USA. v. Beecham

Decision Date02 April 2001
Docket NumberNo. 98-56557,98-56557
Citation245 F.3d 1048
Parties(9th Cir. 2001) UNITED STATES OF AMERICA, EXREL., INSOON LEE, Plaintiff-Appellant, v. SMITHKLINE BEECHAM, INC.; SMITHKLINE BEECHAM CLINICAL LABORATORIES; DOES 1-100, Defendants-Appellees
CourtU.S. Court of Appeals — Ninth Circuit

Thomas H. Tate and David T. Harney, Harney Law Offices, Los Angeles, California, for the plaintiff-appellant.

Thomas H. Lee, II, Frederick G. Herold, and Matthew S. Miner, Dechert Price & Rhoads, Philadelphia, Pennsylvania, and Wayne S. Flick, Latham & Watkins, Los Angeles, California, for the defendants-appellees.

Douglas N. Letter and Sushma Soni, Department of Justice, Washington, D.C., for the amicus curiae.

Appeal from the United States District Court for the Central District of California Mariana R. Pfaelzer, District Judge, Presiding. D.C. No.CV-95-06524-MRP

Before: Harry Pregerson, William A. Fletcher, and Ronald M. Gould, Circuit Judges.

GOULD, Circuit Judge:

Insoon Lee ("Lee") appeals a judgment and order dismissing the qui tam action that he brought under the False Claims Act ("FCA"), 31 U.S.C. SS 3729-3733, against SmithKline Beecham, Inc. ("SmithKline"). We affirm the district court's determination that Lee failed to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). However, we reverse the district court's decision to dismiss Lee's case with prejudice because we conclude that Lee should have been granted leave to amend his federal FCA and federal "whistleblower" retaliation claims. 1

We reverse in part and remand.

FACTS AND PROCEDURAL HISTORY

SmithKline owns and operates regional clinical laboratories, satellite laboratories, draw stations, and patient service centers throughout the United States. At these laboratories, SmithKline personnel test human specimens, including blood, urine, and tissue. Complicated and non-routine tests are performed at SmithKline's National Esoteric Testing Center ("NETC") in Van Nuys, California.

Lee, a supervisor at NETC, filed a complaint on September 29, 1995, asserting claims under the qui tam provisions of the FCA. Lee's allegations centered on SmithKline's handling of control samples.2 Lee alleged that when test results for control samples fell outside the acceptable standard of error, SmithKline falsified the results and made no attempt to investigate the source of the error, fix the problem, or retest the affected patient specimens. Lee alleged that because SmithKline billed Medicare for these allegedly worthless tests and falsely certified the payment requests that it sent to the government, SmithKline had violated the FCA. In a separate claim, Lee asserted that SmithKline illegally retaliated against him after he reported the laboratory's wrongful conduct to SmithKline management.

As required under the FCA, Lee served his complaint on the United States, which chose not to intervene in the lawsuit. Lee continued to pursue this action under section 3730(c)(3) of the FCA.

On December 15, 1997, Lee served SmithKline with his complaint. Shortly thereafter, SmithKline moved to dismiss the complaint for, among other reasons, failure to state a claim upon which relief may be granted and failure to plead fraud with particularity. Before the hearing on SmithKline's motion, Lee filed a first amended complaint pursuant to Federal Rule of Civil Procedure 15(a).

SmithKline responded with a second motion to dismiss that again asserted that Lee had not stated a claim or pled fraud with particularity. SmithKline argued that Lee's amended complaint was deficient because it failed to allege (1) that SmithKline certified to the government that its testing complied with certain rules and regulations, or (2) that such compliance was a prerequisite to payment for the tests. SmithKline also argued that Lee's retaliation claims fell short because he failed to allege that SmithKline's retaliatory conduct resulted from the investigation and pursuit of his FCA claims.

On May 22, 1998, the district court granted SmithKline's motion and dismissed Lee's case with prejudice for failure to plead fraud with particularity under Federal Rule of Civil Procedure 9(b) and failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Lee filed a motion for reconsideration which was denied. This appeal follows.

DISCUSSION

We review de novo both a dismissal for failure to allege facts of fraud with particularity, Wool v. Tandem Computers,

Inc., 818 F.2d 1433, 1439 (9th Cir. 1987), and a dismissal for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), Monterey Plaza Hotel, Ltd. v. Local 483, 215 F.3d 923, 926 (9th Cir. 2000). Denial of leave to amend is reviewed for abuse of discretion. Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1084 (9th Cir. 2000).

A

Complaints brought under the FCA must fulfill the requirements of Rule 9(b). Bly Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001). Lee contends that his qui tam complaint satisfied Rule 9(b)'s heightened pleading requirements. We disagree.

In his first amended complaint, Lee alleged that SmithKline "knowingly . . . changed control numbers [on various tests] to wrongfully represent that the laboratory results fell within an acceptable standard of error." This broad claim had no factual support -Lee did not specify the types of tests implicated in the alleged fraud, identify the SmithKline employees who performed the tests, or provide any dates, times, or places the tests were conducted.

Rule 9(b) may not require Lee to allege, in detail, all facts supporting each and every instance of false testing over a multi-year period. See Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1998) (Where complaint asserting claims of improper revenue recognition identified (i) some of the specific customers defrauded, (ii) the type of conduct at issue, (iii) the general time frame in which the conduct occurred, and (iv) why the conduct was fraudulent, it was "not fatal to the complaint that it [did] not describe in detail a single specific transaction . . . by customer, amount, and precise method."). However, Lee's first amended complaint is not "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Neubronner v. Milken, 6 F.3d 666, 671 (9th Cir. 1993) (internal quotation marks and citation omitted). The complaint therefore fails to satisfy Rule 9(b). Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989) ("[M]ere conclusory allegations of fraud are insufficient."). We affirm the district court's dismissal of Lee's first amended complaint.

Lee contends that he is entitled to a lenient application of Rule 9(b) because the information supporting his claims is in the possession of SmithKline.3 Rule 9(b) may be relaxed to permit discovery in a limited class of corporate fraud cases where the evidence of fraud is within a defendant's exclusive possession. Wool, 818 F.2d at 1439; Deutsch v. Flannery, 823 F.2d 1361, 1366 (9th Cir. 1987). However, given that Lee worked as a supervisor at NETC for over twenty years, was knowledgeable about the tests allegedly falsified, and was employed by SmithKline when he filed this action, he cannot fairly allege that SmithKline has sole possession of the facts evidencing an FCA violation. In light of these circumstances, Lee has no legitimate excuse for filing a vague complaint that does not assert particular details to support its allegations of fraud. In any event, the district court properly determined that Lee's claims, as pled, failed to satisfy Rule 9(b).

B

Although we agree that Lee did not comply with Rule 9(b), we hold that the district court erred in denying him leave to amend. A district court's discretion to deny leave to amend a complaint is not absolute. We consistently have held that leave to amend should be granted unless the district court "determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith , 203 F.3d 1122, 1127 (9th Cir. 2000) (internal quotation marks and citations omitted). This approach is required by Federal Rule of Civil Procedure 15(a) which provides that leave to amend should be freely granted "when justice so requires." See Foman v. Davis, 371 U.S. 178, 182 (1962) (Rule 15(a)'s mandate "is to be heeded.").

In assessing whether leave to amend is proper, courts consider "the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment." Moore , 885 F.2d at 538 (citations omitted). These factors, however, are not given equal weight. Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995). "Futility of amendment can, by itself, justify the denial of a motion for leave to amend." Id.

The district court denied Lee leave to amend because it concluded that any amendment would be futile. This conclusion, however, rested on an unduly narrow reading of Lee's first amended complaint. The district court held that Lee's complaint presented a "false certification" FCA case based on SmithKline's alleged failure to comply with certain testing regulations and its alleged acceptance of federal funds during this period of non-compliance. The district court then determined that Lee's false certification claims were foreclosed by the holding of United States ex rel. Hopper v. Anton, 91 F.3d 1261 (9th Cir. 1996).4

Citing Hopper, the district court determined that Lee failed to state a claim because he did not allege (1) that SmithKline falsely certified on its HCFA-1500 claim forms5 that it had complied with all applicable rules and regulations, and (2) that such...

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