On Wednesday, May 25, 2016, the Second Circuit affirmed the district court’s decision to dismiss FCA claims alleging that defendants supplied $1.5 billion worth of deficient night-vision goggles to the U.S. military. United States ex rel. Ladas v. Exelis Inc. et al., No. 14-4155 (2d Cir. May 25, 2016). The court found that the relator, Michael Ladas, failed to plead the fraud claims with sufficient particularity.
Ladas, a former employee, alleged that the companies (government contractors and subcontractors) gave the military defective goggles for several years. He also alleged that during the course of the companies’ dealings with the military, the companies made substantial changes in the manufacture of the goggles’ supporting equipment; however, they did not perform testing on these changes, and the changes were not submitted to the government for approval. Ladas alleged that these changes caused the goggles to function incorrectly or not at all. Furthermore, Ladas claimed that the companies covered up their deed by filing false reports certifying that the goggles met the standards of the companies’ contracts with the military.
The District of Connecticut dismissed Ladas’s claims on two grounds. First, the court held that Ladas had released his claims against the related companies, pursuant to a separation agreement he signed when he was terminated. Therefore, he lacked standing to bring claims against them. Second, the court held that Ladas’s claims were not pleaded with the requisite particularity under Federal Rule of Civil Procedure 9(b).
On appeal, a three-judge panel affirmed as to particularity, citing the complaint’s failure to describe how contract noncompliance was linked to a false statement. First, the complaint only summarily alleged that the goggles and equipment failed to comply with the contract’s specification requirements. The only specification not met was an internal specification from the company that was not in the contract. Second, the testing that was not performed was only with respect to goggles-equipment, not the goggles themselves (and the contract only called for testing of the goggles). Finally, the allegations that the companies did not seek approval for manufacturing changes that affected device functionality were unsupported and conclusory. In summary, there were no plausible allegations that any claim submitted by the companies was false or that the goggles and their equipment failed to meet contract specifications.
As for the standing issue, the Second Circuit disagreed with the lower court on its finding that claims were barred by the separation agreement. Rather, the Second Circuit found that the release agreement was unenforceable as a matter of public policy, explaining that an agreement releasing qui tam claims without the United States’s knowledge or consent is unenforceable because it would impair a substantial public interest by “nullifying the incentives the FCA gives to file such claims.” (Opinion, at 10.) The court then explained that qui tam suits can be released, but only when the government has knowledge of the relator’s fraud allegations; here, that was not the case.
Notwithstanding the release agreement’s unenforceability, the Rule 9(b) rationale was still in place, and the Second Circuit affirmed.
