Sep 92013

Fifth Circuit Dismisses Conclusory Allegations and Rejects Implied False Certification Theory

Gordon D. Todd and Jeff Beelaert
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Posted by Gordon Todd and Jeff Beelaert

The Fifth Circuit recently had good news for government contractors when, in Steury v. Cardinal Health, Inc., No 12-20314 (5th Cir. Aug. 20, 2013) (per curiam), it rejected the contention that an alleged false certification of merchantability, without more, does not support an FCA claim unless payment was specifically conditioned on the certification. “Not every breach of a federal contract is an FCA problem,” the Court held, because the FCA “is not a general enforcement device for federal statutes, regulations, and contract.” Slip op. at 5 (quoting U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010) (“Steury I“).

The relator alleged the defendant had sold medical devices to the federal government despite being aware of a potential defect. Moreover, she contended that the defendant had “expressly warranted that the [devices] were merchantable,” that the contracts “required the [devices] be merchantable,” and merchantability was “a martial contractual requirement.” The District Court dismissed the Complaint for failure to satisfy Rule 9(b), and the Fifth Circuit affirmed.

The court held the relator had failed to “set forth the who, what, when, where, and how of the alleged fraud.” Because the complaint did not identify how the devices deviated from any required specification or contractual obligation, the court held that the pleadings were insufficient to support an “implied false certification” theory. The Fifth Circuit refused to recognize the “implied certification of an implied contract provision that is an implied prerequisite to payment.”

Moreover, the relator failed to show that in the absence of the merchantability provision the government would not have paid for the devices. The court had previously held that the government “may accept (and pay) for noncompliant commercial items.” Steury I, 625 F.3d at 270. In stark contrast to the relator’s allegations, this analysis confirms that the government’s payment is not conditioned on a warranty of merchantability. Even if the relator sought to rely on an “implied warranty of merchantability,” her argument fails because she would be asking the court to find a knowingly false claim from an implied certification of an implied contract provision—something the court refused to “reckon actionable.”

The Fifth Circuit did not address the relator’s “worthless goods” theory because her complaint similarly failed to plead it with the requisite particularity. She did not point to a single device that was sold to the government over a period of nine years that was ever found to be deficient or worthless.

In his concurring opinion, Judge Higginson urged the court to restore Congress’s statutory distinction between falisity and fraud and apply the “common-sense” understanding of those terms. Because the relator failed to allege that an invoice presented by defendant “contained, on its face, a factual assertion capable of confirmation or contradiction that was untrue when made,” the claim was not “false” under the FCA. Nor was the claim “fraudulent” under the FCA because the relator failed to allege that the defendant knew about the device’s defects but, intending to deceive, sold them anyway.

Gordon D. Todd

Washington, D.C.

gtodd@sidley.com

Jeff Beelaert

JeffBeelaert@sidley.com

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