Qui Tam Relators, Startley General Contractors, Inc., Mandy Powranzas and Steven Stewart (“Relators”), brought False Claims Act claims, among others, against a competing contractor, the Water Works Board of the City of Birmingham (“BWWB”), and multiple individuals personally and in their official capacities (collectively “Defendants”).
According to Relators’ Second Amended Complaint, the Defendants were involved with BWWB in a “pay to play” scheme. More specifically, Relators alleged that BWWB, its management and a host of both retired and current employees, enjoyed personal enrichment through bribery and special favors from preferential contractors. The alleged “preferred” contractors were allowed to bid “low” and charge “high” while the BWWB ratepayers paid ever increasing rates to help fund the budget paying for these projects. Relators further alleged that these preferential contractors then rewarded the decision makers with “perks” for giving them no bid contracts, signing false pay estimates, or simply just looking the other way and allowing them to charge for equipment and labor that was not used on a job.
A copy of the Second Amended Complaint is here ->
Relator’s originally filed this action in Alabama state court. In a nutshell, Relators claimed they were harmed from the “pay to play” schemed engaged in by the competing contractor and BWWB, that ignored bidding laws and fraudulently used federal program dollars to fund public water utility projects. The case was removed to the United States District Court for the Northern District of Alabama (the “District Court”), and Relators filed an Amended Complaint.
The Defendants filed motions to dismiss the Amended Complaint. The District Court granted the motions to dismiss the FCA claim, without prejudice. In dismissing the FCA claim, the District Court explained that the “plaintiffs have not and cannot, on the facts of this case, identify a false claim that a defendant allegedly made to the federal government.”
After a motion for reconsideration, the District Court allowed Relators to file a Second Amended Complaint, but noted that they “needed more than just allegations of improper billing practices; they needed specific allegations that a fraudulent claim was submitted to the federal government or to an entity administering federal funds.”
Relators filed a Second Amended Complaint, again asserting FCA claims. Defendants filed a motion to dismiss. The District Court granted the motion to dismiss and dismissed the FCA claims, with prejudice. the District Court explained its reasons for dismissal, including that the Relators failed to “connect the dots” to demonstrate that federal funds were used by BWWB to pay fraudulent invoices or that there was otherwise a submission of a fraudulent claim to the federal government.” Instead, it seemed that BWWB was allegedly using federal funds as a guarantee to seek bonds and that invoices were paid — not from federal funds — but from bond revenues. In addition, BWWB’s ratepayers seemed to be the victim of any alleged fraud — not the federal government — since any fraudulently made claim would fall ultimately on the ratepayer.
Relators filed a second motion for reconsideration. The District Court denied it, explaining that Relators “had only reiterated their theory of FCA liability and failed to address the concerns the court had previously expressed: that is, the plaintiffs reargued the same theory without alleging a connection between the fraudulent scheme and a claim being submitted to the federal government, as required for an FCA claim.”
Relators appealed the denial of their second motion for reconsideration. The Eleventh Circuit accepted the appeal, and affirmed the District Court’s denial of the second motion for reconsideration. This blog does not discuss the technical issues concerning the appeal, rather, it focuses on the two substantive issues raised by Relators and addressed by the Eleventh Circuit:
First, Relators cited to United States ex rel Clausen v. Laboratory Corp. of America, Inc., for the propositions that some indicia of reliability of fraud is needed, and that “an insider might have an easier time obtaining information about billing practices and meeting the pleading requirements under the False Claims Act.” 290 F. 3d 1301, 1311 (11th Cir. 2002). In rejecting Relators’ position, the Eleventh Circuit addressed Clausen. The Clausen court held (a) that the FCA and Rule 9(b) require some indicia of reliability be alleged “to support the allegation of an actual false claim for payment being made to the government,” id. (emphasis removed and added); and (b) an “outsider” — as opposed to an insider, like the plaintiffs argue they have access to — is not “offer[ed] any special leniency” when he “fail[s] to allege with the required specificity the circumstances of the fraudulent conduct,” id. at 1314. As to the former point, the plaintiffs still fail to explain how their allegations regarding fraudulent billings connect to federal funds. And as to the latter, the plaintiffs fail to indicate how the insider information they do have provides any basis for concluding that their Second Amended Complaint plausibly alleged an FCA claim.
Second, Relators argue that Defendants violated federal regulations. Even on the merits, this argument would still fail to indicate why those alleged federal regulatory violations provide a basis to conclude that a false claim implicated federal funds and was submitted to the federal government. In particular, the plaintiffs repeatedly refer to the fact that federal regulations require separation (from funds from other sources) of federal funds received through the relevant federal program. Yet, the plaintiffs do not argue why the district court was wrong to conclude—as it did in dismissing the second amended complaint—that “even if there was some commingling of … funds, there’s no way right now for the Court based on the allegations before it to identify a specific instance in which federal funds were used to pay a fraudulent claim.”
A copy of the Eleventh Circuit’s opinion is here ->