Mikes v. Straus "Particularity" Requirement May Be Dead, But Materiality is Alive and Well Among District Courts in the Second Circuit
A New York district court recently held in United States v. Strock that Escobar’s materiality standard applies, at a minimum, to express false certification and fraudulent inducement FCA
theories in addition to the implied false certification theory at issue in Escobar. The court further held that the
government failed adequately to plead materiality under Escobar and dismissed the case.
The government alleged that defendants falsely certified that their
company, Veteran Enterprises Company, Inc. (VECO) was a service-disabled
veteran-owned small business (SDVOSB) in order to obtain government contracts
set aside for such businesses. The government alleged that the non-veteran
defendants, who together owned and operated a separate contracting company
unable to capitalize on contracts awarded to SDVOSBs, recruited and appointed a
service-disabled veteran to serve as a mere figurehead in newly created VECO
for the purpose of securing and profiting from SDVOSB awards. Although the
recruited veteran was listed as the majority owner of VECO, he had almost no
role in its management or operations, and had limited access to the business
records for the company. The government’s FCA theory was that despite these
facts, defendants falsely represented and certified to VECO’s qualification as
an SDVOSB, and such false certifications fraudulently induced the government to
award VECO $24 million in contracts for which it otherwise would have been
ineligible, and thus each claim submitted under those contracts was false.
Defendants filed a motion to dismiss, arguing, among other things, that the
government had failed adequately to plead materiality under Escobar.
The court considered, as a threshold matter, whether Escobar’s materiality standard applied
outside of the implied false certification context. Although the Second Circuit
had not expressly addressed the issue, it had strongly signaled in a recent
express false certification case on remand from the Supreme Court, U.S.
ex rel. Bishop v. Wells Fargo & Co., that Escobar is not limited to implied false
certification cases. Under the Second Circuit’s pre-Escobar decision in Mikes v. Straus, an FCA plaintiff
proceeding under an express false certification theory was required to allege
that the defendant submitted “a claim that falsely certifies compliance with a particular statute, regulation or
contractual term, where compliance is a prerequisite to payment.” But the
Second Circuit held in Bishop that Escobar abrogated that particularity
requirement, reasoning that “strict enforcement of the FCA’s materiality and scienter
requirements” would prevent the type of open-ended liability based on a general
certification that the particularity requirement was designed to address. The Strock court concluded that the Second
Circuit would not have abrogated Mikes’
particularity requirement if Escobar’s
materiality standard had been limited to implied false certification theories,
and thus the government’s express false certification and fraudulent inducement
theories were properly analyzed under Escobar.
Applying Escobar, the court
concluded that the government failed adequately to plead materiality. Even accepting as true, for purposes of
deciding the motion to dismiss, that the defendants falsely certified their
qualifications, the court reasoned that the government failed to allege that it
expressly conditioned payment on compliance with SDVOSB contracting
requirements or that it regularly refused to pay claims in the “mine run of
cases” based on noncompliance with such requirements. Further, although the
government alleged that VECO’s SDVOSB status was “important enough to warrant
some level of investigation,” it failed to connect that investigation to the
government’s payment decisions. The court found the government also failed to
allege that it could have terminated VECO from previously awarded contracts
based on the company’s earlier allegedly false certifications. The court
dismissed the complaint without prejudice.
This may not be the end of the government’s campaign in Strock, however, as the government has
filed a motion for reconsideration and still has the option of amending its
complaint. As always, we here at LLB will keep you apprised of any further developments
in the case.