Even if True, Allegation of False Compliance With Small Business Subcontracting Plan Does Not Satisfy Particularity Standard; United States District Court for District of Columbia No. 15-750 (RC), U.S. ex rel. PCA Integrity Associates LLP v. NCO Financial Systems Inc. et al.

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The district court granted a motion to dismiss a qui tam case alleging the defendants violated the FCA by falsely certifying their compliance with their small business subcontracting plans. While the relator plausibly alleged various prime contractors were aware that their small business subcontractors were affiliated with other firms and thus ineligible for small business credit, the court found the relator failed to connect the underlying falsification with the submission of specific false claims, failed to describe the scheme with particularity, and failed to show the certification was material to the agency’s decision to pay invoices.

NCO Financial Systems Inc. and its co-defendants moved to dismiss claims they defrauded the government of funds intended for small businesses under the terms of Department of Education task orders for private collection agency services.

PCA Integrity Associates LLP alleged that their partners had personal knowledge of false claims, statements, and concealment by dint of their participation in an unidentified private collection agency initiative working under various PCAs, as well as from their independent investigation. They alleged the defendants falsely obtained contracts intended for small businesses. The government declined to intervene.

In 2008, the Department of Education issued a solicitation for PCA services. Subsequently, the department awarded 17 task orders on an unrestricted basis and five to small businesses. The department provided incentives to encourage large businesses to subcontract no less than 10 percent of their work to small firms. In 2013, Education issued a solicitation for a follow-on contract, which was subjected to multiple protests and was eventually canceled. The department continued obtaining the required services through other task orders, which are central to this dispute.

In its complaint, the relator alleged a conspiracy between a large prime contractor, a subcontractor, and an allegedly affiliated co-conspirator business. In short, PCA alleged that three named prime contractors falsely claimed credit for awarding subcontracts to small businesses, when in fact those businesses were not small because they were affiliated with large firms. The relator asserted these claims were made to induce the government to believe that the defendants were in compliance with their small business subcontracting plans; (2) to award subsequent task order extensions, invitations to compete on a now-outstanding ED solicitation for the same services, and, in the case of ConServe, an additional two-year award extension; (3) to pay the defendants millions of dollars in contractually-mandated monetary bonuses; and (4) to provide the defendants with additional business volume, resulting in higher revenues and profits.

Second, the relator alleged the small business subcontractor defendants falsely represented their eligibility as small businesses. Finally, the relator alleged that other named defendants were affiliated with the small business subcontractors, which should have deprived them of eligibility to participate on SBA small business programs.

Generally, the relator alleged the small business subcontractors were sham businesses set up for the purpose of obtaining subcontracts on a pass-through basis or were otherwise ineligible due to affiliation with a large company. For one specific example, the relator alleged that small business subcontractor Protocol Financial Service LLC was affiliated with State Collections Services Inc. The relators showed various connections between the firms, including a shared address and employees, and common points of contact and upper management personnel. The relator also alleged financial connections between the firms and the sharing of other resources, and provided evidence they asserted showed the firms attempted to conceal their affiliation from SBA. According to the relator, prime contractor Continental Service Group Inc. was aware of the close relationship between the companies, and therefore knew or should have known that Protocol was not an eligible small business for the purpose of its small business subcontracting plan. The relator made similar allegations against prime contractors Pioneer Credit Recovery Inc. and Alorica Inc. and their small business subcontractors.

The defendants moved to dismiss. As a preliminary matter, the court considered the joint motion to dismiss West Corporation as a defendant and defendant Alorica’s and defendant GRSI’s arguments concerning parent company liability.

First, he parties jointly moved to dismiss with prejudice the claims against defendant West Corporation, the parent company to prime contractor West Asset Management at the time of the original task order. The parties explained that pursuant to the sale of West Asset Management, new owner Alorica assumed all liability for this action. The United States consented to this dismissal and thus the court granted the motion.

Next, the court considered the motion raised by Alorica/GRSI, the new owner of West Asset Management. The defendants argued the relator had not provided any basis to assert liability against them as the parent company. More specifically, Alorica/GRSI argued that the relator had provided no factual allegations that suggest either (1) that the parent company was directly involved with the subsidiary company or (2) that the parent company was an “alter ego” of the subsidiary company. The court agreed that the relator failed to present any facts showing the parent companies directed the activities of the subsidiary, and granted the motion to dismiss.

Turning to the merits of the motion to dismiss, the defendants argued that the presentment and false statement claims that form Count I and Count II of the amended complaint did not plausibly establish a claim for relief with the particularity demanded by Rule 9(b)’s heightened pleading standard. The defendants also argued the relator failed to articulate, with the particularity required, the materiality of any alleged false claim.

Generally, the defendants argued the relator’s allegations were not sufficiently specific in connection with any individual defendant’s presentation of false claims. In other words, the relator failed to allege the who, what, where, and when of the fraud. The court found the relator’s rebuttal generally repeated the core arguments in the complaint. The relator argued that at this state, it need not allege the existence of a request for payment with particularity, or to plead contents of any particular claim for payment. The relator also asserted that it indicated the timing of the claims, by stating the dates of the agency’s solicitation and contract awards, which required statements asserting the awardees would comply with their subcontracting plans. The relator also asserted that the defendants fraudulently induced the government to enter into contracts, which is enough to survive a motion to dismiss.

Second, the relator maintained that the factual allegations provided satisfy Rule 9(b)’s heightened pleading standard, properly construed. The relator argued it established the circumstances constituting fraud, which should be sufficient at this stage. The relator also argued that neither the theory of fraudulent inducement nor the theory of false certification requires it to plead the contents of any particular claim for payment, as the focus is on the defendants’ fraud surrounding any such claim, not the claim itself.

Third, the relators argued they had established the “who” for its presentment and false statement claims against each category of defendant because it is not alleging individual fraud; rather, it is alleging that each of the entities committed fraud at the corporate level.

However, the court found these arguments unavailing. Despite the relator’s assertions, the court held it did indeed require the particularities of the fraud, including who submitted false claims and when, and under what circumstances. Under the fraudulent inducement theory, the relator painted only a general picture of the alleged scheme, but failed to connect the dots, so the court found it unclear what actions were actionably false or fraudulent. PCA Integrity wanted to connect the subcontracting plan and the fraud, but did not establish that any of the prime contractors were required to hire any small businesses in order to win a contract.

Further, the relator did not indicate what particular preferences were given to each prime contractor defendant in return for a promise to meet the subcontracting target, nor indicate that an initial statement at the time that the subcontracting agreement was submitted was the reason why those parties received those preferences. The relator also failed to spell out what promises the primes made in their subcontracting plans, which was the heart of the alleged scheme. The relator also did not assert how or if prime contractors flagged invoices for work performed by small businesses and how or if this factored in the agency’s decision to pay. Without more, the court could not conclude how, exactly, the prime contractors’ initial agreements with ED represent statements that fraudulently induced the government to pay out claims.

Next, the court rejected the relator’s implied false certification theory, also for failing to satisfy the particularity standard. The court discussed in some length the details the pleading lacked, including specifically who submitted false claims, and when and where. While the relator alleged a general scheme, the court explained that the FCA attaches liability to the submission of false claims, not to the underlying scheme.

The relator offered comparatively more detail of the subcontractors’ alleged role in the scheme, but the court found it still came up short. The relator described false certifications for small business eligibility, but did not connect this misconduct to the submission of false claims. Without more specification regarding each of the alleged self-certifications, when it was made, what discrete issue or issues each problematic self-certification misrepresented, and what relationship such alleged misrepresentation had to the claims for payment submitted by the contractor defendants, the court could not find in favor of the relator. The court found these same deficiencies occurred in relation the allegedly affiliated defendants.

Next, the court turned to materiality, and again found the relator’s complaint insufficient. Defendant Uniquity argued that PCA Integrity failed to show that its allegedly false certification about its size status was material to the government’s decision to pay invoices for its work, nor that the government declined to pay invoices under similar circumstances. In response, the relator argued that the contracts at issue state that a subcontractor’s failure to comply in good faith with a subcontracting plan constitutes a material breach of the contract. The relator also asserted that the agency canceled the follow-on solicitation, in part, because it learned of the small business fraud that tainted the original task order. Third, the relator argued that the subcontracting requirements went to the “heart of the bargain” because compliance was the sole factor in determining whether the defendants were entitled to incentive payments.

However, the court again sided with the defendants, finding the relator failed to provide facts supporting its allegation that the fraud was material under the FCA. Even accepting the allegations as true, the relator failed to show how noncompliance with a subcontracting plan would have resulted in the agency’s decision not to pay an invoice.

The court reached similar conclusions for the other allegedly affiliated defendants.

Next, the defendants moved to dismiss Count III alleging reverse false claims. The relator argued the defendants knowingly avoided or decreased their obligation to pay or transmit money to the government. Specifically, the relator argued the defendants failed to pay various penalties arising from their alleged fraud. The defendants argued that the same behavior that gives rise to an FCA claim cannot also be used to support a reverse false claim.

The court sided with the defendant, noting first that the relator’s opposing argument conflated two issues: whether an alleged breach of contractual agreements and alleged misrepresentations in self-certifications might create statutory or regulatory penalties, and whether there is an independent obligation to pay the government. Apart from these allegations that penalties for statutory and regulatory violations are owed, no other affirmative obligation to pay the government is indicated. Without more, there was not enough for the court to support the claim.

Finally, the defendants moved to dismiss Count IV, which alleged conspiracy. The court granted the motion, first noting that civil conspiracy fundamentals provided grounds for dismissal. For claims of civil conspiracy, there can be no liability for a conspiracy unless there is an independently actionable ground for liability. Because FCA liability attaches to the claim for payment, the court reasoned there can by definition be no ground for FCA liability unless the relator established the submission of an actionably false claim. Because the relator failed to do so, the court could not support a claim of conspiracy.

Further, the court agreed with the defendants that the allegations did not clear the heightened materiality pleading standard. The court found the relator only vaguely referred to the conspirators as a group, and provided only a general timeline as to the alleged conspiracy.

Finally, the court considered whether the relator could continue to pursue its claim, or if the claim was barred by the public disclosure bar. The defendants argued the bar applied and that the relator did not qualify as an original source. In response, the relator agued the bar is not applicable, because the defendants failed to establish that there has been a public disclosure of the allegations underlying the complaint in the manner that the FCA and this circuit’s law require. Second, the relator argued that even if the material had been publicly disclosed, PCA Integrity qualifies as an original source of the information and the bar does not apply.

The court sided with the relator. The defendants argued that the public disclosure bar applied because the Small Business Administration was on notice of a potential affiliation between, at a minimum, the parties in the ConServe, Protocol, and State cluster several years before the relator filed this suit. They also argued the relator could not be an original source because the entity was not formed until 2015, after the purported public disclosure.

However, even assuming—without deciding—that the notice amounted to a public disclosure of the same issues—the court found it premature to dismiss the claims on this basis. The relator asserted that its members were participants in the PCA initiative with direct knowledge of the alleged conduct. The defendants did not assert why the court should discredit the relator’s claim that it conducted an independent investigation. Because the relator may have provided information that materially added to the publicly disclosed information and because the defendant did not offer a compelling reason to reject the relator, the court denied the motion to dismiss under the public disclosure bar.

In conclusion, the court dismissed the complaint without prejudice and granted the relator leave to amend.

FCA - PCA Integrity Solutions v NCO Financial