UNITED STATES of America, Plaintiff, v. TOYOBO CO. LTD. et al., Defendants.
Civil Action No. 07-1144 (RWR).
United States District Court, District of Columbia.
Sept. 2, 2011.
RICHARD W. ROBERTS, District Judge.
4. DENIES Defendants’ Motion to Stay Conservation Force II;
5. GRANTS in part and DENIES in part Defendants’ Motion to Dismiss Conservation Force II. The
6. In as much as Defendants’ Motion to Dismiss has been denied as to portions of Claims I and IV, the Government should file the administrative record for this matter. In addition, the parties are instructed to proceed with any additional motions promptly; and
7. The parties should meet and confer so as to provide the court with an updated report as to what issues remain in the case and what motions will be brought. Said report shall be filed with the court no later than 30 days from the date of this order.
Holly Elizabeth Loiseau, Michael J. Lyle, Weil, Gotshal & Manges, LLP, Washington, DC, Brian Keith Gibson, Jed P. Winer, Jeremy T. Grabill, Konrad L. Cailteux, Natalie R. Blazer, Weil, Gotshal & Manges, LLP, New York, NY, for Defendants.
MEMORANDUM OPINION AND ORDER
RICHARD W. ROBERTS, District Judge.
The government filed a complaint against defendants Toyobo Co. Ltd. and Toyobo America, Inc. (collectively “Toyobo“), alleging violations of the False Claims Act (“FCA“),
BACKGROUND
The complaint alleges the following facts. Toyobo manufactured the synthetic fiber “Zylon” for use in the production of bulletproof vests. (Compl. ¶ 17.) Toyobo contracted with two trading companies to distribute its Zylon yarn to three weaving companies, which provided woven Zylon to various vest manufacturers. (Id. ¶¶ 20-21, 23.) However, “Toyobo kept сomplete control over access to and use of Zylon for ballistic applications.” (Compl. ¶ 21.) Between 1999 and 2005, these vest manufacturers sold vests to federal agencies, both indirectly through the Multiple Award Schedule of the General Services Administration (“GSA“) and directly. (Id. ¶¶ 10-12, 16.) The vest manufacturers also sold vests during this time period to state, local, and tribal law enforcement authorities under the Bullet Proof Vest Grant Partnership Act (“BPVGPA“) Program, under which the federal government reimbursed these authorities for up to fifty percent of the costs of the body armor. (Id. ¶¶ 13-16.) Federal agencies paid more than $30,000,000 to purchase more than 59,000 vests through the GSA Schedule (id. at 12), and paid more than $4,600,000 on direct purchases of more than 9,700 vests. (Id. ¶ 16.) The government reimbursed
The government alleges that Toyobo‘s Zylon “was defective and degraded more quickly than Toyobo and the Zylon Vest Manufacturers represented.” (Id. ¶ 1.) In 1997 and 1998, Toyobo discovered that damage during the weaving process reduced the expected strength of its Zylon fiber. (Id. ¶¶ 22, 25.) Internal research suggested that Zylon suffered from hydrolysis, chemical decomposition caused by exposure to water. (Id. ¶ 51.) Toyobo also discovered that Zylon degraded when exposed to light. (Id. ¶¶ 30-31.) Toyobo performed accelerated aging testing, which exposed Zylon to extreme heat and humidity for short periods of time. These tests showed a significant drop in ballistic performance. (Id. ¶¶ 47, 49.) As early as 1999, a Toyobo executive stated at a meeting that “he did not think that Toyobo could make things right with Zylon and the attendees at the meeting discussed how Toyobo should not give out too much know-how about Zylon.” (Id. ¶ 39.)
In July 2001, DSM, a Zylon vest manufacturer, reported to Toyobo that a Zylon vest failed during ballistic testing, and announced that it would put on hold its introduction to market of its Zylon product. (Id. ¶¶ 52-53.) Although “Toyobo was deeply concerned” with the ballistic failure, it “tried to hide its concerns.” (Id. ¶ 58.) Toyobo informed the other vest manufacturers and other companies in the Zylon supply chain of this development but assured them that “it had not found any serious indication of Zylon strength degradation from its aging tests using Zylon fiber[.]” (Id. ¶ 55.) However, Toyobo disclaimed liability “for any use of Zylon fiber.” (Id.) After DSM‘s announcement, Honeywell International Corporation, a manufacturer of vest components called Z Shields, temporarily stopped shipping its Zylon products. (Id. ¶¶ 50, 59.) “[B]ased on Toyobo representations that it had not found any ‘serious indications’ from Toyobo‘s internal testing of Zylon,” Honeywell resumed selling Z Shields. (Id. ¶ 59.)
Toyobo began to release incomplete and misleading data to the vest manufacturers. In July 2001, Toyobo informed the vest manufacturers that its internal testing showed that Zylon‘s strength decreased at elevated temperatures and humidity levels, but Toyobo “failed to release other data regarding Zylon that was in its possession that would have shown the extent to which Zylon degraded[.]” (Id. ¶ 60.) Toyobo released other data suggesting that Zylon lost five percent of its strength over ten years under foreseeable conditions and ten percent of its strength at forty degrees Celsius and eighty percent humidity. The government alleges that this data conflicted with evidence in Toyobo‘s possession at the time, and with data Toyobo obtained in later testing. (Id. ¶¶ 61, 63.) Toyobo also announced a twenty-five to thirty-five percent loss of strength for Zylon “exposed to fluorescent lamps for several weeks, but failed to state that this 25-35% loss of Zylon strength had not occurred under extreme conditions.” (Id. ¶ 67.) In November 2001, Toyobo released data reflecting a “dramatic drop” in Zylon strength. (Id. ¶ 75.) After receiving negative feedback from other companies in the supply chain (see, e.g., id. ¶ 77), Toyobo “notified its ‘important customers’ that it would withdraw its November 2001 degradation data on the grounds that it was ‘statistically not correct and not reliable.’ In January 2002, Toyobo ... replаced it with data that had the bad data points removed.” (Id. ¶ 83.) During 2002 and 2003, Toyobo provided the vest manufacturers with quarterly updates on its research “but did
Additionally, beginning in May 1999, Toyobo discovered that its manufacturing process produced Red Thread, “a reddish, discolored section of Zylon fiber which has a reduced tensile strength.” (Id. ¶¶ 37, 41-42.) Although Toyobo implemented countermeasures designed to reduce the occurrence of Red Thread, “the Red Thread problem re-occurred continually during Toyobo‘s manufacture of Zylon.” (Id. ¶ 45.) When Hexcel, one of the Zylon weavers, discovered Red Thread in its Zylon (id. ¶¶ 93, 95), Toyobo admitted that it had observed a loss of strength in Red Thread. (Id. ¶ 99.) Toyоbo told Hexcel that “if the Red Thread was controlled and short and small in number, they would not harm the Zylon properties or its quality. At the time Toyobo made this statement, it knew this statement was false and misleading because it could not control the [ends with Red Thread] and that they were neither short nor small in number.” (Id. ¶ 101.) Lincoln Fabrics, another weaver, agreed to receive from Toyobo Zylon inventory knowing that it might contain Red Thread. (Id. ¶ 124.)
Toyobo took steps to induce various participants in the Zylon supply chain to continue supplying Zylon products despite questions about its suitability for ballistic applications. For instance, Toyobo agreed to provide Hexcel a refund if its customers stopped using Zylon. (Id. ¶ 76.) When Hexcel stopped weaving Zylon after it became concerned about Red Threаd, Toyobo agreed to provide Hexcel with replacement Zylon fiber and $240,000 in reimbursement. (Id. ¶¶ 102, 104, 111.) Additionally, when Barrday, another weaver, stopped weaving Zylon when it became concerned about possible degradation, Toyobo agreed that Teijin Shoji, one of the Zylon trading companies, would retain title to all Zylon delivered to Barrday. Teijin Shoji later retained title to all Zylon delivered to Lincoln Fabrics as well. (Id. ¶ 184.)
In August 2005, the National Institute of Justice (“NIJ“) issued a report detailing its own ballistics testing on Zylon vests. The report revealed that the “bulk of the Zylon vests failed the testing[.]” (Id. ¶ 126.) After the report issued, all vest manufacturers stopped using Zylon. (Id.)
The government filed a complaint asserting claims against Toyobo for FCA violations involving presenting fraudulent claims (Count 1), making false statements (Count 2), and consрiracy (Count 3), and for common law fraud (Count 4) and unjust enrichment (Count 5).1 Toyobo has filed a motion to dismiss under
DISCUSSION
In evaluating a
I. PRESENTING FALSE CLAIMS
The FCA created a cause of action against anyone who “knоwingly presents, or causes to be presented, to an officer or
A. Falsity
A claim may be false under the FCA if it is either factually or legally false. United States v. Sci. Applications Int‘l Corp., 555 F. Supp. 2d 40, 49 (D.D.C. 2008). A claim can be “factually false if it invoices for services that were not rendered” or incorrectly describes goods or services provided. United States ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25, 64 (D.D.C. 2007). Alternatively, a claim is legally false if it contains an express false certification--that is, “a claim that falsely certifies compliance with a particular statute, regulation or contractual terms, where compliance is a prerequisite for payment.” Id. (internal quotations marks omitted). A claim also may be legally false under an implied certification theory. Id. One way to plead a false claim under this theory is to plead “that the contractor withheld information about its noncompliance with material contractual requirements.” United States v. Sci. Applications Int‘l Corp., 626 F.3d 1257, 1269 (D.C. Cir. 2010). A contractual requirement can be considered material if “both parties to the contract understood that payment was conditional on compliance with the requirement at issue.” Id.; see also United States v. TDC Mgmt. Corp., Inc., 288 F.3d 421, 426 (D.C. Cir. 2002) (noting that withholding “information critical to the decision to pay” is a false claim (quoting Ab-Tech Constr., Inc. v. United States, 31 Fed. Cl. 429, 434 (Fed. Cl. 1994))). Another way to plead an implied certification claim is to plead that the government would not have paid funds to a party had it known of a violation of a law or regulation, and “the claim submitted for those funds contained an implied certification of compliance with the law or regulation and was fraudulent.” United States ex rel. Barrett v. Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 28, 33 (D.D.C. 2003).
B. Fraudulent Inducement
Even in the absence of allegations that the claims themselves were false, however, claims alleged to have been submitted under a contract procured by fraud can be actionable. See United States ex rel. Bettis v. Odebrecht Contractors of Cal., Inc., 393 F.3d 1321, 1326 (D.C. Cir. 2005). Congress intended that “‘each and every claim submitted under a contract or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct ... constitutes a false claim‘” under § 3729(a). Id. (quoting S. Rep. No. 99-345, аt 9 (1986), 1986 U.S.C.C.A.N. 5266, 5274). In United States ex rel. Schwedt v. Planning Research Corp., 59 F.3d 196, 197 (D.C. Cir. 1995), the defendant contracted to design software for an agency within the Department of Labor. The court of appeals noted that the plaintiff could have pled a
The government‘s complaint here alleges—just as the court in Schwedt hypothesized that a complaint could—that Toyobo‘s misrepresentations about Zylon‘s accelerated deterioration induced the vest manufacturers to sell Zylon vests to the government. (See Compl. ¶ 23 (alleging that Toyobo “forward[ed] techniсal information to the weavers and the body armor manufacturers“); ¶ 39 (alleging that Toyobo executives met to discuss Zylon and the attendees “discussed how Toyobo should not give out
Toyobo argues that the government has misconstrued the relevant warranty as one that guaranteed service for five years and that the vest manufacturers warranted only that they would replace or repair a defective shield within five years of its retail purchase. (Defs.’ Mem. of P. & A. in Supp. of Their Mot. to Dismiss (“Defs.’ Mem.“) at 17-18.) Toyobo cites in support of its argument two “exemplar” warranties that it claims demonstrate that the vest manufacturers did not guarantee future performance of their products. (Id. at 18 n. 15; Lyle Decl., Exs. 12-13.) This argument has no bearing on the government‘s fraudulent inducement theory, which hinges not on the vests’ inability to satisfy a five-year warranty but rather on Toyobo‘s attempts to prevent the vest manufacturers and the government from learning that Zylon fiber degraded more quickly than Toyobo represented it would. Even if the scope of the relevant warranties had some bearing on the government‘s fraudulent inducement theory, these warranties are not attached to the complaint and need not be considered in assessing whether the complaint adequately pleads a cause of action. See St. Francis Xavier Parochial Sch., 117 F.3d at 624 n. 3 (refusing to consider materials not attached to the pleadings when reviewing district court ruling on a motion to dismiss). Toyobo‘s argument raises questions of fact that are more appropriately resolved after discovery closes, such аs the scope of these warranties and whether the vest manufacturers issued warranties with comparable language upon every sale, given that Toyobo admittedly refers to the warranties as examples. See Honeywell, 798 F. Supp. 2d at 21, 2011 WL 2672624, at *5. Thus, these factual issues will not be resolved at the motion to dismiss stage of the litiga-
Toyobo also cites an admission from the NIJ warning law enforcement agencies that warranties from the manufacturers of bullet-proof vests do not reflect the anticipated service life of the product. (Def.‘s Mem. at 18-19 and n. 17 (citing Nat‘l Inst. of Justice, Selection & Application Guide to Personal Body Armor, NIJ Guide 100-01 (Nov. 2001)).) Here again Toyobo raises a factual issue that is not resolved appropriately on a motion to dismiss. The argument also has no bearing on the government‘s fraudulent inducement theory, which does not rest on the anticipated service life of the vests.
C. Causation
For a plaintiff to allege a cause of action under
II. FALSE STATEMENTS
The FCA also creates a cause of action against anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.”
Toyobo argues that its “statements were immaterial to the United States’ decision to purchase Zylon vests” as “evidenced by the fact that the United States ... continued to purchase vests until 2005, well after it was presented with all of the information regarding degradation of Zylon.” (Defs.’ Mem. at 21 (emphasis omitted).) Although the false statements provision as amended by the Fraud Enforcement and Recovery Act of 2009 contains by its plain text a materiality requirement, see
Even if the unamended § 3729(a)(2) could be construed to contain a materiality requirement, the government has alleged in its complaint that Toyobo‘s false statements influenced its payment decisions. (See Compl. ¶ 1 (“As a result of Toyobo‘s ... representations, the United States paid for defective Zylon body armor“).) Nowhere in the complaint does the government allege that it possessed all available information and data regarding Zylon degradation prior to 2005. Whether sufficient information about Zylon degradation was in the public domain before the government decided to stop purchasing Zylon vests is a question of fact inappropriate for resolution at the pre-discovery motion to dismiss stage.
III. CONSPIRACY TO DEFRAUD
Anyone who “conspires to defraud the Government by getting a false or fraudulent claim allowed or paid” may be subject to
Toyobo argues that the government‘s allegations “do not indicate any agreement between Toyobo and any other party to conspire to defraud the United States.” (Defs.’ Mem. at 27.) The government responds that it has pled adequately that Toyobo “entered into agreements with numerous companies participating in the chain of Zylon vest production[.]” (U.S. Br. in Opp‘n to Defs.’ Mot. to Dismiss at
However, the government‘s allegations are sufficient to state a claim under the FCA for conspiracy with respect to Toyobo and its weavers. The government alleges that Hexcel sought for Toyobo to indemnify it if Hexcel‘s customers stopped using Zylon and that Toyobo and Hexcel agreed that Toyobo would provide a refund to Hexcel in such an event. (Compl. ¶ 76.) Toyobo also agreed to provide Hexcel with replacement Zylon fiber and $240,000 in reimbursement in an attempt to restart Hexcel‘s weaving after Hexcel became concerned about Red Thread. (Id. ¶¶ 102, 104, 111.) Additionally, Toyobo and Barrday agreed that Teijin Shoji would retain title to Zylon delivered to Barrday to weave, and the parties entered into this arrangement to get Barrday to resume weaving Zylon. (Id. ¶ 184.) Finally, Lincoln Fabrics agreed to receive from Toyobo Zylon inventory knowing that it might contain Red Thread. (Id. ¶ 124.) The government has pled throughout its complaint that the purpose of all of these agreements was tо convince the weavers to continue weaving Zylon despite questions about its ballistic suitability. Because the vest manufacturers could not produce vests without woven Zylon, these allegations are sufficient to satisfy the requirement that the agreements had the purpose of getting claims paid by the government. The detailed allegations about the meetings between Toyobo and the weavers fulfills the requirements for an FCA conspiracy claim under
A plaintiff in an FCA action may plead—if not ultimately recover upon—alternative common law theories. See
V. UNJUST ENRICHMENT
To state a claim for unjust enrichment, a plaintiff must allege that a benefit was conferred upon a defendant, the defendant accepted the benefit, and it would be unjust for the defendant not to pay the plaintiff the value of the benefit. Miller v. Holzmann, Civil Action No. 95-1231(RCL), 2007 WL 710134, at *7 (D.D.C. Mar. 6, 2007). “[U]njust enrichment must be determined by the nature of the dealings between the recipient of the benefit and the party seeking restitution, and those dealings will necessarily vary from one case to the next.” 4934, Inc. v. D.C. Dep‘t of Employment Servs., 605 A.2d 50, 56 (D.C. 1992); see also In re Lorazepam & Clorazepate Antitrust Litig., 295 F. Supp. 2d 30, 51 (D.D.C. 2003). In In re Lorazepam, 295 F. Supp. 2d at 51, refused to dismiss a claim for unjust enrichment brought by a group of plaintiffs, including insurance companies, against drug manufacturers for payments made to reimburse subscribers for prescriptions. The court held that the theory of unjust enrichment could apply to indirect payments because the plaintiffs had properly alleged the defendants’ enrichment to the plaintiffs’ own detriment and not just to the detriment of the plaintiffs’ subscribers. Id.
Toyobo argues that the government has not stated an unjust enrichment claim because “any benefit conferred by the United States was conferred on the Vest Manufacturers—either directly or indirectly—not Toyobo.” (Defs.’ Mem. at 33.) However, the government alleges that “the United States paid for defective bulletproof vests made of Zylon due to false statements and omissions by Toyobo” and that Toyobo “received money, ... indirectly, to which they were not entitled.” (Compl. ¶¶ 147, 149.) Toyobo does not dispute that it retained all the monies from its sales to the vest manufacturers, and the government amply has stated a claim for unjust enrichment. See Honeywell, 798 F. Supp. 2d at 25, 2011 WL 2672624, at *9. Whether Toyobo actually perfоrmed its contract in full, such that the government received the benefit of its bargain, is a question of fact that is inappropriate for resolution at the motion to dismiss stage.
The government has stated FCA presentment and false statements claims and common law fraud and unjust enrichment claims, and it has pled its fraud allegations with respect to these claims with sufficient particularity to meet the standards articulated under
ORDERED that Toyobo‘s motion [14] to dismiss be, and hereby is, GRANTED with respect to the government‘s FCA conspiracy claims as between Toyobo and the vest manufacturers and DENIED in all other respects.
RICHARD W. ROBERTS
United States District Judge