United States ex rel. Cimino v. Int'l Bus. Machs. Corp.

• Decision Date: 06 July 2021
• Docket Number: No. 19-7139,19-7139
• Parties: UNITED STATES of America, EX REL. Paul A. CIMINO, and Paul A. Cimino, Appellant v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellee
• Court: U.S. Court of Appeals — District of Columbia Circuit

3 F.4th 412

UNITED STATES of America, EX REL. Paul A. CIMINO, and Paul A. Cimino, Appellant

v.INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellee

No. 19-7139

United States Court of Appeals, District of Columbia Circuit.

Argued October 9, 2020

Decided July 6, 2021

Tejinder Singh argued the cause for appellant. With him on the briefs was Daniel H. Woofter.

Amanda L. Mundell argued the cause for amicus curiae the United States in support of appellant. With her on the brief were Joseph H. Hunt, Assistant Attorney General, Timothy J. Shea, United States Attorney, and Charles W. Scarborough, Attorney.

Catherine E. Stetson argued the cause for appellee. With her on the brief were Jonathan L. Diesenhaus and Matthew J. Higgins.

Steven P. Lehotsky, Tara S. Morrissey, James C. Stansel, Melissa B. Kimmel, Alan Charles Raul, and Virginia A. Seitz were on the brief for amici curiae the Chamber of Commerce of the United States of America and the Pharmaceutical Research and Manufacturers of America in support of appellee.

Before: Srinivasan, Chief Judge, Rao, Circuit Judge, and Ginsburg, Senior Circuit Judge.

Concurring opinion filed by Circuit Judge Rao

Rao, Circuit Judge:

This case involves the False Claims Act ("FCA") and an alleged fraud perpetrated against the Internal Revenue Service ("IRS"). According to relator Paul Cimino, the International Business Machines Corporation ("IBM") violated the FCA by (1) using a false audit to fraudulently induce the IRS to enter into a $265 million license agreement for software the IRS did not want or need, and (2) presenting false claims for payment for software that the IRS never received. The district court dismissed Cimino's complaint, finding that he did not adequately plead his fraudulent inducement and presentment claims.

This appeal requires us to clarify whether causation is an element of fraudulent inducement under the FCA, and if so, what standard governs it. In light of Supreme Court precedents interpreting the FCA to incorporate the common law, we hold that but-for causation is necessary to establish a fraudulent inducement claim under the FCA. We hold that Cimino plausibly pleaded causation, as well as materiality, and therefore he may proceed with his fraudulent inducement claims on remand. We affirm, however, the dismissal of Cimino's presentment claims because he failed to plead them with the requisite particularity.

I.

Since 1863, the False Claims Act has imposed liability for fraud against the government. Act of Mar. 2, 1863, ch. 67, 12 Stat. 696 (codified as amended at 31 U.S.C. § 3729 et seq . ). Congress enacted the FCA to "stop[ ] the massive frauds perpetrated by large contractors during the Civil War." Universal Health Servs., Inc. v. U.S. ex rel. Escobar , ––– U.S. ––––, 136 S. Ct. 1989, 1996, 195 L.Ed.2d 348 (2016) (cleaned up). Congressional investigations "painted a sordid picture of how the United States had been billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war." United States v. McNinch , 356 U.S. 595, 599, 78 S.Ct. 950, 2 L.Ed.2d 1001 (1958). A person violates the FCA, among other ways, if he "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" by the government or "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1)(A) & (B). A violator faces civil penalties up to $10,000 per claim and treble damages. Id . § 3729(a)(1).

The FCA expands who can prosecute fraud against the government by allowing private persons to bring a qui tam action on the government's behalf. See id . § 3730(b). These so-called relators "serve as a posse of ad hoc deputies to uncover and prosecute frauds against the government." U.S. ex rel. Grubbs v. Kanneganti , 565 F.3d 180, 184 (5th Cir. 2009) (cleaned up). The FCA incentivizes relators to come forward with knowledge of false claims by sharing between ten and thirty percent of any money recovered by the government, with the precise percentage dependent upon the relator's contribution to the suit. See 31 U.S.C. § 3730(d).

To commence a qui tam action under the FCA, a relator files his complaint under seal, providing the government an opportunity to investigate the claims and determine whether to intervene. Id . § 3730(b)(2). If the government intervenes, it assumes "primary responsibility for prosecuting the action," but if the government declines, the relator may proceed with the case on his own. Id . § 3730(c)(1), (c)(3).

This qui tam action began when Paul Cimino filed a complaint alleging that IBM violated the FCA. As a former senior sales representative for IBM, Cimino helped sell software to the IRS. Based on knowledge acquired on the job, Cimino alleged that IBM fraudulently induced the IRS to enter a $265 million license agreement for "unwanted, unneeded" software. J.A. 6 ¶ 1. Because we must accept Cimino's factual allegations as true at the motion to dismiss stage, we recite the facts as he alleges.

Pursuant to a 2007 license agreement, the IRS used IBM's software, paying between $23 and $30 million annually. As the license agreement neared its expiration in 2012, IBM learned that the IRS was not interested in renewing the agreement because it was not using all the software purchased from IBM. For the upcoming tax season, the IRS intended to negotiate an extension only for the software that it needed.

Faced with the possibility of losing significant revenue, IBM allegedly devised a scheme to pressure the IRS into another long-term deal. IBM planned to conduct a "friendly" audit, anticipating that the IRS was overusing the software and therefore would owe a significant amount in compliance penalties. IBM would then leverage the penalties by offering to waive them in exchange for a new agreement. IBM retained Deloitte LLP to perform the audit.

Contrary to IBM's expectations, Deloitte's initial audit showed the IRS was not significantly overusing the licenses and owed only $500,000 in compliance penalties—a relatively small amount for a contract of this size. IBM never released these audit results to the IRS. Instead, IBM worked with Deloitte to manipulate the results. For example, IBM counted licenses on discontinued servers as in constant use, even though they were never used. Deloitte first presented the number of overused licenses from this manipulated audit to Adam Kravitz at the IRS. Cimino alleged that "Kravitz rejected the audit findings because, in his words, ‘IBM cannot substantiate that the IRS is out of compliance.’ " J.A. 27 ¶ 88. IBM then manipulated the audit again to show an outstanding $292 million in compliance penalties. IBM shared this number with the IRS, despite the fact that one IBM employee considered the number "ridiculous," and another "was ‘not comfortable representing’ that number to the IRS." J.A. 28 ¶ 92. In November 2012, IBM presented another audit to Kravitz showing the IRS owed at least $91 million in compliance penalties, but Kravitz again rejected the findings.

Waiting until Kravitz was on vacation in December, IBM approached IRS officials who were "less knowledgeable about the audit." J.A. 34 ¶ 123. Deloitte presented the false audit showing the IRS was overutilizing the software to several IRS officials including Kravitz's boss, Jim McGrane, who served as the IRS's Deputy Chief Information Officer and led the IRS's software acquisitions. A week later, IBM met with McGrane and told him that, if the IRS did not enter the new license agreement, it would owe $91 million and that IBM had retained lawyers to collect the penalties. But if the IRS entered into a new license agreement, IBM promised to waive the penalties. Chris Schumm, an IBM employee at the meeting, believed "[d]uring the course of his employment" that "the IRS was very concerned and ‘scared’ of the false" audit and that the audit's "findings were a substantial factor in the IRS's decision to renew the [agreement]." J.A. 36 ¶ 127. After learning about the extent of compliance penalties revealed by Deloitte's audit, McGrane approved a new license agreement in which the IRS agreed to pay IBM $265 million for a period of five years.

Once the new agreement was in place, IBM allegedly did not make good on its promise to waive the compliance penalties. IBM instead disguised the compliance penalties as an $87 million fee for prospective licenses and support, which "were, upon information and belief, never actually provided to the IRS." J.A. 38 ¶ 140. The IRS continued to pay IBM under the license agreement for the next several years, and it paid most of the $265 million contract price. In 2015, the IRS extended the license agreement for another six months at a cost of over $16 million.

Cimino filed his complaint against IBM under seal in June 2013—about six months after the IRS signed the new license agreement. Cimino's amended complaint asserts that IBM violated the FCA in two ways. First, IBM fraudulently induced the IRS to enter the agreement by using the false audit and the false compliance penalties premised upon it. Second, IBM presented false claims when it charged the IRS for prospective licenses it never provided. After a four-year investigation, the government declined to intervene in the case, and Cimino's complaint was unsealed. IBM moved to dismiss.

The district court dismissed Cimino's complaint in full. With respect to fraudulent inducement, the court held that Cimino had to plead but-for causation, meaning that the IRS would not have entered the agreement but for IBM's false audit. According to the court, Cimino failed to do so because he never alleged that the IRS accepted the false audit's findings. The court also held Cimino failed to plausibly plead the false audit was material to the IRS, because it paid IBM most of the $265 million license agreement and extended the agreement for an...