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United States ex rel Thomas v. AG

April 23, 2010

UNITED STATES OF AMERICA, EX REL. WILLIAM A. THOMAS
v.
SIEMENS AG, ET AL.



The opinion of the court was delivered by: Savage, J.

MEMORANDUM OPINION

In this action brought under the False Claims Act ("FCA"), relator William Thomas ("Thomas") contends that the defendants fraudulently induced the government to pay them more than it should have for the purchase of capital medical equipment by misrepresenting the extent of the pricing discounts given to other customers. The alleged false statements were made on Discount and Pricing Information forms ("DPI") submitted to the Veterans Administration ("VA") as required by federal procurement regulations known as the Federal Acquisition Regulation ("FAR"). The discounts are relied upon by the government in negotiating the price for goods it purchases.

Thomas has sued Siemens Medical Solutions USA, Inc. ("SMS") and its parent, Siemens Corporation, and Siemens Corporation's parent, Siemens Aktiengesellschaft ("Siemens AG"), a German corporation. Thomas alleges that SMS manufactured and sold the medical equipment to the government. SMS, which he alleges is controlled by Siemens Corporation and Siemens AG, sells capital medical equipment, such as CT scanners, MRI scanners and nuclear medicine equipment, to private hospitals, both directly and through hospital group purchasing organizations, and to governmental agencies.

SMS and Siemens Corporation have filed a joint motion to dismiss the plaintiff's second amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Thomas has failed to state a "false statement" cause of action under § 3729(a)(2) or any other theory of liability under the FCA.*fn1 Siemens Corporation also contends that Thomas has failed to state any claim against it, but on grounds that it played no part in the contracting process.

Siemens AG has filed its own motion to dismiss, challenging service of process and personal jurisdiction, and also arguing that Thomas has failed to state a claim against it. With respect to service of process, Siemens AG argues that Thomas failed to serve Siemens AG as required through the Hague Convention and has not renewed his attempt to serve Siemens AG through any acceptable means. Thomas does not dispute his failure to serve Siemens AG through the Hague Convention, but contends that compliance with the Hague Convention is not necessary in this case because Siemens AG's subsidiary, Siemens Corporation, could be deemed Siemens AG's agent for purposes of service of process.

Accepting all well-pleaded allegations in the complaint as true and viewing them in the light most favorable to Thomas, we conclude that he has stated a cause of action under §§ 3729(a)(1) and (2) of the FCA against SMS, but not against Siemens Corporation and Siemens AG. He has failed to state a cause of action against any defendant under § 3729(a)(7).

Because Thomas has not served Siemens AG with process in compliance with the Hague Convention, and has not alleged sufficient facts in the second amended complaint that Siemens Corporation may be considered Siemens AG's agent for accepting service of process, we conclude that service of process has not been effected upon Siemens AG. Even if Thomas had properly served Siemens AG, his second amended complaint and proposed third amended complaint*fn2 fail to state a claim against it.

Background

In processing bids and awarding contracts, federal government contracting officers must follow the guidance and rules contained in the FAR, Title 48 of the Code of Federal Regulations, Chapter 1. To assist the government in getting a fair and reasonable price from vendors, the FAR requires that the purchasing agency obtain information regarding discounts given to the bidder's other customers that result in lower net prices than those offered to the government. The information is provided in the DPI, which requires the contractor to state the percentage discount from the price list that it is offering the government. See DPI, ¶ 4.a. Then, the contractor must answer whether it has in effect, for any customer or any class, discounts and/or concessions, including but not limited to the following, regardless of price list, which results in lower net prices than those offered the government in this offer.

Id., ¶ 4.b.

The DPI sets out, by way of example, a non-exclusive list of these discounts: "rebates of any kind"; "multiple quantity unit pricing plan"; "cumulative discounts of any type"; "products that may be combined for maximum discounts"; and "other." Id., ¶ 4.b.

In addition, the contractor must report the "best discount" from its price list in six different discount categories: regular discount; quantity discount; aggregate discounts; prompt payment; FOB point; and other, that it offers to private hospitals, educational institutions, governments, original equipment manufacturers, and buying groups. Id., ¶ 4.c.

Thomas alleges that SMS made false representations in its DPI in response to VA solicitations for medical equipment contracts when it omitted greater discounts it had given non-governmental customers. He cites four instances where SMS gave larger discounts on CT scanners, MRI systems, ultrasound equipment and nuclear imaging systems to Broadlane, a hospital group purchasing organization, than it gave the VA. He contends that because the government was led to believe that the discounts listed on the DPI were the best SMS had given its other customers, the government accepted lower discounts from SMS than it would have had it known about the discounts given to Broadlane. As a result, the government paid more than it would have for that equipment.

In support of his contention, Thomas alleges that the defendants engaged in a pattern of undercutting government pricing. He claims that SMS assured Broadlane that it was receiving a greater discount than the government was. He saw a chart summarizing discounts given in 2005 which revealed that discounts to private customers on average exceeded those given to the government. Additionally, an SMS senior vice president announced that SMS had "significant exposure" because discounts given to private customers often exceeded those given to the government. After it acquired Acuson, a group purchasing organization, SMS continued a scheme, known as "Y Code," that utilized pretextual codes in its sales data to justify "lower-than-government" prices. Discount quotes were often back-dated to include an after-the-fact "Y Code." In short, according to Thomas, the "Y Code" served to obscure higher discounts given to private customers, resulting in higher prices to the government.

Central to its Rule 12(b)(6) challenge is the distinction SMS creates between "contractual" and "transactional" discounts. It argues that Thomas's claims relate to transactional discounts. It contends that all that is required to be disclosed are "contract discounts," not "transactional discounts." Thus, it argues that because it disclosed all contract discounts, it cannot be liable.

Thomas draws no distinction between contractual and transactional discounts. He contends that a vendor is required to disclose its best discounts, both contractual and transactional.

SMS contends that it is required to disclose on the DPI only the best "contract discounts" it gave to private customers, and that is exactly what it disclosed. It begins its explanation with its interpretation of the FAR. According to SMS, the FAR establishes a two-tiered regime for government purchasing of capital medical equipment. At the qualifying stage, the government solicits offers from multiple contractors at negotiated baseline prices. Those whose bids are accepted are placed on a list of qualified vendors. At the transactional stage, the government purchases from a vendor or vendors on the qualified list at a price that is then negotiated based on volume and other terms. This "transactional discount" is often significantly greater than the previously established "contract discount." SMS contends that the FAR calls for the establishment of set per-unit prices at the inception of a contract, and that these prices are "ceiling" prices subject to downward negotiation. 48 C.F.R. §§ 16.201, 16.504(a). In other words, the placing of a vendor on a qualified contractors list does not necessarily result in government sales, but rather entitles a contractor to compete with other qualified vendors for sales at the subsequently requested configurations and volume. Thus, SMS argues, contracts to sell medical equipment to the government are distinct from actual transactions for the sale of medical equipment under those contracts, which are negotiated if and when a government facility decides to purchase the equipment.

In addition, when contracting for medical equipment, the contracting officer must establish "price reasonableness" or a "fair and reasonable price." 48 C.F.R. §§ 12.209,

13.106-3, 15.402(a). To do this, he may seek information other than the vendor's catalog price list, such as: the discount price information on the DPI; comparison of proposed prices for the same or similar items offered by other contractors, both in the current solicitation and in previous ones; or, call upon an audit office to conduct an audit to assist in determining price reasonableness. 48 C.F.R. §§ 15.403-3(a)(1), (c);15.404-1(b)(2), (3); § 15.404-2(c).

According to SMS, the Office of Inspector General of the VA conducted a pre-award audit with respect to the CT and MRI scanner contract solicitations.*fn3 SMS provided the auditors pricing and discount data for sales made to non-governmental customers the prior year, which included both contract and transactional discounts. The government made a chart of the SMS data, reflecting that the discounts SMS gave on individual transactions were far greater than those given on contract discounts. SMS contends that these contract discounts are the ones it had identified on the DPI for the CT and MRI solicitations. The government, after considering the audit results, awarded SMS the CT/MRI equipment contract at the same contract discount levels that SMS had initially offered. SMS contends that the transactional discounts on the chart are precisely the information that Thomas claims SMS concealed from the government on its DPI. From this contention, which Thomas disputes, SMS concludes that the government's award of the CT/MRI contract at the same rate as before the transactional discounts were disclosed shows that SMS was not obligated to have disclosed any additional information on its DPI.

Legal Standards

When considering a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6), all well-pleaded allegations in the complaint are accepted as true and viewed in the light most favorable to the plaintiffs. Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008). A complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), giving the defendant "fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Although this standard "does not require 'detailed factual allegations,' . . . it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 555). There must be enough factual content from which the court can draw a reasonable inference that the defendant is liable. The claim for relief must be "plausible on its face." Twombly, 550 U.S. at 570. To reach this point in the analysis, a court must consider only those legal conclusions that are supported by factual allegations and disregard those that are not.

In FCA cases, the particularity requirement imposed by Fed. R. Civ. P. 9(b) applies. United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 242 n.9 (3d Cir. 2004). Rule 9(b) requires that in "alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b).*fn4 To comply with the requirements of Rule 9(b), a complaint must state "the date, place or time of the fraud," or otherwise inject "precision or some measure of substantiation into [the] allegations of fraud." Lum v. Bank of Am., 361 F.3d 217, 224 (3d Cir. 2004) (quoting Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984)). Rule 9(b) requires a plaintiff to identify the source of the allegedly fraudulent misrepresentation or omission. See Klein v. General Nutrition Cos., Inc., 186 F.3d 338, 345 (3d Cir. 1999).

False Statements

The FCA covers all fraudulent attempts to cause the government to pay money. Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 183 (3d Cir. 2001) (citing United States v. Neifert-White Co., 390 U.S. 228, 232 (1968)). To state a claim under the FCA, the relator must allege that the defendant made or submitted a materially false statement or claim to the government. Harrison v. Westinghouse Savannah River Co. ("Harrison I"), 176 F.3d 776, 785, 788, 792-94 (4th Cir. 1999).

In its challenge under Rule 12(b)(6), SMS asserts that Thomas's false statement claim under 31 U.S.C. § 3729(a)(2)*fn5 should be dismissed because its statements were not knowingly false, material or required by the government when it awarded the contracts at issue.*fn6 It contends that there were no false statements because there was no omission of required information. In other words, it argues that the information that Thomas claims was not disclosed was not required. Specifically, according to SMS, the FAR did not require that the DPI contain information regarding transactional discounts, only contractual discounts.

SMS's arguments are based on factual assertions that require resolution by the fact finder. In responding to the motion to dismiss, Thomas disputes the factual basis for SMS's arguments. First, without knowing what the government required and considered in awarding the contracts, one is unable to conclude at this stage that SMS had no duty under the FAR to disclose transactional discounts. A plain reading of the DPI suggests that transactional discounts are not excluded from the calculus. The bidder must disclose its "best discount," not just its best "contractual discount." Nor do 48 C.F.R. ยงยง 15.404-1 (b)(2)(i)-(ii) and (b)(3) support the proposition that the FAR contemplates the comparison of only contract discounts. Those ...


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