United States District Court, District of Columbia
UNITED STATES OF AMERICA ex rel. TIEN H. TRAN, Plaintiff,
COMPUTER SCIENCES CORPORATION, et al., Defendants.
KETANJI BROWN JACKSON, District Judge.
Relator Tien H. Tran ("Relator" or "Tran") brings this action under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33 (2013), seeking to challenge the contracting practices of Defendant Computer Sciences Corporation ("CSC") with respect to a particular government contract. Under the contract at issue, CSC agreed to serve as a prime contractor with respect to certain information technology ("IT") work to be performed for the United States Citizenship and Immigration Service ("USCIS"), and CSC also promised to make a good faith effort to subcontract a certain percentage of the IT work to be performed under the contract to qualified small businesses. The complaint alleges that, rather than comply with its obligations under the contract, CSC set up a scheme in which it would subcontract work to qualified small businesses, such as Defendant Sagent Partners, LLC ("Sagent"), and as a condition of the subcontract, those small businesses would agree to further subcontract the work to large businesses that CSC trusted, such as Defendant Modis, Inc. ("Modis"), in exchange for a small fee. (First Amended Complaint ("Compl."), ECF No. 4, ¶¶ 3-4.) According to the complaint, this "pass-through" scheme violated several provisions of the FCA insofar as it permitted CSC to report to the government that the company had met its small business subcontracting goals when, in reality, large businesses were performing the substantive work under the contract. ( Id. ¶¶ 4-6.)
Before this Court at present are three motions to dismiss, one filed by each of the three Defendants. Although each Defendant offers a different rationale for dismissing the particular charges that pertain to it, all argue that Relator has failed to state a claim upon which relief can be granted for the purpose of Federal Rule of Civil Procedure 12(b)(6) and that Relator has failed to plead fraud with the requisite particularity as Federal Rule of Civil Procedure 9(b) requires. Because this Court concludes that some of the claims that Relator has made against Defendants CSC and Modis are viable and properly pled when the complaint is liberally construed, but that none of Relator's claims against Defendant Sagent are sufficiently alleged, the Court will DENY IN PART and GRANT IN PART CSC and Modis's motions to dismiss, and will GRANT Sagent's motion to dismiss in full, as explained further below. What remains of this case are Relator's contentions that (1) CSC has presented false claims for payment to the government in connection with the government contract at issue and made material false statements in support of those claims; (2) CSC fraudulently induced the government into awarding it that contract; (3) Modis caused CSC to present the false claims and to make the material false statements; and (4) CSC and Modis conspired to commit these violations of the FCA. A separate order consistent with this opinion will follow.
A. Initial Relationship Between the Parties
The Department of Homeland Security ("DHS") maintains a program through which the agency identifies "prime contractors" that are qualified to perform specific contracts for IT services that DHS and any of its constituent agencies-including USCIS-require. (Compl. ¶ 21 (describing DHS's Enterprise Acquisition Gateway for Leading Edge Solutions ("EAGLE") program).) Defendant CSC is an approved EAGLE prime contractor. ( Id. at 19.) Each contract awarded under the EAGLE program is broken down into a series of "task orders" of limited duration, and at the end of the prescribed period for each task order, DHS awards a new task order through a competitive bidding process amongst EAGLE-approved prime contractors. ( Id. ¶ 19.)
CSC has been the recipient of task orders on a particular USCIS contract (the "Prime Contract") since the early 2000s. ( Id. ) Under the Prime Contract, CSC is required to provide IT personnel to USCIS to work on a variety of technology initiatives. ( Id. ¶ 52.) In order to provide the necessary personnel to USCIS for each task order awarded under the Prime Contract, CSC entered into subcontracting relationships with various other companies in the business of providing IT personnel. ( Id. ¶ 56.) Defendant Modis was one of these companies. ( Id. ¶¶ 13, 56.) According to the complaint, Modis is a large business ( id. ¶ 13) that is the subcontractor CSC most heavily relied upon to provide personnel to CSC, which in turn placed those persons with USCIS in order to fulfill its obligations under the Prime Contract. ( Id. ¶ 57.)
Significantly, Modis also relied on subcontracting to provide the personnel that CSC required from it for the Prime Contract. Infotran, a small business owned by Relator Tran, was one of the companies with which Modis had a subcontracting agreement. ( Id. ¶ 74.) Modis and Infotran entered into this agreement in April of 2006. ( Id. ) According to the complaint, the subcontracting agreement between Modis and Infotran contained a non-compete clause that stated that Infotran could not enter into any direct contractual relationship with CSC while it maintained its subcontracting agreement with Modis (and for one year thereafter). ( Id. )
Thus, initially, CSC operated as the prime contractor placing personnel with USCIS under the Prime Contract, Modis was a direct subcontractor of CSC, and Infotran was a second-tier subcontractor who had a contractual relationship only with Modis, but provided personnel to Modis whom Modis then designated to perform work for CSC under the Prime Contract.
B. The September 2008 Task Order And CSC's Small Business Subcontracting Plan
As noted above, the Prime Contract was awarded periodically in the form of task orders that were subject to competitive bids that EAGLE-approved prime contractors submitted. In May of 2008, CSC bid on a task order under the Prime Contract that is hereinafter referred to as the "September 2008 Task Order." ( Id. ¶¶ 3, 58.) As a part of its bid, CSC included a "Small Business Subcontracting Plan" in which it represented that, if it was awarded the task order, a minimum of 40% of the money that it paid out to subcontractors for personnel supplied to perform work under the task order would go to qualified "small business concerns." ( Id. ¶ 59.) According to the complaint, if CSC had not included the Small Business Subcontracting Plan in its bid, then it would not have been eligible to compete for the September 2008 Task Order. ( Id. ¶ 62.) CSC was eventually awarded the task order-valued at over $200 million-on September 29, 2008. ( Id. ¶ 63.)
Under the September 2008 Task Order and the applicable federal contracting regulations (specifically, 48 C.F.R. § 52.219-9(1)), CSC was also required to submit to USCIS semi-annual "Individual Subcontract Reports" ("ISRs") and "Summary Subcontractor Reports" ("SSRs") detailing CSC's compliance with its Small Business Subcontracting Plan. ( Id. ¶ 37.) The complaint alleges that "[i]n order for a particular Small Business to count towards the goals set out in [the] Small Business Subcontracting Plan, the Small Business must actually perform the work described in the subcontracting plan-the work cannot be performed by a second tier subcontractor or by an entity that is not a Small Business." ( Id. ) Additionally, the complaint alleges that the Prime Contract required CSC to submit invoices periodically to USCIS for the amounts due to CSC from its work on the Prime Contract. ( Id. ¶¶ 185-86.) The complaint further states that CSC in fact did submit such invoices, and that those invoices were paid. ( Id. )
C. The "Pass-Through" Proposal
The complaint alleges that neither CSC nor Modis qualify as "small business concerns" under the criteria that the Small Business Administration has set forth. ( Id. ¶¶ 12-13.) Thus, the personnel that CSC sourced from Modis could not count towards CSC's small business subcontracting goals under the September 2008 Task Order. ( Id. ¶¶ 6, 10.) According to the complaint, Ken Harvey, CSC's program manager for the Prime Contract, recognized in the run-up to CSC's bid for the September 2008 Task Order that CSC would have to find a way to increase the percentage of its subcontracting that went to qualified small business concerns in order to win the task order. ( Id. ¶ 77.) The complaint asserts that, to remedy this problem, Harvey approached Tim Martin, Modis's sales director, in September of 2007, to discuss CSC's need to increase the amount of subcontracting work it awarded to small businesses. ( Id. ) Martin subsequently approached Tran and proposed that Infotran, which was a qualified small business concern, become a direct subcontractor of CSC in order to allow CSC to increase the percentage of its subcontracting that was awarded to small businesses. ( Id. ¶ 78.) In the arrangement Martin proposed to Tran, once Infotran had formed a direct subcontracting agreement with CSC, Infotran would use exclusively Modis personnel to fulfill its obligations to CSC, and would be paid a small fee per each hour of labor performed by personnel sourced from Modis through Infotran. ( Id. ) In other words, the complaint alleges that Modis proposed an arrangement whereby Modis and Infotran would essentially switch places vis-à-vis CSC. The purpose of this arrangement, according to the complaint, was to allow Modis to pass personnel through Infotran to CSC, thereby allowing CSC to report those personnel as coming from a small business (Infotran), when in reality they were coming from a large business (Modis).
Tran alleges that he refused to participate in this "pass-through" scheme when it was first proposed in September of 2007. ( Id. ¶ 79.) Nevertheless, on April 11, 2008, Infotran, allegedly with the consent of Modis, entered into a direct subcontracting agreement with CSC. ( Id. ¶ 80.) The complaint alleges that, by the terms of this contract, Infotran agreed to provide personnel to perform certain services for CSC under the Prime Contract, but never agreed to use Modis personnel in fulfillment of those obligations. ( Id. ¶¶ 80-82.)
Apparently, Infotran was not the only small business that Modis approached about setting up a pass-through arrangement. According to the complaint, CSC preferred to work with larger businesses (such as Modis) for reasons of efficiency, despite its contractual commitment to utilizing qualified small business subcontractors. ( Id. ¶ 83.) For this reason, Modis allegedly formed pass-through relationships with several small-businesses, including Defendant Sagent. ( Id. ¶¶ 87-91.) The complaint claims that the structure of these relationships mirrored the structure that Tim Martin had proposed to Infotran in September of 2007; that is, Modis would encourage small businesses, such as Sagent, to form a direct relationship with CSC, with the understanding that those small businesses would fulfill any of CSC's requests for personnel through subcontracts with a larger company such as Modis. That larger company would then provide the personnel, and the small business would keep a small fee as a commission for its role as a conduit. ( See, e.g., id. ¶¶ 92-100.) According to the complaint, this pass-through system permitted CSC effectively to eschew its small business subcontracting obligations, but nevertheless report that it had met its goal of allocating 40% of its subcontractor spending to small businesses as the Small Business Subcontracting Plan directed, despite the fact that employees of large businesses were performing almost all of the actual work under the September 2008 Task Order. ( Id. ¶ 100.)
D. Modis's Lawsuit Against Infotran
In October of 2008, four months after Infotran entered into its direct subcontracting agreement with CSC, CSC first asked Infotran to provide personnel for work to be performed under the September 2008 Task Order. ( Id. ¶¶ 115, 144.) In response, Infotran allegedly submitted two of its own employees to CSC for the open positions. ( Id. ) According to the complaint, Tim Martin of Modis subsequently called Tran to complain about Infotran's actions, including threatening Infotran with legal action should it again attempt to place its own employees with CSC, rather than simply playing a role as a conduit for Modis employees. ( Id. ¶¶ 117, 146.) Martin allegedly told Tran that Modis had only agreed to waive enforcement of the non-compete clause in Infotran's contract with Modis-the waiver that had enabled Infotran to enter into a direct subcontracting agreement with CSC-on the condition that Infotran would provide personnel to CSC only with the guidance and consent of Modis. ( Id. ¶¶ 118-20.)
In March of 2009, Infotran again placed one of its own people with CSC when a position became open under the September 2008 Task Order, without consulting Modis. ( Id. ¶ 150.) The complaint alleges that, in response, Martin sent Tran a long email stating in part that "Modis has elected to allow Infotran to obtain a subcontract with CSC for the sole purpose of acting as a small business conduit for Modis to continue to provide resources to CSC while helping them meet their small business quota" and that "[a]t no time did Modis agree to waive its non-compete to allow Infotran to provide direct staffing services to CSC... without Modis participation." ( Id. ¶ 150.)
On June 5, 2009, Modis filed a breach of contract action against Infotran in the United States District Court for the District of Columbia, alleging that Infotran had violated the non-compete clause in its contract with Modis. ( Id. ¶ 152; see also Modis, Inc. v. Infotran Systems, Inc., 09-cv-1051-RWR (D.D.C. 2009) (" Modis v. Infotran ").) The complaint alleges that Modis brought that lawsuit as retaliation for Infotran's refusal to participate in the pass-through scheme. (Compl. ¶ 159.) Moreover, the complaint states that after Modis commenced litigation against Infotran, CSC allegedly "froze out" Infotran from receiving new opportunities under its EAGLE contract from approximately May 2009 through November 2010, and eventually officially terminated its relationship with Infotran. ( Id. ¶¶ 153-54.) Relator alleges that these actions were also taken in retaliation for Infotran's refusal to participate in the pass-through scheme. ( Id. ¶ 160.)
E. Tran Files The Instant FCA Complaint Against CSC, Modis, And Sagent
Tran filed the original complaint in the instant case on May 5, 2011, and amended the complaint on October 17, 2011. (ECF Nos. 1, 4.) Tran alleges five counts under the FCA in relation to the alleged pass-through arrangement: (1) Presentation of False Claims in violation of 31 U.S.C. § 3729(a)(1)(A), against all Defendants (the "Presentation" count); (2) Fraudulent Inducement in violation of 31 U.S.C. § 3729(a)(2), against CSC only (the "Fraudulent Inducement" count); (3) Making Material False Statements in violation of 31 U.S.C. § 3729(a)(1)(B), against all Defendants (the "Material False Statements" count); (4) Conspiracy to Present False Claims and Make Material False Statements in violation of 31 U.S.C. § 3729(a)(1)(C), against CSC and Modis (the "Conspiracy" count); and (5) Retaliation in violation of 31 U.S.C. § 3730(h), against CSC and Modis (the "Retaliation" count). The United States declined to intervene in this action on October 4, 2012, and the Court subsequently entered an order unsealing the Amended Complaint. (ECF Nos. 9, 10.)
Defendants were served with the amended complaint on December 11, 2012, and on January 11, 2013, Defendants filed the three motions to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) that are now before this Court. (ECF Nos. 29, 30, 32.)
II. LEGAL LANDSCAPE
A. Legal Standard For Motion To Dismiss Under Rule 12(b)(6)
Federal Rule of Civil Procedure 12(b)(6) provides that a party may move to dismiss a complaint on the grounds that it "fail[s] to state a claim upon which relief can be granted[.]" Fed.R.Civ.P. 12(b)(6). To survive a Rule 12(b)(6) motion, a complaint must comply with Rule 8, which requires "a short and plain statement of the claim showing that the pleader is entitled to relief[.]" Fed.R.Civ.P. 8(a). This requirement is meant to "give the defendant fair notice of what the... claim is and the grounds upon which it rests[.]" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks and citation omitted).
"Although detailed factual allegations' are not necessary to withstand a Rule 12(b)(6) motion to dismiss for failure to state a claim, a plaintiff must furnish more than labels and conclusions' or a formulaic recitation of the elements of a cause of action.'" Busby v. Capital One, N.A., 932 F.Supp.2d 114, 133 (D.D.C. 2013) (quoting Twombly, 550 U.S. at 555). In other words, the plaintiff must provide "more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "Mere conclusory statements" of misconduct are not enough to make out a cause of action against a defendant. Id. Rather, a complaint must contain sufficient factual allegations that, if true, "state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citation omitted).
In deciding whether to grant a motion to dismiss under Rule 12(b)(6), "[t]he court must view the complaint in [the] light most favorable to the plaintiff and must accept as true all reasonable factual inferences drawn from well-pleaded factual allegations." Busby, 932 F.Supp.2d at 134 (citation omitted). Even so, the court "need not accept inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint[.]" Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994). Nor is the court "bound to accept as true a legal conclusion couched as a factual allegation[.]" Twombly, 550 U.S. at 555 (internal quotation marks and citation omitted).
B. Legal Standard For Motion To Dismiss Under Rule 9(b)
Federal Rule of Civil Procedure 9(b) applies to FCA actions. See U.S. 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). That rule provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake[, ]" but "[m]alice, 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), which are: to "ensure that defendants have adequate notice of the charges against them to prepare a defense[, ]" U.S. ex rel. McCready v. Columbia/HCA Healthcare Corp., 251 F.Supp.2d 114, 116 (D.D.C. 2003); to discourage "suits brought solely for their nuisance value" or as "frivolous accusations of moral turpitude[, ]" U.S. ex rel. Joseph v. Cannon, 642 F.2d 1373, 1385 (D.C. Cir. 1981); and to "protect reputations of... professionals from scurrilous and baseless allegations of fraud[.]'" Id. at 1385 n. 103 (alteration in original) (quoting Felton v. Walston & Co., Inc., 508 F.2d 577, 581 (2d Cir. 1974)).
Rule 9(b) does not abrogate Rule 8, and must be read in light of Rule 8's requirement that allegations be simple, concise, and direct, and short and plain statements of each claim. Joseph, 642 F.2d at 1386; see also U.S. ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., Inc., 238 F.Supp.2d 258, 269 (D.D.C. 2002) ("While... Rule 9(b) requires more particularity than Rule 8, ... Rule 9(b) does not completely vitiate the liberality of Rule 8."). In an FCA action, Rule 9(b) requires 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[, ]'... [and] individuals allegedly involved in the fraud." U.S. ex rel. Williams v. Martin-Baker Aircraft Co., Ltd., 389 F.3d 1251, 1256 (D.C. Cir. 2004) (quoting Kowal, 16 F.3d at 1278). "In sum, although Rule 9(b) does not require plaintiffs to allege every fact pertaining to every instance of fraud when a scheme spans several years, defendants must be able to defend against the charge and not just deny that they have done anything wrong.'" Williams, 389 F.3d at 1259 (quoting U.S. ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1052 (9th Cir. 2001)); accord McCready, 251 F.Supp.2d at 116 (noting that a court "should hesitate to dismiss a complaint under Rule 9(b) if the court is satisfied (1) that the defendant has been made aware of the particular circumstances for which she will have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery evidence of those facts'" (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999))).
C. The Small Business Act
The Small Business Act, 15 U.S.C. §§ 631-657s (2013), governs much of the federal government's procurement policy towards small businesses. The very first section of that law provides clear insight into the law's animating purpose and Congress's intent in passing it:
The essence of the American economic system of private enterprise is free competition.... The preservation and expansion of such competition is basic not only to the economic well-being but to the security of this Nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and developed. It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small-business enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nation.
15 U.S.C. § 631(a) (emphasis added).
Specifically with respect to contracts that the federal government enters into, section 637(d)(1) of Title 15 of the U.S. Code provides that "[i]t is the policy of the United States that small business concerns... shall have the maximum practicable opportunity to participate in the performance of contracts let by any Federal agency[.]" In furtherance of this goal, section 637(d)(4) provides that government contractors who wish to bid on contracts of more than $500, 000 shall "negotiate with the procurement authority a subcontracting plan which incorporates" certain contract clauses that relate to the federal government's policy towards small business and the contractor's obligations with respect to that policy. This plan is a requirement for any large government contract, because "[n]o contract shall be awarded to any offeror ...