U.S.A v. Siemens Ag

• Decision Date: 23 April 2010
• Docket Number: Civil Action No. 09-4414.
• Citation: 708 F.Supp.2d 505
• Parties: UNITED STATES of America, ex rel. William A. THOMASv.SIEMENS AG, et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

708 F.Supp.2d 505

UNITED STATES of America, ex rel. William A. THOMASv.SIEMENS AG, et al.

Civil Action No. 09-4414.

United States District Court E.D. Pennsylvania.

April 23, 2010.

COPYRIGHT MATERIAL OMITTED

Catherine C. Jobe, Samuel L. Boyd, Boyd & Associates PC, Dallas, TX, Howard D. Scher, Landon Y. Jones, Richard M. Simins, Buchanan Ingersoll & Rooney PC, Viveca D. Parker, U.S. Attorney's Office, Philadelphia, PA, Joel M. Androphy, Kathryn E. Nelson, Berg and Androphy, Houston, TX, for United States of America, ex rel. William A. Thomas.

Adam Blumenkrantz, Claude Platton, Erik Haas, Nicholas Suplina, Patterson Belknap Webb Tyler LLP, New York, NY, David M. Howard, Erin C. Fisher, Dechert, Price & Rhoads, Philadelphia, PA, for Siemens AG, et al.

MEMORANDUM OPINION

SAVAGE, District Judge.

In this action brought under the False Claims Act (“FCA”), relator William Thomas (“Thomas”) contends that the defendants fraudulently induced the government to pay them more than it should have for the purchase of capital medical equipment by misrepresenting the extent of the pricing discounts given to other customers. The alleged false statements were made on Discount and Pricing Information forms (“DPI”) submitted to the Veterans Administration (“VA”) as required by federal procurement regulations known as the Federal Acquisition Regulation (“FAR”). The discounts are relied upon by the government in negotiating the price for goods it purchases.

Thomas has sued Siemens Medical Solutions USA, Inc. (“SMS”) and its parent, Siemens Corporation, and Siemens Corporation's parent, Siemens Aktiengesellschaft (“Siemens AG”), a German corporation. Thomas alleges that SMS manufactured and sold the medical equipment to the government. SMS, which he alleges is controlled by Siemens Corporation and Siemens AG, sells capital medical equipment, such as CT scanners, MRI scanners and nuclear medicine equipment, to private hospitals, both directly and through hospital group purchasing organizations, and to governmental agencies.

SMS and Siemens Corporation have filed a joint motion to dismiss the plaintiff's second amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Thomas has failed to state a “false statement” cause of action under § 3729(a)(2) or any other theory of liability under the FCA.¹ Siemens Corporation also contends that Thomas has failed to state any claim against it, but on grounds that it played no part in the contracting process.

Siemens AG has filed its own motion to dismiss, challenging service of process and personal jurisdiction, and also arguing that Thomas has failed to state a claim against it. With respect to service of process, Siemens AG argues that Thomas failed to serve Siemens AG as required through the Hague Convention and has not renewed his attempt to serve Siemens AG through any acceptable means. Thomas does not dispute his failure to serve Siemens AG through the Hague Convention, but contends that compliance with the Hague Convention is not necessary in this case because Siemens AG's subsidiary, Siemens Corporation, could be deemed Siemens AG's agent for purposes of service of process.

Accepting all well-pleaded allegations in the complaint as true and viewing them in the light most favorable to Thomas, we conclude that he has stated a cause of action under §§ 3729(a)(1) and (2) of the FCA against SMS, but not against Siemens Corporation and Siemens AG. He has failed to state a cause of action against any defendant under § 3729(a)(7).

Because Thomas has not served Siemens AG with process in compliance with the Hague Convention, and has not alleged sufficient facts in the second amended complaint that Siemens Corporation may be considered Siemens AG's agent for accepting service of process, we conclude that service of process has not been effected upon Siemens AG. Even if Thomas had properly served Siemens AG, his second amended complaint and proposed third amended complaint ² fail to state a claim against it.

Background

In processing bids and awarding contracts, federal government contracting officers must follow the guidance and rules contained in the FAR, Title 48 of the Code of Federal Regulations, Chapter 1. To assist the government in getting a fair and reasonable price from vendors, the FAR requires that the purchasing agency obtain information regarding discounts given to the bidder's other customers that result in lower net prices than those offered to the government. The information is provided in the DPI, which requires the contractor to state the percentage discount from the price list that it is offering the government. See DPI, ¶ 4.a. Then, the contractor must answer whether it has

in effect, for any customer or any class, discounts and/or concessions, including but not limited to the following, regardless of price list, which results in lower net prices than those offered the government in this offer.

Id., ¶ 4.b.

The DPI sets out, by way of example, a non-exclusive list of these discounts: “rebates of any kind”; “multiple quantity unit pricing plan”; “cumulative discounts of any type”; “products that may be combined for maximum discounts”; and “other.” Id., ¶ 4.b.

In addition, the contractor must report the “best discount” from its price list in six different discount categories: regular discount; quantity discount; aggregate discounts; prompt payment; FOB point; and other, that it offers to private hospitals, educational institutions, governments, original equipment manufacturers, and buying groups. Id., ¶ 4.c.

Thomas alleges that SMS made false representations in its DPI in response to VA solicitations for medical equipment contracts when it omitted greater discounts it had given non-governmental customers. He cites four instances where SMS gave larger discounts on CT scanners, MRI systems, ultrasound equipment and nuclear imaging systems to Broadlane, a hospital group purchasing organization, than it gave the VA. He contends that because the government was led to believe that the discounts listed on the DPI were the best SMS had given its other customers, the government accepted lower discounts from SMS than it would have had it known about the discounts given to Broadlane. As a result, the government paid more than it would have for that equipment.

In support of his contention, Thomas alleges that the defendants engaged in a pattern of undercutting government pricing. He claims that SMS assured Broadlane that it was receiving a greater discount than the government was. He saw a chart summarizing discounts given in 2005 which revealed that discounts to private customers on average exceeded those given to the government. Additionally, an SMS senior vice president announced that SMS had “significant exposure” because discounts given to private customers often exceeded those given to the government. After it acquired Acuson, a group purchasing organization, SMS continued a scheme, known as “Y Code,” that utilized pretextual codes in its sales data to justify “lower-than-government” prices. Discount quotes were often back-dated to include an after-the-fact “Y Code.” In short, according to Thomas, the “Y Code” served to obscure higher discounts given to private customers, resulting in higher prices to the government.

Central to its Rule 12(b)(6) challenge is the distinction SMS creates between “contractual” and “transactional” discounts. It argues that Thomas's claims relate to transactional discounts. It contends that all that is required to be disclosed are “contract discounts,” not “transactional discounts.” Thus, it argues that because it disclosed all contract discounts, it cannot be liable.

Thomas draws no distinction between contractual and transactional discounts. He contends that a vendor is required to disclose its best discounts, both contractual and transactional.

SMS contends that it is required to disclose on the DPI only the best “contract discounts” it gave to private customers, and that is exactly what it disclosed. It begins its explanation with its interpretation of the FAR. According to SMS, the FAR establishes a two-tiered regime for government purchasing of capital medical equipment. At the qualifying stage, the government solicits offers from multiple contractors at negotiated baseline prices. Those whose bids are accepted are placed on a list of qualified vendors. At the transactional stage, the government purchases from a vendor or vendors on the qualified list at a price that is then negotiated based on volume and other terms. This “transactional discount” is often significantly greater than the previously established “contract discount.” SMS contends that the FAR calls for the establishment of set per-unit prices at the inception of a contract, and that these prices are “ceiling” prices subject to downward negotiation. 48 C.F.R. §§ 16.201, 16.504(a). In other words, the placing of a vendor on a qualified contractors list does not necessarily result in government sales, but rather entitles a contractor to compete with other qualified vendors for sales at the subsequently requested configurations and volume. Thus, SMS argues, contracts to sell medical equipment to the government are distinct from actual transactions for the sale of medical equipment under those contracts, which are negotiated if and when a government facility decides to purchase the equipment.

In addition, when contracting for medical equipment, the contracting officer must establish “price reasonableness” or a “fair and reasonable price.” 48 C.F.R. §§ 12.209, 13.106-3, 15.402(a). To do this, he may seek information other than the vendor's catalog price list, such as: the discount price information on the DPI; comparison of proposed prices for the same or similar items offered by other contractors, both in the current solicitation and in previous ones; or, call upon an audit office to conduct an audit to assist in determining price reasonableness. 48 C.F.R. §§...