Monday, March 17, 2014

False Claims Act - pleading requirements - ED Pa. case - excerpts

US ex rel. Knisely v. Cintas Corporation – ED Pa. – March 14, 2014

It is well-established that claims under the False Claims Act must be pled with particularity under the special pleading standard of Fed. R. Civ. P. 9(b), which states in relevant part that “[i]n alleging fraud. . ., a party must state with particularity the circumstances constituting fraud[.]” See United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 242 n.9 (3d Cir. 2004); see also United States ex rel. LaCorte v. SmithKline Beecham Clinical Labs., Inc., 149 F.3d 227, 234 (3d Cir. 1998); accord Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1477 (2d Cir. 1995) (citing cases).

This heightened pleading standard serves a dual purpose. Requiring plaintiffs to plead with particularity “place[s] the defendants on notice of the precise misconduct with which they are charged” and also “safeguard[s] [them] against spurious charges of immoral and fraudulent behavior.” Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984). In Judge Easterbrook’s oft-cited phrasing, plaintiffs must support their fraud allegations under Rule 9(b) with all the essential detailed factual circumstances that constitute “the first paragraph of any newspaper story” that is, “who, what, when, where and how.” DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) (cited in In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002). Our Court of Appeals has adopted a “flexible” alternative when plaintiffs cannot plead particularized evidence of a false claim, holding the plaintiff need not allege “date, place or time” if he can “inject[]precision and some measure of substantiation” by some other means into his allegations of fraud. Seville, 742 F.2d at 791.

As Wright and Miller teach, the degree of pleading particularity required under Rule 9(b) rests on the nature of the underlying fraud claim. 5A Charles Alan Wright and Arthur R. Miller, Federal Practice & Procedure, § 1298. While a simple allegation of fraud may suffice under the Bankruptcy Code, “considerable pleading particularity may be necessary to satisfy Rule 9(b) and to state a claim under the federal civil false claim statutes.” LaCorte, 149 F.3d at 234.

Our Court of Appeals has not specifically addressed how the Rule 9(b) pleading requirements deal with the false-claim elements. Knisely cites cases from our district court colleagues to urge that we apply a “generous” standard for Rule 9(b) under which he need not identify specific claims for payment. Mem. in Opp. at 12. But Knisely misconstrues the Rule's requirements as it pertains to his claim. He relies on United States ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295 (3d Cir. 2011), in which our Court of Appeals noted that “to our knowledge we have never held that a plaintiff must identify a specific claim for payment at the pleading stage of the case to state a claim for relief.” Id. at 308 (emphasis in original). But that passage referred specifically to the district court’s erroneous dismissal of a False Claims act case for a failure to plead under the Rule 12(b)(6) standard for a motion to dismiss, where the district court explicitly declined to apply the Rule 9(b) pleading requirements. Tellingly, our Court of Appeals then continued in Wilkins, “In any event. . . the question of whether a plaintiff, at the pleading stage, must identify representative examples of specific false claims that a defendant made to the Government in order to plead an FCA claim properly is a requirement under the more particular pleading standards of Rule 9(b).” Id. The Court thereafter cited with approval Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010), where that Circuit held:  We do not embrace the . . . categorical approach that would, as a matter of course, require a relator to identify representative examples of false claims to support every allegation[.] . . . We … conclud[e], in accord with general pleading requirements under Rule 9(b), that it is sufficient to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”  Id. at 998-99 (quoting United States ex rel. Grubbs v. Ravikumar Kanneganti, 565 F. 3d 180, 190 (5th Cir. 2009)).

Our colleagues have adopted that seemingly “flexible” standard for particularity where the specific details of claims have been elusive. See, e.g., United States ex rel. Schumann v. AstraZeneca PLC, 2010 WL 4025904 at *10 (E.D.Pa. Oct. 13, 2010) (Ditter, J.); see also United States ex rel. Budike v. PECO Energy, 897 F.Supp.2d 300 (E.D.Pa. 2012) (Surrick, J.). In short, even under our Court of Appeals’s so-called flexible approach to Rule 9(b), a relator must offer particulars to satisfy both the elements of an FCA claim and the Rule 9(b) pleading standards.

One who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” faces liability under Section 3729(a)(1)(A) and (B). To establish a prima facie False Claims Act violation, a plaintiff must prove that “(1) the defendant presented or caused to be presented to an agent of the United States a claim for payment; (2) the claim was false or fraudulent; and (3) the defendant knew the claim was false or fraudulent.” Wilkins, 659 F.3d at 305 (citing Schmidt, 386 F.3d at 242). There are two categories of false claims under the FCA, a factually false claim where the claimant misrepresents the goods or services it provided to the Government and a legally false claim where the claimant knowingly falsely certifies compliance with a statute or regulation that is a condition for Government payment. Id. ….

Rule 9(b) permits pleading “based upon information and belief”, particularly where key factual information remains within the defendant’s control. In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1418 (3d Cir. 1997). But such allegations are permissible “only if the pleading sets forth specific facts upon which the belief is reasonably based.” State Farm Mut. Auto. Ins. Co. v. Ficchi, 2012 WL 1578247 at *5 (E.D. Pa. May 4, 2012) (Pratter, J.). District courts in this Circuit have sometimes obliged plaintiffs even in the pleading stage of FCA actions to provide a statement of efforts undertaken to obtain information from the opposing party. See United States ex rel. Bartlett v. Tyrone Hospital, Inc., 234 F.R.D. 113, 122 (W.D.Pa. 2006) (granting defendants’ motion to dismiss). As Judge Buckwalter held in another FCA case, “cursory allegations, made on information and belief alone, are unquestionably insufficient to open the door to broad and burdensome discovery.”