Third Circuit Affirms Dismissal of Relators' FCA Action Against Educational Institution and Awards Attorneys' Fees Against Relator for Filing a Frivolous Appeal

Posted on September 20, 2011 by Cliff Katz

Relators, Mary Beth Pilecki-Simko and Tom Giunta, sued The Chubb Institute (“TCI”) and TCI’s corporate parents, The Chubb Corporation (“TCC”) and High-Tech Institute, Inc., alleging that TCI made misrepresentations to the Department of Education to obtain student financial aid in the form of loans and grants from the federal government.  The District Court dismissed the case with prejudice because relators failed to plead their claims with particularity as required by Rule 9(b) and denied relators’ motion for reconsideration.  The Third Circuit affirmed, holding that conclusory allegations of scienter fail to even satisfy the more lenient standard of Fed R. Civ. P. 8(a).  Additionally, the Third Circuit ordered relators to pay TCC attorneys’ fees and costs because relators included TCC as a party to the appeal but failed to challenge any of the District Court’s rulings regarding the sufficiency of the veil-piercing and successor liability allegations directed at TCC.  See United States ex rel. Pilecki-Simko v. The Chubb Institute, Case No. 10-3907, 2011 WL 3890975 (3rd Cir. Sept. 6, 2011).

Relators based their theory of liability against TCI on an implied false certification theory.  TCI allegedly falsely certified compliance with the Program Participation Agreement that educational institutions are required to enter into to receive federal subsidies under Title IV of the Higher Education Act.  Among the requirements in the Agreement, TCI certified that it did not provide incentive compensation based on success in securing enrollments. 

Relators argued that Rule 9(b) did not apply to their claims, an argument which the Third Circuit found “implausible.”  Nonetheless, the Third Circuit never needed to decide this issue because it held the complaint failed to satisfy even the basic pleading standards of Rule 8(a).  Under Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009), relators were required to plead a “plausible” claim.  As the Third Circuit explained: 

A complaint satisfies the plausibility standard when the factual pleadings “allow[ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” This standard requires that plaintiff allege “more than a sheer possibility that a defendant has acted unlawfully.” “[A] plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” (internal citations to Iqbal and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) omitted).

The relators' allegations that TCI acted “knowingly” were merely “conclusory allegations” stating that TCI knew the claims were false because the students were not eligible for financial aid due to TCI’s incentive compensation.  Relators failed to allege any facts to indicate that TCI “knowingly” submitted false claims, such as whether TCI documented or was aware of any violations of the Program Participation Agreement.
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9th Circuit Applies Iqbal's Plausibility Requirement to FCA Case

Posted on September 20, 2011 by Cliff Katz

Mary Cafasso, a former employee of General Dynamics C4 Systems (“GDC4”), brought a False Claims Act case against her former employer after her job was eliminated following corporate restructuring.  The 9th Circuit affirmed the District Court’s dismissal of Cafasso’s claims and the granting of summary judgment in favor of GDC4 on its counterclaim for breach of a confidentiality agreement.  The Court held that, in addition to meeting the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure, an FCA complaint must also “state a plausible claim for relief” pursuant to Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009).  See United States ex rel. Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (9th Cir. 2011).

GDC4 is a technology company that services the military.  Cafasso alleged that GDC4 is a participant in the Advanced Telecommunications & Information Distribution Research Program (“ATIRP”), which grants the government certain rights to inventions developed in performance of the military contracts.  Cafasso claimed that GDC4 failed to disclose new inventions to the government.  Before her termination, Cafasso copied almost eleven gigabytes of data from GDC4 computers.

The 9th Circuit affirmed the dismissal of Cafasso’s claims under Rules 8(a) and 9(b).  As the Court stated:

Because Rule 8(a) requires the pleading of a plausible claim, Iqbal, 129 S. Ct. at 1949-50, we hold that claims of fraud or mistake--including FCA claims--must, in addition to pleading with particularity, also plead plausible allegations.  That is, the pleading must state “enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the misconduct alleged].” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). 

Cafasso’s complaint was not “sufficiently particularized and plausible” because she did not allege an actual false claim.  “An actual false claim is the sine qua non of an FCA violation.”  The Court found that Cafasso’s allegations, if true, might rise to the level of breach of contract, but not a false or fraudulent claim for payment.  Breach of contract or allegations of “unsavory conduct” cannot, by themselves, form the basis for an FCA claim.

Cafasso admitted that she breached her confidentiality agreement with GDC4 by taking files from GDC4’s computers, but asked the Court to adopt a public policy exception that would allow relators to disclose such information in furtherance of an FCA action.  The Court declined to do so under the circumstances of this case due to the “vast and indiscriminate appropriation of GDC4’s files,” but left open the possibility in other cases.  As the Court stated:  

Although we see some merit in the public policy exception that Cafasso proposes, we need not decide whether to adopt it here. Even were we to adopt such an exception, it would not cover Cafasso's conduct given her vast and indiscriminate appropriation of GDC4S files. Cafasso copied nearly eleven gigabytes of data--tens of thousands of pages… Swept up in this unselective taking of documents were attorney-client privileged communications, trade secrets belonging to GDC4S and other contractors, internal research and development information, sensitive government information, and at least one patent application that the Patent Office had placed under a secrecy order…Were we to adopt a public policy exception to confidentiality agreements to protect relators--a matter we reserve for another day--those asserting its protection would need to justify why removal of the documents was reasonably necessary to pursue an FCA claim.
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