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United States Dep't of Transportation, ex rel Arnold v. CMC Engineering

May 5, 2009

THE UNITED STATES DEPARTMENT OF TRANSPORTATION, EX REL. AUGUST W. ARNOLD, AN INDIVIDUAL
v.
CMC ENGINEERING; ERDMAN ANTHONY ASSOCIATES, INC.; L. ROBERT KIMBALL & ASSOCIATES; M.A. BEECH; MACKIN ENGINEERING; MCTISH, KUNKEL & ASSOCIATES; MICHAEL BAKER, JR., INC; SAI CONSULTING ENGINEERS, INC; VE ENGINEERING, INC. AUGUST W. ARNOLD, APPELLANT



On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civ. No. 03-cv-1580) District Judge: Honorable Gary L. Lancaster.

The opinion of the court was delivered by: Fuentes, Circuit Judge

PRECEDENTIAL

Argued January 6, 2009

Before: FUENTES and FISHER, Circuit Judges and PADOVA,*fn1 District Judge.

OPINION OF THE COURT

In this qui tam action, filed by August Arnold, the Relator alleges that the Defendants, consultants who provided services to the Pennsylvania Department of Transportation ("PennDOT"), falsified their credentials to qualify for higher pay rates. Arnold contends that, as a result, the consultants defrauded the federal government, which funded the contracts at issue, in violation of the False Claims Act ("FCA"), 31 U.S.C. § 3729. On motions to dismiss, the District Court concluded that claims presented to state agencies that disburse federal funds are not actionable under the FCA, and because Arnold failed to allege that the consultants' false claims were presented to or approved by the federal government, as opposed to the state agency, they were not actionable.

While this appeal was pending, the United States Supreme Court decided Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008), which held that the method by which federal funds are disbursed by federal grantees is relevant to determining whether a defendant possessed the requisite intent to defraud the federal government as required by the FCA. Because the District Court did not have the benefit of Allison Engine when it ruled on the instant matter, we will vacate and remand for further proceedings.

I.

August Arnold is a retired PennDOT employee. While at PennDOT, one of Arnold's duties was to conduct field audits of consultants who provided engineering and inspection services on road and bridge projects for PennDOT. Defendants Michael Baker, Jr., Inc.; L. Robert Kimball & Associates, Inc.; CMC Engineering; and Erdman Anthony Associates, Inc. (collectively "consultants") were among the engineering consultants subject to the audit, which spanned from 2000 until 2002. The audits uncovered significant overcharges to PennDOT for services performed by individuals who worked on behalf of the consultants. Specifically, the audits disclosed that the consultants submitted bills for services by individuals who did not possess the requisite credentials to justify their hourly pay rates under the consulting contracts at issue. Arnold alleges that PennDOT officials knowingly overpaid the consultants because of systemic corruption, which included prohibited gift-giving in exchange for the hiring and payment of unqualified contract personnel. At least eighty percent of PennDOT's funding for the contracts originated from the Federal Highway Administration, which is a branch of the United States Department of Transportation ("U.S. DOT").

Arnold's disclosure of the overpayment ultimately led to an independent review, which revealed that over twenty percent of the consultants examined during the review had flawed credentials. As a result, some of the consultants returned a portion of the overpayments to PennDOT.

In October 2003, Arnold, as the Relator on behalf of the federal government, filed a qui tam complaint in the United States District Court for the Western District of Pennsylvania, asserting claims against the six consultants under the FCA. The complaint alleged that the consultants were engaged in a fraudulent scheme to obtain overpayments for engineering, inspection, and consultant services on federally-funded highway projects administered by PennDOT. The United States declined to intervene.

The consultants moved to dismiss, arguing, among other things, that Arnold had insufficiently alleged that the consultants had presented false claims to the federal government. As the real party in interest, the federal government filed two Statements of Interest in the District Court opposing the consultants' motions to dismiss. The District Court granted Arnold leave to amend his complaint twice, and each time the consultants renewed their motions to dismiss.

On February 7, 2007, the District Court granted the consultants' motion to dismiss the Second Amended Complaint. The District Court stated that the FCA imposes liability only on those who defraud the federal government, further noting that "[t]he sine qua non of [the FCA] is Federal government involvement in paying, approving, or allowing false claims." U.S. Dep't of Transp. ex rel. Arnold v. CMC Eng'g, No. 03-1580, 2007 WL 442237, at *4 (W.D. Pa. Feb. 7, 2007). The District Court concluded that Arnold "ha[d] not established that any defendant presented a false claim to the [f]ederal government, made a false statement in order to get a false claim paid or allowed by the [f]ederal government, or conspired to get a false claim paid or allowed by the [f]ederal government." Id. at *1. The District Court further held that because the FCA requires that the fraudulent claim be presented to the federal government, not a grantee of federal funds, it was irrelevant that PennDOT receives substantial funding from U.S. DOT. Id. at *3. The District Court similarly ruled that Arnold's allegation that PennDOT is an agent of U.S. DOT was insufficient, as was his allegation that the false claims were presented to the federal government when Federal Highway Administration inspectors reviewed PennDOT project sites and logs. Id. Arnold filed a timely Notice of Appeal.

As we previously noted, while this appeal was pending the United States Supreme Court decided Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008), in which a unanimous Court held that the funding mechanism by which fraudulent claims prompt the disbursement of federal funds via a federal grantee is instructive in determining whether a relator has stated a claim under the FCA.Following this decision, the ...


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