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United States v. The Public Warehousing Co., K.S.C.

United States District Court, N.D. Georgia, Atlanta Division

March 16, 2017

UNITED STATES OF AMERICA Ex Rel, et al.,
v.
THE PUBLIC WAREHOUSING COMPANY K.S.C. also known as Agility, et al., Defendants.

          OPINION AND ORDER

          THOMAS W. THRASH, JR. United States District Judge

         This is a qui tam action. It is before the Court on the Defendants The Public Warehousing Company, K.S.C. (“PWC”), The Sultan Center Food Products Co. K.S.C., and Tarek Abdul Aziz Sultan Al-Essa's Motions to Dismiss the First Amended Complaint in Intervention of the United States of America pursuant to Rules 9(b) and 12(b)(6) [Docs. 163-1 & 182]. For the following reasons, the Defendants' Motions to Dismiss [Docs. 163-1 & 182] are GRANTED in part and DENIED in part.

         I. Background

         The United States alleges that the Defendants falsely billed the United States on three defense contracts to provide food and other subsistence items to American soldiers in Iraq and elsewhere in the Middle East. According to the United States' First Amended Complaint (the “Complaint”), PWC entered into three contracts between May 2003 and July 2005 with the Defense Supply Center Philadelphia (“Defense Supply Center”), an agency of the Department of Defense.[1]

         A. The Parties

         The Defendant The Public Warehousing Company is a large, publicly traded Kuwaiti logistics company now known as Agility Public Warehousing Company K.S.C. PWC is headquartered in Sulaibiya, Kuwait. The Sultan Center Food Products Co. K.S.C. (“The Sultan Center”) is a provider of various perishables and consumer goods, also headquartered in Kuwait, which PWC used to fulfill many of its orders related to the contracts at issue.[2]

         B. The Contracts

         The Defense Supply Center issued a solicitation for the first contract, known as the PV-1 Contract, on May 10, 2002.[3] PWC submitted a bid for the PV-1 Contract, which was accepted and entered into with an effective date of May 28, 2003. It required PWC to acquire and distribute subsistence items to U.S. military personnel located in Kuwait and Qatar.[4] On June 27, 2003, the Defense Supply Center issued a modification which added Iraq to the contract, which it noted could potentially increase the estimated value of the contract by up to 1, 200 percent.[5] The Defense Supply Center paid PWC in excess of $1.4 billion over the life of the PV-1 Contract.[6]

         Just over one year later, on September 3, 2004, the Defense Supply Center issued another solicitation for a prime vendor contract, known as the PV-II Contract.[7]PWC submitted an initial bid on November 16, 2004.[8] In order to avoid a discontinuation of services, the Defense Supply Center awarded PWC a temporary bridge contract (the “PV-Bridge Contract”) while the PV-II Contract bid process was finalized.[9] On July 7, 2005, the Defense Supply Center awarded the PV-II Contract to PWC with an effective date of June 3, 2005, though PWC continued to provide services under the PV-1 Contract until December 15, 2005.[10] Through October 2010, the Defense Supply Center had paid PWC over $7.3 billion on the PV-II Contract, and $1.1 billion on the PV-Bridge Contract.[11] All told, the Complaint alleges that the Defense Supply Center has paid PWC in excess of $9.8 billion for claims arising under all three contracts through October 2010.

         All three contracts contained the same contractual language regarding how PWC was to invoice the Defense Supply Center. Under the contracts, PWC was to invoice the “unit price” for each product delivered, which was comprised of two components: “delivered price” and “distribution price.”[12] The “delivered price” was whatever PWC paid its “manufacturer/supplier” to get the product to a distribution point. The “distribution price” was supposed to be a fixed fee set by PWC which covered all of its overhead, transportation expenses, etc. The only variable cost which could change, therefore, was the actual amount paid to a “manufacturer/supplier” to deliver the product. The contracts also required PWC to return to the Defense Supply Center any rebates or discounts it received as a direct result of the contracts.[13]

         C. The Alleged Schemes

         The Plaintiffs allege that the Defendants participated in two different schemes to defraud the United States. The first scheme involved products purchased outside the continental United States. The contracts required PWC to purchase perishable goods on the local market, products called Local Market Ready Items or LMRI. When PWC received orders from the Defense Supply Center for these local market items, PWC typically called upon the Defendant The Sultan Center to fulfill them. The Sultan Center would then purchase the LMRI from local producers and invoice the cost to PWC.[14]

         The Complaint states, however, that The Sultan Center substantially marked up the prices it had paid local manufacturers and suppliers for the LMRI. According to the Complaint, the Defendants knew that the prices were inflated, and knew the price The Sultan Center had actually paid, but billed the Defense Supply Center at the inflated price anyway. The Plaintiffs argue that PWC should have billed the lower price because they maintain that The Sultan Center was not a “manufacturer/supplier” as defined by the contract.

         The second scheme involved “prompt payment” discounts which were never passed along to the government. According to the Complaint, The Sultan Center and PWC had an agreement for PWC to receive a ten percent discount on the inflated price.[15] The two parties called this discount a “prompt payment” discount, stating that it was given to PWC for paying invoices earlier than required. Because of that, the Defendants argue that the payments were not directly attributable to the PV Contracts, and, therefore, PWC did not have to rebate them to the United States. The Complaint alleges, however, that often these discounts were given regardless of whether payments were made early, on time, or even in some circumstances, late.[16]

         D. Procedural History

         The Relator in this case, Kamal Mustafa Al-Sultan, was a former business partner of PWC who initially filed this qui tam case in November 2005. The Relator then filed amended complaints on September 25, 2006 and October 1, 2009. In his complaints, the Relator alleged ten different counts against all of the Defendants. On November 13, 2009, the United States elected to intervene in part and declined to intervene in part. The United States intervened in the counts against PWC and The Sultan Center relating to the inflated prices and unreported discounts PWC allegedly claimed. The United States declined to intervene against the Defendants Switzer and Al-Saleh. The Defendants PWC and The Sultan Center now move to dismiss the United States' First Amended Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.

         II. Legal Standard

         A complaint should be dismissed under Rule 12(b)(6) only where it appears that the facts alleged fail to state a “plausible” claim for relief.[17] A complaint may survive a motion to dismiss for failure to state a claim, however, even if it is “improbable” that a plaintiff would be able to prove those facts; even if the possibility of recovery is extremely “remote and unlikely.”[18] In ruling on a motion to dismiss, the court must accept the facts pleaded in the complaint as true and construe them in the light most favorable to the plaintiff.[19] Generally, notice pleading is all that is required for a valid complaint.[20] Under notice pleading, the plaintiff need only give the defendant fair notice of the plaintiff's claim and the grounds upon which it rests.[21]

         Rule 9(b), however, adds a heightened pleading requirement to Rule 12(b)(6) when the plaintiff is alleging claims based on fraud. Under Rule 9(b), the plaintiff must state “with particularity the circumstances constituting fraud...”[22] In order to satisfy this particularity requirement, the complaint must state:

(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.[23]

         In other words, the plaintiff must allege the who, what, where, when, and how of each element, except scienter, which can be pleaded generally.[24] Rule 9(b)'s standard does not require a plaintiff “to actually prove his allegations.”[25] But in order to prevent claims of fraud from being too easily made, the plaintiff must offer some “indicia of reliability” that he can prove what the complaint alleges.[26]

         III. Discussion

         A. False Claims Act

         The United States has alleged six different counts of violations of the False Claims Act (“FCA”)[27] against the Defendants. The first four counts refer to PWC's use of allegedly inflated invoices from The Sultan Center in its claims for payment.[28]The last two counts refer to the discounts that were allegedly given to PWC by The Sultan Center and others.[29] The FCA, among other things, imposes liability on anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”[30] The FCA also imposes liability on anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”[31]

         1. Presentment (Counts 1, 2, 5 and 6)

         The Defendants argue that the United States' claims which rely on Section (a)(1)(A) of the False Claim Act should be dismissed because the Complaint fails to plead with the particularity required by Rule 9(b) that false claims were actually presented to the government. According to the Defendants, the Rule 9(b) standard articulated in Clausen requires at a minimum that the United States attach examples of actual claims for payment submitted by the Defendants. Because the United States did not attach any invoices that either misrepresented The Sultan Center's role or mischaracterized the nature of the discounts PWC received from The Sultan Center, the Defendants argue that the government has failed to plead presentment.

         The Defendants' argument is wrong for two reasons. First, the Defendants completely misread Clausen. Clausen requires a plaintiff to provide “some indicia of reliability” to support the assertion that an actual claim was presented to the government.[32] Because the actual submission of a claim is the “sine qua non of a False Claims Act violation, ” a plaintiff cannot “merely...describe a private scheme in detail but then...allege simply and without any stated reason for his belief that claims requesting illegal payments must have been submitted.”[33] The purpose of this requirement is, of course, to prevent frivolous claims by private plaintiffs who have no evidence that a defendant actually defrauded the government. Oftentimes, especially in situations where the government has declined to intervene, this can be shown by providing examples of actual claims that were submitted.[34]

         Contrary to the Defendants' contention, however, actual invoices are not required. While Clausen acknowledges that the submission of actual invoices would satisfy Rule 9(b), the Court also goes out of its way to make clear that it “merely lists some of the types of information” that might have been helpful, “but does not mandate all of this information for any of the alleged claims.”[35] And as the Eleventh Circuit has since made clear, “there is no per se rule that an FCA complaint must provide exact billing data or attach a representative sample claim.”[36] The consistent standard, rather, is whether the plaintiff has provided some “indicia of reliability.”[37] In other words, a plaintiff must “at a minimum...explain the basis for her assertion that fraudulent claims were actually submitted.”[38]As such, particularity under Rule 9(b) is assessed on a case-by-case basis.

         With that standard in mind, there is no question that the Complaint sufficiently pleads presentment. First-hand knowledge can oftentimes provide a relator with a sufficient basis for his presentment allegations.[39] This is only more pertinent when the plaintiff is the government. As a party to the actual submission of the allegedly false claims, the government is not saying that the Defendants “must have” or “likely” submitted claims, as the relator did in Clausen.[40] Rather, the government is saying that the claims were actually submitted, and it knows this because the claims were actually submitted to the United States. The Complaint also provides numerous details about the claims, including that the claims for payment were submitted by PWC between 2003-2009, PWC used prices supplied to it by The Sultan Center in its claims for payment, and the United States also included an exhibit which contained a detailed list of the different orders PWC sent to the United States. The invoices also failed to include discounts PWC had received from The Sultan Center and other companies. Coupled with the government's first-hand knowledge, these details provide more than enough “indicia of reliability” to satisfy Rule 9(b).

         The Defendants also misread the Complaint itself. The Defendants argue that the Complaint fails to allege how PWC actually mischaracterized its claims. But this view of the Complaint only makes sense if one reads the Complaint with the necessary assumptions friendly to the Defendants' position, namely, that The Sultan Center is actually a “manufacturer/supplier” and that the discounts at issue were actually for prompt payment. If those two things are true, then yes, the United States has failed to show how the Defendants' claims were false. But the Defendants ignore that the government has in fact said the exact opposite is true. According to the Complaint, The Sultan Center is not a “manufacturer/supplier” and the prompt payment discounts were not actually given for prompt payment. Both of those contentions are backed up by specific factual allegations.[41] And contrary to The Sultan Center's argument, the Complaint shows that The Sultan Center caused the claims to be submitted by knowingly participating in the two schemes and providing PWC with the invoices and discounts which the Defendants used to defraud the United States.

         Ultimately, the Defendants are trying to shoehorn an argument about presentment into a case where it is inappropriate. Presentment is normally an issue when a relator makes wild claims about fraud, but cannot show whether or not those supposedly fraudulent claims were actually submitted to the government. In this case, however, neither party denies that claims were submitted to the government. And both parties agree that, for example, the submitted claims were based on invoices provided by The Sultan Center and that the claims did not include the “prompt payment” discounts. The core issue in this case is not whether the claims for payment were presented to the government, but whether those claims were false. Considering that neither party disputes that claims were actually submitted, and that the Court finds that the Complaint sufficiently pleads presentment regardless, dismissal on this ground is not warranted.[42]

         2. Materiality (Counts 1-6)

         The Defendants next argue that the Complaint fails to adequately plead that the alleged misrepresentations were material. In order for a misrepresentation about compliance with a contractual requirement to be actionable under the FCA, the misrepresentation must be material.[43] “The materiality standard is demanding.”[44] The FCA defines material as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”[45] The Supreme Court has taken this definition to be equivalent to the common law understanding.[46] In both the common law and FCA understandings of materiality, one “look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”[47] Absent special knowledge, if a misrepresentation is such that it would reasonably change a person's decision making process, then it is material.

         Evidence of past behavior is certainly relevant to this inquiry. As the Supreme Court noted in Escobar, “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”[48] Indeed, the Defendants rest much of their argument on this sentence. According to the Defendants, because PWC supposedly disclosed The Sultan Center's role as its “supplier” in its proposals, that the government had full knowledge of the alleged misrepresentation. And because the government continued to pay under the contracts, the Defendants argue that the alleged misrepresentations could not possibly be material.

         The Court disagrees for three reasons. First, the Defendants once again ignore the facts alleged in the Complaint. The government does not dispute that it knew PWC was using The Sultan Center as a “supplier, ” or that “prompt payment” discounts were allowed by the PV Contracts. But the fundamental claim of the Complaint is that the Defendants lied. According to the government, The Sultan Center was not a supplier and the “prompt payment” discounts were not for prompt payment. Regardless of whether the government was aware of PWC using The Sultan Center, unless the government knew about the Defendants' alleged deception, the government could not have the knowledge necessary to undermine materiality.

         The Defendants argue, however, that even if the Defense Supply Center was not put on notice by the contract proposals, the “government” was put on notice once the Relator filed his original Complaint.[49] But just because one agency within the vast bureaucracy of the federal government has knowledge of a contractor's wrongdoing does not mean that the Defendants have a “government knowledge” defense. The issue is whether the actors actually involved in the contractual relationship are aware of the alleged fraud.[50]

         In this case, the agency that became aware of the allegations when the Relator filed his original Complaint was the United States Attorney's Office, which is a branch of the Department of Justice, a completely different Cabinet Department from that of the Department of Defense. The Defense Supply Center and the United States Attorney's Office have no regular interaction with each other, and the United States Attorney's Office had no regular contact with PWC during its performance of the contracts. Even if it did, mere suspicion of wrongdoing is not enough. The appropriate time to impute knowledge is at the end of an investigation, not at the beginning. And in this case, once the United States Attorney's Office's investigation was complete and the government decided to intervene, the Defense Supply Center promptly terminated its relationship with PWC.

         Third, the Defendants assume that once fraud is discovered, the government is then required to stop continuing payments or lose its right to enforce the FCA. But even if the Defense Supply Center was aware of the Defendants' alleged fraud, there are “instances in which a government entity might choose to continue funding the contract despite earlier wrongdoing by the contractor.”[51] The more essential the continued execution of a contract is to an important government interest, the less the government's continued payment weighs in favor of the government knowledge defense. “To find otherwise could lead to perverse outcomes; the more dependent the government became on a fraudulent contractor, the less likely it would be to terminate the contract (and the less likely the contractor would be held liable).”[52] The contracts at issue in this case were for the procurement of necessary supplies for American troops in an active theater of war. A contract could hardly be more essential to an important government interest than that.

         In addition to their “government knowledge” arguments, the Defendants also argue that the Complaint does not plead materiality with sufficient particularity. Because the word “material” only appears four times in the Complaint, and in those circumstances is only used in a conclusory manner, the Defendants argue that the government did not plead materiality with sufficient particularity. This argument clearly ignores the other facts pleaded in the Complaint. Particularity is not met or unmet by the presence or absence of the magic word “material” in connection with a fact, but by pleading facts which by their nature support a finding of materiality. In this case, the United States has alleged a number of facts to support its claim that the Defendants participated in a scheme to charge the United States inflated prices for supplies and split the profits among themselves. Taking those facts as true, such actions on the part of the Defendants would clearly be material to the United States' decision to pay on the contracts. The fact that it did not describe in the Complaint how each of these facts would go toward proving materiality is irrelevant.

         The Defendants finally argue that the misrepresentations could not have been material to the government because each of the invoices was supposedly approved by an officer the Defense Supply Center as “fair and reasonable.” The United States alleges that the responsible officer did not have all material facts required to be able to make a determination of “fair and reasonable” because the Defendants lied. Just as importantly, “fair and reasonable” is merely an approval of the price in the abstract. But the abstract price is not the fundamental issue in this case; how that price was reached is. Even if the price from The Sultan Center was a “fair and reasonable” price for the supplies, it is not the price the government would pay if The Sultan Center is not a “supplier.” The heart of the bargain between the government and PWC is that the government would pay the contract price, not a “fair and reasonable” one. For all of these reasons, the Court concludes that the United States sufficiently alleged the material nature of the claims for payment.

         3. Scienter and ...


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