The opinion of the court was delivered by: SULLIVAN
Ronald E. Long ("Long" or "relator") brought this action as a relator on behalf of the United States alleging violations of the False Claims Act ("FCA" or "the Act"), 31 U.S.C. § 3729-3733, and on his own behalf pursuant to 42 U.S.C. § 1983. Long named as defendants SCS Business & Technical Institute, Inc. ("SCS"), Mohammed (a.k.a. Michael) Alharmoosh, President of SCS, Kamal Alsultany, principal owner and Chairman of the Board of SCS, the State of New York ("New York"), and Joseph P. Frey ("Frey"). Pursuant to the qui tam provisions of the FCA, the complaint was immediately put under seal. See 31 U.S.C. § 3730(2). The government intervened in July 1995, and the Department of Justice filed a first amended complaint against SCS, Michael Alharmoosh, and Kamal Alsultany in September 1995.
The government declined, however, to intervene against New York and Frey. Long then filed his second amended complaint in June 1996.
Pending before the Court are defendant New York's and defendant Joseph P. Frey's motions to dismiss relator Long's second amended complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted, or, in the alternative, to dismiss Counts I and II for failure to plead fraud with particularity.
Long, relator and plaintiff in this action, served as Coordinator of Investigations and Audit for the Bureau of Proprietary School Supervision ("BPSS") of the New York State Department of Education ("NYSED") from August 21, 1989 to April 8, 1992. BPSS is the state agency that regulates proprietary schools in New York. Frey was Long's supervisor at BPSS. SCS managed five proprietary schools in New York: two in Brooklyn, and one each in the Bronx, Queens, and Manhattan.
Long's second amended complaint contains three counts against New York and Frey. Count I alleges that New York, Frey, and SCS formed a conspiracy to have false claims paid by the United States in violation of 31 U.S.C. § 3729(a)(3). Count II alleges that New York and Frey caused false claims and reports to be presented to the United States for payment in violation of 31 U.S.C. § 3729(a)(1) and (2). Count II also alleges that New York and Frey were unjustly enriched as a result of the payments they received from SCS. Count III alleges that New York and Frey harassed and wrongfully discharged Long in violation of 31 U.S.C. § 3730(h) and 42 U.S.C. § 1983.
As Coordinator of Investigations for BPSS, Long directed an investigation of SCS beginning in September 1989. SCS allegedly received federal funding under a variety of federal programs for student financial assistance.
Long has alleged that the investigation he coordinated uncovered a variety of fraudulent policies and acts by SCS that resulted in SCS receiving federal moneys. This fraud included allegedly falsifying enrollment-eligibility scores, training low-level SCS staff how to falsify records, assigning students to courses for which they were ineligible and in which they were incapable of participating, and refusing to make required refunds to students. BPSS responded to Long's investigation by instituting administrative proceedings against SCS. In February 1992, BPSS issued an "Order to Show Cause" and a "Bill of Particulars" alleging that SCS had engaged in a number of violations of New York law. BPSS and SCS reached a settlement in March 1992.
Long alleges, however, that this was a "sweetheart" settlement because the violations upon which it was based were confined to actions of low-level personnel and to a small number of violations at one school, even though, according to Long, New York officials, including Frey, knew that the fraud was occurring at more than one school and that it included actions by SCS management. Long further alleges that as a result of this settlement, New York falsely represented to the federal government that SCS was no longer engaging in fraud, and that New York was monitoring SCS.
Central to Long's claim is that BPSS allegedly received a share of the federal funding that SCS fraudulently obtained. BPSS allegedly received this share through tuition assessments and fines that SCS paid for violations of state law. Long alleges that BPSS's share of SCS's federal funding was so large that SCS was one of BPSS's major sources of funding. Further, Long alleges that as a result of BPSS's interest in SCS's continued operation, BPSS engaged in two illegal activities: it limited Long's investigation and it ignored evidence that SCS continued to present fraudulent claims.
First, Long alleges that BPSS placed limitations on Long's investigation of SCS resulting in the "sweetheart" settlement with SCS which allowed SCS to continue to fraudulently receive federal moneys. Long alleges that BPSS placed the following limitations on his investigation of SCS: reducing the number of incidents of alleged fraud he was authorized to investigate, rejecting evidence that SCS management and owners were involved in the fraud, limiting the number of schools he was authorized to investigate, and placing limitations on his documentation of evidence. Further, Long alleges that BPSS refused to investigate information Long had gathered indicating that SCS believed it was protected by its contacts in BPSS. Long also alleges that in October 1991, Frey specifically prohibited Long from investigating evidence of fraud by SCS management and owners.
After the 1992 settlement with SCS, Long alleges that BPSS ignored evidence that SCS continued to receive federal moneys on a fraudulent basis in order to allow SCS to continue receiving federal moneys. According to Long, New York officials, including Frey, falsely represented to the federal government that SCS was not engaged in fraud and that BPSS was continuing its investigation when in fact it was not. Moreover, Long alleges that New York officials, including Frey, indicated to the federal government in the 1992 settlement that there was no indication of widespread fraud nor of involvement by management, even though BPSS knew this was false.
Long asserts that he refused to follow his superiors' instructions regarding the investigation of SCS and that, as a result, in November 1991, Frey informed him that he would be demoted with a loss of pay effective April 8, 1992, if Long had not resigned by that date. Long further alleges that in December 1991, he contacted the FBI to inform them of the evidence of fraud that he had gathered, and that he felt BPSS's limitations on his investigation were a result of the agency's interest in continuing to receive a share of the federal moneys that SCS received. According to Long, the FBI then launched an investigation (the Court assumes of SCS) in which Long assisted the FBI by obtaining evidence from SCS. Long allegedly reported his cooperation with the FBI to Frey. On January 14, 1992, Frey removed Long from the investigation of SCS. Long alleges that Frey then ordered him to prepare a final report of the investigation consisting of reporting one type of violation at one school. Long alleges that he prepared this report under protest. On January 22, 1992, Long was placed on administrative leave.
Long finally alleges various acts by New York officials following his placement on administrative leave and eventual termination. The essence of Long's allegations are that New York colluded with SCS's continuing fraud, thereby allowing SCS and BPSS to continue to receive federal moneys based on false claims. Long alleges that New York officials, including Frey, ignored State Comptroller reports in April and December 1992 which indicated that there was continuing and broader fraud than had been stated in the 1992 "Order to Show Cause." Long alleges that in February 1993, BPSS investigators noticed indications of continuing fraud at SCS. Long alleges that New York officials, including Frey, refused to act on that information, and instead unreasonably ordered further investigation rather than taking steps to stop the fraud. Thus, Long alleges that, between at least March 1993 and April 1994, New York and Frey knew that SCS continued to engage in fraudulent activities, but did not act upon that information. SCS declared bankruptcy in January 1995. Long alleges that between 1988 and 1991, the United States paid SCS over $ 25 million per year in response to SCS's false claims, with BPSS receiving a portion of these payments.
A complaint may be dismissed for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)6). The motion will be denied only if the plaintiff could prove no set of facts which would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In responding to a motion to dismiss, the Court treats all allegations of fact in the complaint to be true, and draws all reasonable inferences from those facts in favor of the plaintiff. See id; EEOC v. St. Francis Xavier Parochial School, 326 U.S. App. D.C. 67, 117 F.3d 621, 624 (D.C. Cir. 1997); United States ex rel. Alexander v. Dyncorp, Inc., 924 F. Supp. 292, 296 (D.D.C. 1996) (citing United Parcel Serv., Inc. v. International Bhd. of Teamsters, 859 F. Supp. 590, 593 (D.D.C. 1994)).
Federal courts are courts of limited jurisdiction. The party who invokes federal court jurisdiction must "allege in [its] pleading the facts essential to show jurisdiction," and "must support [those facts] by competent proof." McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189, 80 L. Ed. 1135, 56 S. Ct. 780 (1936).
New York has moved to dismiss the second amended complaint on the grounds of lack of subject matter jurisdiction, failure to state a claim, and failure to plead fraud with particularity as to Counts I and II. Defendant Frey has moved to dismiss the second amended complaint on the grounds of plaintiff's failure to state a claim, or, in the alternative for summary judgment on the basis of Eleventh Amendment immunity and qualified immunity.
A. Whether New York and its Officials Are Proper Defendants in an False Claims Act Suit
The first issue the Court considers in this case is New York's argument that it has Eleventh Amendment immunity from suit under the FCA. This Court rejects New York's argument that the Eleventh Amendment bars an FCA action against a state. The Eleventh Amendment is not a bar to an FCA action because the United States is always the plaintiff in a qui tam action and the Eleventh Amendment does not prohibit suits by the United States against States in federal court. See Seminole Tribe of Florida v. Florida, 517 U.S. 44, 71 n.14, 134 L. Ed. 2d 252, 116 S. Ct. 1114 (1996) (citing United States v. Texas, 143 U.S. 621, 644-45, 36 L. Ed. 285, 12 S. Ct. 488 (1892)) (noting that state compliance with federal law is ensured by the fact that the federal government can sue a state in federal court for a violation of federal law); United States v. Mississippi, 380 U.S. 128, 140, 13 L. Ed. 2d 717, 85 S. Ct. 808 (1965) ("Nothing in [the Eleventh Amendment] or any other provision of the Constitution prevents or has ever been seriously supposed to prevent a State's being sued by the United States"). For this reason, states have often been defendants in qui tam suits under the FCA. See United States ex rel. Berge v. Board of Trustees of the Univ. of Alabama, 104 F.3d 1453 (4th Cir.) (state university defendant), cert. denied, 139 L. Ed. 2d 232, 118 S. Ct. 301 (1997); United States ex rel. Milam v. University of Texas M.D. Anderson Cancer Center, 961 F.2d 46 (4th Cir. 1992) (state university defendant); United States ex rel. Weinberger v. Florida, 615 F.2d 1370 (5th Cir. 1980) (state defendant); United States ex rel. Wilkins v. Ohio, 885 F. Supp. 1055 (S.D. Ohio 1995) (state defendant); United States ex rel. Milam v. Regents of Univ. of California, 912 F. Supp. 868 (D. Md. 1995) (state university defendant); United States ex rel. Moore v. University of Mich., 860 F. Supp. 400 (E.D. Mich. 1994) (state defendant); United States ex rel. Fine v. University of California, 821 F. Supp. 1356 (N.D. Cal. 1993) (state university defendant), aff'd, 72 F.3d 740 (9th Cir. 1995); United States ex rel. Navarette v. Rockwell Int'l Corp., 730 F. Supp. 1031, 1035 (D. Colo. 1990) (laboratory, operated and managed by state university, was defendant).
B. Whether New York and Its Officials Are "Persons" Within the Meaning of the FCA
New York next argues that it is shielded from liability under the FCA because a state cannot be considered a "person" under that statute. The FCA provides, in pertinent part, that "any person" who causes false claims and reports to be presented to the United States for payment, or who forms a conspiracy to have false claims paid by the United States, will be liable for treble damages and civil penalties. See 31 U.S.C. § 3729. This section of the FCA, however, does not define the word "person."
The "fundamental task in interpreting the FCA is 'to give effect to the intent of Congress.'" United States ex rel. D.J. Findley v. FPC-Boron Employees' Club, 105 F.3d 675, 681 (D.C. Cir.) (citations omitted), cert. denied, 139 L. Ed. 2d 114, 118 S. Ct. 172 (1997). "The starting point for interpreting a statute is the language of the statute itself." Id. To determine the meaning of the statute, the Court considers the statute's language and structure, and its legislative history. See California State Bd. of Optometry v. Federal Trade Comm'n, 285 U.S. App. D.C. 476, 910 F.2d 976, 979 (D.C. Cir. 1990). Although the word "person" is ordinarily construed to exclude a sovereign, this reading "may . . . be disregarded if 'the purpose, the subject matter, the context, the legislative history, [or] the executive interpretation of the statute . . . indicate an intent, by the use of the term, to bring a state or nation within the scope of the law.'" International Primate Protection League v. Administrators of Tulane Educ. Fund, 500 U.S. 72, 83, 114 L. Ed. 2d 134, 111 S. Ct. 1700 (1991) (internal quotations omitted).
Although Congress did not define the word "person" in § 3729, it did define that term in § 3733 of the FCA.
That section defines a "person," specifically for the purposes of that section, to include a "state." 31 U.S.C. § 3733(1)(4). Moreover, courts have allowed states to act as relators and bring civil suits for violations of § 3729 on behalf of the United States where the qui tam provisions allow a "person" to bring a civil suit. See 31 U.S.C. § 3730(b); United States ex rel. Woodard v. Country View Care Center, Inc., 797 F.2d 888 (10th Cir. 1986) (State of Colorado as relator); United States ex rel. Wisconsin v. Dean, 729 F.2d 1100 (7th Cir. 1984) (State of Wisconsin as relator). In allowing states to act as relators, courts have thus interpreted "person" to include a state in the context of who may commence a qui tam action.
In the absence of express judicial authority as to whether a state may be a defendant in a qui tam action, however, it is necessary to consider the legislative history of the Act. The FCA was originally enacted during the Civil War to combat the rampant fraud being perpetrated on the government by defense contractors. See S. Rep. No. 99-345, at 8. The FCA has been amended three times, with major revisions in 1986. See id. The purpose of the 1986 amendments was to "make the statute a more useful tool against fraud" in the face of continuing fraud against the Government. Id. at 2. The Senate Report accompanying the 1986 amendments to the FCA sets out the broad reach of the statute. "In its present form . . . the False Claims Act reaches all parties who may submit false claims. The term 'person' is used in its broad sense to include partnerships, associations, and corporations . . . as well as States and political subdivisions thereof." See id. at 8 (citations omitted).
On the other hand, New York argues that the Court should be guided by the general understanding that construing the word "person" to include states is generally disfavored. See Will v. Michigan Dep't of State Police, 491 U.S. 58, 64, 105 L. Ed. 2d 45, 109 S. Ct. 2304 (1988) (citing Wilson v. Omaha Tribe, 442 U.S. 653, 667, 61 L. Ed. 2d 153, 99 S. Ct. 2529 (1979)). New York's reliance upon Will is, however, misplaced. First, 42 U.S.C. § 1983 is clearly distinguishable from the FCA because § 1983 establishes a cause of action for individual plaintiffs,
whereas the FCA establishes civil liabilities for frauds at the expense of the United States.
See 31 U.S.C. § 3729. In an FCA action, therefore, the suit is always on behalf of the federal government. See 31 U.S.C. §§ 3729, 3730(b). Since § 1983 creates a private cause of action, the analysis in Will necessarily included Eleventh Amendment considerations. See Will, 491 U.S. at 66-67. The reasoning underlying the Will Court's reluctance to construe "persons" to include States for the purposes of § 1983 was "that if Congress intended to alter the 'usual constitutional balance between the States and the Federal Government,' it must make its intention to do so 'unmistakably clear-in the language of the statute.'" Will, 491 U.S. at 65 (quoting Atascadero State Hospital v. Scanlon, 473 U.S. 234, 242, 87 L. Ed. 2d 171, 105 S. Ct. 3142 (1985)). Because states are not immune from suits by the federal government, however, Congress was not required to state in the FCA that it intended to abrogate the states' sovereign immunity, as Congress would have been required to do if it intended to subject states to private suits by individuals.
After reviewing the language and purpose of the statute, this Court finds no indication that Congress sought to create an exception for state actors to perpetrate fraud upon the federal government, especially since states are not immune to suits by the federal government in federal court. See United States v. Rockwell Int'l Corp., 730 F. Supp. 1031, 1035 (D. Colo. 1990) (holding that state defendants are not entitled to Eleventh Amendment immunity from suits brought pursuant to the FCA and noting that to "hold otherwise would render meaningless the FCA's provision authorizing qui tam actions against state agencies and officials operating under government contracts"). Consistent with the intent and purpose of the FCA, the Court therefore concludes that states are "persons" for the purposes of § 3729 and that Congress did not intend to exempt states from the FCA.
C. Whether the FCA's Damages Provisions Are Punitive and Therefore Inapplicable to a State
As a final point, New York argues that the damages provision of the FCA suggests that the statute has a punitive purpose, and consequently, that the FCA cannot apply to the states because states enjoy a common law immunity to punitive damages which can only be overcome by a clear congressional statement of abrogation.
The purpose of the FCA is to enable the federal government to recover losses it sustains as a result of fraud. See S. Rep. No. 99-345, at 2-8. In interpreting the pre-1986 version of the FCA, which provided for double damages and penalties, the Supreme Court held that the FCA was a remedial, rather than punitive statute. See United States v. Halper, 490 U.S. 435, 446, 449, 104 L. Ed. 2d 487, 109 S. Ct. 1892 (1988) (the FCA's damages provision represents "rough remedial justice" as long as rational relation exists between the government's loss and the damages imposed); United States v. Bornstein, 423 U.S. 303, 314-315, 46 L. Ed. 2d 514, 96 S. Ct. 523 (1976) (FCA's damages provision are remedial except under extreme circumstances); United States ex rel. Marcus v. Hess, 317 U.S. 537, 551-52, 87 L. Ed. 443, 63 S. Ct. 379 (1943) (purpose of the FCA is to make the government whole for its losses and therefore statute not punitive). The Court further reasoned that the federal government is entitled to "rough remedial justice" and declined to impose a more exact method of accounting on the Congress. United States v. Bornstein, 423 U.S. at 314-315.
With regard to the treble damages provision of the amended FCA, the Eighth Circuit has held that the amended provision does not transform the statute from a remedial to a punitive one. In United States v. Brekke, 97 F.3d 1043 (8th Cir. 1996), the court held that the FCA's treble damages were compensatory rather than punitive. Id. at 1047. The court based its decision upon the Supreme Court's reasoning in Halper that the "'Government is entitled to rough remedial justice, that is, it may demand compensation according to a somewhat imprecise formula.'" Brekke, 97 F.3d at 1047 (quoting Halper, 490 U.S. 435 at 446). This Court agrees with the reasoning in Brekke and concludes that the federal government's recovery of treble damages gives it "rough remedial justice" and therefore that the FCA is a remedial statute.
Furthermore, there is no indication that Congress intended to change the purpose of the statute from a remedial to a punitive one when it enacted the 1986 Amendments. See S. Rep. No. 99-345, at 7 (noting that the Committee clarified that knowing standard did not require actual knowledge of fraud or specific intent to commit the fraud in order to make it more appropriate for remedial actions) (emphasis added).
Rather, the damages provision was amended for other reasons. First, Congress saw the need to modernize the provision, which had not been changed since the FCA was originally enacted 123 years ago. See id. at 2. Second, the provision was changed to make it consistent with the false claims provision in the 1986 Department of Defense Appropriations Act. See id. at 17. Third, the increased damages provision gives effect to the overall purpose of the 1986 amendments to make the FCA more effective and to encourage qui tam actions. See id. at 2. Although the amended FCA does not provide for a significant increase in the percentage of the recovery to a qui tam relator,
by virtue of the increased damages, the relator stands to receive a larger recovery. This increased recovery therefore serves the purpose of encouraging qui tam actions.
The Court therefore concludes that the FCA's penalties are not punitive, but rather remedial, as long as a rational relation exists between the government's loss and the damages assessed.
Given the Court's conclusions that New York may be sued under the FCA, that New York may be considered a "person" within the context of the FCA, and that the damages provisions of the FCA are not punitive, the Court goes on to consider the subject matter jurisdiction provisions of the FCA.
D. Whether this Court Has Subject Matter Jurisdiction Under the FCA