The district court granted the relator’s motion for leave to file an amended complaint, which he filed instead of opposing the defendants’ motion to dismiss. The defendants argued amendment would be futile, but the court found that the SAC added new details to the claims, even though some pleading deficiencies appeared to remain. Several individually named defendants argued against the motion, arguing that they had previously negotiated dismissal with the relator, but the court noted that dismissal was without prejudice. Had the defendants sought dismissal with prejudice, they should have said so. The court also rejected the individual defendants’ assertion that they were immune from prosecution because they acted within the scope of their employment with a state school district, but the court reasoned the allegations—including bid-rigging, kickbacks, and misappropriation of public funds—were arguably outside their job duties.
Relator Steven Fallon moved the court for leave to amend his qui tam complaint alleging that Hayward Unified School District, certain of its employees, and three private entities—Bell Transit Corporation, MCET Affordable Transportation, and Functional Floors—submitted false claims to California and the federal government regarding the provision of transportation services to disabled students.
The original complaint alleged the defendants collaborated to inflate the number of students who received personal transportation by the private entities to and from school. The relator alleged the defendants presented false claims and made false statements to both the federal and state governments.
Previously, the parties filed a stipulated order for partial dismissal of the claims against the individual HUSD employees and all but a claim of employment retaliation against HUSD. Bell Transit filed a motion to dismiss, and the relator filed this instant motion for leave to file a second amended complaint. In his motion, the relator asserted that his amended complaint would cure the deficiencies argued in Bell’s motion to dismiss.
The second amended complaint differed from the initial complaint in four main areas. First, the SAC made additional factual allegations concerning Bell’s and MCET’s participation in the manipulation of HUSD’s contract approval process, and provided additional details about an alleged conflict of interest between one of the individually named defendants and Bell and MCET, based on the employment of her son at both entities. The SAC adds a claim of reverse false claims based on the defendants’ failure to repay monies owed the governments and reinstated the previously dismissed claims against the individual defendants.
In response, the defendants argued they would be prejudiced by the amended complaint. First, the individually named defendants argued that the doctrine of res judicata bars the SAC’s claims against them. The court disagreed, explaining that the final judgment used by the defendants to support their argument was the stipulated order of partial dismissal. The court held that Rule 41(a)(2)—which states that a dismissal of this nature is without prejudice, unless stated otherwise—applied here. Because the stipulated dismissal did not state the dismissal was with prejudice and because the relator dismissed the subject claims without prejudice, the court rejected the res judicata argument.
Next, the individual defendants argued that reinstatement would be prejudicial because they had previously negotiated dismissal. However, as above, the court noted the parties filed a stipulated dismissal that had a non-prejudicial effect, leaving no legal basis for this argument. Had the defendants wished for the order to have a prejudicial effect, it should have stated so at the time.
Next, HUSD and the individual defendants argued that the relator failed to explain the reinstatement of the claims against the individual defendants. In his reply, the relator argued that he dismissed the individual defendants out of a good faith belief that they were immune under the Eleventh Amendment and that an intervening decision in U.S. ex. rel. Citynet, LLC v. Gianeto et. al., “changed the law” on qualified immunity, thus justifying the reinstatement.
The court was not convinced that Citynet was as pivotal as the relator asserted, first noting the decision is not binding. More importantly, that case appeared to concern the scope of qualified immunity available to agents of a state actor who are sued for false claims violations. However, HUSD and the individual defendants disclaimed any intent to pursue such a defense.
However, despite that opinion, the court found that neither HUSD nor the individual defendants would suffer prejudice. Significantly, the court noted that less than a month passed between the order of stipulated dismissal and the instant motion, that no major litigation events in this action have occurred or deadlines have passed since the dismissal, and that the defendants failed to identify any specific harm to their litigation position suffered as a result of their brief dismissal.
Next, Bell argued that the SAC’s allegations of fraud are damaging to its reputation and that it has already expended resources against the first complaint. The court found this unpersuasive as the first complaint also alleged fraud. Second, while the court understood the defendant’s concerns about litigation costs, such expenditures do not demonstrate prejudice to Bell’s litigating position.
The defendants also argued amendment would be futile. First, Bell argued that the SAC did not address the deficiencies identified in its motion to dismiss, including a failure to state a claim and failure to plead the allegations with particularity. However, the court could not say at that juncture that the amendments would fail to save the relator’s claims. The relator alleged the defendants collaborated to cause HUSD to purchase unnecessary services from Bell and falsely characterized the nature of these purchases to avoid ordinary approval processes and to illegally structure the contracts to avoid public bidding. The relator also alleged Bell knew the purchases were large enough to undergo the ordinary approval process and require competitive bidding. The court held those allegations were enough to prevent it from concluding that amendment would be futile.
Nonetheless, the court still identified potential pleading deficiencies, including poor writing and a lack of details about the circumstances of the alleged fraud. However, on the merits, the court found the complaint good enough to proceed.
Next, HUSD and the individual defendants argued that the SAC also fails to allege fraud with particularity. In support, they noted that allegations concerning contract splitting and bid rigging did not include any particularized detail supporting the claims. However, the court again held that it could not reach this conclusion at this juncture.
HUSD and the individual defendants also argued the Citynet decision was irrelevant to this action. The court was inclined to agree, but explained that the applicability of that decision said nothing about the futility of an amended complaint.
Fourth, the individual defendants argued that the state claims against them are futile because they qualify as public entities not subject to suit under its provisions. According to the defendants, regardless of whether the relator technically alleged this claim against them individually, state code requires their employer HUSD to defend and indemnify them against claims arising out of acts or omissions occurring within the scope of their employment. Under that logic, any suit against them is a suit against the school district itself.
However, the court was not ready to conclude that the state claims against the individual defendants were non-actionable. The court noted the complaint did not allege the defendants acted within the scope of their employment when engaging in the alleged fraud. On the contrary, the complaint alleged they were involved in bid-rigging, kickbacks, and misappropriation of public funds. Because such conduct is unlawful, it could be considered outside the scope of their employment. In sum, the court found the futility argument did not derail the relator’s motion.
HUSD and the individual defendants also argued that the relator and his counsel caused undue delay and engaged in bad faith litigation tactics by omitting the added allegations and claims from the FAC. According to the defendants, because the relator failed to advance all the relevant facts and theories in that filing, they will incur undue expenses. As evidence of bad faith, the defendants noted the relator failed to offer any explanation for his late amendments or decision to reinsert them into this action.
Bell Transit argued that, given his alleged insider knowledge, the relator surely knew all the facts and theories to support his case at the time he filed the FAC. Further, because the FAC lacked this information, the state and federal governments were effectively prevented from evaluating all the facts when they decided against intervening, which, in turn, raises serious questions about the timing and validity of the amendments.
However, the court disagreed, finding no support for finding undue delay or bad faith on the relator’s part. The court agreed the relator failed to explain why he failed to include his new factual allegations in his FAC, but explained that this failure was not enough to bar him from amending his complaint. Relatedly, the action had been unsealed for less than five months, and the court had not set any deadlines that would unfairly affect the defendants’ ability to litigate this case. Finally, the court noted the state and federal governments could decide to intervene if either believed the new allegations warranted intervention.
Finally, HUSD asked the court to impost costs upon the relator to compensate it for opposing his FAC. In response, the relator argued that this request was unsupportable under Rule 15. The court noted the relator was incorrect but nonetheless declined to impose costs. While substituting an opposition to a pending Rule 12 motion with a motion for leave to file an amended pleading is a questionable strategy, the court found HUSD failed to cite any authority expressly forbidding it.
