United States ex rel. Ladas v. Exelis, Inc.
| Citation | 824 F.3d 16 |
| Decision Date | 25 May 2016 |
| Docket Number | August Term, 2014,Docket No. 14-4155 |
| Parties | United States of America ex rel. Michael A. Ladas, Plaintiff–Appellant, v. Exelis, Inc., ITT Power Solutions, Inc., and Innovative Mold Solutions, Inc., Defendants–Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Todd D. Steigman, Hartford, Connecticut (Peter B. Prestley, Madsen, Prestley & Parenteau, Hartford, Connecticut; Steven A. Skalet, Teresa Yeh, Mehri & Skalet, Washington, D.C., on the brief), for Plaintiff–Appellant.
Matthew A. Fitzgerald, Richmond, Virginia (John D. Adams, Alexander J. Brackett, Jeremy S. Byrum, McGuireWoods, Richmond, Virginia, on the brief), for Defendants–Appellees Exelis, Inc., and ITT Power Solutions, Inc.
Christopher C. Palermo, White Plains, New York (Bleakley Platt & Schmidt, White Plains, New York; Neil Matthew Merkl, Kelley Drye & Warren, New York, New York, on the brief), for Defendant–Appellee Innovative Mold Solutions, Inc.
Before: KEARSE, POOLER, and DRONEY, Circuit Judges.
KEARSE
, Circuit Judge:
Plaintiff Michael A. Ladas, a former employee of defendant ITT Power Solutions, Inc. (“Power Solutions”), appeals from a judgment of the United States District Court for the District of Connecticut, Alfred V. Covello, Judge , dismissing his qui tam action brought on behalf of the United States under the False Claims Act, 31 U.S.C. § 3729 et seq.
(or “FCA”), against Power Solutions et al . for alleged fraud in representations made to the United States in connection with certain equipment supplied to the government pursuant to a procurement contract. The court dismissed Ladas's Substitute Second Amended Complaint (or “SSAC”) in part pursuant to Fed. R. Civ. P. 12(b)(1), ruling that Ladas had released his claims against Power Solutions and its parent corporation and thus lacked standing to bring claims against them, and in part pursuant to Fed. R. Civ. P. 9(b) on the ground that the fraud claims were not pleaded with the requisite particularity. On appeal, Ladas argues principally that his claims against Power Solutions and its parent are not barred by his release agreement and that his complaint satisfied the requirements of Rule 9(b). He also contends that the district court abused its discretion by not allowing him to amend the Substitute Second Amended Complaint. For the reasons that follow, although we do not endorse the district court's ruling on the enforceability of the release, we affirm the dismissal of the Substitute Second Amended Complaint—without leave to amend further—for failure to plead fraud with the requisite particularity.
The Substitute Second Amended Complaint, along with portions of the motion papers supporting defendants' motions to dismiss and the opinion of the district court granting those motions, as well as the briefs and most of the record on this appeal, have been filed under seal; they are hereby deemed unsealed to the extent that their contents are quoted or described in this opinion. The following description reflects allegations in the Substitute Second Amended Complaint, taken as true for purposes of reviewing a dismissal pursuant to Rule 9(b)
, see, e.g. , Mills v. Polar Molecular Corp. , 12 F.3d 1170, 1174 (2d Cir. 1993).
In 2005, Power Solutions's then-parent, ITT Corporation (“ITT”), was awarded a contract to provide the United States with equipment that included certain devices and apparatus to supply the devices with power (the “Contract”). The Contract required that the devices, their component parts, and their supporting apparatus meet particular specifications for, inter alia , form, fit, and function, as well as for logistics with regard to replacement parts. Equipment produced after any change to the manufacturing materials or process that had potential for causing a deviation from Contract specifications was required to be subjected to product qualification tests; such changes were also required to be submitted to the government for its approval.
Power Solutions entered into a subcontract with defendant Innovative Mold Solutions, Inc. (“IMS”), pursuant to which IMS would manufacture casing components for the devices' power-supply apparatus. Components manufactured by IMS were delivered to Power Solutions, which sent them to another ITT business unit for assembly of the devices and the accompanying apparatus (hereinafter the “assembly division”), and for shipment to the government. Delivery of the equipment to the government began in the fourth quarter of 2007.
In November 2007, IMS made substantial changes in the manufacture of the power-supply case component, using a less expensive adhesive material and changing the process it used to apply that material. An engineering professor had alerted an assembly-division employee that a change in application method would require significant additional testing to ensure the apparatus' reliability and endurability; but no new product qualification testing was performed, and the changes were not submitted to the government for approval. The SSAC alleged that IMS made the changes in 2007 in collusion with the assembly division and did not disclose these changes to Power Solutions.
The SSAC alleged generally that IMS's changes affected compliance with Contract specification requirements and would affect the function of the equipment, causing the devices to function incorrectly or not at all. Power Solutions engineers were aware that a process change had occurred with potential to significantly affect the quality and function of the power-supply apparatus; and in a 2007 meeting with IMS, they complained of defects in some of the components IMS had shipped. IMS denied having made any changes. Power Solutions rejected the defective parts based on their noncompliance with an internal ITT specification.
In February 2009, Power Solutions began documenting problems with the IMS-manufactured power-supply case components, noting various types of degradation. Power Solutions's general manager decided, however, that the IMS components should be sent on to the assembly division without awaiting complete test results. In May 2009, Power Solutions contacted IMS's adhesive-application supplier to review the process being used, and learned that IMS had taken over that supplier's role more than two years earlier. IMS then, realizing what Power Solutions had learned, finally admitted that IMS had introduced changes in 2007. Employees of the assembly division met with IMS to discuss the matter; Ladas, who was responsible for ensuring and improving the quality of Power Solutions products, was not included in the meeting.
Ladas was Director of Quality at Power Solutions from 2006 until March 2010; he reported to the head of quality assurance at the assembly division. In mid-2009, after Power Solutions quality-assurance personnel had become aware of the significant changes to IMS's manufacturing process, the Power Solutions quality-assurance department advocated disclosure of the Contract violations to the government—as required by the Contract—and drafted a request for a government waiver of the deviations and a proposal for corrective action. The deviation waiver request was initially approved by the assembly division but was never sent to the government.
Instead, assembly-division employees sent the government a “white paper” (the “White Paper”) and an accompanying letter (collectively the “2009 Letter”) stating falsely that ITT had only recently become aware of a change in the IMS application process—a change they described misleadingly—stating that no tests had identified degradation or failure in the metalized area of the components, and stating falsely that the adhesive used had not changed. The 2009 Letter stated that there was no major or functional change having any potential to affect any specification requirement. ITT continued to ship devices to the government, fraudulently certifying that they had been produced in accordance with Contract specifications and requirements. The government placed at least one additional order after receiving the 2009 Letter.
After learning of the assembly division's “false, deceptive and misleading” 2009 Letter to the government, the Power Solutions quality-assurance department prepared, in or about March 2010, a second deviation waiver request for submission to the government, detailing “the true” changes. (SSAC ¶ 90.) This request also was not sent to the government.
On March 31, 2010, Ladas's employment with Power Solutions was terminated. Ladas signed a separation agreement (“Separation Agreement” or “Agreement”) in which he, inter alia , agreed to release “all claims or demands [he] may have arising out of or relating to [his] employment,” including “any rights or claims [he] may have under ... federal ... laws” (the “Release”). The Agreement, which is in the district court record as an unsealed document, stated that the Release “shall be construed in the broadest sense possible and shall be effective as a prohibition to all claims ... and causes of action of every character, nature, kind or description, known or unknown, and suspected or unsuspected.”
Ladas commenced the present qui tam action under the False Claims Act in July 2010 and a month later filed an amended complaint. Ladas alleged that Power Solutions, IMS, and ITT had knowingly made to the United States false or fraudulent claims for payment, in violation of 31 U.S.C. § 3729(a)(1)(A)
; had knowingly created and used, or caused to be used, false records or statements material to such claims for payment, in violation of 31 U.S.C. § 3729(a)(1)(B) ; and had conspired to make such claims or statements, in violation of 31 U.S.C. § 3729(a)(1)(C). In or about 2011, ITT spun-off its defense-contracting business—including Power Solutions and the assembly division—to a new company, Exelis, Inc. Exelis was...
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