The district court granted in part and denied in part a motion to dismiss a qui tam complaint alleging the defendants fraudulently inflated the amount of required transportation services for disabled students, in order to increase billings for the service provider. As an initial matter, the court found the named school district immune from FCA liability, under both the FCA’s definition of “person” and the Eleventh Amendment. However, the court found the complaint plausibly alleged that individually named defendants acted outside the course of their duties to fraudulently inflate the value of the transportation contract and its associated billings. The court also found the relator satisfactorily alleged the presentment of false claims and records. The court granted the motion to dismiss the relator’s retaliation claim against the school district. While the court did not find that the school district had immunity under the FCA on this claim, it noted that the relator did not contest the issue of immunity, and therefore had abandoned it. Because the relator did not adequately challenge the motion to dismiss, the court granted it without considering the merits.
Hayward Unified School District, Bell Transit Corp., and individually named defendants moved to dismiss a qui tam complaint alleging they defrauded California and the United States out of millions of dollars paid to HUSD for providing transportation services to disabled students.
The defendants included HUSD, Bell Transit, and HUSD associate superintendent Matthew Wayne, CFO Luci Rogers, office specialist Miriam Delgadillo, and director of special education Tammy Watson. Relator Steven Fallon alleged the defendants inflated the number of special needs students in need of individual student transportation to obtain additional funding; (2) split transportation bids to avoid the $45,000 threshold for requiring school board approval and competitive bidding; and (3) failed to disclose a conflict of interest between a HUSD employee and her son, an employee of Bell Transit.
According to the complaint, a school district typically uses individual student or taxi transportation for approximately 15 students out of every 100,000 students. However, when Fallon began working for HUSD, he observed that a disproportionate number of students were afforded taxi transport. For the 2015-16 school year, taxi transportation accounted for 42 percent of HUSD’s transportation budget, but the next year, after Fallon first complained about the problem, the number of taxi-transported students fell from 149 to 13. According to Fallon, the abrupt changes made after his complaint demonstrates that some 90 percent of the services provided over the previous five years had not been required.
Fallon also alleged that Watson and Delgadillo falsely structured contracts so that they fell below the dollar threshold requiring for school board approval and competitive bidding. For example, Fallon alleged that Watson and Delgadillo priced Bell Transit’s initial 2015-16 contract at $41,700 to avoid the $45,000 threshold, then incrementally increased the contract 16 times over the course of the school year, resulting in a final contract amount of over $2 million. Fallon alleged that splitting contracts to avoid competition requirements is illegal under California law, and therefore the taxi contracts were void, rendering any claim for payment false.
Finally, Fallon alleged that Bell Transit hired Emmanuel Delgadillo, the son of HUSD employee Miriam Delgadillo, because Bell Transit knew that Miriam Delgadillo could control the award and amount of taxi service contracted for by HUSD. Fallon argued that Bell Transit’s failure to disclose this conflict of interest was a material omission from each transportation contract. Fallon also alleged that, through Emmanuel, Bell Transit knew that HUSD was inflating the number of students for whom taxi transportation was needed.
Fallon also alleged that he was subjected to severe harassment due to his reporting, including threats of employment termination. He also alleged that his job was eventually eliminated due to a pretextual budget shortfall.
HUSD and Bell Transit both filed motions to dismiss the SAC in its entirety. In its motion, HUSD argued that it is immune from liability under both the federal and California False Claims Act. HUSD argued that California school districts are “arms of the state” and thus entitled to state sovereign immunity. HUSD also argued that both the federal and state versions of the FCA impose liability only on a “person” who makes a false claim, and that a school district is not a “person” for purposes of the statutes.
Fallon’s opposition did not contest the immunity of the school district. The district court acknowledged that the Ninth Circuit had previously concluded that school districts are immune from FCA liability, under the same reasoning put forth by HUSD. In addition to finding that school districts are not persons under the FCA, the Ninth Circuit concluded a school district would be immune under the Eleventh Amendment. Because HUSD is immune to the relator’s claims, the court granted the motion to dismiss the counts alleging false claims.
Next, HUSD argued that the individually named defendants were acting within the course and scope of their employment and thus should be entitled to the same immunity. However, the Ninth Circuit had previously held the opposite opinion, holding that state employees sued in their individual capacities are persons who may be subject to liability for submitting a false claim to the United States.
HUSD made the related argument that, because the school district indemnifies its employees, a suit against the individual employees is tantamount to a suit against the district, and thus the same immunity should apply. However, the district court explained that indemnification would apply only if the individual defendants were acting in the scope of their employment. In this case, Fallon alleged they acted outside their scope of employment. Further, the immunity analysis is not changed by the fact that a state may choose to indemnify the employees for any judgment rendered against them. The court therefore denied the motion to dismiss the complaint against the individually named defendants.
Next, the court examined whether the claims against those defendants were sufficient. First, HUSD argued that the complaint did not state a claim against Delgadillo or Watson because it uses conclusory terms like “falsely” and “illegally” without actually alleging the specific content of the false representations. HUSD also argued that the bid-splitting allegations involved no more than internal contract practices and that the complaint did not allege any specific wrong-doing by Delgadillo, even if she did steer business to Bell Transit. HUSD also argued that the complaint did not allege a claim against Rogers, because the only allegation is that she approved the incremental increases in Bell’s contract value.
HUSD next challenged the allegations against Wayne. The complaint alleged that Wayne submitted a proposed contract to the school board that misrepresented and substantially overstated the number of students transported by Bell Transit in 2015-16, and also overstated the number of students to be served by Bell Transit in the 2016-17 school year. The relator also alleged that Wayne submitted the contract for board approval without any public bidding process, even though a public bidding process was required. HUSD argued that these allegations were not specific enough to give Wayne notice of the alleged misconduct. HUSD also argued that the complaint did not allege that Wayne actually presented a fraudulent statement to the government, because Fallon alleges that he himself prevented Wayne from moving forward with any improper conduct.
In response, Fallon argued that Delgadillo and Watson caused false claims to be submitted by reason of the falsely inflated charges issued in the contract. Fallon further argued that the defendants created false records in the form of falsely characterized contracts and work orders related to their bid-splitting. According to Fallon, any contracts issued in violation of state bid-splitting laws are automatically rendered void, making any payment on them illegal. Fallon similarly argued that the conflict of interest between HUSD employee Delgadillo and her son at Bell Transit rendered the relevant contracts void.
The court examined the complaint against the particularity standard. The court found the first alleged falsity—that the defendants falsely overstated the number of students needing individual transportation—to be straightforward. Also, the court found that the drastic decrease in the number of individually-transported students after Fallon’s complaint served as reliable indicia that false claims were actually submitted. As noted, the number of students with individual transportation fell from 135 to 13 after Fallon’s complaint.
HUSD took issue with Fallon attributing a monetary motive to the individual defendants without more specificity, but the court explained a relator need not allege that the individual defendants personally profited from such false submissions. The FCA requires only a false submission.
The court also found that Fallon had adequately stated a claim for the presentation of false claims and the submission of false records or statements, as to Delgadillo and Watson, who were alleged to have exclusively handled the taxi contracts. Accordingly, the court denied the motion to dismiss these claims.
The court also found that Fallon had sufficiently alleged that Wayne presented documents to the school board that overstated the number of students needing/receiving transportation, in furtherance of the scheme to inflate the contract to Bell. Therefore, the court denied the motion to dismiss the presentation and false records claims against Wayne.
Because the complaint did not allege that defendant Rogers was involved in any alleged number-inflation, the court granted the motion to dismiss Rogers as a defendant. However, the court granted Fallon leave to amend.
The court found the allegation that the defendants improperly split contracts to avoid competition and approval contracts to be less straightforward. While California public contracting law prohibits the splitting of projects for the purpose of evading competitive bidding, the court found that did not automatically mean that the submission of invoices under such a contract is false or fraudulent.
While Fallon argued that the contract was voided by the misconduct, the court found he cited no cases tying this argument to the FCA. The court granted the motion to dismiss with leave to amend.
The court found the alleged falsity of the conflict of interest claim also not too straightforward. Fallon argued that the failure to disclose rendered the contract void and any claims for payment false. However, the court again found that he had failed to connect citations to other conflict of interest cases to an FCA context. While one cited case held that a contract affected with a prohibited conflict is void from its inception, the same court acknowledged that not every conflict voids a contract. The court again granted the motion to dismiss with leave to amend.
The court also granted the defendants’ motion to dismiss the count asserting reverse false claims, finding that the claims simply repackaged the standard FCA claims.
Next, the court considered the claims of unlawful employment retaliation. HUSD argued that its immunity from FCA liability should also provide immunity from liability for a retaliation claim. However, the court found that Ninth Circuit precedent did not apply with the same force to this question. While FCA liability attaches to “persons”, the court noted that liability for retaliation claims applies to employers. While a school district is not a “person,” it can be an “employer.” However, because Fallon did not challenge the school district’s immunity, the court held the argument was waived and granted the motion to dismiss with no decision on the merits.
Next, the court considered the liability of the individually named defendants. HUSD argued that the individual defendants were not Fallon’s employer, and therefore they cannot be liable for the alleged retaliation. However, the court found HUSD cited no controlling case law for this proposition. On the other hand, the court found the complaint lacked specific retaliation-related allegations against any of the individual defendants. The court therefore granted the motion to dismiss, but with leave to amend.
Finally, Bell Transit also moved to dismiss. The court granted Bell’s motion to dismiss the claims related to reverse false claims, contract management misconduct, and conflicts of interest, for the same reasons stated above. The remaining issue revolved around Bell’s challenge to the sufficiency of the allegations that the number of special needs students was fraudulently inflated, as it pertained to Bell.
First, Bell argued that it never employed Emmanuel Delgadillo, the son of HUSD employee Delgadillo, but the court noted the motion did not contain any supporting details. Nonetheless, the court found the complaint did not adequately allege that Bell Transit had knowledge of the scheme to inflate its contract and billings.
The court found the allegations did not make clear how Bell Transit was involved in the actual presentation of a false claim or any related false records/statements. While Bell Transit may have benefitted from any false inflation of student transportation needs made by HUSD, the court found that Fallon had not adequately alleged facts showing that Bell Transit was involved in either presenting a false claim, or causing a false claim to be presented, or causing a false record to be made or used. The court granted the motion to dismiss, but gave Fallon leave to amend certain of his claims against Bell.
