District Court Rejects “Worthless Services” FCA Claim, Interprets First-to File Bar and Res Judicata in FCA Context
Earlier this month, the U.S. District Court for the Eastern District of Virginia dismissed a 2-count False Claims Act (FCA) complaint against Unisys Corporation. United States ex rel. Soodavar v. Unisys Corp., 2016 WL 1367163 (April 5, 2016) (“Soodavar”). The case addresses several important limits on FCA claims.
Count I alleged that certain Unisys employees were so unqualified that their services, which involved installing and maintaining RFID sites, were worthless. Concluding that the count failed to state a claim and that amendment would be futile, the court dismissed this count with prejudice. “[T]he proper analytical focus for assessing the claim is whether such RFID sites were installed and maintained in a manner that provided some value to the federal government.” Id. at *3 (emphasis added). The bar is low: it is insufficient for FCA liability to allege that some members of a team did not pull their weight, or that their performance was below expectations. “Indeed, any services that advanced the goals of [the project] in any respect, no matter how small, had some value—even answering the telephone to take a message is a type of productivity.” Id. (emphasis in the original). “To conclude otherwise would inappropriately transform a ‘dispute involving contractual performance . . . into a qui tam FCA suit.’ ” Id., quoting United States ex rel Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 373 (4th Cir. 2008) (alteration in the original). As the court emphasized, services that are worth less than the amount paid for them are not necessarily worthless.
Count II involved a fraudulent-invoicing theory, alleging that Unisys billed time to two contract line items proportionately to match the estimates in its bid, when in fact the services rendered fell more heavily under one contract line item, which was to be charged at a lower rate. Had Unisys reported the time actually worked for each line item, the proportions would have been different and the total amount paid to Unisys would have been lower. Fatally to the relator’s claim in this case, a similar scheme was alleged in United States ex rel. Saunders v. Unisys, No. 12-cv-379 (E.D. Va.) (“Saunders”), which was pending at the time Soodavar was filed. The parties in Saunders reached a settlement and dismissed that case with prejudice on December 26, 2014.
The Soodavar court dismissed Count II with prejudice for lack of subject matter jurisdiction or, in the alternative, on grounds of res judicata. Under the “first-to-file bar,” § 3730(b)(5)(ii), “[w]hen a person brings an action under [the FCA], no person other than the Government may . . . bring a related action based on the facts underlying the pending action.” Soodavar, 2016 WL 136763, at *5 (alterations in the original). According to Fourth Circuit precedent, this provision is jurisdictional.
The analysis under § 3730(b)(5) is a “material elements test,” and a later suit is barred “if it is based on the same material elements of fraud as the earlier suit, even though the later suit may not involve identical facts and details.” Id. Because the Saunders complaint had alleged facts that “provide[d] the government with enough knowledge of essential facts of the scheme to discover related fraud,” the Soodavar court concluded that the later case was barred even though the factual allegations did not entirely overlap. Id. at *4. Curiously, the court later stated that because the same set of facts could give rise to multiple theories of fraud, the focus is not on the legal theory of fraud, but rather on the underlying facts. Id. Thus, the court concluded, it was not sufficient that Soodavar alleged a different type of fraud than that in Saunders.
Citing technicalities in the statute and case law, the Soodavar court also explained that even though Sanders had been dismissed and thus was no longer pending, Soodavar could not cure the jurisdictional defects through amendment. Rather, despite the recognized inefficiencies of doing so, the relator would have to refile Count II as a new action.
The Soodavar court also undertook, in the alternative, a res judicata analysis, concluding that almost all of Count II must be dismissed on that ground even if not barred by the first-to-file rule. The Saunders dismissal with prejudice was a final judgment on the merits, and Saunders and Soodavar were actions between the same parties, since the United States, not the relator, is the true party in interest in an FCA case. After a careful examination of the transactions giving rise to the two cases, the court concluded that only that portion of Count II that alleged liability for conduct post-dating the facts alleged in Saunders would survive res judicata.