based on false statements] applies retroactively to all claims pending on or after June 7, 2008 (that is, just before the Supreme Court's decision in [Allison Engine]." Steury, 625 F.3d at 267 n. 1. As one commentator has noted, Congress may have used the term "claim" in § 4(f)(1) given that FERA amended more than one FCA theory of liability, but Congress only intended retroactive treatment of its new definitions for one cause of action — those based on the FCA's false statement theory of liability. That was the only thing necessary to overrule Allison Engine. If Congress had used the word "cases" instead, then the amendment could have been construed to mean that all FCA causes of action included in the "case" would receive retroactive treatment under FERA. That would have been a broader and unintended result:
Claire M. Sylvia, The False Claims Act: Fraud against the Government § 10:46 (also describing the approach of the majority of circuits as "both more logical and more consistent with Congress's goal"). The Court finds this explanation of the text's language quite persuasive.
Accordingly, the Court concludes it is not appropriate in this instance to apply mechanically the statutory definition of "claim" in the FCA to the FERA amendment at § 4(f)(1) and holds that "claims under the False Claims Act" means a civil action or legal claim under Section 3729(a)(1)(B), and thus the FERA applies
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Complaints brought under the FCA must also comply with Rule 9(b). See United States ex rel. Totten v. Bombardier Corp., 286 F.3d 542, 551-52 (D.C.Cir.2002) ("Every circuit to consider the issue has held that, because the False Claims Act is self-evidently an anti-fraud statute, complaints brought under it must comply with Rule 9(b)."). Rule 9(b) states that in "alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." FRCP 9(b). However,
U.S. ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1256 (D.C.Cir. 2004) (quoting United States ex rel. Joseph v. Cannon, 642 F.2d 1373, 1386 (D.C.Cir. 1981)) (internal quotation marks omitted).
Thus, "[c]ombining Rules 8 and 9(b)," the D.C. Circuit has required "that `the pleader state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud.'" Williams, 389 F.3d at 1256 (quoting Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1278 (D.C.Cir.1994)). See also Totten, 286 F.3d at 552 (explaining that the "`circumstances' that must be pleaded with specificity are matters such as the `time, place, and contents of the false representations,' such representations being the element of fraud about which the rule is chiefly concerned") (emphasis in original) (quoting WRIGHT & MILLER § 1297).
Section 3729(a)(1) imposes liability on any person who "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." 31 U.S.C. § 3729(a)(1)(A) (2006). Thus, the elements are "(1) the defendant submitted a claim to the government, (2) the claim was false, and (3) the defendant knew the claim was false." United States ex rel. Harris v. Bernad, 275 F.Supp.2d 1, 6 (D.D.C.2003) (citing United States v. Southland Mgmt. Corp., 288 F.3d 665, 674-75 (5th Cir.2002), aff'd en banc, 326 F.3d 669 (5th Cir.2003)). The Court will separately address whether the plaintiffs have adequately pled this claim against each of the defendants who raised the Rule 9(b) issue.
Defendant Weisel argues that the relator's Count 1 fails for three reasons: "Relator does not adequately allege (a) that Mr. Weisel made a claim to the USPS for payment, (b) that any such claim was `false' or (c) that Mr. Weisel knew that any such claim was false." Weisel Mot. to Dismiss Relator SAC at 4.
The relator concedes that his complaint "does not allege that Weisel was an employee, the team manager, nor the individual who physically submitted false claims to the U.S. Postal Service." Relator Opp'n to Weisel Mot. to Dismiss at 5-6. He contends that it is not necessary for Mr. Weisel to have "personally" submitted a claim, because the statute imposes liability for those who "cause" false claims to be presented. Id. at 5. To support his argument that Mr. Weisel caused the submission of false claims, the relator points to Mr. Weisel's failure — as the founder, president, chairman and largest shareholder of Tailwind — to prevent or at least investigate the allegations of doping. Id. at 6. And in "addition to failing to take preventative action," the relator alleges that Mr. Weisel "also took affirmative steps to facilitate the doping scheme and the submission of the false claims by undermining the impartial enforcement of doping rules." Id. at 7.
Responding to Defendant Weisel's argument that the claims were not false, the relator states that this argument "boils down to the contention that, even if the [USPS] had understood that virtually the entire USPS Team was engaged in illicit doping, it would not have mattered; the Postal Service still would have been obliged to pay and would have willingly done so." Id. at 10. The relator rejects this argument, and further states that the falsity of a claim can be established by "fraudulent inducement" and "false implied certifications." Id. at 10-17.
Finally, as to whether Defendant Weisel "knew" the claims were false, the relator contends he has satisfied Rule 9(b)'s requirement that knowledge be pled generally, but that, in any event, he has sufficiently pled that Defendant Weisel had actual knowledge of the defendants' doping. Id. at 17.
Courts generally require that the defendant affirmatively act in order to impose liability under the FCA, particularly when a plaintiff alleges that the defendant "caused" the submission of false claims. See Sikkenga, 472 F.3d 702, 714 (10th Cir.2006) (requiring "affirmative action on the part of a defendant before imposing liability under the FCA" because "too broad an interpretation of the `causes to be presented' language in the FCA would impose liability on parties merely for failing to prevent the fraudulent acts of others") (some internal quotation marks omitted). Thus, a failure to act, without more, is insufficient to impose FCA liability. See JOHN T. BOESE, CIVIL FALSE CLAIMS § 2.01(A), at 15 (4th ed. & 2013-2 Supp.) [hereinafter, CIVIL FALSE CLAIMS] ("Mere inaction does not constitute a violation of the False Claims Act, and the government must argue more than that a defendant was aware of an alleged fraud."). The relator has not alleged with the specificity required under Rule 9(b) that Mr. Weisel "caused" the submission of false claims. See United States v. Bornstein, 423 U.S. 303, 312, 96 S.Ct. 523, 46 L.Ed.2d 514 (1976) ("The [FCA] does not penalize [a defendant] for what [another defendant] did. It penalizes [a defendant] for what it did.").
The relator argues that the claim Defendant Weisel allegedly caused to be submitted was "false" because it was "fraudulently induced" or because there was an "false implied certification." Relator Opp'n to Weisel Mot. to Dismiss at 10-17. Because the Court concludes the claims were false under the theory of implied certification, it need not address whether the claims were also false under the theory of fraudulent inducement.
Our Court of Appeals has explained that under the theory of implied certification, "a claim for payment is false when it rests on a false representation of compliance with an applicable federal statute, federal regulation, or contractual term." United States v. Science Applications Int'l Corp., 626 F.3d 1257, 1266 (D.C.Cir.2010) (hereinafter "SAIC"). "False certifications can be either express or implied," and courts "infer implied certifications from silence where certification was a prerequisite to the government action sought." Id. (internal quotation marks omitted). Further, the plaintiff must show that the defendant "withheld information about its noncompliance with material contractual requirements," and the "existence of express contractual language specifically linking compliance to eligibility for payment may well constitute dispositive evidence of materiality...." Id. at 1269.
As explained previously, both the 1995 and 2000 sponsorship agreements required that the cycling team adhere to the rules of the UCI, IOC, and the other governing bodies of international cycling. E.g. 1995 Agreement ¶ 13; 2000 Agreement ¶ 12. The complaints of the government and the relator both allege that the cycling team engaged in repeated and rampant doping activity that was prohibited by these governing bodies while submitting claims for payment to the Postal Service under those agreements. This would appear to be sufficient to allege there was a false certification of compliance with a material contract term. However, the plaintiff must also allege and prove that Weisel withheld information about this noncompliance (doping). SAIC, 626 F.3d at 1269. Because a person cannot withhold information about something of which he has no knowledge, for the reasons that immediately follow, the pleading of this element also falls short.
The FCA's scienter requirement should be strictly enforced. As our Court of Appeals has explained, "strict enforcement of the FCA's scienter requirement will also help to ensure that ordinary breaches of contract are not converted into FCA liability." Id. at 1271. To allege that Mr. Weisel had knowledge of the falsity, the relator can demonstrate either that Mr. Weisel had actual knowledge or that he deliberately avoided or recklessly disregarded the truth. See id. at 1274-75 ("Although Congress defined `knowingly' to include some forms of constructive knowledge, its definition of that term imposes liability for mistakenly false claims only when the defendant deliberately avoided learning the truth or engaged in aggravated gross negligence.").
The relator does not allege that Mr. Weisel had actual knowledge of the riders'
Instead, the relator's allegations mostly emphasize Mr. Weisel's inactions. For example, the relator states that "Weisel never called for the Team to test the riders for banned substances or otherwise investigate doping by the Team." Relator Opp'n to Weisel Mot. to Dismiss at 7. But allegations that Mr. Weisel — even as the president, chairman, and largest shareholder of Tailwind — failed to take "preventative action" are insufficient to plead knowledge of the doping activity.
The relator's attempts to identify "affirmative steps" taken by Weisel to "facilitate the doping scheme" also fall short of Rule 9(b)'s specificity requirement. For example, the relator states that,
Id. at 7. The relator also contends that the USPS was "persuaded by Weisel's company to sponsor" the team, and that Weisel signed the 1995 agreement. Id. Accepting all of these allegations as true, none identify acts specifically taken by Defendant Weisel that actually facilitated any of the alleged doping activities, nor do they show that they he knew about the doping.
The relator also relies upon Mr. Weisel's high-ranking position in Tailwind to argue that he was likely aware of the doping. The problem with the relator's theory is that, if accepted, it threatens to cast too wide of a net around corporate officials for FCA liability. Given that our Court of Appeals has rejected the theory that the "collective knowledge" of a corporation's officers can support the argument that the corporation knowingly submitted a false claim, SAIC, 626 F.3d at 1275, the Court declines to accept the theory that the FCA's scienter requirement can be established solely because an individual had a high-ranking position within the corporation that submitted an allegedly false claim. Such a theory substitutes the FCA's scienter requirement with "a type of loose constructive knowledge that is inconsistent with the Act's language, structure, and purpose." Id. at 1274. Thus, the relator has failed to plead with particularity that Mr. Weisel knew the claims were false.
Accordingly, the relator has failed to pled facts that would establish each element necessary to establish a prima facie case against Weisel for presenting false claims pre-FERA, and this claim is dismissed without prejudice.
The Tailwind defendants contend that the
In response, the government asserts, preliminarily, that Tailwinds' "perfunctory and unsupported argument regarding the sufficiency of the Government's pleading should be deemed waived because it gives no indication of why the United States' Complaint in Intervention is insufficient." Gov't Opp'n to Tailwind Mot. to Dismiss at 19 (emphasis in original). But in any event, the government argues, its complaint is sufficient. Id. at 19-21.
The Court agrees that the Tailwind defendants have waived their Rule 9(b) arguments by not sufficiently developing these arguments. In most instances, joining and incorporating the legal arguments of a co-party is common in complex, multifaceted litigation. The same or similar legal arguments can often be made on behalf of many parties. But the Rule 9(b) analysis is a fact-intensive inquiry as to whether a plaintiff has raised allegations against a particular defendant with the required specificity. As such, it is more difficult for a co-party to join and incorporate the arguments of its co-party. Here, Mr. Weisel's arguments focus on why the relator has not pled fraud with specificity against Mr. Weisel; these arguments do not do much to support the argument that dismissal under Rule 9(b) is proper against the other defendants. At most, Mr. Weisel's arguments may incidentally support the other defendants' Rule 9(b) arguments — but it takes more than incidental support or cursory discussion to sufficiently develop a legal argument. See Cement Kiln Recycling Coal. v. E.P.A., 255 F.3d 855, 869 (D.C.Cir.2001) ("A litigant does not properly raise an issue by addressing it in a cursory fashion with only bare-bones arguments.") (internal quotation marks omitted). Accordingly, the Court finds that the Tailwind defendants have not sufficiently developed their Rule 9(b) argument with respect to the pre-FERA presenting false claims cause of action and, consequently, it has been waived.
In moving to dismiss the plaintiffs' complaints, Defendant Bruyneel joined and incorporated Mr. Armstrong's motions to dismiss the plaintiffs' complaints. Bruyneel Mot. to Dismiss Gov't Compl. at 1; Bruyneel Mot. to Dismiss Relator SAC at 1. As stated previously, Armstrong did not even raise a Rule 9(b) objection. Thus, Defendant Bruyneel has also waived this argument.
The pre-FERA version of the false records or statements provision imposed liability on any person who "knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government." 31 U.S.C. 3729(a)(2) (2006). Post-FERA, this provision imposes liability on any person who "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1)(B). This distinction between the two provisions does not affect the Court's analysis of whether relator has pled Counts 2 and 6 with the required specificity.
The relator's Counts 2 and 6 suffer from the same defect as the relator's false claims Counts: the relator has failed to allege that Mr. Weisel "caused" to be made or used a false record or statement material to a false or fraudulent claim. The Court therefore dismisses these Counts as well, without prejudice.
For the reasons stated supra in Part III.B.1, the Tailwind Defendants and Defendant Bruyneel have waived any Rule 9(b) argument.
Section 3729(a)(3) imposes liability on any person who "conspires to defraud the Government by getting a false or fraudulent claim allowed or paid." 31 U.S.C. 3729(a)(3) (2006). "[T]o prove a False Claims Act conspiracy, a [plaintiff] must show (1) the existence of an unlawful agreement between defendants to get a false or fraudulent claim allowed or paid by the Government and (2) at least one act performed in furtherance of that agreement." United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 193 (5th Cir. 2009) (internal quotation marks omitted). Furthermore, "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." Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 672, 128 S.Ct. 2123, 170 L.Ed.2d 1030 (2008) (internal quotation marks omitted).
Defendant Weisel argues that Count 3 of the relator's complaint fails for two reasons: "Relator does not adequately allege (a) that Mr. Weisel entered into a conspiracy with anyone, much less (b) with the specific intent to defraud the USPS." Weisel Mot. to Dismiss Relator SAC at 4. The relator responds that he has alleged Mr. Weisel conspired with one or more persons to have a fraudulent claim paid by the U.S.; that there were acts by the members of the conspiracy to conceal the doping and submit false claims to the USPS; and the conspirators' continued lies allowed them to keep collecting payments and avoid returning payments. Relator Opp'n to Weisel Mot. to Dismiss at 21-22 (citing Relator SAC ¶¶ 53-59, 81-154).
The relator has not adequately pled that Mr. Weisel entered into a conspiracy to defraud the USPS. To establish that Mr. Weisel conspired with others, the relator alleges, for example, that "Weisel, Armstrong, Bruyneel and CSE were all involved in the wrongful conduct by Tailwind alleged herein, and all four were also shareholders of Tailwind during all or part of the period covered by the 2000 Sponsorship Agreement...."). Relator Opp'n to Weisel Mot. to Dismiss at 21 n.16 (citing Relator SAC ¶ 234). But to satisfy Rule 9(b), the relator must do more than draw inferences of a conspiracy to defraud the government based on Mr. Weisel being a shareholder and a corporate official at Tailwind. Cf. United States ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1256 (D.C.Cir.2004) (requiring the plaintiff to "`state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud.'" (quoting Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1278
For the reasons stated supra in Part III.B.1, the Tailwind Defendants and Defendant Bruyneel have waived their Rule 9(b) argument.
The reverse false claims provision imposes liability on any person who "knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government." 31 U.S.C. 3729(a)(7) (2006). The parties dispute whether the defendants owed an obligation to pay money to the government within the meaning of this provision.
The defendants seek dismissal pursuant to FRCP 12(b)(6) because the "government has not alleged a single contract that requires the defendants to pay the government." Armstrong Mot. to Dismiss Gov't Compl. at 16. The defendants also contend that reverse false claims do "not extend to contingent liabilities," and the government "has not pleaded that any defendant owes a non-contingent liability to pay money to the government." Armstrong Reply to Gov't Opp'n at 11. Thus, the defendants argue that "[b]ecause any contract liability had not been reduced to an obligation to pay prior to the alleged false statements, the government's section 3729(a)(7) claim fails." Armstrong Mot. to Dismiss Gov't Compl. at 16. Other defendants also assert that the reverse false claims Count fails for the additional reason that the defendants never made a false statement or record, even if they had an obligation to pay money to the government. Weisel Mot. to Dismiss at 22-23.
The plaintiffs respond that the reverse false claims provision applies to contingent obligations because, post-FERA, "obligation" is defined as "an established duty, whether or not fixed." Gov't Opp'n to Armstrong Mot. to Dismiss at 29 (emphasis in original) (citing 31 U.S.C. § 3729(b)(4)). The plaintiffs assert that "Congress intended the new definition to clarify rather than change the meaning of an obligation under the FCA." Id. Thus, according to plaintiffs, the amended definition of the cause of action informs the interpretation of the pre-FERA provision. Separately, the relator argues that the defendants did have an obligation to pay the government money, because "the Complaint alleges that Tailwind had a contractual obligation to indemnify the U.S. Postal Service in the event of damages arising from material misrepresentations." Relator Opp'n to Weisel Mot. to Dismiss at 23.
The government's argument essentially is that the defendants had an "obligation" to reimburse the government because they breached the sponsorship agreement, and the defendants made false statements to avoid or prevent the occurrence of any such reimbursement. See Gov't Compl. ¶ 72 ("In making the false statements ... the Defendants intended to avoid Tailwind's obligation to repay the United States the amounts it had received as a result of its submission of false claims, and it was reasonably foreseeable that the Defendants' statements would enable Tailwind to avoid its obligation to repay those amounts."). Thus, the first issue before the Court is whether the alleged breach of the sponsorship agreements due to the riders' doping impose an "obligation" to reimburse the government for money previously awarded under the contract.
Further, the Sixth Circuit's inclusion of both "final judgments" and "breaches of government contracts" as "obligations" necessarily means that the court was referring to alleged breaches of government contracts, for if the court had intended to refer only to breaches that have resulted in a court awarding a judgment, it would have been redundant for the court to separately refer to final judgments in addition to breaches of contracts. That said, every alleged breach of contract does not give rise to the type of obligation that would serve as the basis for a reverse false claims. Rather, the allegations must be sufficiently weighty to show that the defendant owes to "the government an obligation sufficiently certain to give rise to an action of debt at common law." Am. Textile Mfrs. Inst., Inc. v. The Ltd., Inc., 190 F.3d 729, 736 (6th Cir.1999).
At common law,
Turning to the obligations imposed by both the 1995 and 2000 sponsorship agreements, the parties were required to perform those obligations in "compliance with all applicable rules" of various organizations that governed cycling, including the Union Cycliste Internationale [UCI] and the International Olympic Committee [IOC]. See 1995 Agreement ¶ 13; 2000 Agreement ¶ 12. Both the UCI and IOC prohibited the use of certain performance enhancing drugs and prohibited other practices known to enhance rider performance. Gov't Compl. ¶ 17; Relator SAC ¶ 36. In the 2000 Agreement, the parties added a provision stating:
For several reasons, the alleged doping activity would constitute a breach of contract with the Postal Service that would create a potential liability to the government sufficiently certain to constitute an "obligation" under the reverse false claims theory of liability.
First, the parties to the contract unmistakably understood the symbolism embodied by having a bicycle racing team associated with the Postal Service, which was in competition with other courier, mail and delivery services and seeking to enhance its reputation as having "fast" services. An Addendum to the 1995 Agreement provided that "Montgomery Sports' primary mission is to accomplish the business objectives of the U.S. Postal Service." 1995 Agreement Ex. D (Sponsorship Proposal) (Dkt 93-1 at 23). Another goal of the sponsorship was "[a]ssociat[ing] the U.S. Postal Service with a sports property that showcases its advances in technology, speed and efficiency of Priority Mail," and "[a]ssociat[ing] with a property that enhances the U.S. Postal Service image in the community and generates goodwill." Id., Dkt 93-1 at 23-24. Doping by the cycling team would therefore be a total breach of the contracts, not only because they expressly required compliance with anti-doping rules, but also because rather than being associated with a team that is genuinely fast, the Postal Service's reputation and goodwill are seriously damaged by an association with a team that is faster because it cheats. Indeed, given the public relations goals of the sponsorship, it is
Secondly, the other core benefit of the bargain for the Postal Service was increased marketing exposure. Thus, another goal of the relationship was to ensure participation of the cycling team in as many promotional events and races as possible in order to "produce significant exposure [for the USPS] in newspapers, radio and television throughout North America, Europe and Asia." 1995 Agreement Exh. D, ¶ C. Competing in races was a central part of the agreement. Indeed, when approximating the expected value to the USPS of advertisements at $12 million, the 1995 Agreement expressly based its valuation on the cycling team competing in various races, and more generally on hours of televised coverage. Id. The only way the cycling team could provide the USPS with televised coverage of its iconic logo on the team jerseys — and thereby provide the promotion contemplated under the agreement — was to comply with the governing organizations' rules concerning doping. Doping would lead to suspensions or bans for team members and/or the entire team, and a team that cannot race cannot generate positive publicity for its sponsor.
In sum, the alleged rider doping would have been a total breach of the 1995 agreement, and the same clearly holds true for the 2000 Agreement.
The Court rejects defendants' argument that, even if a breach of contract created an "obligation," it was a contingent obligation because the government had discretion in deciding whether to seek repayment. See Armstrong Mot. to Dismiss Gov't Compl. at 16. Because contingent obligations cannot give rise to liability for a reverse false claims, the defendants contend, the breach of contract theory is not an "obligation" within the meaning of the reverse false claim statute. The argument proves too much. A party to a contract that has allegedly been breached always has "discretion" as to whether to seek remedy for the breach; parties to a contract are not required by law or custom to sue each other for every breach. Thus, accepting the defendants' argument would mean that a breach of contract could never be an "obligation" until a formal demand was made or a lawsuit was initiated, a result that cannot be squared with the language or the purpose of the statute. See, e.g., Bahrani, 465 F.3d at 1204 ("Some discretion inheres in a wide variety of government
Even if the alleged doping created an obligation for breach of contract, the next question is who had the obligation to the government, and does that matter for the reverse false claim purposes? Defendant Armstrong argues that, even assuming someone had an obligation to pay money to the government, he does not owe that obligation. See Armstrong Mot. to Dismiss Gov't Compl. at 14-15 ("The government has not — and cannot — plead that Armstrong had an obligation to pay money to the government at the time of the alleged false statements."). And according to Armstrong, this distinction is critical, because "[t]o recover under section 3729(a), the plaintiff must demonstrate that the defendant owed a specific, legal obligation to pay the government money or property at the time the alleged false record or statement was made." Id. at 15. Weisel makes a similar argument. Weisel Mot. To Dismiss Relator Compl. at 22-23. One can certainly find language that appears to support this contention. See, e.g., American Textile Mfrs., 190 F.3d at 736 ("[W]e hold that a reverse false claim action cannot proceed without proof that the defendant made a false record or statement at a time that the defendant owed to the government an obligation sufficiently certain to give rise to an action of debt at common law.") (emphasis added); S.Rep. No. 345, 99th Cong., 2nd Sess. 18 (1986) ("The question of whether the False Claims Act covers situations where, by means of false financial statements or accounting reports, a person attempts to defeat or reduce the amount of a claim or potential claim by the United States against him, has been the subject of differing judicial interpretations.") (emphasis added); S.Rep. No. 10, 111th Cong., 1st Sess. 13-14 (2009) ("This provision is commonly referred to as creating "reverse" false claims liability because it is designed to cover Government money or property that is knowingly retained by a person even though they have no right to it.") (emphasis added).
The government responds by stating that "[a]lthough Armstrong argues that he was not in privity with the USPS, reverse false claims liability arises whenever a defendant makes a false statement to avoid an obligation to pay the Government, even if the obligation is not his." Gov't Opp'n to Armstrong Mot. to Dismiss at 7; see id. at 26 ("The statute imposes liability regardless of whether it is the defendant or
Caremark discussed this issue and cited supporting precedent, and unlike the dictum relied upon by Armstrong and the passing observations quoted above, the language in Caremark is clearly a holding of a court. Significantly, Armstrong did not respond in any way to the government's argument or the Caremark decision in his reply brief. See Armstrong's Reply to Gov't Mot. to Dismiss at 11-14. Armstrong's silence in this regard is deafening.
Nonetheless, as noted above, the Court's analysis of statutory construction must begin with the text of the statute, and the government's position seems more consistent with the text of the FCA: "The reverse false claims provision imposes liability on any person who `knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease
In conclusion, with respect to the reverse false statements claim, the Court holds that the plaintiffs have sufficiently pled that the defendants owed an obligation to pay money to the government due to the alleged breach of the sponsorship agreements as a result of the riders' doping.
Having determined that the plaintiffs sufficiently pled an obligation, the plaintiffs
As to Weisel, for reasons as stated above in Part III.B.1., the relator has failed to allege that Mr. Weisel "caused" to be made or used a false record or statement material to a false or fraudulent claim. Furthermore, there are insufficient allegations that Weisel had knowledge of the doping, and without such knowledge, he could not have had knowledge of any obligation to repay the government or have a purpose to conceal, avoid or decrease any such obligation. The Court therefore dismisses this reverse false claims count against Weisel, without prejudice.
Armstrong is a different matter. The government's and relator's complaints are rife with allegations that Armstrong had knowledge of the doping, and that he made false statements to conceal the doping and the attendant obligation which would have resulted if the government had known of the doping. The Court therefore denies the motion to dismiss the reverse false claims count against Armstrong.
The relator seeks to pierce the Tailwind defendants' corporate veil, and thereby hold Ross Investments and Mr. Weisel personally liable for the alleged violations of the FCA by Tailwind. Relator Opp'n to Weisel Mot. to Dismiss at 37 ("If Tailwind's veil is pierced, then Ross Investments, in addition to Thomas Weisel, will have potential liability, for Ross Investments held the stock of Tailwind.").
In Labadie Coal Co. v. Black, 672 F.2d 92, 96 (D.C.Cir.1982), the D.C. Circuit explained that "[s]everal factors have been identified as helpful in deciding when to pierce the corporate veil...." Id. at 96. The court stated that
With respect to the "formalities" prong — i.e., the unity of interest and ownership — the court identified several factors, but stated that "[i]t is clearly not necessary that all of these factors be present in a given case to justify piercing the veil." Id. at 97. The factors were: "(a) The nature of the corporate ownership and control"; (b) "Failure to maintain corporate minutes or adequate corporate records"; (c) "Failure to maintain the corporate formalities for issuance or subscription to stock...."; (d) "Commingling of funds and other assets of the corporation"; (e) "Diversion of the corporation's funds or assets to non-corporate uses such as the personal uses of the corporation's shareholders." Id. at 96-99.
Under the "fairness" prong, the court discussed the issue of adequate capitalization. The court stated that "[w]hether capitalization is adequate is understandably a function of the type of business in which the corporation engages." Id. at 99. The court also explained that the "essence of the fairness test is simply that an individual businessman cannot hide from the normal consequences of carefree entrepreneuring by doing so through a corporate shell." Id. at 100.
The relator's allegations do not satisfy Labadie's two-pronged inquiry.
In any event, even if the relator's allegations regarding commingling were sufficient to satisfy the first prong, the relator has not satisfied the second prong — that it would be unjust if the Court did not pierce Tailwind's corporate veil. See, Bufco Corp. v. N.L.R.B., 147 F.3d 964, 969 (D.C.Cir.1998); Labadie, 672 F.2d at 96. For example, the relator has not shown that Tailwind was grossly undercapitalized. To establish that Tailwind was "grossly undercapitalized," the relator alleges that it was "dependent on the U.S. Postal Service payments for the vast majority of its revenue, that it lost money each year, and that it had negative equity, while it simultaneously was promising to indemnify the U.S. Postal Service against damages arising from events of default like doping violations." Relator Opp'n to Weisel Mot. to Dismiss at 34-35. Just because the company was losing money and relied on one source for the majority of its revenue does not indicate that the company was "grossly" undercapitalized, where there is no specific allegation that the company's assets and revenues were "[grossly] small in relation to the nature of the business of the corporation and the risks attendant to such businesses." FLETCHER CYCLOPEDIA § 41.33, p.216 (defining inadequate capitalization). Compare, Bridas S.A.P.I. C. v. Gov't of Turkmenistan, 447 F.3d 411, 420 (5th Cir.2006) (finding that the entity "was grossly undercapitalized with the equivalent of $17,000 U.S., a paltry sum to finance oil and gas exploration and production"). See also, Southeast Texas Inns, Inc. v. Prime Hospitality Corp., 462 F.3d 666, 680 (6th Cir.2006) (applying Delaware and Tennessee law and stating that "[f]ailure of a business venture and resulting loss of capital does not constitute gross undercapitalization as that term is used to pierce the corporate veil") (internal quotation marks omitted).
Accordingly, the relator has not alleged facts sufficient to pierce the corporate veil of Tailwind and hold Ross Investments or Weisel liable.
The relator's attempt to pierce Ross Investments' corporate veil also comes up short. He alleges, for example, that "[w]hile not dispositive, the fact that Weisel was the sole shareholder and President of Ross Investments, Inc. is a significant consideration here." Id. at 37. He also makes the conclusory assertion that "Weisel used the ownership and control he exercised via Ross over Tailwind's shares to cause Tailwind to engage in fraud and less than arms-length transactions with Weisel's investment banking firm." Id. These allegations are not sufficiently substantive, and the Court finds that the relator has not satisfied the high burden required to pierce Ross Investments' corporate veil.
The relator's third attempt to pierce a company's corporate veil fares no batter. To support his argument that Montgomery Sports' (predecessor to Tailwind) corporate veil should be pierced, he asserts that Mr. Weisel "founded Montgomery Sports as part of Montgomery Securities... served as [its] president, and dominated and controlled the company."
Relying primarily on Labadie, as a fallback argument the relator contends that, at the very least, the Court should grant him discovery on the factors announced in Labadie, rather than dismissing these corporate defendants. Relator Opp'n to Weisel Mot. to Dismiss at 35 ("Indeed, the decision in Labadie was to reverse a dismissal."). However, the prejudice in Labadie was due to the fact that the defendant was dismissed with prejudice after having frustrated the plaintiff's efforts to conduct discovery into its corporate records and affairs to determine whether the corporate veil should be pierced. Labadie, 672 F.2d at 93-95. In remanding the decision, the D.C. Circuit instructed that the "plaintiff should be allowed the fullest discovery into [the individual defendant's] private financial records, as well as [the corporation's] corporate records (such as they are), to determine facts bearing on whether [the corporation's] corporate existence should be ignored in this case." Id. at 100. In this case, such discovery can still go forward even if the these defendants are dismissed without prejudice. See FRCP 45. Depending upon the outcome of such discovery, the relator, of course, remains free to plead these corporate defendants back into this litigation at a later date, see FRCP 15(c), but these corporate defendants will not remain parties to this litigation in the meantime.
The relator has requested that the Court allow him leave to amend his complaint if the Court grants defendants' motion to dismiss. The relator states that he "has not yet made any amendments in response to the alleged deficiencies raised by defendants, as the Second Amended Complaint was filed with the Court prior to any motion to dismiss by any defendant." Relator Opp'n to Weisel Mot. to Dismiss at 44. The relator notes that any amendment to his complaint would be his "first opportunity to address any deficiencies and to incorporate additional information to cure the same." Id. Defendants Weisel and Ross Investments contend that the relator "now has had three years to investigate the basis of his claims against Mr. Weisel and Ross Investments — claims that are based on nine-year old conduct of which Relator was an integral part — yet he still is unable to state a claim." Weisel Reply to Relator Opp'n at 24-25. Thus, the defendants argue that "[a]ll of Relator's claims against Mr. Weisel and Ross Investments should be dismissed and Relator's request for leave to amend ... should be denied." Id. at 25.
"Failure to plead fraud with particularity ... does not support a dismissal with prejudice." Firestone, 76 F.3d at 1209. "To the contrary, leave to amend is almost always allowed to cure deficiencies in pleading fraud." Id. (internal citations omitted). "[D]ismissal with prejudice," on the other hand, "is warranted only when a trial court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Rollins v. Wackenhut
It is true that the relator was involved in the alleged fraud and has had several years to investigate his claims. Nonetheless, the Court cannot say that the relator's pleading cannot possibly be cured. Through discovery or further investigative efforts in this litigation, some of the pleading defects recognized could possibly be cured. Dismissal is therefore without prejudice, except for the dismissal with prejudice of all claims against TS LLC and the dismissal with prejudice of all of relator's FCA claims arising prior to June 10, 2004.
For the foregoing reasons, the defendants' motions are
Each defendant (or group of defendants) that filed a motion to dismiss shall confer with plaintiffs to settle an order regarding same (said order should explicitly reference the affected docket numbers), and file a proposed order by June 25, 2014.
Summary of Rulings *
Motions, Requests, Objections
Motions/Requests/Objections Ruling
CSE Request for Judicial Notice Granted
(Dkt. No. 94 at ECF p. 36)
Relator's Objection to Extrinsic Evidence Granted
(Dkt. No. 107-1)
Bruyneel Mot. to Dismiss Relator SAC Denied
(Dkt. No. 84)
Bruyneel Mot. to Dismiss Gov't Compl. Denied
(Dkt. No. 85)
Weisel Mot. to Dismiss Relator SAC Granted in Part, Denied in Part
(Dkt. No. 88)
TS Corp & TS LLC Mot. to Dismiss Gov't Granted as to TS LLC (with prejudice), Denied
Compl. and Relator SAC as to TS Corp
(Dkt. No. 91)
Armstrong Mot. to Dismiss Relator SAC Denied
(Dkt. No. 92)
Armstrong Mot. to Dismiss Gov't Compl. Denied
(Dkt. No. 93)
CSE Mot. to Dismiss Relator SAC Granted in Part, Denied in Part
(Dkt. No. 94)
Relator's Counts Counts Ruling Count 1: False Claims (pre-FERA) Dismissed as to Weisel (see III.B.1(a)); Not Dismissed as to Tailwind (see III.B.1(b)), Bruyneel (see III.B.1(c)), and the remaining non-intervened defendants (see III.B.1(c), n.33) Count 2: False Statements (pre-FERA) Dismissed as to Weisel (see III.B.1(a)); Not Dismissed as to Tailwind (see III.B.1(b)), Bruyneel (see III.B.1(c)), and the remaining non-intervened defendants (see III.B.1(c), n.33) Count 3: Conspiracy as to False Claims (pre-FERA) Dismissed as to Weisel (see III.B.3(a)); Not Dismissed as to Tailwind (see III.B.3(b)), Bruyneel (see III.B.3(c)), and the remaining non-intervened defendants (see III.B.1(c), n.33) Count 4: Reverse False Claims (pre-FERA) Dismissed as to Weisel (see III.B.4(b)(i)); Not Dismissed as to Tailwind (see III.B.4(b)(ii), Bruyneel (see III.B.4(c)(iii)), and the remaining non-intervened defendants (see III.B.1(c), n.33) Count 5: False Claims (post-FERA) Dismissed as to all defendants (see III.A. 1; see also III.B.1) Count 6: False Statements (post-FERA) Dismissed as to Weisel (see III.B.2(a)); Not Dismissed as to Tailwind (see III.B.2(b)), Bruyneel (see III.B.2(c)), and the remaining non-intervened defendants (see III.B.1(c), n.33) Count 7: Conspiracy as to False Claims (post-FERA) Dismissed as to all defendants (see III.A.1; see also III.B.3) Count 8: Reverse False Claims Dismissed as to all defendants (see III.A.1)
United States' Counts
Counts Ruling
Count 1: False Claims (pre-FERA) Defendants did not seek dismissal
Count 2: False Statements (pre-and post-FERA) post-FERA not dismissed (see III.A.2); Pre-FERA
was pled and not dismissed (see III.A.2)
Count 3: Conspiracy as to False Claims (pre-FERA) Defendants did not seek dismissal
Count 4: Reverse False Claims (pre-FERA) Not dismissed (see III.B.4(a))
Count 5: Common Law Fraud Not Dismissed (see II.E.2.)
Count 6: Unjust Enrichment against Armstrong Not Dismissed (see II.E.2.)
and Bruyneel
Count 7: Breach of Contract against Tailwind Not Dismissed (see II.E.2.)
