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United States ex rel. Cohen v. City of Palmer

United States District Court, Ninth Circuit

August 26, 2013

THE UNITED STATES OF AMERICA, ex rel. ARLENE COHEN, Relator, Plaintiff,
v.
CITY OF PALMER, ALASKA, a Political Subdivision of the State of Alaska, Defendant.

ORDER GRANTING MOTION TO DISMISS

SHARON L. GLEASON, District Judge.

Before the Court at Docket 26 is a Motion to Dismiss filed by Defendant City of Palmer. The motion has been fully briefed and oral argument was held in Anchorage on May 13, 2013. For the reasons explained below, the motion will be granted, with partial leave to amend.

FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

The False Claims Act ("FCA"), 31 U.S.C. §§ 3729-3733, was enacted in 1863 to protect the federal government from false claims submitted by government contractors. The FCA authorizes a qui tam civil action, in which a private individual (known as a "relator") may bring suit on behalf of the government and share in any proceeds that result from the action.

Arlene Cohen brought this action as Relator on behalf of the United States against the City of Palmer, Alaska. The First Amended Complaint alleges that beginning in 2009 and continuing through 2011, Palmer violated the FCA in its use of federal grant funds for public works construction projects.[1]

The First Amended Complaint makes the following factual allegations:

In February 2009, Congress passed the American Recovery and Reinvestment Act ("ARRA") to aid the country's recovery from the recession.[2] ARRA made federal grant funds available for public works construction programs, intended to help stimulate private sector activity. A separate portion of ARRA created subsidies for state and local governments to help stabilize public employment.

The Environmental Protection Agency ("EPA") solicited public works construction project proposals from the fifty states, which, in turn, solicited project proposals from localities. Through this process, Palmer applied for and obtained two ARRA grants from the EPA intended to stimulate the private sector, administered by the Alaska Department of Environmental Conservation ("ADEC"). One grant was for a water main replacement project, applied for on August 3, 2009; the other was for a wastewater treatment facility, applied for on June 2, 2009.[3] The First Amended Complaint does not allege when these projects commenced, when the projects were completed, or any other specific details of these projects. It also makes no allegations regarding how or when the ARRA grant funds were received, or the process Palmer followed in submitting its claims for payment.

The First Amended Complaint asserts that Palmer violated the FCA through its administration of these grant funds "in no less than twenty-four instances."[4] These instances can be grouped into four distinct claims, as explained below.[5]

(1) Bid-Rigging.

The First Amended Complaint alleges that "[o]ne of the standard conditions accepted by Palmer in its applications for the grant funds required a competitive bidding process for construction contracts."[6] However, it alleges, "Palmer decided on its own without proper authority to direct almost all of the labor costs of the two projects to city coffers" by using its own employees, instead of submitting the projects to contractors for competitive bidding.[7]

(2) Excessive Employee Compensation.

The First Amended Complaint also alleges that Palmer paid its public works employees "so-called Davis-Bacon union wages."[8] It alleges that "[e]ven after Palmer was directly informed by the EPA legal office and the State of Alaska that local government workers are never allowed Davis-Bacon wages in federal contracting, defendant Palmer persisted in the pay bonus scheme from July, 2009 until December, 2009" and "enhanced wages for the Palmer public works force were also paid for several months prior to that time by the EPA ARRA funds."[9]

(3) Stockpiling.

The First Amended Complaint also alleges that Palmer purchased $127, 000 in excess building materials ("steel pipe, copper tubing, gate valves, bends and other material") using ARRA grant funds, "all beyond the needs of the two construction projects at issue and obviously so at the time of the materials order."[10] Although the dates of this alleged conduct are imprecise, it appears that it took place in spring 2010 but was not investigated by Ms. Cohen until spring 2011.[11]

(4) Failure to Create Jobs.

The First Amended Complaint alleges that in two forms submitted on September 25, 2009, Palmer guaranteed that it would use the ARRA grant funds to "create jobs and promote economic activity."[12] However, "no jobs are known to have been created or saved in Palmer with the ARRA grant funds from the EPA."[13] The First Amended Complaint alleges that "[t]here are a number of qualified companies in South-Central Alaska that could have completed either Palmer public works project and, if successful with their bid, would have created new private-sector jobs as ARRA intended."[14]

In January 2010, Ms. Cohen alleges that she began gathering information and notifying federal authorities regarding the alleged financial abuses identified in the First Amended Complaint.[15] Ms. Cohen filed the Complaint in this action on October 7, 2011. On August 27, 2012, the United States declined to intervene. Ms. Cohen filed a First Amended Complaint on November 9, 2012 and on February 7, 2013, Palmer filed the present Motion to Dismiss. The motion seeks dismissal of the First Amended Complaint on three grounds: (1) lack of subject matter jurisdiction under Rule 12(b)(1); (2) failure to state a claim under Rule 12(b)(6); and (3) failure to plead fraud with specificity under Rule (9)(b).

DISCUSSION

I. Applicable Law.

When faced with a challenge to its subject matter jurisdiction, a court must resolve that issue before determining whether a complaint states a cause of action.[16] Palmer's jurisdictional arguments under Rule 12(b)(1) are premised on the public disclosure rule, which is codified at 31 U.S.C. § 3730(e)(4). On March 23, 2010, Congress amended § 3730.[17] The prior version of the statute explicitly stated that public disclosure deprived a court of subject matter jurisdiction and extensive pre-2010 case law discussed the jurisdictional test to be applied when evaluating an alleged public disclosure.[18] However, in the 2010 amendments, Congress changed the language of § 3730(e)(4) from a jurisdictional statement ("No court shall have jurisdiction") to an instruction for dismissal ("The court shall dismiss") of an action if it is based upon publicly disclosed information. In addition, Congress left intact the jurisdictional language of two other provisions in § 3730.[19] The change to § 3730(e)(4) is a clear indication that Congress intended to render the public disclosure requirement non-jurisdictional. As, under the new law, public disclosure no longer deprives the court of subject matter jurisdiction, it is appropriate to apply the standard of Rule 12(b)(6) to FCA claims that may be subject to the public disclosure rule.

Thus, the Court has divided its analysis into two parts: one addressing claims based on facts prior to the March 23, 2010 amendments ("pre-2010 claims) that fall under the prior version of the statute, and one addressing claims based on facts subsequent to the March 23, 2010 amendments ("post-2010 claims") and therefore subject to the current FCA.[20] For the pre-2010 claims, the Court will begin its analysis under Rule 12(b)(1) and resolve the jurisdictional question before addressing the arguments under Rules 12(b)(6) and 9(b). The Court will evaluate the post-2010 claims under only Rules 12(b)(6) and (9)(b). Accordingly, the motion under Rule 12(b)(1) will be denied for the post-2010 claims.

II. Pre-2010 Claims.

The First Amended Complaint alleges that Ms. Cohen "has been gathering information and notifying federal authorities concerning the financial abuses set out in this Complaint since January, 2010."[21] Thus, for the claims based on alleged false claims prior to March 23, 2010, "whether we consider the relevant conduct to be [Ms. Cohen's] disclosure to the Government or [Palmer's] submission of the allegedly false claim[, ]" the prior version of the FCA applies.[22]

Palmer's alleged bid-rigging and overpayment of its employees appear to have occurred, at least in part, before the March 23, 2010 amendments to 31 U.S.C. § 3730 took effect.[23] Palmer's alleged failure to create new jobs is a claim that correlates factually with the bid-rigging claim, as it relies on Palmer's failure to submit the projects for competitive bidding. The claim for stockpiling materials appears to post-date the March 23, 2010 FCA amendments and is therefore addressed in the Court's discussion of the post-2010 claims.

Palmer asserts that because the facts alleged in the First Amended Complaint were publicly disclosed, and because Ms. Cohen was not an original source of those facts, the Court ...


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