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United States of America v. Toyobo Co. Ltd. et al

September 2, 2011

UNITED STATES OF AMERICA, PLAINTIFF,
v.
TOYOBO CO. LTD. ET AL., DEFENDANTS.



The opinion of the court was delivered by: Richard W. Roberts United States District Judge

MEMORANDUM OPINION AND ORDER

The government filed a complaint against defendants Toyobo Co. Ltd. and Toyobo America, Inc. (collectively "Toyobo"), alleging violations of the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33, as well as a common law claims for fraud and unjust enrichment in connection with the sale of Zylon body armor. Toyobo has moved to dismiss. The government has sufficiently alleged and pled with particularity its FCA presentment and false statements claims and its common law fraud and unjust enrichment claims. However, the government has alleged sufficiently its FCA conspiracy claims only as to the purported conspiracies between Toyobo and the Zylon weavers, not as to the purported conspiracies between Toyobo and any of the vest manufacturers. Toyobo's motion to dismiss therefore will be granted with respect to the government's FCA conspiracy claims as to Toyobo and the vest manufacturers and denied in all other respects.

BACKGROUND

The complaint alleges the following facts. Toyobo manufactured the synthetic fiber "Zylon" for use in the production of bulletproof vests. (Compl. ¶ 17.) Toyobo contracted with two trading companies to distribute its Zylon yarn to three weaving companies, which provided woven Zylon to various vest manufacturers. (Id. ¶¶ 20-21, 23.) However, "Toyobo kept complete control over access to and use of Zylon for ballistic applications." (Compl. ¶ 21.) Between 1999 and 2005, these vest manufacturers sold vests to federal agencies, both indirectly through the Multiple Award Schedule of the General Services Administration ("GSA") and directly. (Id. ¶¶ 10-12, 16.) The vest manufacturers also sold vests during this time period to state, local, and tribal law enforcement authorities under the Bullet Proof Vest Grant Partnership Act ("BPVGPA") Program, under which the federal government reimbursed these authorities for up to fifty percent of the costs of the body armor. (Id. ¶¶ 13-16.) Federal agencies paid more than $30,000,000 to purchase more than 59,000 vests through the GSA Schedule (id. at 12), and paid more than $4,600,000 on direct purchases of more than 9,700 vests. (Id. ¶ 16.) The government reimbursed state, local, and tribal authorities at least $9,800,000 for the purchase of at least 46,000 vests. (Id. ¶ 15.) The vest manufacturers offered five-year warranties on all vests the government purchased. (Id. ¶¶ 12, 15-16.)

The government alleges that Toyobo's Zylon "was defective and degraded more quickly than Toyobo and the Zylon Vest Manufacturers represented." (Id. ¶ 1.) In 1997 and 1998, Toyobo discovered that damage during the weaving process reduced the expected strength of its Zylon fiber. (Id. ¶¶ 22, 25.) Internal research suggested that Zylon suffered from hydrolysis, chemical decomposition caused by exposure to water. (Id. ¶ 51.) Toyobo also discovered that Zylon degraded when exposed to light. (Id. ¶¶ 30-31.) Toyobo performed accelerated aging testing, which exposed Zylon to extreme heat and humidity for short periods of time. These tests showed a significant drop in ballistic performance. (Id. ¶¶ 47, 49.) As early as 1999, a Toyobo executive stated at a meeting that "he did not think that Toyobo could make things right with Zylon and the attendees at the meeting discussed how Toyobo should not give out too much know-how about Zylon." (Id. ¶ 39.)

In July 2001, DSM, a Zylon vest manufacturer, reported to Toyobo that a Zylon vest failed during ballistic testing, and announced that it would put on hold its introduction to market of its Zylon product. (Id. ¶¶ 52-53.) Although "Toyobo was deeply concerned" with the ballistic failure, it "tried to hide its concerns." (Id. ¶ 58.) Toyobo informed the other vest manufacturers and other companies in the Zylon supply chain of this development but assured them that "it had not found any serious indication of Zylon strength degradation from its aging tests using Zylon fiber[.]" (Id. ¶ 55.) However, Toyobo disclaimed liability "for any use of Zylon fiber." (Id.) After DSM's announcement, Honeywell International Corporation, a manufacturer of vest components called Z Shields, temporarily stopped shipping its Zylon products. (Id. ¶¶ 50, 59.) "[B]ased on Toyobo representations that it had not found any 'serious indications' from Toyobo's internal testing of Zylon," Honeywell resumed selling Z Shields. (Id. ¶ 59.)

Toyobo began to release incomplete and misleading data to the vest manufacturers. In July 2001, Toyobo informed the vest manufacturers that its internal testing showed that Zylon's strength decreased at elevated temperatures and humidity levels, but Toyobo "failed to release other data regarding Zylon that was in its possession that would have shown the extent to which Zylon degraded[.]" (Id. ¶ 60.) Toyobo released other data suggesting that Zylon lost five percent of its strength over ten years under foreseeable conditions and ten percent of its strength at forty degrees Celsius and eighty percent humidity. The government alleges that this data conflicted with evidence in Toyobo's possession at the time, and with data Toyobo obtained in later testing. (Id. ¶¶ 61, 63.) Toyobo also announced a twenty-five to thirty-five percent loss of strength for Zylon "exposed to fluorescent lamps for several weeks, but failed to state that this 25-35% loss of Zylon strength had not occurred under extreme conditions." (Id. ¶ 67.) In November 2001, Toyobo released data reflecting a "dramatic drop" in Zylon strength. (Id. ¶ 75.) After receiving negative feedback from other companies in the supply chain (see, e.g., id. ¶ 77), Toyobo "notified its 'important customers' that it would withdraw its November 2001 degradation data on the grounds that it was 'statistically not correct and not reliable.' In January 2002, Toyobo . . . replaced it with data that had the bad data points removed." (Id. ¶ 83.) During 2002 and 2003, Toyobo provided the vest manufacturers with quarterly updates on its research "but did not provide other 'confidential' and 'top secret' Toyobo internal documents concerning Zylon research in its possession[.]" (Id. ¶ 87.)

Additionally, beginning in May 1999, Toyobo discovered that its manufacturing process produced Red Thread, "a reddish, discolored section of Zylon fiber which has a reduced tensile strength." (Id. ¶¶ 37, 41-42.) Although Toyobo implemented countermeasures designed to reduce the occurrence of Red Thread, "the Red Thread problem re-occurred continually during Toyobo's manufacture of Zylon." (Id. ¶ 45.) When Hexcel, one of the Zylon weavers, discovered Red Thread in its Zylon (id. ¶¶ 93, 95), Toyobo admitted that it had observed a loss of strength in Red Thread. (Id. ¶ 99.) Toyobo told Hexcel that "if the Red Thread was controlled and short and small in number, they would not harm the Zylon properties or its quality. At the time Toyobo made this statement, it knew this statement was false and misleading because it could not control the [ends with Red Thread] and that they were neither short nor small in number." (Id. ¶ 101.) Lincoln Fabrics, another weaver, agreed to receive from Toyobo Zylon inventory knowing that it might contain Red Thread. (Id. ¶ 124.)

Toyobo took steps to induce various participants in the Zylon supply chain to continue supplying Zylon products despite questions about its suitability for ballistic applications. For instance, Toyobo agreed to provide Hexcel a refund if its customers stopped using Zylon. (Id. ¶ 76.) When Hexcel stopped weaving Zylon after it became concerned about Red Thread, Toyobo agreed to provide Hexcel with replacement Zylon fiber and $240,000 in reimbursement. (Id. ¶¶ 102, 104, 111.) Additionally, when Barrday, another weaver, stopped weaving Zylon when it became concerned about possible degradation, Toyobo agreed that Teijin Shoji, one of the Zylon trading companies, would retain title to all Zylon delivered to Barrday. Teijin Shoji later retained title to all Zylon delivered to Lincoln Fabrics as well. (Id. ¶ 84.)

In August 2005, the National Institute of Justice ("NIJ") issued a report detailing its own ballistics testing on Zylon vests. The report revealed that the "bulk of the Zylon vests failed the testing[.]" (Id. ¶ 126.) After the report issued, all vest manufacturers stopped using Zylon. (Id.)

The government filed a complaint asserting claims against Toyobo for FCA violations involving presenting fraudulent claims (Count 1), making false statements (Count 2), and conspiracy (Count 3), and for common law fraud (Count 4) and unjust enrichment (Count 5).*fn1 Toyobo has filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the government failed to plead fraud with particularity as required by Rule 9(b), failed to plead factual allegations that Toyobo presented a false claim for payment, or that Toyobo made any false statements or conspired to get the United States to pay a claim, and failed to plead factual allegations that support its fraud and unjust enrichment counts.

DISCUSSION

In evaluating a Rule 12(b)(6) motion, a court "'may consider only the facts alleged in the complaint, any documents either attached to or incorporated in the complaint and matters of which [a court] may take judicial notice.'" Trudeau v. FTC, 456 F.3d 178, 183 (D.C. Cir. 2006) (quoting EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624 (D.C. Cir. 1997)). A court considering a Rule 12(b)(6) challenge must accept as true any facts alleged by the plaintiff and grant all reasonable inferences drawn from those facts. Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). "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, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

Rule 9(b) applies to FCA actions. United States ex rel. Totten v. Bombardier Corp., 286 F.3d 542, 551-52 (D.C. Cir. 2002) (noting that every circuit to consider the issue has held that Rule 9(b) applies to FCA complaints). It provides that "[i]n 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." Fed. R. Civ. P. 9(b). Motions to dismiss for failure to plead fraud with sufficient particularity are evaluated in light of the overall purposes of Rule 9(b) to "ensure that defendants have adequate notice of the charges against them to prepare a defense[,]" United States ex rel. McCready v. Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 114, 116 (D.D.C. 2003), discourage "suits brought solely for their nuisance value" or as "frivolous accusations of moral turpitude[,]" United States ex rel. Joseph v. Cannon, 642 F.2d ...


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