The district court mostly denied the defendants’ motion to dismiss a government action alleging fraud on the SBIR and STTR programs. The government alleged the defendants mispresented their personnel, facilities, and direct costs in their proposals for several contracts under the SBIR and STTR projects, and asserted that the agencies involved would not have awarded the contracts had they know about these intentional misstatements. The defendants argued that the government had not alleged the submission of any false claims, but the court found the complaint did describe payment requests. Further, the government appeared to pursue a fraudulent inducement theory, meaning any claims for payment would be actionable if the government could show the contract was obtained via fraud. The defendants also challenged the complaint on falsity, materiality, and knowledge, but the court held the government had identified misstatements based on concrete verifiable facts and that the agencies would not have awarded the contracts had they known the representations were false. However, the court did dismiss a conspiracy count, finding that the individually named defendants had acted in their roles as corporate officers and therefore they could not enter into a conspiracy with themselves and their own company.
Defendants Wavefront LLC, Jie Yao, and Feng Sun moved to dismiss the United States complaint alleging they violated the False Claims Act in relation to contracts awarded through Small Business Innovation Research and Small Business Technology Transfer programs.
Between January 2011 and January 2015, Wavefront applied for and was awarded a total of seventeen SBIR and STTR contracts with DoD, NASA, and the National Science Foundation. Each proposal was submitted and certified by either Sun or Yao. The government alleged that these proposals included material misrepresentations about personnel, facilities, and payments for a laboratory membership. For example, the proposals listed numerous individuals as engineers, advisors, or subcontractors, when in fact it later appeared none of those individuals ever worked on a subsequent award.
Wavefront also represented that it average five employees over the previous 12 months, when in fact Yao and Sun were the only employees during that time. The proposals also stated that Wavefront had a specialized laboratory, when in fact the address used on the proposals was Sun’s residence. Finally, the proposals claimed as a direct cost the fees for annual membership at the Micro- and Nano-Fabrication Laboratory at the Princeton Institute for the Science and Technology of Materials. However, because some of the contracts spanned the same time periods, Wavefront duplicated this cost across seventeen proposals.
The defendants moved to dismiss, first arguing the government failed to allege the submission of a false claim, or how any claim for payment was false. However, the court disagreed, finding the complaint reference payment requests and the remittance of payments. However, according to the defendants, because they made the alleged misrepresentations in their proposals, the complaint alleged only that the defendants had the opportunity to submit payment requests for costs that were not incurred.
However, the court found the complaint explicitly stated that the misrepresentations resulted in the United States actually remitting payment. Further, the government appears to bring its case under a fraudulent inducement theory of FCA liability, and therefore, if the defendants procured the contracts fraudulently, their subsequent payment requests under the contracts would not need to be false or fraudulent to be actionable.
Next, the defendants argued that the government’s fraudulent inducement theory failed because their alleged misstatements were not “objectively false” when they were made. However, the court noted that the alleged misrepresentations did not merely comprise estimates about costs or expected staffing needs. They comprised verifiable statements about Wavefront’s past employees and ascertainable details about Wavefront’s unique laboratory, as well as potentially repetitive budgeting of the PRISM membership fees.
Next, the defendants argued that the government failed to plead its complaint with the required particularity. Again, the court disagreed, finding the complaint explained the alleged scheme in detail, including how the misrepresentations about personnel, facilities, and budgeting influenced the government’s award and payment decisions. Because the government set out the who, what, when, where, and how of the alleged fraud, the court denied the motion to dismiss on these grounds.
Next, the defendants challenged the complaint on materiality grounds, but the court again sided with the government. The court found that during the evaluation process, the government considered the qualifications and experience of the proposed key personnel. The complaint expressly stated that had the government known these individuals would not perform any work on the contracts, the agencies would not have awarded the contracts and Wavefront would not have received any payments. The government alleged similar facts in relation to the purported laboratory space and the claim for fees to the PRISM labs.
The court found the allegations suggested with sufficient particularity that Wavefront’s misrepresentations were capable of influencing government payment decisions and that these misrepresentations were not minor or insubstantial. The court noted that at the pleading stage, the government need not set out information about past government actions in response to similar fraud. While that information would go to the materiality of the alleged conduct, a failure to expressly plead it was not dispositive.
Next, the court found the government adequately pleaded the defendants’ knowledge of the falsity of their representations. The complaint explicitly alleges the defendants proposed certain individual for contract performance, despite knowing they would not perform any work on the projects. The complaint alleges the defendants knowingly misstated their average number of employees and that they operated a high-end laboratory. The fact that Yao and Sun collaborated on the proposals supported an inference that they were aware of these misrepresentations.
The defendants argued that the complaint did not allege that they acted with knowledge with respect to both the falsity and the materiality of their representations. However, the court concluded that the complaint plausibly alleged motive and opportunity, or at minimum a conscious or reckless disregard.
Second, the defendants asserted that the government had not pleaded scienter with respect to specific misrepresentations. For example, in relation to the PRISM membership fees, the relators argued that the government appeared to allege the defendants had foreknowledge that the proposal would be awarded, when it would be awarded, when the contract’s period of performance would be, and when that period of performance would overlap with another to-be awarded proposal’s period of performance. Further, they argued the government had not alleged that the defendants knew that their laboratory could not be residentially zoned, or that the advisors and consultants listed in their proposals would not work on their projects.
The court acknowledged that additional insight into the defendants’ direct knowledge in these areas would be helpful, but noted that this level of detail was not required at this stage. Without the benefit of discovery, the government could not be expected to cite extensive facts demonstrating the defendants’ knowledge of the falsity and materiality of each alleged misrepresentation in all the proposals. The court therefore concluded that the government has adequately pleaded scienter.
Next, the relators moved to dismiss the conspiracy count. Here, the court sided with the defendants, finding that the individually-named defendants had acted within their corporate roles and therefore they could not conspire with themselves and Wavefront.
Next, the relators moved to dismiss the count of common-law fraud under New Jersey law. The court applied its analyses of the materiality and knowledge elements under the FCA to this claim, and then turned to damages.
The parties disagree as to whether the complaint sufficiently alleged damages under Rule 9(b), but the court concluded that it did. The complaint maintained that the defendants proposed direct labor costs of over $560,000 for an optoelectronic engineer or engineer, and that they overstated PRISM laboratory membership costs by a total of approximately $187,750. While the total amount was not explicitly stated, the complaint disclosed the proposed total budget and/or the budget allocation approximating the proposed budget. Taken together, the court found those facts plausibly suggested the government suffered damages.
In their motion to dismiss Count 5 alleging unjust enrichment, the defendants argued that: (1) the government expected no remuneration from awarding the contracts, and (2) the unjust-enrichment claim sounds in fraud and is therefore a tort-based theory of recovery barred by New Jersey law.
The court found these arguments unavailing. First, while the government did not expect Wavefront to provide traditional renumeration in the form of monetary payments, it did expect to realize the benefits of the contracts. The court rejected the latter argument because the government allegedly did not receive its expected benefit by awarding the contracts and making payments to Wavefront.
Finally, the defendants challenged the quasi-contract claims, arguing the complaint alleged the existence of valid contracts and therefore the unjust enrichment and payment by mistake claims should be dismissed. However, the court found this argument relied on a disputed premise. The court noted that the government’s case rested, in part, on the theory that the contracts awarded to Wavefront were procured by fraud. Moreover, there was no indication in the complaint that the SBIR and STTR contracts expressly govern the applicants’ fraudulent procurement of awards. The court held that the government’s quasi-contract claims were not precluded merely because this case involved several awarded contracts under a grant program.
