A False Claims Act (“FCA”) complaint filed by John McLain (not to be confused with the main character of the Die Hard series sharing the same name) was recently dismissed for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and failure to plead fraud with particularity under Rule 9(b). See United States ex rel. McLain v. KBR, Inc., No. 1:08-cv-499 (E.D. Va. Feb. 27, 2013).
The decision provides us an opportunity to build upon our recent blog post, in which we took stock of the increasingly contoured landscape of pleading requirements in FCA cases.
John McLain’s Allegations
Mr. McLain was an electrician formerly working for KBR in Iraq. His FCA allegations revolved around “ground resistance testing,” a procedure required under KBR’s contract with the U.S. Army but allegedly not performed by KBR personnel. McLain at *3. McLain also alleged that KBR produced documents which falsely indicated that the procedure had been performed. Id. After allegedly raising these concerns with his superiors, McLain was terminated and eventually brought suit under the FCA. Id. at *4-5.
Rule 12(b)(6) Dismissal
The district court concluded that the complaint failed Rule 12(b)(6) scrutiny because—other than a “threadbare recital” of the elements of an FCA cause of action—it did not allege any false claim submitted by KBR to the government. Nor did it allege a false certification inducing payment by the government. The court’s reasoning was rooted in the distinction between fraudulent conduct and fraudulent claims. Id. at 8 (“The statute focuses on liability as to the claim for payment, not the underlying fraudulent conduct.”). Mr. McLain may have adequately pled fraudulent conduct, the court reasoned, but not the existence of any false claims for payment: “While Relator sufficiently alleges fraudulent action—falsifying log entries to show electrical testing when none occurred—he fails to allege the submission of a claim by KBR.” Id. at *9. We endorsed this reasoning in our recent blog post, noting that FCA liability “is premised on the false or fraudulent claim—not the scheme surrounding it.” The McLain court rightly concluded that fraudulent conduct without a false claim amounts to “merely a breach of contract.” Id. at 10.
Rule 9(b) Dismissal
Because the court dismissed the complaint under Rule 12(b)(6), it could have stopped its analysis there. But it proceeded to review the complaint under Rule 9(b), concluding that the complaint lacked particularity because it failed to plead the details of any false claims.
This was the focus of our previous post. We observed that Rule 9(b) has been “relaxed” by some courts in at least two circumstances. The first is where the pertinent facts are “peculiarly within the perpetrator’s knowledge.” See, e.g., United States ex rel. Russell v. Epic Healthcare Mgmt. Grp., 193 F.3d 204, 308-09 (5th Cir. 1999). The second is where the relator describes the scheme in detail, along with “reliable indicia that lead to a strong inference” that claims were submitted. United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009). The Grubbs case and its progeny have allowed relators to survive motions to dismiss even where they do not plead the existence of a false claim. See United States ex rel. Jajdelski v. Kaplan, Inc., No. 11-16651 (9th Cir. Feb. 13, 2013).
The McLain court refused to relax Rule 9(b). But the way in which the court rejected Mr. McLain’s argument deserves mention. The Fourth Circuit recently addressed the relaxation of Rule 9(b) in United States ex rel. Nathan v. Takeda Pharmaceuticals, No. 11-2077, 2013 WL 136030, at *6-7 (4th Cir. Jan. 11, 2013). There, the relator argued that he needed only to “allege the existence of the fraudulent scheme that supports the inference that the false claims were presented to the government.” Id. at *6. This is not surprising, given the recent trend of relaxing the particularity requirement as to claims. Yet the Fourth Circuit expressly “decline[d] to adopt Relator’s argument for a more lenient application of the Rule.” Id. at *7. Instead, the court found that “nothing in the Act or in our customary application of Rule 9(b) suggests that a more relaxed pleading standard is more appropriate in this case.” Id. The Fourth Circuit described Grubbs as a rare example where “specific allegations of the defendant’s fraudulent conduct necessarily led to the plausible inference that false claims were presented.” Id. at *9 (emphasis added). But the Fourth Circuit also parted company with courts that have taken Grubbs too far. It admonished those courts for accepting complaints that did not identify false claims when the alleged scheme “could have led, but need not necessarily have led, to the submission of false claims[.]” Id. at *10. The court was crystal clear: “To the extent that other cases apply a more relaxed construction of Rule 9(b) in such circumstances, we disagree with that approach.” Id.
In light of that admonition, the McLain court’s treatment of the Grubbs argument before it is particularly interesting. The McLain court only distinguished Grubbs on it on its facts. See McLain at *17 (“Unlike Grubbs, Relator fails to allege any facts regarding a scheme for payment.”). This is certainly reasonable, given that the Fourth Circuit chose to distinguish rather than extinguish the principle adopted by the Fifth Circuit in Grubbs. But the McLain court went further, suggesting that “[e]ven alleging some details of the claims process could meet the Rule 9(b) requirements.” Id. (quotation marks omitted). This language treads dangerously close to the “more relaxed construction” that was expressly disdained by the Fourth Circuit in Takeda Pharmaceuticals. But that case was not cited in McLain, leading us to wonder whether the McLain court took notice of it. For that reason, we question whether the McLain decision is good law.
FCA Cases in the Fourth Circuit: What Does Rule 9(b) Require?
Takeda Pharmaceuticals was a blow to proponents of relaxing Rule 9(b) in FCA cases. It identified and rejected the recent trend of allowing complaints that merely plead the fraudulent scheme, without identifying any false claims with particularity. Yet the Fourth Circuit did not expressly disavow the Fifth Circuit’s holding in Grubbs, leaving the door open to relators to argue that there may still be some contexts in which the Fourth Circuit might relax Rule 9(b). Time will tell whether other cases can clear the Grubbs hurdle, or whether the Fourth Circuit has in effect blocked this avenue of pleading once and for all.