The district court denied the defendants’ motion to dismiss a qui tam complaint alleging they obtained small business set-aside contracts via the creation of sham pass-through small businesses. The defendants argued that the relator’s claims were precluded by the terms of a settlement and release she signed when she sold her interests in the business. However, the court disagreed, finding such releases unenforceable when outweighed by the interests of public policy. Because neither the relator nor the government was aware of the fraud when the releases were signed, the court found they did not apply to potential qui tam claims. The defendants also argued that the relator was an opportunistic plaintiff, because she filed her case after selling her interest in the defendants’ business. According to the defendants, as an owner, the relator had inside knowledge of their business dealings but did not report the alleged fraud until after she sold her interests. The court found no support for this argument, first noting there were no alleged facts showing the relator had any involvement in the operations of the business, which she inherited from her late husband. Second, the court explained that the express purpose of the qui tam provisions is to encourage insiders to come forward with knowledge of fraud. Even if the relator were involved in the fraud or profited from it, the court found no authority to preclude her from bringing her claims.
RRSA (Commercial Division) LLC and its co-defendants moved to dismiss a qui tam complaint alleging they violated the Anti-Kickback Act and the False Claims Act.
Relator Tina Haight alleged that the defendants violated the False Claims Act by falsely certifying that RRSA was a small business, conspiring with the prime contractor to obtain small business subcontracts, and paying a kickback.
According to the relator, Roofing and Restoration Services of America LLC is a large, national roofing company. Although RRSA and its affiliates were not eligible to obtain small business contract set-asides, they formed RRSA Commercial and claimed that it qualified as small under the relevant NAICS code. The relator maintained that RRSA Commercial was not a small business under SBA rules because it shares common ownership, common management, and identity of interests with the RRSA-affiliated defendants, which the defendants did not dispute. Further, they share the same place of business, email domain name, and phone number.
The relator alleged the defendants falsely certified RRSA Commercial’s small business status in SAM and repeatedly falsely certified its status annually thereafter. The relator asserted this fraud was openly discussed internally and that defendants Jon Seymore and Corey Sanchez suggested that even if the government uncovered their misrepresentations, RRSA would no longer need the small business classification to obtain government contracts.
After RRSA was registered in SAM, the prime contractor defendants began awarding the company small business subcontracts, even though the prime was aware that RRSA was not an eligible small business. Some of the primes claimed credit for subcontracting with a small business for these awards. The relator also alleged that RSSA and one of the primes agreed that the prime would guarantee award to RRSA provided its bid was within a designated range, and that the RRSA defendants paid a bribe to prime contractor project managers to ensure they awarded subcontracts to RRSA.
Because the prime contractor defendant was required to have a small business subcontracting plan and small business award goals, the relator alleged its certifications about its compliance were rendered false when it made subcontract awards to RRSA. The relator asserted these certifications were also made on the prime’s invoices for services they claimed were performed by small businesses. In addition to invoice payment, the prime contractors earned bonuses for subcontracting to small businesses.
The defendants moved to dismiss, arguing that the relator lacked standing to pursue her claims because she purportedly signed a settlement agreement prior to filing the instant qui tam action, releasing any claims related to the settled matters, which the defendants argued included the claims in dispute here.
According to the defendants, relator Tina Haight is the widow of Grady Haight, who founded and operated RRSA Commercial, Roofing, and Restoration Services of America LLC and several affiliated companies. After a series of unrelated business disputes, Tina Haight sold her interest in the RRSA defendants. The defendants argued that the settlement and mutual release agreement and the equity purchase agreement that closed the sale also foreclosed Haight’s qui tam claim. Specifically, the defendants noted that the settlement agreement contained a broad release pursuant to which the relator agreed to release the defendants from all claims related to the operation of the RRSA defendants, including these qui tam claims.
In response, the relator argued that the agreements are not enforceable. First, she argued that she signed blank, undated signature pages that were subsequently affixed to the agreements, and therefore she did not affirmatively agree to their terms. Second, she argued that parties cannot prospectively release claims for intentional torts, including qui tam claims. Third, even if the agreements are enforceable, the relator argued that the release only pertained to retrospective conduct that was discussed and negotiated, not future claims such as the qui tam claims. Finally, the relator argued the agreements are not enforceable on public policy grounds.
The court noted that the FCA precludes a relator from unilaterally entering into an enforceable agreement or release after filing an FCA case, but contains no language about the enforceability of a prefiling release. Although situated within the Fifth Circuit, the court applied a balancing test first articulated by the Ninth Circuit. Using that test in a qui tam case, the Ninth Circuit analyzed whether the interest in enforcing a release was outweighed in the circumstances by a public policy harmed by enforcing the release.
In that case, the Ninth Circuit concluded that enforcing a prefiling release would nullify the central purpose of the qui tam provisions of the FCA, i.e.: incentivizing whistleblowers to reveal fraud. Further, the court concluded that if such releases were enforceable, a relator might be willing to accept a payment to settle a claim immediately, rather than preserve the right to eventually file an action in which the government would retain a majority of the proceeds. In such a scenario, it would be unlikely the government would ever learn of the alleged fraud.
While the Ninth Circuit held that a prefiling release was enforceable in another action, in that case the relator had already reported his concerns to the government. Because the public interest had been preserved by his reporting, the court determined that the relator could be held to the terms of the release, even though it was signed before he filed his complaint.
Applying that framework, the court concluded that the release did not bar this complaint, as neither the relator nor the government was aware of the fraud allegations when the release was executed.
The defendants argued that enforcing the release would not be contrary to public policy, because the relator is an opportunistic plaintiff. According to the defendants, the relator had knowledge of the facts underlying her claims, sold her interest in the business, and then leveraged her insider knowledge to file this complaint. The defendants argued that the qui tam provisions were not intended to protect aa prior owner who profited from business dealings, instead of coming forward with knowledge of fraud. The defendants argued that, but for the sale and release, the relator would have been a defendant in this case, and therefore the public interest should not be taken so far as to permit a would-be defendant to turn into a qui tam relator.
The court rejected these arguments as meritless, first noting that the term “opportunistic plaintiff” refers to someone who brings a qui tam lawsuit based on publicly disclosed information, which was not the case here. The argument that the relator was “opportunistic” because she profited from the sale of the business defendant was unsupported by case law. The court also noted that the FCA expressly encourages insiders to come forward with knowledge of fraud.
Second, the court also rejected the defendants’ assertion that it should not allow a would-be defendant to become a relator, finding no reason the relator would be considered a would-be defendant. The defendants did not accuse the relator of participating in the fraud and there was no evidence the relator had any involvement in the defendants’ operations during the time period addressed in the complaint. Rather, it was the relator’s late husband who operated the businesses. Further, even if the relator were involved in the fraud or profited from it, the court found no authority to preclude her from bringing her claims.
Next, the defendants argued that the relator failed to state a claim, but the court found the defendants’ motion did not develop this argument, address the full scope of allegations, or cite any relevant authority. In response, the relator argued that false certifications to the government do, in fact, support an FCA violation because the SAM.gov website and FAR reports expressly warn that by submitting a certification, an individual attests to the accuracy of such certification and may be subject to civil liability under the FCA. The court found that the defendants appeared to abandon this argument because they did not address the relator’s rebuttal.
Further, the court had already addressed the relator’s allegations regarding the false certifications. In prior proceedings, the court identified the claims that survived the defendants’ motion to dismiss and granted the relator leave to amend the dismissed claims. The court declined to revisit the merits of the surviving claims and explained that the defendants would have to more completely develop their dismissal arguments before it would consider them.
