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Phone Recovery Services, LLC v. Verizon Washington, DC, Inc.

Court of Appeals of The District of Columbia

August 16, 2018

Phone Recovery Services, LLC, Appellant,
Verizon Washington, DC, Inc., et al., Appellees.

          Argued January 18, 2017

          Appeal from the Superior Court of the District of Columbia (CAB-2277-14) (Hon. Michael L. Rankin, Trial Judge)

          Jordan Rand, with whom Joshua D. Wolson and Malini Rao were on the brief, for appellant.

          Jay P. Lefkowitz, with whom Gregory L. Skidmore, Mark A. Hiller, Scott H. Angstreich, J. William Codinha, Laura Steinberg, Christopher T. McWhinney, Alison L. Nadel, Emily Crandall Harlan, Megan Thibert-Ind, Russell M. Blau, Daniel D. Barnowski, Charles C. Hunter, Daniel Z. Herbst, Wayne C. Stansfield, Katherine J. Seikaly, Jeremy S. Newman, Daniel G. Morris, Matthew H. Kirtland, Rebecca E. Bazan, Michael P. Donahue, Allison D. Rule, and Catherine M. Hannan were on the brief or made an appearance, for appellees.

          Before Beckwith and McLeese, Associate Judges, and Kravitz, Associate Judge, Superior Court of the District of Columbia:


         Phone Recovery Services (PRS) appeals the dismissal of a lawsuit it brought on behalf of the District of Columbia against various telecommunications providers alleged to have fraudulently underpaid taxes that the District requires such providers to charge their customers in order to fund the city's 911 emergency services. At issue in this appeal, among other matters, is whether the fraudulent conduct PRS alleged was the sort of misconduct that had already been brought to light in news articles or other public disclosures-in which case, PRS's claim that the providers had violated the District's False Claims Act (FCA) would fall outside the category of cases the FCA allows others to bring on the District's behalf. Following the approach taken by several federal appellate court decisions analyzing the public disclosure bar contained in the federal analog to the District's FCA, we hold that PRS's FCA claim was not precluded by the statute's public disclosure bar. For the reasons discussed below, however, we nonetheless affirm the trial court's dismissal of that FCA claim and of two common law claims PRS included in its complaint.

         I. Background

         The District of Columbia funds its emergency 911 call center in part by imposing a monthly tax on all wireline, wireless, and interconnected Voice Over Internet Protocol (VoIP) service providers, calculated at different rates for each line leased or sold in the District. D.C. Code § 34-1803 (2012 Repl.).[1] In April 2014, Phone Recovery Services brought a qui tam action as a relator against a number of telecommunications companies operating in the District, [2] alleging that those companies were defrauding the District of millions of dollars in 911 taxes. The complaint[3] alleged that the providers had violated the FCA, see D.C. Code § 2-381.02, and breached their fiduciary duty to the District. A third count requested an accounting to allow PRS to ascertain "the true extent to which" the providers had underpaid 911 taxes. In compliance with the FCA, PRS filed its original complaint under seal in the Superior Court and provided the District with the opportunity to review the claim and to decide whether to intervene in the action. D.C. Code § 2-381.03 (b)(1)(4)(A)-(B). The District ultimately declined to get involved, and the court unsealed the complaint. The crux of PRS's complaint was that most of the District's telecommunications companies had used fraudulent means to underpay on their 911 tax obligations-underpayment that PRS says it uncovered by relying in part upon a "proprietary methodology" developed by its principal and founder, Roger Schneider.

         Roger Schneider formed PRS to investigate telecommunications firms after discovering, while serving on an Alabama county emergency services board in 1993, that one particular provider was underremitting 911 fees to the county. Schneider began to investigate other companies to determine whether they were also underremitting fees, and concluded that the problem was widespread and national in scope. According to PRS, prior to this lawsuit, it had launched more than fifteen "911 fee recovery efforts" in different jurisdictions around the country, based in large part on the "proprietary methodology" Mr. Schneider had developed for calculating underremitted 911 fees.

         PRS alleged in its complaint that, by applying its "proprietary methodology" to the defendants in the District, it determined that each defendant had underpaid taxes in three ways, and had done so intentionally, knowingly, or recklessly. First, the complaint alleged that each defendant miscategorized the service that it provided in order to take advantage of the different tax rates for wireline services and VoIP services. See D.C. Code § 34-1803. More specifically, PRS claimed that each defendant classified the service it provided to its customers as a wireline primary rate interface (PRI), organized into private exchange stations and ordinarily taxed at $0.62 per station, when the defendant was actually providing a VoIP service that should be taxed at $0.76 per line, trunk, or path. By classifying a service as PRI rather than VoIP, a company might save up to $0.14 per transaction. Second, the complaint alleged that even where a defendant correctly classified the service provided as a wireline PRI service, the defendant undercharged for that service. To demonstrate how a company might undercharge, PRS attached to the complaint a phone bill of one of the provider's customers in which the provider did not use the correct trunking ratio to arrive at the proper charge. Finally, the complaint alleged that some companies did not pay 911 taxes at all-a claim in apparent tension with the coinciding assertion in the estimation-of-damages section of the complaint that each one of the companies had underremitted taxes at a rate of 31.7%.

         In their motion to dismiss, the phone companies attached thirteen news articles that in their view constituted public disclosures precluding PRS's FCA claim.[4] These articles described allegations that various telecommunications companies failed to pay adequate 911 taxes by means such as "intentionally undercount[ing] lines used to calculate and remit 911 charges, "[5] issuing reports that listed fewer business phone lines than the company actually provided, [6]charging for a landline rather than multi-line commercial service, [7] and paying a wireless fee "based only on the number of active customers who had purchased prepaid service directly from [the provider], as opposed to the number of customers [the provider] ha[d] with [local] telephone numbers."[8] Other articles alleged more generally that it was "pretty much like the Wild West out there in telephone land today"[9] or discussed a local legislature's passage of a "bill that would give an emergency services district the authority to obtain information to determine whether the district's '911' emergency services fee is correctly billed, collected, and remitted to the district."[10] Seven of these articles described conduct within various counties in Tennessee, and the remainder focused on conduct in five other states.[11] None described fraudulent activity in the District of Columbia.

         The trial court, applying a version of the FCA that preceded a 2013 amendment, first found that the conduct alleged in PRS's complaint was "substantially similar" to information already publicly available through various news articles, and that PRS's FCA claim was therefore precluded by the statute's public disclosure bar.[12] Because many telecommunications companies operating in the District had a national reach, the court reasoned, articles raising the possibility that fraudulent shortchanging of 911 fees was industrywide "surely could have alerted the D.C. government to the possibility of fraud." The court further expressed concern that PRS's complaint "treat[ed] [] defendants uniformly, without identifying specific allegations against any particular one." Noting that the complaint originally named defendants that PRS later learned had ceased operating in the District before the time period at issue, and that "PRS's claims to each particular defendant [were] speculative," the court concluded that PRS had added little to what was already in the public domain. In the court's view, PRS appeared to have "arrived at its specific accusations by applying the same calculations to each defendant in accordance with its share of the wireless communications market in the District, multiplied by the number of lines the FCC allocates to the District." PRS had also applied this calculation to unnamed defendants and had admitted that it did not know the number of lines operated or amount in taxes submitted by each defendant over the relevant time period.

         For similar reasons, the court also granted dismissal of the FCA claim on the independent ground that PRS failed to plead fraud with the particularity required by Super. Ct. Civ. R. 9 (b). Finally, the court dismissed PRS's breach-of-fiduciary-duty claim and request for an accounting on the ground that PRS had not established that the defendants had a fiduciary relationship with the District.

         On appeal, PRS challenges each of the trial court's findings, and we address them in turn.

         II. False Claims Act

         The False Claims Act-modeled after federal legislation[13] established during the Civil War to combat defense contractors' efforts to defraud the government, see United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 649 (D.C. Cir. 1994)-permits both the District's Attorney General and private qui tam relators to recover from those who make false or fraudulent claims to the District for payment, but bars recovery where the allegations are substantially the same as public disclosures found in news reports and other public filings. D.C. Code §§ 2-381.02, -381.03. Since the federal statute's enactment, Congress has amended the Act on various occasions in attempts to strike the appropriate balance between "adequate incentives for whistle-blowing insiders with genuinely valuable information and discouragement of opportunistic plaintiffs who have no significant information to contribute of their own," Springfield Terminal Ry., 14 F.3d at 649, and the D.C. Council has followed suit.

         A. Public Disclosure Bar

         1. The 2013 Amendment

         As a preliminary matter, PRS argues that the trial court erred in applying the pre-2013 version of the FCA to PRS's claims, rather than applying the version in place when the complaint was filed-the version amended in 2013-to all of the conduct at issue.[14] The 2013 amendment was significant, in PRS's view, because it limited the scope of the public disclosure bar to claims that are "substantially the same" as, rather than "based upon," facts available to the public.[15] Specifically, the District's FCA previously provided that "[n]o person may bring an action pursuant to . . . [the FCA] based upon allegations or transactions . . . disclosed by the news media[.]" D.C. Code § 2-381.03 (c)(2)(A) (2001) (emphasis added). In March 2013, the D.C. Council amended this language to state that "a court shall dismiss an action or claim under [the FCA] if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed[.]" D.C. Code § 2-381.03 (c-1)(1) (2013) (emphasis added). The purpose of this amendment was to "make the District's false claims act consistent with federal law," 2012 D.C. Laws 19-323 (Act 15-549), which previously barred suits that alleged facts "based upon" publicly disclosed material, and which Congress, prompted by a circuit split on the interpretation of this language, amended to read "substantially the same."[16]

         Courts have since recognized that the amended federal statute, barring suits alleging facts that are "substantially the same" as those already in the public domain, essentially codified one interpretation of the prior statute that read "based upon" to mean facts "substantially similar" to those publicly disclosed. See, e.g., Bellevue v. Universal Health Servs. of Hartgrove, Inc., 867 F.3d 712, 718 (7th Cir. 2017) (holding that the change was "not significant," as the court had "previously interpreted the phrase 'based upon [a] public disclosure' to mean 'substantially similar to publicly disclosed allegations'") (quoting Leveski v. ITT Educ. Servs., Inc., 719 F.3d 818, 828 n.1 (7th Cir. 2013)); United States ex rel. Mateski v. Raytheon Co., 816 F.3d 565, 570, 573-75 (9th Cir. 2016); United States ex rel. Osheroff v. HealthSpring, Inc., 938 F.Supp.2d 724, 732 n.10 (M.D. Tenn. 2013). In our decision in Grayson v. AT&T Corp., this court also interpreted the pre-amendment language "based upon" to mean "substantially similar," 980 A.2d at 1146-48, and we likewise conclude that there is no significant substantive difference between the District's pre-amendment and post-amendment versions of the public disclosure bar.[17]

         2. Application of the Public Disclosure Bar

         As noted above, the FCA now provides that "a court shall dismiss an action or claim" brought by a qui tam plaintiff on the District's behalf "if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed . . . [b]y the news media." D.C. Code § 2-381.03 (c-1)(1)(C). This public disclosure bar "is triggered where the public disclosure raises the inference of fraud so as to set the government squarely upon the trail of the alleged fraud." Grayson, 980 A.2d at 1148 (internal quotation marks omitted). "[T]he Act bars suits based on publicly disclosed allegations or transactions," rather than general information. Springfield Terminal Ry., 14 F.3d at 653 (internal quotation marks omitted). Thus, "a qui tam action cannot be sustained where all of the material elements of the fraudulent transaction are already in the public domain and the quitam ...

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