“Conclusory Allegations Won’t Cut It Under FCA”
Law360 09/10/13 By Lisa E. Davis, Jennifer J. Hennessy
Law360, New York (September 10, 2013, 1:19 PM ET) -- The contract specifically conditioned payment on a certification of compliance with the warranty of merchantabilityThe Fifth Circuit dismissed a qui tam relator's claims under the False Claims Act regarding allegedly defective devices sold to the government for failing to "clearly state the substance of the fraud that has been committed." The court noted that "descriptive or conclusory allegations" are not sufficient.
Further, the court stated that the relator's allegations that merchantability was a "standard condition" of the contracts between the government and the contractor and that the government would not have paid the contractor had the government been aware of the defect in the devices were merely "an implied certification of an implied contract provision that is an implied prerequisite to payment."
Simply put, the court rejected the relator's argument that the contractor falsely certified compliance with the device's warranty of merchantability by asking the government to pay for the devices.
Leslie Steury marketed Cardinal's Signature pump to the U.S. Department of Veterans Affairs hospitals from 1996 until 2001, when she was terminated. The Signature pump is a device that regulates the rate at which intravenous fluids flow into patients.
Steury alleged that she became aware of a design flaw in the Signature pump, which could potentially result in the patient's death in late 2000 and notified management in early 2001. Cardinal suspended shipment of the Signature pumps for three months in mid-2001 while it reviewed the defect.
Steury marketed the Signature pumps during this three-month review period and was scheduled to fill an order with a VA hospital at the end of the review period. However, Cardinal terminated Steury at the end of the review period.
Steury sued Cardinal in 2007 for alleged FCA violations. The district court dismissed Steury's complaint, and the Fifth Circuit affirmed the dismissal on appeal but remanded to allow Steury to amend her complaint in 2010 (Steury I).
Steury filed two more amended complaints, both of which the district court dismissed. Steury again appealed to the Fifth Circuit, and that appeal is the topic of this article.
Claims under the FCA
An FCA claim requires the plaintiff to prove that the defendant knowingly presented a false claim to the government for payment. Further, such claims must "must state with particularity the circumstances constituting fraud," meaning that at a minimum, Steury needed to set forth "the who, what, when, where, and how of the alleged fraud."
Steury based her FCA claims on two theories: an "implied false certification" theory and a worthless goods theory.
Implied False Certification
In Steury I in 2010, the Fifth Circuit held that a claim under the FCA must assert that a contractor's (here, Cardinal's) certification of compliance with particular laws or contract terms "was a 'prerequisite' to the payment sought." The prerequisite requirement recognizes that unless the government conditions payment on a certification of compliance with federal statutes, regulations or contract provisions, a contractor's request for payment does not imply certification of compliance with these laws or contract provisions.
In that case, Steury alleged that Cardinal impliedly certified compliance with a warranty of merchantability because the government's standard contract included a warranty of merchantability. The court held that Steury's allegation did not meet the required standard but stated that a knowing delivery of defective goods could be actionable under the FCA if either of the following were true:
- The party knowingly provided worthless goods to the government
- The court authorized a remand so that Ms. Steury could attempt to comply with the court's holding.
Steury's attempts to comply with this guidance from the court brought the case back to the Fifth Circuit, with Steury now alleging that merchantability was a "standard condition" of Cardinal's contracts with the VA and that the VA would not have paid for the Signature pumps had the VA been aware of the defect.
Specifically, Steury alleged that Cardinal “expressly warranted that the [Signature pumps] were ‘merchantable,’” that Cardinal’s “contract with the VA specifically required that the [Signature pumps] be merchantable,” that Cardinal’s “contract with the VA required it to implicitly certify that the [Signature pumps] were merchantable” and that “[t]he requirement that the [Signature pumps] be merchantable was a material contractual requirement.”
The Fifth Circuit held these allegations deficient as they did not identify the specific contractual provisions regarding merchantability. The court stated that Steury must show how the Signature pumps deviated from the government's specifications.
Further, the court noted that the standard government procurement regulations do not provide that merchantability is a standard contract condition because the government can override the implied merchantability provisions with express warranties and can accept and pay for noncompliant items, meaning payment is not conditioned on compliance with the warranty of merchantability.
Steury also failed to allege that the government would not have paid Cardinal in the absence of the merchantability provision in the contract.
Worthless Goods Theory
Steury's second allegation was that Cardinal violated the FCA under a worthless goods theory, specifically that the Signature pumps were "worthless" because the VA's expected tort liability from using the Signature pumps exceeded the expected benefit.
The court refused to consider this allegation because Steury did not address the who, what, when, where or how of this claim. The court noted that Steury did not allege that any Signature pump sold to the VA was ever found to be deficient or worthless, that any patient was harmed to the use of the pump at a VA hospital or that the VA was ever sued from an injury based on a defective Signature pump.
Manufacturers and providers should breathe a sigh of relief at this decision, at least to the extent they are subject to the jurisdiction of the Fifth Circuit. The Fifth Circuit declined to broaden the reach of the FCA to be a basic breach of contract remedy that could be brought any time a federal contractor (e.g., a device manufacturer here) fails to live up to the terms of its contract with the government or violates applicable statutes or regulations.
However, other circuit courts of appeals have not been so hesitant to expand the reach of the FCA. Currently, the circuits are split regarding the permissibility of using an implied false certification theory of liability as the basis for an FCA claim.
For example, in contrast to the Fifth Circuit, the Third Circuit allows the implied false certification theory of liability, stating, "To plead a claim for relief under an implied certification theory, appellants [must] allege, as they did, that appellees submitted claims for payment to the Government at a time that they knowingly violated a law, rule, or regulation which was a condition for receiving payment from the Government."
The U.S. Supreme Court denied a petition for writ of certiorari on a First Circuit implied false certification theory of liability case in 2011. The First Circuit held that a claim may be false or fraudulent in violation of FCA due to an implied representation of compliance with a precondition of payment that is not expressly stated in a statute or regulation, permitting an implied false certification theory of liability.
The Supreme Court's decision to deny certiorari leaves the circuits split, meaning that the reach of the FCA varies depending on which circuit is examining the issue. As the circuits continue to separately analyze this theory of liability, the circuit split deepens. The likely result is that cases with very similar facts could have polar opposite results, depending on the circuit court of appeals reviewing the case.
From a practical standpoint, manufacturers and providers will want to direct any FCA claims to which the manufacturer or provider is subject toward circuit courts of appeals that have not expanded the reach of the FCA. Manufacturers and providers with the ability to negotiate the choice-of-law provision in government contracts should set the venue for any lawsuits that arise as a district court in a state that is subject to a circuit court of appeals that interprets the FCA to have a narrower reach as the Fifth Circuit did here.
This simple change in a service contract could lead to a more favorable result down the road, in the event of an FCA claim. Alternatively, at the time an FCA claim is brought in district court, to the extent possible, the attorney for the defendant manufacturer or provider should seek to move the case to a district court in a state that will be subject to a circuit court of appeals that interprets the FCA to have a narrower reach.
In this case, the Fifth Circuit declined to extend the reach of the FCA under the implied false certification theory of liability, widening the circuit split on this particular issue. For a relator to bring a successful FCA claim in the Fifth Circuit, the relator must be able to describe the specifics of the allegation. Relators with only general, conclusory allegations will find it extremely difficult to prevail.
--By Jennifer J. Hennessy, Quarles & Brady LLP
Jennifer Hennessy is an associate in the Madison, Wis., office.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 U.S. ex rel. Steury v. Cardinal Health Inc., No. 12-20314 (5th Cir. filed Aug. 20, 2013).
 U.S. ex rel. Steury v. Cardinal Health Inc., 625 F.3d 262 (5th Cir. 2010).
 31 U.S.C. § 3729(a)(1)(B).
 U.S. ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295 (3d Cir. 2011).
 Blackstone Medical Inc. v. U.S. ex rel. Hutcheson, 132 S.Ct. 815 (2011).
 U.S. ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377 (1st Cir. 2011).
Originally published in Law360, September 10, 2013