The district court mostly denied the defendants’ motion to dismiss an FCA case alleging they engaged in a scheme to circumvent federal rules and contract provisions requiring them to award a certain portion of contract work to disadvantaged business enterprises. The court found the government adequately alleged that one of the defendants essentially acted as a pass-through entity for an ineligible firm that actually performed most of the work. The court found the government met its standard for particularity, scienter, and materiality. While the defendants argued that the DBE goals were aspirational, and therefore could not be the basis of an FCA complaint, the court noted that the contract clearly stated that contracts could be terminated for noncompliance, that the state DOT had assigned on-site monitors to verify compliance with the DBE goals, and most tellingly, that the defendants had acted in concert to conceal the involvement of the ineligible firm in performance. The court did agree that some of the conspiracy claims were time-barred, but explained that the resulting claims were not, because the effective date for the statute of limitations is the date of a claim or the claim payment, not the date the conspiracy was entered into nor the date the work was performed.
Spectrum Painting Corp. and Tower Maintenance Corp. moved to dismiss the government’s claims that they participated in a scheme to circumvent federal rules designed to encourage the participation of historically disadvantaged businesses in federally funded construction projects. The government sought recovery under the False Claims Act and New York common law. Co-defendant Ahern Painting Contractors moved for an order removing it from the case as a result of its settlement with the government.
At issue were several Department of Transportation funded construction projects in New York. On both projects, the agencies, contractors, and subcontractors were required to comply with regulations regarding participation by disadvantaged business enterprises. The Brooklyn Bridge contract had a DBE participation goal of 14 percent of the total dollar value of the work. It provided that DBEs should participate meaningfully in performance and that primes could not unilaterally remove or substitute a DBE or alter the scope of a DBE’s work. The Queens Plaza contract had a DBE participation goal of 17 percent and laid out similar requirements.
The Brooklyn Bridge contract was awarded to a firm called Skanska Koch Inc., which then contracted with defendant Ahern to perform approximately $140 in bridge-painting work. Under the contact, Ahern was required to achieve a 14 percent DBE participation rate on its portion of the work. Ahern awarded Tower a contract to provide painting platforms for the work and to perform steel painting. That contract also incorporated the terms of the underlying prime contract, and explicitly required that all subcontractors and consultants must be approved by, Ahern, Skanska and the NYCDOT. Ahern also won a contract to provide steel painting services for the Queens Plaza project, and attested it would meet the 17 percent DBE goal by subcontracting to Tower.
The government alleged that Tower did not have the expertise or financial resources to perform the steel painting work that it had agreed to. Defendant Spectrum had the experience and resources, but lacked the required industrial painting licenses, and was not a DBE. The three companies then made a deal through which Spectrum would provide the expertise and resources for the work, while Tower would pay the laborers who would be under Spectrum’s direction. As payment, Spectrum would receive 50 percent of Tower’s profits.
The government alleged the parties disguised Spectrum’s participation in the work by identifying Spectrum as a consultant for lead, health, safety, and quality control. In reality, Spectrum played a substantive role in preparing Tower’s bid, hiring workers, buying equipment, scheduling work, negotiating prices, and managed the work. When Ahern communicated with prime contractor Skanska, it presented Spectrum’s project manager and superintendent as Tower employees. These individuals also identified themselves as Tower employees.
According to the complaint, Ahern and Tower also misrepresented the amount of work performed by Tower and the amount of payments. Ahern also submitted DBE progress reports that misrepresented the reality of its subcontractor arrangements. Ahern submitted invoices with these attestations, and in turn, Skanska submitted claims to NYCDOT that included the misrepresentations.
Ahern previously reached a settlement agreement with the government and was dismissed from the case. The remaining defendants moved to dismiss, and Ahern moved to have its name removed from the case caption.
First, the court agreed to remove Ahern from the caption. The government did not oppose.
Next, the court considered the remaining defendants’ motion to dismiss. First, the defendants argued the case was barred by the FCA’s statute of limitations. The government initiated this action on March 6, 2019, claiming that it first heard of the Queens Plaza claims in 2017. Accepting this as true, the court held these claims were timely. The defendants argued the government must have known its claims before 2017, based on conversations Tower alleged had occurred in 2013 and subpoenas it had received in 2015. However, the court explained that it could not consider factual assertions that are not grounded in the complaint.
The government alleged that the Brooklyn Bridge claims were submitted in 2013, 2014, and 2015. Because the complaint was filed on March 16, 2019, the court found these claims were also timely. The defendants argued the claims were not timely because Spectrum’s participation in the Brooklyn Bridge project ended in 2012. However, the court explained that the FCA limitations period begins on the date a false claim is submitted or paid, not the date the conduct occurred. Spectrum argued that it last received payment in April 2012, but the court noted that the date the claims were submitted to the government remained the relevant starting point, not the date Tower or Ahern paid Spectrum.
The court also held the conspiracy claims were timely, as to the Queens Plaza Claims, but found the Brooklyn Bridge conspiracy claims were not timely. The government did not allege that it first became aware of a conspiracy to submit the Brooklyn Bridge Claims in 2016 or later. Rather, it argued that its conspiracy claim is timely in relation to the Brooklyn Bridge claims because acts in furtherance of the conspiracy—the submission of the relevant claims—occurred within the limitations period. The government argued it should be allowed to rely on those facts to prove the existence of a conspiracy, even if the formation of the conspiracy occurred outside the limitations period.
However, the court disagreed, explaining that the actionable wrong in the context of an FCA conspiracy claim is the formation of the conspiracy, not the submission of claims. Therefore, the six-year limitations period must be calculated from the date the parties agreed to the conspiracy. Accordingly, the court granted the motion to dismiss the conspiracy claims as to the Brooklyn Bridge contract only.
On the merits, the defendants argued the government failed to plead its allegations with particularity. The court disagreed, finding the complaint identified the alleged fraudulent statements, the individuals who made the false statements, the times and locations these statements were made, and the reason the statements were fraudulent. The court found the government named several specific false statements, the documents in which they were made, the party who prepared them, and the time and place they were made. For example, the government identified the Spectrum employees who identified themselves as Tower employees, and when, where, and to whom, and noted they made false representations to secure security ID cards and vests. The government also cited to a number of falsified reports. The court found this sufficient.
The court also found the government establish fraudulent intent by describing the motive for the scheme, which allowed Spectrum, a non-DBE, to perform work that DBE Tower could not. The government also described the steps they took to cover up the scheme.
Next, Tower argued the government had not shown that it had submitted any claims containing falsehoods. According to Tower, at most the government showed some false statements in certain certification forms that were not themselves requests for payment. However, the court found no dispute that claims for payment were submitted to the government and that Tower knew that it had not performed all the work it had contracted to perform and that the otherwise ineligible Spectrum had done the work instead. The court found the government described Tower’s specific involvement in the scheme and, accepting that description as true for the purpose of a motion to dismiss, found it clear Tower had caused the submission of false claims. Spectrum made similar arguments, which the court rejected with generally the same reasoning.
Next, Tower argued the government failed to show that the relevant claims contained false or fraudulent statements. However, the court found the claims obviously factually false, in that they falsely described which contractor had performed the work. Each of the claims showed that Tower solely performed its share of the work and the monthly DBE reports excluded information about Spectrum’s involvement. The court found evidence of misleading half-truths and implied false certifications, as well as direct misrepresentations.
Tower argued that it had complied with the DBE provisions in the contract, because it had made a “good faith” effort to meet the goals, and because the regulations state that a recipient cannot be penalized simply because participation fell short of the goal. However, the court found those regulations irrelevant to the question of whether the defendants made false statements in their claims. The court noted Spectrum was not brought in to assist Tower, but instead performed most of the work Tower agreed to perform. The court found Spectrum’s involvement was not part of a good faith effort to meet DBE goals, but intended to circumvent them. Finally, Tower argued Spectrum’s involvement was not as extensive as the complaint suggested, but the court found that was not a matter for a motion to dismiss.
Next, the defendants argued the alleged falsehoods were not material misrepresentations. However, the court found the complaint clearly established that compliance with the DBE regulations and contract provisions were material to payment decisions and that the parties were on notice of the importance of the DBE goals. Enforcing the DBE goals was a condition of funding from the federal government to NYCDOT and the government has suspended or debarred contractors who have attempted to defraud the program, and attempted to recoup payments. Finally, the contract barred contractors from unilaterally modifying DBE agreements and stated that NYCDOT could terminate a contract for noncompliance. Moreover, NYCDOT stationed a contractor on-site to monitor compliance.
The court found materiality more than adequately demonstrated, including by the defendants’ attempts to cover up their conduct. The defendants again attempted to show the DBE goals were merely aspirational and therefore could not be the basis for FCA claims. However, the court found this stance inconsistent with the actions they took to disguise the arrangement, as the subterfuge suggested they understood that having Tower’s work counted towards the DBE goals was important to their getting paid.
Finally, Tower argued the government was aware of Spectrum’s involvement in the projects as early as 2013, because of the investigation that led to this case. Because payments continued despite the government’s knowledge, Tower argued the alleged misconduct could not be material. The court rejected this assertion, finding no facts to support the claim the government was aware of the alleged scheme at the time payments were made, nor that MTA or NYCDOT were aware. Regardless, the court found it hard to fathom how an aggressive government investigation into Tower and Spectrum’s alleged wrongdoing with respect to DBE goals could be used to show that false statements related those goals were immaterial.
Next, the defendants argued the government failed to show it suffered damages. However, the court agreed with other courts who had found that an FCA plaintiff need not show actual damages to the government, so long as there is some direct impact. The FCA applies a civil penalty liability to anyone who presents or causes to be presented a false or fraudulent claim for payment. The court found that language indicated that the government’s actual damages are relevant to the amount of recovery, not the issue of liability. The court explained that the government is entitled to set conditions on payment of its funds to advance policy goals and to insist that those conditions are met. The court found it would be inconsistent with that principle, and the FCA’s language, to limit FCA actions to cases in which the government suffered a dollars-and-cents loss as a result of the false claims.
Next, Spectrum argued the government failed to establish that it had made or used any false records or statements material to the submission of false claims. However, the court found that argument undercut by the record, generally as already discussed. Spectrum also argued the government failed to show that it conspired to violate the FCA. Because the Brooklyn Bridge conspiracy claims were deemed time-barred, the court considered only the Queens Plaza conspiracy claims. Given the adequate description of the scheme already noted, the court quickly denied this portion of the motion.
The defendants also moved to dismiss the government’s common law claims of unjust enrichment and payment by mistake. The court found that neither Tower or Spectrum had a relationship with the government that could have caused reliance or inducement. The false claims that Tower and Spectrum allegedly caused to be submitted led to the NYCDOT and the MTA paying funds, not the federal government. While DOT provided the funds, the court found the complaint did not allege that the federal government, as such, took any action based on the claims that Tower and Spectrum caused to be submitted. The court therefore granted the motion on this basis.
Regarding the motion to dismiss the claim of payment by mistake, the court found the complaint did not allege with particularity that Tower or Spectrum received funds as a result of a mistake of fact on the part of the NYCDOT or the MTA. The complaint alleged the particular false claims and the scheme, but did not identify specific payments to Tower or Spectrum that resulted from that false belief, or show that any payments to Tower or Spectrum consisted of federal funds in which the government has a property interest. Accordingly, the court granted the motion on this basis as well.