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United States ex rel. Lupo v. Quality Assurance Services, Inc.

United States District Court, S.D. California

March 16, 2017

UNITED STATES OF AMERICA ex rel. ERIN HAYES LUPO, Plaintiff,
v.
QUALITY ASSURANCE SERVICES, INC., an entity; GLENN RUSSELL DEACON II, an individual; GLENN RUSSELL DEACON, an individual; SUSAN DEACON, an individual; and SHELLY BECKER, an individual, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS PLAINTIFF/RELATOR'S FIRST AMENDED COMPLAINT

          JEFFREY T. MILLER United States District Judge.

         Defendants Quality Assurance Services, Inc. (“QAS”), Glenn Russell Deacon, Glenn Russell Deacon II, Susan Deacon, and Shelly Becker (collectively, “Defendants”) move the court to dismiss the first amended complaint (“FAC”) of Relator Erin Hayes Lupo for failure to state a claim. (Doc. No. 18.) Relator opposes the motion. (Doc. No. 19.) The court finds the matter appropriate for decision without oral argument pursuant to Civil Local Rule 7.1(d)(1). For the following reasons, the court grants the motion in part and denies the motion in part.

         BACKGROUND

         QAS is a California corporation that contracts to perform inspections and diagnostic testing on medical equipment for hospitals and other health care providers. (Doc. No. 13 ¶¶ 6, 17.) The individual defendants are all shareholders of QAS. (Id. ¶¶ 7-10.) Relator worked at QAS for approximately eight years, including as office manager. (Id. ¶¶ 5, 12.)

         On September 16, 2016, Relator filed the FAC, alleging six counts: (1) substantive violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729(a)(1); (2) conspiracy to violate the FCA, id. § 3729(a)(3); (3) retaliation in violation of the FCA, id. § 3730(h); (4) retaliation in violation of California Labor Code section 1102.5 (“section 1102.5”); (5) retaliation in violation of California Labor Code section 232.5 (“section 232.5”); and (6) wrongful termination in violation of California public policy. (See generally Doc. No. 13.) All six counts stem from allegations that Defendants falsified medical device inspection reports, which caused the submission of false claims to the government, and that QAS terminated Relator for exposing that activity.

         LEGAL STANDARDS

         A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the legal sufficiency of the pleadings. Generally, to overcome such a motion, the complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Facts merely consistent with a defendant's liability are insufficient to survive a motion to dismiss because they establish only that the allegations are possible rather than plausible. Id. at 678-79. The court must accept as true the facts alleged in a well-pleaded complaint, but mere legal conclusions are not entitled to an assumption of truth. Id. The court must construe the pleading in the light most favorable to the non-moving party. Concha v. London, 62 F.3d 1493, 1500 (9th Cir. 1995).

         A heightened pleading standard governs FCA claims, however. United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 2011). That heightened standard, provided by Federal Rule of Civil Procedure 9(b), requires that the complaint “state with particularity the circumstances constituting fraud or mistake, ” although “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” “Rule 9(b) demands that, when averments of fraud are made, the circumstances constituting the alleged fraud be specific enough to give defendants notice of the particular misconduct so that they can defend against the charge and not just deny that they have done anything wrong.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal ellipsis omitted). To satisfy Rule 9(b), “[a]verments of fraud must be accompanied by ‘the who, what, when, where, and how' of the misconduct charged.” Id. (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)).

         DISCUSSION

         The court will address each count in the FAC in the order Relator presents them, and then Relator's claim for punitive damages.

         1. Violation of the FCA

         The primary source of FCA liability arises under 31 U.S.C. § 3729(a)(1)(A), [1]which prohibits submission of false or fraudulent claims to the United States. This subsection imposes liability upon a person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval[.]” The next subsection, (a)(1)(B), imposes liability for knowingly making, using, or causing to be made or used, a false record or statement that is material to a false or fraudulent claim.[2] The difference between subsections (a)(1)(A) and (a)(1)(B) “is that the former imposes liability for presenting a false claim, while the latter imposes liability for using a false record or statement to get a false claim paid.” Jana, Inc. v. United States, 34 Fed.Cl. 447, 449 (1995).

         Thus, to state a claim under subsection (a)(1)(A), Relator must show: “(1) a false or fraudulent claim (2) that was material to the decision-making process (3) which defendant presented, or caused to be presented, to the United States for payment or approval (4) with knowledge that the claim was false or fraudulent.” Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1047 (9th Cir. 2012). To state a claim under subsection (a)(1)(B), Relator must show that Defendants “knowingly made, used, or caused to be made or used, a false record or statement material to a false or fraudulent claim.” Id.

         In moving to dismiss the FAC, Defendants focus on Relator's failure to identify any actual claims made to the government. Defendants quote the Ninth Circuit's observation in United States ex rel. Aflatooni v. Kitsap Physicians Serv., 314 F.3d 995, 997 (9th Cir. 2002), that “[i]t seems to be a fairly obvious notion that a False Claims Act suit ought to require a false claim.” At the summary judgment stage, as was the case in Aflatooni, that may indeed be an obvious notion. At the pleading stage, it is less obvious. In fact, as Defendants acknowledge, the Ninth Circuit has held “that it is sufficient to allege particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010) (internal quotations omitted). The FAC, even if not artfully drafted, meets Ebeid's requirements. First, Relator alleges particular details of a scheme: rather than properly test medical equipment, Defendants produced reports on the performance of medical equipment using falsified data and provided those reports to various health care providers, including government-run institutions. Second, there is convincing reason to infer that this alleged scheme caused claims to be submitted to the government: the various health care providers used the equipment to treat patients and sought reimbursement for that treatment via claims to the government for Medicare and Medicaid funds; but the government would not have made those payments had it known the treatment was rendered on improperly tested and uncertified medical equipment. Through this process, false claims for payment were submitted.[3]

         The court finds that, in alleging this activity, the FAC satisfies the stated purposes of Rule 9(b)-giving Defendants “notice of the particular misconduct so that they can defend against the charge and not just deny that they have done anything wrong.” Vess, 317 F.3d at 1106. Relator claims that on numerous occasions, but at minimum on January 15, 2016 (when), Glenn Russell Deacon II, through his employment at QAS (who and where), generated fraudulent reports that were not based on actual testing done (what), which were provided to health care providers, which were then used to garner improper government payments (how). This recitation makes clear what wrongs Relator believes Glenn Russell Deacon II (and QAS) committed, and the manner in which those wrongs were committed. At this point in the case, the specific manner in which reports were delivered to the health care providers and then incorporated into false claims is less important.

         Thus, while Relator undoubtedly will be required to offer more as this case advances, possibly including, as Defendants suggest, “what programs were at issue, which forms were used to submit allegedly false claims, what false statements or certifications (if any) were made in support of any claim, and who submitted the claim or made the false certifications, ” (id. at 11), the court finds that she has satisfied her burden at the pleading stage with regard to QAS and Glenn Russell Deacon II.

         The court agrees with Defendants, however, that Relator has failed to state facts demonstrating how the other individual defendants participated in the scheme. Instead, Relator merely claims that the other defendants “were aware of Glenn Russell Deacon II's fraudulent practices.” (Doc. No. 13 ¶¶ 25-26.) “This is not sufficient to put each individual [d]efendant on notice of their alleged role in a fraudulent scheme as required by the particularity requirements of the FCA.” (Doc. No. 18-1 at 12.) Accordingly, the court grants Defendants' motion, with leave to amend, as to Glenn Russell Deacon, Susan Deacon, and Shelly Becker, but denies it as to QAS and Glenn Russell Deacon II.

         2. Conspiracy to Violate the FCA

         In Count II, Relator alleges that, through the acts described, Defendants entered into a conspiracy “among themselves” and with unnamed others to defraud the government in violation of the FCA. In moving to dismiss this count, Defendants make two points.

         First, Defendants argue the intracorporate conspiracy doctrine bars Relator's allegation as to a conspiracy “among themselves.” The intracorporate conspiracy doctrine, derived from antitrust law, holds that a conspiracy requires “an agreement among two or more persons or distinct business entities.” United States v. Hughes Aircraft Co., 20 F.3d 974, 979 (9th Cir. 1994), as amended (Apr. 28, 1994). “The logic for the doctrine comes directly from the definition of a conspiracy.” Hoefer v. Fluor Daniel, Inc., 92 F.Supp.2d 1055, 1057 (C.D. Cal. 2000). “It is basic in the law of conspiracy that you must have two persons or entities to have a conspiracy. ‘A corporation cannot conspire with itself anymore than a private individual can, and it is the general rule that the acts of the agent are the acts of the corporation.'” Id. (quoting Nelson Radio & Supply Co. v. Motorola, Inc., 200 F.2d 911, 914 (5th Cir.1952)).

         Though the Ninth Circuit has not spoken on the issue, a number of district courts, including those within the Ninth Circuit, have applied the intracorporate conspiracy doctrine to FCA claims. See, e.g., United States ex rel. Huey v. Summit Healthcare Ass'n, Inc., 2011 WL 814898, at *6-7 (D. Ariz. Mar. 3, 2011) (applying doctrine and distinguishing FCA cases from criminal conspiracies); United States ex rel. Fago v. M&T Mortgage Corp., 518 F.Supp.2d 108, 117-18 (D.D.C. 2007) (finding that corporation cannot conspire with its employees and defendant therefore entitled to judgment as a matter of law on conspiracy claim); United States v. EER Sys. Corp., 950 F.Supp. 130, 132-33 (D. Md. 1996) (dismissing conspiracy claim under FCA where plaintiff did not allege exception to established rule that a corporation cannot conspire with its officers or agents); United States ex rel. Fent v. L-3 Comm. Aero Tech LLC, 2007 WL 3283689, at *5 (N.D. Okla. Nov. 2, 2007) (applying doctrine to FCA claim); United States v. Berkeley Heartlab, Inc., 2016 WL 7851459, at *17 (D.S.C. Mar. 28, 2016) (same).

         While Defendants cite a number of these cases in their motion, Relator does not cite a single instance in which a court refused to apply the doctrine to an FCA case. The court's own research also failed to turn up such a case. Accordingly, the court follows the many ...


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