UNITED STATES OF AMERICA, ex rel. WILLIAM A. THOMAS
SIEMENS AG, et al.
In this qui tam action brought under the False Claims Act (“FCA”) in which the government has declined to intervene, the defendant Siemens Medical Solutions USA, Inc. (“SMS”) has moved for summary judgment, arguing that the relator, William Thomas (“Thomas”), cannot prevail on his claims because there is no genuine dispute as to any material fact regarding whether SMS made any knowingly false statements or omissions in obtaining the contracts at issue, or that the statements or omissions were material or induced the government to enter into the contracts with SMS. Thomas counters that there are genuine issues of material fact regarding SMS’s submission of false and incomplete information submitted to the government. He insists that he need not establish that the government relied upon the false statements in awarding the contracts.
In his second amended complaint,  Thomas contends that SMS, and its then affiliate, Acuson Corporation (“Acuson”), fraudulently induced the government to pay more than it would have paid for the purchase of capital medical equipment (“CME”). Thomas claims that SMS misled the Veterans Administration (“VA”) in the contract bidding process by misrepresenting the extent of the pricing discounts given to other customers. The alleged false statements were made on Discount and Pricing Information (“DPI”) forms submitted to VA that were required by federal procurement regulations known as the Federal Acquisition Regulation (the “FAR”). The discounts reported on the DPI forms are relied upon by the government in negotiating the price for goods it purchases. The government uses the discount information to obtain a “fair and reasonable price.”
After briefing on the summary judgment motion was completed, the government, although it has declined to intervene in this action, submitted a Statement of Interest describing its role in the procurement of the contracts at issue. Relying on the declaration of Maureen Regan, who manages the auditors and management analysts of the Office of Contract Review (“OCR”) of VA’s Office of Inspector General (“VAOIG”), the government represents that VA had complete, contractually required information regarding the two contracts that had been audited.
Despite the government’s unequivocal statement that it was not defrauded, Thomas has cobbled together facts that he perceives as suspicious and probative of fraud. But, he has been unable to fit them together to prove that fraud occurred. He as failed to present facts controverting the government’s own admission that it had not been misled and had not been harmed. Thomas could have conducted discovery of the government, but chose not to do so.
After reviewing the evidence in the light most favorable to Thomas and drawing all reasonable inferences in his favor, we conclude that SMS is entitled to judgment as a matter of law. Thomas has failed to produce sufficient evidence to present a factual issue as to whether: (1) SMS made any false statements; (2) the omissions or false disclosures were material to VA’s decision to award the contracts; or (3) the government was actually misled or induced into awarding any of the contracts at issue. Although he points to several sales transactions where a commercial customer had received a higher discount than what SMS or Acuson had apparently disclosed to VA, Thomas has not proffered evidence showing or tending to show that in each instance the disclosure of additional or accurate information would have affected VA’s negotiating position and led VA to have negotiated a greater contract discount than what was actually obtained. Therefore, because there is no evidence from which a reasonable jury could find that the government was defrauded, we shall grant SMS’s motion for summary judgment.
SMS manufactures and sells CME, such as ultrasound systems, computed-tomography (“CT”) scanners, magnetic-resonance imaging (“MR”) scanners, and nuclear medicine (“NM”) equipment to private hospitals and educational institutions, directly and through hospital group-purchasing organizations (“GPOs”), and to governmental agencies. Acuson, which was acquired by SMS’s parent and became an independent SMS affiliate in 2000, manufactured and sold ultrasound equipment. Acuson was merged into SMS in 2002. Before the acquisition, SMS and Acuson had done business independently with federal, state and local governments, and commercial customers. After becoming an affiliate of SMS and before merging into SMS, Acuson continued to administer its own contracts with the federal government.
Thomas began his career in the medical device industry at Acuson, selling cardiovascular ultrasound equipment from 1989 to 2000. He was a marketing manager for two years before becoming a district sales specialist. After leaving Acuson in 2000, he worked at Broadlane, Inc., a GPO for hospitals and healthcare organizations. There, as Vice President of Capital Medical Equipment Contracting Services, he provided purchasing services to groups of hospitals, clinics, outpatient centers and private healthcare offices. In early 2004, two years after Acuson had been merged into SMS, Thomas began working at SMS. As Senior National Accounts Manager for GPO contracts, he negotiated and managed diagnostic imaging contracts with Premier, a GPO. After notifying SMS in August of 2008 of his intention to pursue claims for violations of the FCA for its alleged unlawful pricing and discount practices with respect to the government,  Thomas accepted an early retirement package from SMS in October 2008.
The Contracting Process
The contracts at issue are direct-delivery, multiple award, fixed price, indefinite delivery/indefinite quantity (“IDIQ”) contracts that were administered by VA’s National Acquisition Center (“VANAC”). In this type of contract, the price is fixed at a level negotiated below specified catalog or list prices. A vendor awarded this type of contract is guaranteed an opportunity to compete for specific sales when a government facility seeks to purchase equipment. 48 C.F.R. §§ 16.505(b), 504(a)-(c). A multiple award contract permits a government contracting officer to award a contract to more than one vendor whose offers meet the award criteria in the contract solicitation. 48 C.F.R. §§ 16.504(c), 500. “Fixed price” guarantees the unit prices for a certain period of time. 48 C.F.R. §§ 16.201, 202-1, 202-2. IDIQ means that the government is not committed to buying a minimum quantity of CME from any awardee. 48 C.F.R. §§ 16.504(a), 501-1, 501-2(b)(2), 501-2(b)(3).
The process for awarding direct-delivery, multiple award, fixed price, IDIQ contracts is aimed at negotiating a fair and reasonable price, not the lowest price. After VANAC announces a solicitation for CME, vendors submit initial solicitation responses on required DPI forms. VANAC contracting officers seek additional information, sometimes by way of an audit, from the vendors. Then, the contracting officer conducts a pricing analysis in order to make a “price-reasonableness” determination, negotiates a “fair and reasonable price, ” and ultimately awards a base, or “umbrella, ” contract to approved vendors. The prices agreed to in these contracts represent the “ceiling” prices for CME purchased under the umbrella contracts. Later, at the second step of the procurement process, when a VA facility needs particular CME, the awardees of the umbrella contracts are eligible to compete for the sale. At this stage, the contracting officer chooses the vendor based on a “best value” determination, that is, he selects the vendor that best meets VA’s needs in terms of price and several other factors. The contracting officer may negotiate a price under the “ceiling” prices set in the umbrella contract.
The two levels of the process may be described as the initial “qualifying” or contract stage where the vendor qualifies to bid for future sales, and the later “transactional” stage where the vendor competes with other vendors in negotiating with VA for the sale. Thus, the placing of a vendor on a qualified vendors list does not necessarily result in government sales, but only entitles that vendor to compete with other qualified vendors for sales at the subsequently requested configurations and volume.
In reviewing solicitation responses and making determinations for awarding direct delivery CME 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 in obtaining a fair and reasonable price on CME from vendors, the FAR requires that the purchasing agency obtain information regarding discounts given to the vendor’s other customers that result in lower net prices than those offered to the government. The information is obtained initially from the vendor’s disclosures on the DPI form, which requires the vendor 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 vendor must report the “best discount” from its price list that it offers to private hospitals, educational institutions, governments, original equipment manufacturers, and buying groups in six different discount categories: regular discount; quantity discount; aggregate discounts; prompt payment; FOB point; and other. Id., ¶ 4.c.
The form contains no instructions on how to complete it. Nor does it define the terms it uses. It does not specify whether the government is seeking information regarding contract-level or transaction-level discounts.
The contracting officer is not required to obtain the best price the vendor offers any other customer. Nonetheless, when determining “price reasonableness” or a “fair and reasonable price” in negotiating these type of contracts, the contracting officer wants to know the discounts vendors are offering their commercial customers who have comparable contractual arrangements. At the same time, the contracting officer knows that the government does not enter contracts under the same terms and conditions that commercial customers do. For example, the government does not commit to purchase from a single vendor or for a minimum volume or quantity. Additionally, the government has an opportunity to get a greater discount at the second or transactional stage. Furthermore, it is more costly to prepare and submit a proposal, and negotiate and administer a contract with the government than with a private-sector customer.
In making a price reasonableness determination, the contracting officer considers information other than the vendor’s catalog/price list. He or she also takes into account the discount price information on the DPI; the vendor’s prior pricing; a comparison of proposed prices for the same or similar items offered by other contractors, both in the current solicitation and in previous ones; and market research. He or she must also consider several contract-specific factors, such as speed of delivery, warranty terms, limitations of the vendor’s liability, contract length, and expected quantities. 48 C.F.R. §§ 12.209, 13.106-3(a), 15.402(a).
If the contracting officer is unable to make a price reasonableness determination or reach his or her negotiation objectives on the basis of the vendor’s DPI and the other information mentioned above, he or she must seek clarification or additional disclosures from the vendor. 48 C.F.R. § 15.403-3(a)(1). One way to obtain this additional information is for the contracting officer to request the audit office to conduct an audit as part of the price reasonableness analysis. Id. § 15.404-2(a), (c). In an audit, the VAOIG auditor thoroughly reviews the vendor’s commercial discount and pricing data. He or she can request the vendor to produce actual sales data or summaries of sales data, or examine the vendor’s information on site. Vendors are often required to provide explanations for the transactions that exceed the discount offered the government. The auditor then provides the contracting officer with a detailed report, which often includes recommended negotiation terms.
During the time period in question, VA’s policy was to refer for audit responses to a solicitation for a contract estimated at a value of at least $9 million. Consequently, vendors knew that there would be an audit of the solicitation responses where the contract exceeded $9 million. That is what happened here. The responses to VA’s solicitations in 2001 for ultrasound CME and in 2002 for CT and MR CME were audited, and SMS and Acuson had received advance notice from VANAC that their solicitation responses would be audited.
The purpose of performing the price reasonableness analysis is “to develop a negotiation position that permits the contracting officer and the [vendor] an opportunity to reach agreement on a . . . price that is fair and reasonable to both the Government and the [vendor].” 48 C.F.R. § 15.405(a), (b). The contracting officer’s objective is to get prices and discounts that are “comparable” to the vendor’s best price.
Before negotiating with the vendor, the contracting officer establishes objectives, such as price, warranty terms and quality, to assist him or her in setting the government’s initial negotiation position. 48 C.F.R. § 15.406-1. To establish these objectives, the contracting officer analyzes the vendor’s DPI disclosures, clarifications and supplemental submissions, and any OIG audit report. Id.
The contracting officer is vested with broad discretion to negotiate the terms of the contract. 48 C.F.R. § 15.405 (“[T]he contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement.”). Id. The ultimately agreed-upon price need not be “within the contracting officer’s initial negotiation position.” Id. After analyzing and weighing the available information regarding price and other factors, he or she makes a final determination of whether the final negotiated price is fair and reasonable to the government and the vendor, and whether to recommend that the contract be awarded. Id. The contracting officer must document, in a Price Negotiation Memorandum, the principal elements of the negotiated agreement, including the most significant factors upon which the prenegotiation objectives and final negotiated agreement were based, and the source and type of data used to support the price reasonableness determination. 48 C.F.R. § 15.406-3(a).
In determining “best value” at the transactional stage, VA considers each vendor’s product price, past performance, product quality, availability of required features, reliability of service, compliance with technical requirements and ability to meet delivery time requirements.
While many of these factors are also considered in a “price reasonableness” determination, the primary differences between the two analyses are when the particular determination is made and the type of competition the vendor faces. A “price reasonableness” determination is made at the first (qualifying) stage and sets a ceiling on prices for various CME. The “best value” determination is made later, at the second (transactional) stage when VA needs a particular item of CME. At the first stage, the contracts are awarded non-competitively to multiple vendors, and the contract prices ultimately awarded are based, in part, on information on the DPI about the vendor’s commercial sales pricing. Other factors considered are the vendor’s catalog/price list; the vendor’s prior pricing; a comparison of proposed prices for the same or similar items offered by other contractors, both in the current solicitation and in previous ones; market research; delivery terms; warranty terms; and contract length.
At the second (transactional) stage, all of the vendors who were awarded an umbrella contract compete with one another to make the actual sale to VA. At this stage, the contracting officer knows what VA’s needs are, and can select the vendor that best meets its needs in terms of price and other factors. Because the contracting officer is now in a position to commit to purchase a certain quantity of CME in a finite amount of time, he or she can negotiate for a price lower than the contract price.
Thomas seeks to ignore the government’s description of the contracting process, both generally and specifically in this case. He contends that Regan’s declaration and the government’s statement of interest based on the declaration are not admissible evidence because they are documents written by lawyers with no personal knowledge of the underlying facts in this case. He argues that the declaration is not based on personal knowledge of the specific representations, negotiations or events in this particular case. Yet, he concedes that Regan has personal knowledge about VA’s general practices and negotiation objectives. Further, Thomas’s counsel stated at oral argument that “for the purposes of this argument for summary judgment purposes, the Regan declaration is information that I think Your Honor can include in your consideration.” Despite this acknowledgment, Thomas did not depose Regan or any other official having knowledge of the process and the contracts.
Regan’s declaration is admissible. She has the requisite personal knowledge. Her job, both at the time the contracts at issue were audited and now, was and still is to manage the auditors who conduct pre-award reviews of contract proposals submitted to VA. When the CT/MR and Acuson ultrasound contracts were audited, she supervised or managed the auditors of those proposals. Although the auditors must comply with the law in carrying out their job responsibilities, Regan’s description of the process that the auditors must follow in all direct delivery contracts for CME is a specific, not a generic, one. Similarly, when she describes the audit process with respect to the specific CT/MR and Acuson ultrasound audit, she refers to the actual, specific documents and reports produced in each audit. See Regan Decl., ¶ 9 (referencing audit reports by date). Therefore, her declaration was made with personal first-hand knowledge.
Thomas also argues that SMS’s expert, Nancy Darr, is not qualified to offer testimony in this action. Darr worked in healthcare contracting at VA for twenty-three years, including as a contracting officer and ultimately as Chief Operating Officer of VANAC from 1993 to 1997. She opines that the DPI is ambiguous, subject to differing interpretations, and does not specifically seek disclosure of the best transactional discounts as opposed to the best contract discounts. Additionally, she opines that when negotiating a contract award, the VA contracting officer takes into consideration that the government does not enter contracts under the same terms and conditions as commercial customers, such as a commitment to purchase from a single vendor or for a minimum volume or quantity, and that it is more costly to submit a proposal, and negotiate and administer a contract with the government than with a private-sector customer.
Thomas contends that because Darr was no longer employed by VA at the time SMS submitted proposals for the contracts at issue and never worked with DPI forms “directly” while she was at VA, she is not qualified to testify as to any issues in this case.On the contrary, because Darr has more than twenty years of experience at VA, and was head of VANAC, which entered into the contracts at issue in this case, she is competent to testify about the general process of solicitation, negotiation and award of the type of contracts in this case. She is also competent to give her opinion about what kind of information vendors were required to disclose on the DPI, such as transactional versus contractual discounts.
The Alleged Fraudulent Scheme
Thomas alleges that SMS was engaged in a “multi-tiered fraud.” He claims that SMS, “[c]aught in a whirlpool of increasing discount pressure by its commercial customers, ” developed a system to sell its CME without constantly lowering its prices by “withholding discounting and low price information from customers until absolutely forced to disclose it, only then to rationalize why the newest lowest price was not available to the inquiring customer for some fictional reason or other.”
Specifically with respect to the government, Thomas alleges that SMS either hid its lowest prices from the government, or, when “caught, ” often “justified” those prices with deceptive, after-the-fact “explanations” that were supposedly unique to the customer receiving the lower price. When, in pre-award audits, the government attempted to “test the candor of Siemens’ price disclosures, ” SMS produced only select data that “understated the scope and magnitude of its discounting.” Thomas further claims that “through a process of repeated delays, ” SMS “dragged out its compliance with Government requests” for specific pieces of information, impeding the government’s ability to investigate SMS’s disclosures.
The Contracts at Issue
SMS argues that the only claims remaining in this action are based on three contracts encompassing four modalities: (1) the 2001 ultrasound contract between Acuson and VA (“2001 Acuson U/S Contract”); (2) the 2002 CT/MR contract between SMS and VA (“2002 CT/MR Contract”); and (3) the 2003 nuclear medicine imaging contract between SMS and VA (“2003 NM Contract”). Pointing to the ruling dismissing claims relating to seventeen other contracts as inadequately pled, SMS contends that Thomas may not now assert new claims based on those contracts that had not been identified in the second amended complaint.
Thomas argues that there are three additional contracts at issue: (1) the 2001 ultrasound contract between SMS and VA (“2001 SMS U/S Contract”); (2) the 2002 multi-modality contract between SMS and Defense Supply Center of Philadelphia (“DSCP”)(“DSCP Contract”); and (3) the 2000 nuclear medicine imaging contract between SMS and VA (“2000 SMS NM Contract”). He contends that these contracts were “repackaged under the authorization of” the three contracts that SMS agrees are at issue. Specifically, he contends the Acuson U/S Contract “novated” to SMS’s U/S Contract, resulting in a “merger” of the two ultrasound contracts; and the DSCP contract was merely an extension of the first three contracts because after they expired, VA continued to purchase the same CME at the same discount rates under the DSCP contract.
What contracts are at issue is important because it determines what allegedly false statements must be examined and the scope of any damages.
Background on the Contracts
The three contracts the parties agree are at issue are the 2001 Acuson U/S Contract, the 2002 CT/MR Contract and the 2003 NM Contract (collectively, “agreed-upon contracts”).
2001 Acuson U/S Contract
On October 23, 2000, VA issued a solicitation for ultrasound imaging equipment for the contract period from the later of April 1, 2001 or the date of the award until March 31, 2002, with the option to renew the contract for two additional one-year periods. Priscilla Ryland, who managed Acuson’s contracts with the government for ultrasound products, submitted Acuson’s DPI response to this solicitation on December 19, 2000. VA issued a pre-award audit engagement letter on January 18, 2001. The audit and negotiations between Acuson and VA took place between January and April of 2001. Acuson submitted an amended DPI on April 11, 2001, and the contract was awarded on May 2, 2001. The final audit report was issued on July 10, 2001. This contract originally expired on April 1, 2002. By agreement, the contract was renewed twice for additional one-year periods, extending the expiration date to March 31, 2004.
2002 CT/MR Contract
SMS submitted its DPI response to this solicitation on April 9, 2002. VA issued a pre-award audit engagement letter on April 25, 2002. The audit and negotiations between SMS and VA took place between April and September of 2002. VAOIG issued a final audit report on July 25, 2002. SMS submitted a revised DPI on August 15, 2002. The contract was awarded on September 19, 2002. This contract originally expired on March 31, 2003. By agreement, the expiration date was extended to March 31, 2005.
2003 NM Contract
SMS submitted its DPI response to the solicitation in January of 2003. The contract was awarded on April 1, 2003 without an audit. Originally due to expire on March 31, 2004, it was extended to August 31, 2006.
Thomas contends that the 2001 SMS U/S Contract, the DSCP Contract and the 2000 SMS NM Contract are at issue. SMS argues that they are not. We agree with SMS and now explain why they are not at issue.
2001 SMS U/S Contract
SMS’s DPI response to this solicitation was submitted on December 21, 2000. The contract was awarded on March 5, 2001. The contract, originally set to expire on April 1, 2002, was extended to March 31, 2004.
Thomas argues that this contract between SMS and VA is at issue because the Acuson U/S Contract – which is undisputedly at issue – was “merged” into the SMS U/S Contract. He asserts that the Acuson U/S Contract “novated” to SMS’s U/S Contract after Siemens acquired Acuson and Acuson changed its name to “Siemens Medical Solutions USA, Inc.”
Thomas’s position is baseless. First, the acquisition of a company does not mean the acquired company’s contracts automatically “merge” into the acquiring company’s existing contracts. Second, it is not accurate that Acuson changed its name to Siemens.The document on which Thomas relies – an October 2001 letter from Kathy Sasala at SMS – states that “our company name has officially been changed from Siemens Medical Systems, Inc. to Siemens Medical Solutions USA, Inc.” There is no mention of a name change from Acuson to Siemens. More importantly, Thomas offers no legal document or filing with any governmental body confirming any name change. Third, the Acuson ultrasound contract neither novated nor merged with the SMS ultrasound contract. There is no writing demonstrating that there was a novation.
A “novation” is the “displacement and extinction of an existing valid contract” through the “substitution [of it with] a valid new contract.” McCarl’s, Inc. v. Beaver Falls Mun. Auth., 847 A.2d 180, 184 (Pa. Commw. Ct. 2004) (citation omitted); Refuse Mgmt. Sys., Inc. v. Consol. Recycling and Transfer Sys., Inc., 671 A.2d 1140, 1145 (Pa.Super. Ct. 1996). In other words, an old obligation or an original party is replaced by a new obligation or a new party. Id. See also Black’s Law Dictionary 1091 (7th ed. 1999) (defining “novation” as the “act of substituting for an old obligation a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party”). Additionally, for a novation to occur, both contracting parties must intend to extinguish their obligations under original contract and assent to the substituted contract. McCarl’s, 847 A.2d at 184; Paramount Aviation Corp. v. Agusta, 178 F.3d 132, 148 (3d Cir. 1999); Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1071 (3d Cir. 1979).
Similarly, the FAR defines a “novation agreement” as:
a legal instrument . . . [e]xecuted by the (i) Contractor (transferor); (ii) Successor in interest (transferee); and (iii) Government; and (2) By which, among other things, the transferor guarantees performance of the contract, the transferee assumes all obligations under the contract, and the Government recognizes the transfer of the contract and related assets.
48 C.F.R. § 2.101. According to the FAR, there is no novation without a document creating it.
In the two pieces of evidence Thomas points to in support of his novation argument – a December 2002 letter from Jo Ann Brunetti and an August 2003 email written by JoAnn Sweitzer – the only references to the term “novation” were fleeting remarks, having no legal effect, in an internal email sent by a non-lawyer. They were not describing an actual novation. An examination of both documents actually shows that the two contracts did not merge or “novate.” In the 2002 letter, Brunetti said:
As you know, Acuson was purchased by Siemens two years ago. In that time, Acuson kept separate contracts from Siemens. P.J. Ryland and myself were responsible for the Government contracts for ultrasound. Now that we are fully integrated with our Siemens counterparts, at contract renewal it may be more logical to combine contracts. Currently, there has been a change in responsibilities within our department. Frank Biddlestone and JoAnn Sweitzer will be managing the ultrasound contracts for the Government for both Siemens and Acuson.
The August 2003 email from Sweitzer stated:
You will note that there are two Ultrasound contracts. These will be combined into one contract when I submit our new proposal in October. In the meantime . . . the VA contract (797P6915a) is the former Acuson contract that we had novated. Acuson did not have a contract in place with the DSCP at the time that we had transferred responsibility, so we introduced the Acuson products to our Multi-modality contract with the DSCP. The other contract that we novated ownership from Acuson is one with the Navy.
Why Sweitzer, who was not speaking as an attorney or in a legal context, used the word “novated” is unknown. Nor is there evidence to suggest what she understood the term to mean. What is clear is that despite Sweitzer’s use of the word “novated, ” neither a novation nor a merger of the Acuson and SMS ultrasound contracts occurred. The context of the rest of the language in the email and other undisputed evidence demonstrate that there was no novation. In the two sentences preceding her reference to “novated, ” Sweitzer clearly states that two separate ultrasound contracts still existed. Additionally, she has since clarified, in an affidavit, that VA did not want to combine the two contracts and they remained separated “for the life of the contracts.”
Because the Acuson and SMS U/S Contracts originated from the same VA solicitation for ultrasound equipment (Solicitation No. M6-Q9-00), the two contracts ran simultaneously. Both contracts’ original terms ended March 31, 2002, and both were renewed for two additional one-year terms expiring on March 31, 2004. The SMS U/S Contract had been awarded two months earlier than the Acuson U/S Contract. But, the two contracts were negotiated by different employees from different divisions of SMS for different equipment: Ryland and Brunetti negotiated for Acuson; Sasala and Biddlestone, for SMS.
Importantly, the two contracts continued to exist and operate independently of each other and were administered separately until both expired in March of 2004. This separateness is confirmed by numerous undisputed sources:
A July 2004 list of SMS’s contracts shows two separate entries for the Acuson and SMS U/S Contracts, and reflects that the contract periods for both contracts began in 2001 and expired on March 31, 2004.
SMS began to administer the Acuson U/S Contract more than six months after it was awarded for the purpose of billing and receiving payment from the government. It incurred no new legal obligations or liability by taking administrative responsibility for the contract. See Modification of Acuson U/S Contract (“designat[ing] SMS, effective as of January 1, 2002, to act as Acuson’s agent for the purposes of: billing the government for its purchases of Acuson’s products under [the Acuson ultrasound] Contract; and receiving payment for such purchases from the Government. . . . Nothing in this designation shall give rise to any government liability to SMS under the Contract.”).
In the December, 2002 letter, Brunetti refers to the two contracts as continuing to operate, but with new personnel at SMS assigned to manage them. Specifically, she informs a VA contracting officer that she and Ryland would no longer be “responsible for the Government contracts for ultrasound, ” and instead, Biddlestone and Sweitzer would manage all “ultrasound contracts” that the government has with “both Siemens and Acuson.”
In that same letter, Brunetti suggests that “it may be more logical to combine contracts” three months later “at contract renewal” time, which was April 1, 2003. However, in an affidavit submitted in this case, Sweitzer confirms that VA did not want to combine the two contracts and required that they remain separate until they expired on March 31, 2004.
In the August 2003 email, Sweitzer states that “there are two ultrasound contracts.”
In that same email, Sweitzer states that the two ultrasound contracts “will be combined into one contract when I submit our new proposal in October .” (emphases added). Because both ultrasound contracts were due to expire in March of 2004, the “new proposal” to which Sweitzer refers is undoubtedly for a completely new contract for ultrasound equipment with VA, not for combining the two then-current contracts.
In sum, the evidence does not prove a novation or merger of the two contracts. Indeed, it proves the contrary. There was no substitution of an old obligation for a new one or an old party for a new party. Although Brunetti suggested to VA in December of 2002 that the parties “combine” the two contracts as of April 2003, VA did not agree to combine them. As late as August 26, 2003, Sweitzer confirmed that the two ultrasound contracts remained separate. Consequently, without VA’s assent to novate the two contracts and merge them, there could not have been a novation. Thus, because the 2001 Acuson U/S Contract never legally merged into the 2001 SMS U/S Contract, the DPI form associated with the former cannot provide a basis for a claim under the latter.
SMS submitted its response to the DSCP solicitation on October 30, 2000. The contract was awarded on February 12, 2002. By agreement, the original expiration date of February 11, 2003 was extended by four years to February 11, 2007.
Thomas contends that this DSCP contract is at issue because when the 2001 Acuson U/S, 2002 CT/MR and 2003 NM Contracts (the agreed-upon contracts) expired, VA began purchasing the same CME that it had purchased under those three contracts solely under the DSCP contract. Asserting that “VA treated its own contracts and the DSCP contract as interchangeable, ” Thomas argues that the DSCP contract and the agreed-upon VA contracts were “integrated” because the terms and conditions of the expired contracts were applied to the DSCP contract.
SMS argues that only the three agreed-upon contracts are at issue because false claims based on all other contracts were dismissed. Additionally, although SMS concedes that discounts offered to VA were “generally” the same as those offered to DSCP, it disputes that the agreed-upon VA contracts were integrated into the DSCP contract. It argues that VA never treated the contracts as “interchangeable” and the contracts were never integrated. SMS points out that the DSCP Contract was negotiated and executed by a different, separate federal agency (the Department of Defense), negotiations took place before the 2002 CT/MR and 2003 NM Contracts were negotiated, and the DSCP and VA contracts were administered independently of each other.
Thomas argues that even though he neither identified the DSCP contract nor specified any false statements SMS had made in procuring it in his second amended complaint, he is not precluded from asserting new claims based on this contract because we did not specifically prohibit him from bringing claims based on it. In ruling on SMS’s motion to dismiss, we examined allegations regarding SMS’s false statements made in the procurement of the agreed-upon contracts, and we considered Thomas’s references to a listing of numerous other contracts that we had presumed were listed in Exhibit 8 to the complaint. We held that merely listing a contract without specifying the false statements that allegedly induced VA to enter into the contract lacked the requisite particularity to state a false claim under the FCA. 708 F.Supp.2d at 515. Thomas now argues that because the “DSCP contract was not among the contracts listed on Exhibit 8 to Thomas’s Second Amended Complaint that this Court ruled could not be pursued, ” he is not precluded from bringing a claim based on the DSCP contract, which was listed on Exhibit 3 to the complaint.
Thomas is correct that we did not expressly preclude him from presenting claims based on contracts listed in Exhibit 3 to the second amended complaint and did not specifically prohibit him from asserting claims based on the DSCP contract. At the motion to dismiss stage, Thomas never referred to the DSCP contract and created the impression that Exhibit 8 listed all seventeen additional contracts. Because his merely listing a contract is insufficient to state a false claim under the FCA, and he did not specify any false statements SMS allegedly made in procuring the DSCP contract, he cannot now bring a claim based on that contract because it was listed in a different exhibit.
In order to bring a claim based on the DSCP contract, Thomas must prove that one or more of the agreed-upon contracts novated into the DSCP contract. In support of his position that the agreed-upon contracts became integrated with the DSCP contract, he points to the following evidence. On September 22, 2004, approximately six months after the Acuson and SMS U/S Contracts expired, DSCP wrote an amendment to its contract with SMS giving VA authority to purchase CME off the DSCP contract. Ten months before the DSCP contract was amended, the Acuson and SMS U/S Contracts were amended, allowing DSCP authority to purchase ultrasound equipment under the VA ultrasound contracts. Additionally, an SMS internal document listing its contracts reflects that once the Acuson and SMS U/S Contracts expired on March 31, 2004, SMS should “use DSCP contract” for selling ultrasound products to VA.
Regarding the 2002 CT/MR contract, Thomas cites a 2005 letter from VANAC to SMS sent shortly before the contract was set to expire on March 31, 2005. In the letter, VA notified SMS that if VA received SMS’s DSCP contract by March 31, it would let the CT/MR contract expire and then order CT/MR equipment off the DSCP contract. On the other hand, if it did not receive the DSCP contract before the March 31 expiration date, VA advised that it would extend the term of the CT/MR contract by one year to March 31, 2006.
Thomas also points to the similarity of the terms and conditions applied to the CME ordered under the DSCP contract to the terms and conditions applicable to the expired ultrasound and CT/MR contracts. In its response to VA’s ultrasound solicitation and DSCP’s multi-modality solicitation, SMS stated that its discount policy is to offer both VANAC and DSCP “the same discounts for products under contract.” Similarly, SMS’s manager of contract administration, Thomas Lengel, testified that discounts that had been offered to VA were “generally the same as [those] offered on the DSCP contract.” In fact, during negotiations for the DSCP contract, SMS increased the discount it offered DSCP on two MR products from 33% and 34% to 35% “to be in line with” the discount negotiated on a prior CT/MR contract with VA. Additionally, after the DSCP contract was awarded, SMS expressed its willingness to provide DSCP with the same discounts on the same products that it had negotiated with VA.
We conclude that the agreed-upon VA contracts are separate from and never merged with the DSCP contract. The amendment to the DSCP contract granting VA authority to purchase off the DSCP contract the same modalities that it had purchased under the VA contracts does not, by itself, amount to an extension or novation of the expired VA contracts.
The DSCP contract was negotiated and executed by the procurement arm for the Department of Defense. The three agreed-upon contracts were negotiated by VANAC, a different federal agency. The solicitation forms, products, modalities, and contracting officers who negotiated and awarded the DSCP contract were different from those connected to the agreed-upon VA contracts. Because the parties to the contracts and the negotiations leading up to the contract awards were different, and there is no evidence of coordination, the contracts did not “merge” or become “integrated.” Because the DSCP and VA contracts were negotiated at different times by different parties and covered different products and modalities, and SMS submitted different disclosures to different agencies, any reliance VANAC contracting officers had placed on SMS’s disclosures cannot be imputed to DSCP’s contracting officers. Nor could SMS’s “knowing” disclosure of false information to VA’s contracting officers be imputed to DSCP’s contracting officers. The only way these elements could be imputed from one party to another party and from one time period to another is if the DSCP contract was a novation of, or substituted contract for, the other contracts. No novation of the three agreed-upon contracts happened here. Thus, Thomas cannot prove that, in connection with the DSCP contract, SMS knowingly made false statements to the government which were capable of influencing the government’s funding decision and upon which the government relied.
As explained earlier, for a novation to occur, the new contract must be substituted for an existing valid one. This can occur only when an old obligation is replaced by a new obligation or an original party by a new party.
With respect to the DSCP contract, no new obligations or new parties replaced existing ones. Just the opposite occurred. An amendment was made to the DSCP contract between SMS and DSCP, not to the agreed-upon contracts between SMS and VA. Specifically, on September 22, 2004, DSCP and SMS signed an amendment to the contract between DSCP and SMS giving VA authority to purchase CME off the DSCP contract. None of the obligations from the VA contracts, such as discount amount or terms and conditions, were transferred or substituted by way of this amendment. Additionally, because the agreed-upon contracts had expired, they were not valid, existing contracts at the time they purportedly were “extended, ” “novated, ” or “integrated” into the DSCP contract.
Thomas has not offered any evidence identifying what CME from the VA contracts were available and at what price on the DSCP contract. He does not identify what the actual prices on the DSCP contract were in comparison to the prices for the same CME under the agreed-upon contracts. Although its practice was to offer VA and DSCP discounts that were “generally the same” for the same CME, SMS was not required to give DSCP the same discounts. SMS made a voluntary business decision to do so in most cases. If anything, SMS lowered prices on CME on the DSCP contract to bring it down to the levels of the VA contract pricing.
Additionally, even if VA purchased the same CME off the DSCP contract at the same prices that it had under the expired contracts, this does not constitute an extension or integration of the old contracts into the DSCP contract, allowing Thomas to base an FCA claim on those purchases. Thomas’s fraudulent inducement claim is predicated on SMS’s knowing misrepresentation of information to DSCP that was material to DSCP’s decision to enter into its contracts on specific terms. There is insufficient evidence showing how DSCP decided the pricing terms, including whether it relied on SMS’s allegedly fraudulent disclosures, or that it would have not agreed to those terms had it known about SMS’s alleged fraudulent disclosures in negotiating the agreed-upon VA contracts. If SMS’s disclosures influenced VA’s contracting officers in negotiating pricing terms, it does not mean they influenced DSCP’s contracting officers. Nor can SMS’s “knowing” disclosure of false information to VA’s contracting officers be a “knowing” false disclosure to DSCP’s contracting officers.
The only connection between the expired VA contracts and the DSCP contract provided by the September 2004 amendment to the DSCP contract was that VA, a party to the old contracts, was able to order CME off of the DSCP contract. Discounts offered to VA were “generally” the same as those offered to DSCP. Thus, because no obligations from the expired agreed-upon contracts were substituted, replaced or extended, the DSCP contract is not an extension of the VA contracts.
Even assuming the VA and DSCP contracts were “integrated” and the VA contract pricing was higher than the DSCP contract pricing, Thomas cannot recover damages on the DSCP contract for the period of time before the CT/MR and NM contracts came into existence. Thomas’s theory is that because SMS fraudulently induced VA to accept its higher pricing on the three agreed-upon contracts, the fraud continued when VA continued to pay the same higher prices when it began ordering off the DSCP contract. But, if the fraudulently-induced prices did not yet exist because the DSCP contract was ...