United States District Court, District of Columbia
UNITED STATES ex rel. LANDIS et al., Plaintiffs,
TAILWIND SPORTS CORP., et al., Defendants.
CHRISTOPHER R. COOPER, United States District Judge
Former professional cyclist Floyd Landis filed this False Claims Act (“FCA”) qui tam action against Lance Armstrong-his former teammate on the U.S. Postal Service (“USPS”) cycling team-and a host of associated defendants. Landis (“Relator”) alleged that the defendants had wrongly obtained and retained money under a Sponsorship Agreement with USPS by concealing the team’s use of performance-enhancing drugs. The Government intervened against Armstrong but has thus far declined to do so against his longstanding business representatives William Stapleton and Barton Knaggs, and their company, Capital Sports & Entertainment Holdings, Inc. (collectively, “CSE Defendants”).
While the case was still in the early stages of discovery, the CSE Defendants moved for summary judgment on the five counts that remain against them. Four of these counts relate to “direct” false claims, while the other alleges a series of “reverse” false claims. Direct false claims cause the United States to remit money directly to claimants, whereas reverse false claims facilitate the improper withholding of money or property to which the United States is legally entitled. Compare 31 U.S.C. § 3729(1)-(2) (2006), with id. § 3729(a)(7) (2006). Direct and reverse false claims are mirror images of one another-both result in a loss to the Government. See United States ex rel. Ervin & Assocs., Inc. v. Hamilton Sec. Grp., Inc., 370 F.Supp.2d 18, 37 (D.D.C. 2005) (noting that Congress intended § 3729(a)(7) “to treat ‘an individual who makes a material misrepresentation to avoid paying money owed to the Government . . . as if he submitted a false claim to receive money’” (quoting United States ex rel. Wilkins v. N. Am. Constr. Corp., 173 F.Supp.2d 601, 630 (S.D. Tex. 2001)). Armstrong has joined those parts of the CSE Defendants’ motion pertaining to reverse-false-claim liability. The Court held a hearing on the motion for summary judgment on December 7, 2015.
Because a genuine issue of material fact exists as to whether any false claims for payment under the Sponsorship Agreement were submitted within the FCA’s six-year limitations period, the Court will deny the CSE Defendants’ motion as to Relator’s Counts 1, 2, 3, and 6 (direct false claims). But the Court will grant the CSE Defendants’ motion with respect to Count 4 (reverse false claims), because the Sponsorship Agreement created no legal obligation to repay USPS any sponsorship fees obtained as a result of materially false statements. Accordingly, the Court will enter summary judgment in favor of both the CSE Defendants and Armstrong on Count 4 of Relator’s Second Amended Complaint.
A. The Sponsorship Agreement, Tailwind, and the CSE Defendants
In 1995 and again in 2000, USPS agreed to sponsor the professional cycling team prominently linked with Lance Armstrong. The 2000 Sponsorship Agreement (“Sponsorship Agreement”) was a contract between USPS and DFP Cycling, LLC, a predecessor of Tailwind Sports Corporation (“Tailwind”), which managed the USPS team. Under the Agreement and subsequent modifications, USPS was obligated to pay Tailwind sponsorship fees in exchange for various “Promotional Rights and Activities, ” including media exposure, the display of USPS’s logo on the team’s uniforms, and hospitality at major cycling events. Decl. of Laura Hundley Ritts Supp. Defs.’ Mot. Summ. J. (“MSJ”) (“Ritts Decl.”), Ex. A (“Sponsorship Agreement”) 4-6. The Sponsorship Agreement specified the amount and frequency of lump-sum payments from USPS to Tailwind over a four-year period, but it also contemplated various other “incidental costs” to be allocated between the parties, depending on which promotions were undertaken. Id. at 7, 9.
In the contract, Tailwind’s predecessor represented to USPS that “each rider on the Team has a moral turpitude and drug clause that allows the Company to suspend or terminate the rider” for reasons such as failure to abide by the rules of international cycling organizations, “failure to pass drug or medical tests, ” or “inappropriate drug conduct prejudicial to the Team, or the Postal Service, which is in violation of the Team rules or commonly accepted standards of morality.” Id. at 5. The “Company agree[d] to take appropriate action within thirty (30) days” in the event of such behavior. Id. The Sponsorship Agreement itself did not obligate Tailwind to return any funds received during periods of noncompliance, but it did authorize USPS to “immediately terminate” the contract, and recognized its right to “exercise any . . . right or remedy available to it under law or in equity, ” upon the occurrence of a specified Event of Default. Id. at 4. Two such events were Tailwind’s “fail[ure] to take immediate action . . . in a case of a rider or Team offense related to a morals or drug clause violation, ” and “negative publicity associated with an individual rider or team support personnel, . . . due to misconduct such as but not limited to, failed drug or medical tests, alleged possession, use or sale of banned substances, or a conviction of a crime.” Id.
_____________________________________ CSE was responsible for submitting Tailwind’s invoices for sponsorship fees to USPS during the time period relevant to the present motion. Ritts Decl. ¶ 2.
Stapleton and CSE began acting as Armstrong’s business agents in 1995 and 2001, respectively. Decl. of William Stapleton Supp. Defs.’ MSJ (“Stapleton Decl.”) ¶ 3; Decl. of Barton B. Knaggs Supp. Defs.’ MSJ (“Knaggs Decl.”) ¶ 3. ________ Knaggs began acting as Armstrong’s business manager in 2004. Knaggs Decl. ¶ 3. Stapleton and Knaggs were both principals of CSE throughout the sponsorship period, _______ Stapleton Decl. ¶ 1; Knaggs Decl. ¶ 3; _____________.
B. Prior Proceedings in This Case
Relator filed this qui tam action in June 2010 against Lance Armstrong and several other individuals and entities associated with the USPS professional cycling team. Relator’s Second Amended Complaint included four counts (5 through 8) based on the FCA as amended by the Fraud Enforcement and Recovery Act (“FERA”) of 2009, Pub. L. No. 111-21, 123 Stat. 1617 (2009), and four counts (1 through 4) based on the pre-2009 version of the FCA. Relator’s pre-FERA counts alleged that all defendants knowingly submitted, or caused to be submitted, false or fraudulent claims for payment under the Sponsorship Agreement, in violation of 31 U.S.C. § 3729(a)(1) (Count 1); knowingly made or used, or caused to be made or used, false records or statements to get false or fraudulent claims paid or approved by the United States, in violation of § 3729(a)(2) (Count 2); conspired to defraud the United States by getting false or fraudulent claims allowed or paid, in violation of 31 U.S.C. § 3729(a)(3) (Count 3); and avoided the obligation to return funds paid by the United States by concealing and failing to disclose the USPS team’s doping, in violation of § 3729(a)(7) (Count 4). Am. Compl. ¶¶ 239-58. In February 2013, the Government intervened against Armstrong and certain other defendants but declined to intervene against the CSE Defendants.
In June 2014, the Court granted in part and denied in part several defendants’ motions to dismiss Relator’s Second Amended Complaint in an opinion issued by Judge Wilkins, who previously presided over the case. Mem. Op. June 19, 2014, ECF No. 174. The Court initially held that 31 U.S.C. § 3731(b)(1)’s six-year statute-of-limitations period applied to all of Relator’s claims. Id. at 30. The Court then dismissed Counts 5, 7, and 8 as to all defendants (including the CSE Defendants and Armstrong), id. at 44, 81, and held that Relator could recover under Counts 1, 2, 3, and 6 only for “direct” false claims submitted after June 10, 2004 (within the six-year limitations period), id. at 30. The Court further denied the CSE Defendants’ motion to dismiss as to Count 4, brought under the pre-FERA reverse-false-claim provision. That provision imposed liability on anyone 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). The Court identified three key questions with respect to Count 4: First, can the alleged breach of a government contract-here, the Sponsorship Agreement-ever impose an “obligation” on the breaching party to reimburse the Government for money previously awarded under the contract? Second, would the alleged doping on the part of the USPS riders have generated an indebtedness sufficiently certain to constitute such an “obligation”? And third, can a person or entity that does not itself owe the obligation be liable for a reverse false claim?
The Court first held that the statutory term “obligation” “encompasses a breach of a government contract and the attendant obligation to repay the government.” Mem. Op. June 19, 2014, at 63. The Court determined that the D.C. Circuit had not addressed the issue, and went on to agree with the Sixth Circuit’s conclusion that “‘obligation’ certainly includes those arising from acknowledgments of indebtedness, final judgments, and breaches of government contracts.” Id. (quoting Am. Textile Mfrs. Inst. v. The Limited, Inc., 190 F.3d 729, 741 (6th Cir. 1999)). The Court further observed that the Sixth Circuit must have been referring to alleged breaches of government contracts, because if it had intended to limit its statement only to adjudicated breaches resulting in monetary judgments, it would have been redundant to mention both final judgments and breaches of contracts. Id. at 64.
But not every alleged breach of contract with the Government gives rise to a reverse-false-claim “obligation, ” the Court reasoned. Instead, “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.’” Id. (quoting Am. Textile, 190 F.3d at 736). The Court found that such an obligation is triggered by a “total breach”-“the breach of a core, vital material term that defeats the purpose of the contract.” Id. at 65. When a contract is breached in this way, “the injured party can obtain restitution of some or all monies paid to the breaching party as a remedy.” Id. (citing Farnsworth on Contracts § 12.20 (3d ed. 2004); Corbin on Contracts § 61.2 (revised ed. 2012); 26 Williston on Contracts § 68:2 (4th ed.)). By this reasoning, the indebtedness created by a “total” breach exists entirely apart from a later decision to seek restitution through the coercive machinery of the judicial process. The breaching party is legally obligated to return payments made under the contract until the applicable statute of limitations has expired, whether or not the Government ever brings suit.
Second, the Court held that the doping activity alleged in this case “would constitute a breach of contract with the Postal Service that would create a potential liability . . . sufficiently certain to constitute an ‘obligation’” under the FCA. Id. at 66. Both the 1995 and 2000 Sponsorship Agreements, after all, mandated compliance with the governing rules of various cycling organizations, which expressly prohibited certain performance-enhancing substances and practices. Id. at 65. In the 2000 Agreement, Tailwind’s predecessor even “represent[ed] that each rider on the Team has a moral turpitude and drug clause” allowing it to suspend or terminate a rider for (among other things) “inappropriate drug conduct prejudicial to the Team, or the Postal Service, which is in violation of Team rules or commonly accepted standards of morality.” Id.
The Court gave additional reasons why doping by USPS riders would “be a total breach of the contracts.” Id. at 66. “[T]he Postal Service’s reputation and goodwill, ” it concluded, would be “seriously damaged by an association with a team that is faster because it cheats.” Id. The anti-doping regulations incorporated by reference were therefore a “core term of the contracts, because the negative publicity associated with doping defeats the essential purpose of the venture (from the sponsor’s perspective).” Id. USPS had also sought to maximize its marketing exposure through the cycling team’s participation in as many races and promotional events as possible. But because “a team that cannot race cannot generate positive publicity for its sponsor, ” rider doping-culminating in failed blood tests, suspensions, and bans-would have destroyed “a core benefit of the bargain for the Postal Service.” Id. at 67. For all these reasons, the alleged doping “would have been a total breach” of the Sponsorship Agreement, enabling the Government to seek “restitution-repayment of the sponsorship fees-as a remedy.” Id. at 68. Such conduct therefore generated an “obligation sufficiently certain to give rise to an action of debt at common law.” Id. (quoting Am. Textile, 190 F.3d at 736).
In relation to these first two issues, the Court rejected the CSE Defendants’ argument that any breach of the Sponsorship Agreement was merely a contingent obligation (one incapable of creating reverse-false-claim liability) because it depended on the Government exercising its discretion to seek damages or repayment in restitution for breach of the Sponsorship Agreement. The Defendants’ argument-that a final judgment or an acknowledgment of indebtedness was necessary to ripen Tailwind’s alleged breach into an “obligation”-“prove[d] too much, ” because otherwise a breach of contract could never create an “obligation” in the absence of a demand or a lawsuit. Id. In the Court’s view, this result could “not be squared with the language or the purpose of the statute.” Id. It would also have the pernicious effect of “allowing those with knowledge of contractual breaches or other non-compliance to make false statements about those matters, without penalty, unless and until the government files a lawsuit.” Id. at 68-69.
Lastly, the Court rejected Defendant Armstrong’s argument that Tailwind alone could be liable for reverse false claims given that no other defendant had contracted with the United States. As the Court noted, some authorities seem to suggest that only a defendant who personally owed an obligation to the Government can be subject to reverse-false-claim liability. See id. at 69-70. The Court nonetheless focused on the FCA’s text, which speaks of “decreas[ing] an obligation to pay or transmit money or property to the Government” rather than a defendant’s “own obligation.” Id. at 71 (quoting 31 U.S.C. § 3729(a)(7)) (emphasis in original); see id. (emphasizing “Congress’s use of the indefinite article”). The Court cited a Fifth Circuit decision for this proposition. See United States v. Caremark, Inc., 634 F.3d 808, 817 (5th Cir. 2011) (“The statute does not require that the statement impair the defendant’s obligation; instead, it requires that the statement impair ‘an obligation . . . .’”).
C. The Present Motion for Summary Judgment
The CSE Defendants move for summary judgment on Relator’s remaining claims: Counts 1, 2, 3, 4, and 6. They contend that the direct-false-claim counts (Counts 1, 2, 3, and 6) are time-barred under 31 U.S.C. § 3731(b)(1)’s six-year statute of limitations. Mem. Supp. Defs.’ MSJ (“Mem. Supp. MSJ”) 8. Relator filed his original complaint on June 10, 2010. Although the parties agree that Tailwind made four claims for payment to USPS after June 10, 2004, the CSE Defendants maintain that the resulting payments were reimbursements for “hospitality-related expenses” that “had nothing to do with the Sponsorship Agreement, ” which they say ended before the four claims for payment were made. Id. at 8-9. Relator counters that, at the very least, a genuine issue exists as to whether the Sponsorship Agreement contemplated these claims and whether the Agreement was still in effect when they were submitted. Relator’s Opp’n Defs.’ MSJ (“Relator’s Opp’n”) 16, 18.
The CSE Defendants, joined by Armstrong, also urge the Court to grant summary judgment as to Count 4, which is grounded in a reverse-false-claim theory. They contend-contrary to the Court’s June 2014 Memorandum Opinion-that the mere breach of a government contract that enables the United States to sue for repayment cannot create an “obligation” within the meaning of § 3729(a)(7), Mem. Supp. MSJ 15, and that even if such an obligation existed, it belonged only to Tailwind, as the party to the Sponsorship Agreement, id. at 20. The CSE Defendants further contend that Relator has not identified a single actionable false statement by ...