Court Grants Motion to Dismiss in Qui Tam Action Alleging False Claims in the Form of Federal Grant Applications

In United States of America, ex rel. v. CASA de Maryland , No. CV PX-16-0475, 2018 WL 1183659 (D. Md. Mar 6, 2018), the United States District Court for the District of Maryland was asked to decide whether the complaint alleged claims under the False Claims Act (“FCA”) in connection with federal grant applications and whether the complaint also alleged claims of retaliation under the FCA and the tort theory of termination in violation of public policy (i.e., wrongful termination). The court granted the motion to dismiss filed by CASA de Maryland (and other related entities and individuals) (“CASA”), but granted the plaintiff leave to amend the FCA claims. In granting leave to amend, however, the court noted it was “skeptical that [the plaintiff]’s pleading deficiency can be cured.” The court also granted CASA’s motion to dismiss with prejudice with respect to the wrongful termination claim. Hyatt & Weber attorney, Stephen Stern, was one of CASA’s defense counsel.

CASA receives federal grants through the United States Department of Education’s (“DOE”) Fund for the Improvement of Education and Investment in Innovation Fund, as well as the United States Department of Labor’s (“DOL”) Occupational Safety and Health Susan Harwood Training Grants. As a condition of receiving these grants, CASA had to complete Program Participation Assurances (“PPAs”) on Office of Management and Budget (“OMB”) Form SF424B, and provide annual financial status reports (“FSPs”) using OMB Form SF270. Because CASA expended more than $500,000 in federal funds in 2014, it was required to undergo an audit for that fiscal year pursuant to OMB Circular A-133 (the “A-133 audit”). In the PPAs, FSPs, and the A-133 audit, CASA had to certify that it complied with “applicable requirements” under federal law and regulations.

Plaintiff-Relator, Amalia Potter (“Potter”), was CASA’s Human Resources Manager, from May 20, 2013 through August 20, 2014. Potter alleged that during the A-133 audit she discovered a number of CASA’s I-9 forms (forms that confirm an individual is authorized to work in the United States) dating back to the 1980s appeared deficient. Potter claimed that she alerted Virginia Kase (“Kase”), CASA’s Chief Operating Officer (“COO”), of the alleged problem and that Kase instructed Potter to fix the issue going forward for all new employees, but do nothing about the past deficiencies. When Potter learned in June 2014 that CASA would be subject to an A-133 audit for the preceding fiscal year, she allegedly conducted a “self-audit” that revealed other deficiencies with CASA’s I-9 forms. Potter claims she discussed these concerns with Kase, who allegedly instructed Potter to fill out the defective I-9 forms herself. Potter claims to have refused Kase’s instruction, but agreed to work with CASA’s management on updating the I-9s for current employees. Potter contends the updates were never made and, when she attempted to address the I-9 issues with Kase one more time, Kase “became irate” and accused Potter of “complicating matters.” Potter contends that Kase later “chastised” her for sending an email to all CASA managers that instructed them to have employees bring their I-9 documentation to an all staff meeting one day and that she was subsequently terminated from employment. Potter further claims that CASA failed to “disclose its widespread noncompliance with federal employee eligibility regulations” and, as a result, its certification was false.

To state a claim under the FCA for making false statements to the government to secure government funding (Count I in this case), a plaintiff must allege: (1) that there was a false statement or fraudulent course of conduct; (2) that was made or carried out with the requisite knowledge; (3) that was material; and (4) that caused the government to pay money or forfeit money that was due. When government funding is conditioned on compliance with certain requirements and that compliance is falsified, an FCA claim may be brought. Liability does not exist, however, “merely for non-compliance with a statute or regulation[;]” rather, the falsified compliance must be “a prerequisite” “to securing the government funding.” The court described Potter’s claim as one where she alleged CASA’s certification of “general compliance, without disclosing CASA’s more specific I-9 noncompliance[] renders the information provided to the government a misrepresentation.” The court found that Potter’s claim “sweeps too broadly” in that Potter’s allegations “fail[] to demonstrate how CASA’s certifications to the government plausibly relate to CASA’s employees’ I-9s.” The court further found that Potter “d[id] not show, for example, how CASA’s certifications relate, refer, or are at all connected to properly executed I-9s or even compliance with federal immigration laws.”

The court also examined the certification forms CASA signed. When examining the Data Collection Form for the A-133 audit, the court found that “[n]othing on this form allows the [c]ourt to infer that certification of compliance means that failure to disclose I-9 noncompliance is a ‘misleading half-truth.’” The SF424B form required CASA to certify that it was in compliance with a number of requirements, including “other Federal laws . . . governing this program .” (emphasis added by court). The court found that “[n]owhere in this exhaustive list is I-9 or immigration compliance mentioned, directly or indirectly.” As for the SF270 form, it required CASA to attest to the accuracy of certain financial data it submitted and that “all outlays were made in accordance with the grant conditions or other agreement and that payment is due and has not been previously requested.” Again, the court found that “nothing in the form requests any information, directly or indirectly, about I-9 or immigration compliance.” For these alone, Potter’s FCA claimed failed to state a claim.

The court nevertheless proceeded to examine the materiality requirement, finding that even if Potter established a false statement was made she did “not plausibly aver that the omissions were material.” The court explained that an omission of “violations of statutory, regulatory, or contractual requirements” is a basis for liability under the FCA “only if the omissions ‘render the defendant’s representations misleading with respect to the goods or services provided .’” (emphasis added by court). To this end, the court found that the complaint did “not include any facts showing that the sufficiency of CASA’s employees’ I-9s related at all to the decision to grant CASA government funding.” Instead, the court found that the complaint “merely assert[ed] . . . that CASA would not have received federal funds if the government knew about the I-9 deficiencies” and further lacked any factual allegations that showed “funding [wa]s tied to the sufficiency of I-9s or to compliance with immigration regulations generally.” For these reasons, Potter’s claim for a substantive violation of the FCA failed as well. The court, however, granted Potter leave to amend, even though it was “skeptical that Potter’s pleading deficiency can be cured.”

As for Count II, which alleged conspiracy to violate the FCA, it failed to state a claim for the same reasons that Count I failed to state claim, as the two counts were based on the same factual allegations. In addition, conspiracy claims are “premised on . . . claims of underlying FCA violations” and, thus, such claims “rise[] and fall[] with the individual claims.” The court granted Potter leave to amend Count II for the same reasons it granted leave to amend Count I.

When it addressed Count III, retaliation under the FCA, the court once again found Potter’s allegations insufficient. To assert a claim for retaliation under the FCA, a plaintiff must allege that: (1) the employee engaged in protected conduct; (2) the employer had notice of the employee’s protected conduct; and (3) the employer retaliated against the employee. There are two types of protected activity. The first kind is activity to further an FCA claim, which includes initiating, testifying for, or assisting with the filing of an FCA claim. Such conduct is considered in furtherance of an FCA claim if it involves a “distinct possibility” of FCA litigation. The second kind of protected activity involves activity undertaken to stop one or more substantive FCA violations. It requires an objectively reasonable belief that the employee’s employer is violating or will soon violate the FCA. This element will be satisfied if the employee’s words or actions are “sufficiently suggestive of fraud or falsity” such that the employer knew or should have known that FCA litigation “was a reasonable possibility.”

As for the first type of conduct, the court found that Potter did not satisfy the requirements because she “voluntarily disclosed” the alleged insufficiency of CASA’s I-9 practices to the United States Department of Justice (“DOJ”) after her employment terminated. In addition, Potter claims that CASA made “negative, unsavory and defamatory remarks” about her to prospective employers, but Potter did not identify when those comments allegedly were made and, as a result, they are insufficient to support a claim for retaliation. Moreover, the court found it significant that Potter’s DOJ disclosure did not indicate whether it was made to stop CASA’s alleged ongoing FCA violation or a broader complaint about noncompliance with immigration regulations. The court, however, granted Potter leave to amend her claim with respect to the “post-termination retaliation [allegedly] motivated by the DOJ disclosure.”

The court likewise found Potter’s allegations regarding her purported attempt to prevent an FCA violation were insufficient to state a claim. To this end, the court found that Potter’s alleged discovery of CASA’s I-9 verification violations, which was made on one occasion during a “self-audit,” does not permit an inference that she reasonably believed an FCA violation would occur. “Missing are any facts to suggest that any of the certifications in the A-133 audit process explicitly or implicitly included an attestation of I-9 compliance.” Furthermore, the court found that Potter’s alleged self-audit of I-9s from decades ago suggested the opposite – that an FCA violation was not about to occur.

Even if Potter alleged facts to indicate she engaged in protected activity, the court found that she did not allege any facts to indicate CASA was on notice of her protected conduct. To this end, there were no allegations in the complaint to suggest that CASA could interpret Potter’s supposed complaints to indicate there was a reasonable possibility of FCA litigation. Instead, Potter’s alleged complaints to CASA focused solely on I-9 compliance, not any potentially fraudulent activity. Thus, Potter’s FCA claim for retaliation failed to state a claim for these reasons too, but Potter was granted leave to amend her complaint “ only if she can allege facts to cure the[ ] deficiencies.” (emphasis added by court).

Lastly, with respect to Count IV, Potter failed to state a claim upon which relief could be granted because a statutory remedy was available to her (i.e., the FCA anti-retaliation provision) and the availability of such a remedy is a bar to filing a wrongful termination claim under Maryland law. Even if that did not bar Potter’s claim, her claim still failed because, to state a claim for wrongful termination in Maryland, the employee must report alleged misconduct to outside authorities before the employee’s employment is terminated. Here, Potter did not allege that she reported the alleged improper conduct to a government official; she claimed that she reported it only internally to executives. For these reasons, the court dismissed Potter’s wrongful termination claim, with prejudice.

If you have any questions regarding this post, please contact Stephen B. Stern at sstern@hwlaw.com or (410) 260-6585.

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