Case: 09-20718 Document: 00511280821 Page: 1 Date Filed: 11/01/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 1, 2010
No. 09-20718 Lyle W. Cayce
Clerk
UNITED STATES OF AMERICA EX REL. LESLIE STEURY,
Plaintiff - Appellant
v.
CARDINAL HEALTH, INC., formerly known as Alaris Medical
Systems, Inc.; CARDINAL HEALTH 303, INC., formerly known as
Alaris Medical Systems, Inc.; CARDINAL HEALTH SOLUTIONS, INC.,
Defendants - Appellees
Appeals from the United States District Court
for the Southern District of Texas
Before D EMOSS, BENAVIDES, and ELROD, Circuit Judges.
FORTUNATO P. BENAVIDES, Circuit Judge:
Relator Leslie Steury, on behalf of the United States, claims that
defendants Cardinal Health, Inc., Cardinal Health 303 Inc., and Cardinal Health
Solutions, Inc., successors to Alaris Medical Systems, Inc., sold the United States
Department of Veterans Affairs defective medical equipment in violation of the
False Claims Act (FCA), 31 U.S.C. § 3729(a) (2009). A magistrate judge
recommended dismissing Steury’s complaint for failure to state a claim under
Federal Rules of Civil Procedure 9(b) and 12(b)(6), but also recommended
granting Steury leave to amend. Both parties filed timely objections. After de
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No. 09-20718
novo review, the district court adopted the magistrate judge’s recommendations
in full. The same day, the district court entered a final judgment dismissing
Steury’s action. Steury appeals on grounds that she stated a claim under Rules
9(b) and 12(b)(6), and alternatively that the district court abused its discretion
in denying her an opportunity to amend her complaint. We affirm the district
court’s decision with respect to Steury’s failure to state a claim, but we vacate
the final judgment and remand to give Steury an opportunity to amend.
I. BACKGROUND
According to her amended complaint, Steury marketed Cardinal’s
Signature Edition Infusion Device (Signature pump) to various hospitals,
including hospitals operated by the Veterans Administration, from March 18,
1996 until her termination on September 28, 2001. The Signature pump is an
electronic device that regulates the rate at which intravenous fluids flow into
patients. Steury alleges that the Signature pump has a dangerous defect that
can cause air bubbles to accumulate and ultimately release into a patient’s
intravenous line, potentially resulting in serious injury or death. Steury alleges
that Cardinal sold Signature pumps to the Veterans Administration from 1997
until August 26, 2006, at which time Cardinal suspended production, sales,
repairs, and installation of the Signature pump after certain devices were
recalled by the Food and Drug Administration for a separate problem.
Steury alleges that she first became aware of the air-in-line defect in the
Signature pump in October 2000. Steury asserts that Dr. Mark DiLuciano, a
pediatric anesthesiologist at Children’s Hospital of Akron, informed Susan
Springman, another Alaris employee, that a Signature pump had injected air
into his patient’s intravenous line, and that a similar problem had been reported
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at Children’s Hospital of Philadelphia. On May 23, 2001, Steury allegedly met
with John Snow (Alaris’s area manager) and nurses from Children’s Hospital of
Akron to discuss concerns about the Signature pump. According to Steury, Snow
discredited a nurse’s report of an infant mortality related to an intravenous air
bubble. Steury asserts that she and various other Alaris employees again
discussed the air-in-line defect during a conference call on May 25, 2001 and at
a meeting on May 31, 2001.
In June 2001, Snow allegedly informed Steury that Alaris had temporarily
suspended shipments of Signature pumps while it reviewed the air-in-line
defect, but nonetheless directed Steury to continue marketing the Signature
pump. Steury asserts that she was told to expect a final answer from Snow
within 90 days. E-mails attached to Steury’s complaint suggest that Children’s
Hospital of Akron continued to raise concerns about the Signature pump
between June and September 2001. On September 28, 2001, Alaris terminated
Steury’s employment. According to Steury, she would have “completed filling a
major order” of Signature pumps by the Veterans Administration Hospital of
Ohio only five days later.
Steury sued Cardinal on May 11, 2007 for alleged violations of the FCA
and a number of similar state statutes. The United States filed a notice of
declination to intervene pursuant to 31 U.S.C. § 3730(b)(4)(B) on January 28,
2008. On November 26, before Cardinal answered, Steury filed an amended
complaint. The amended complaint again raised claims under the FCA and
similar state statutes. In addition to the above factual allegations, Steury’s
amended complaint asserts, in relevant part:
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51. . . . A claimant submits a false or fraudulent claim within the
meaning of the FCA when he submits a claim for payment to the
Government for products that contain defective parts.
52. By accepting payment from the federal Government or one of its
agencies for the SE infusion pumps, Cardinal Health knowingly
misrepresented that the SE infusion pumps were safe, reliable, and
quality-assured.
***
54. A false certification occurs when the Government has
conditioned payment of a claim upon the certification of compliance
with, for example, a contract provision, regulation or statute. The
claimant submits a false or fraudulent claim within the meaning of
the FCA when he or she falsely certifies compliance with that
contract provision or statute. These certifications can either be
express or implied.
***
58. An implied false certification theory occurs when a claimant
submits a false claim without expressly certifying compliance with
a contract provision, statute, regulation, or governmental program.
Liability is imposed on the premise of breach of contract or an
implied responsibility, not a financial loss.
59. Cardinal Health is obligated to provide safe, reliable, and
quality-tested products, which perform to their specifications, to the
Government. By delivering and receiving payments for the SE
infusion pumps, Cardinal Health is impliedly certifying compliance
with the terms of its contract with the Government for the products.
Cardinal moved to dismiss Steury’s complaint on February 2, 2009, and
the matter was referred to a magistrate judge. On August 31, 2009, the
magistrate judge issued a report and recommendation finding, inter alia, that
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Steury’s allegations of fraud did not satisfy the heightened pleading
requirements of Rule 9(b) and thus failed to state a claim under Rule 12(b)(6).
The magistrate judge recommended that Steury’s “complaint be dismissed
without prejudice to the filing of an amended complaint within ten days, if this
recommendation is adopted.” Both parties filed timely objections. On
September 25, 2009, after de novo review, the district court adopted the
magistrate judge’s report and recommendation in full. On the same day, the
district court entered a final judgment dismissing Steury’s “action.” In bold
letters, the district court confirmed that “THIS IS A FINAL JUDGMENT.”
Steury filed a timely notice of appeal on October 23, 2009.
II. STANDARD OF REVIEW
We review de novo a district court’s ruling on a Rule 12(b)(6) motion.
United States ex rel. Willard v. Humana Health Plan of Tex. Inc., 336 F.3d 375,
379 (5th Cir. 2003). We accept all well-pleaded factual allegations as true, and
we interpret the complaint in the light most favorable to the plaintiff. Id. The
plaintiff’s factual allegations must support a claim to relief that is plausible on
its face and rises above mere speculation. United States ex rel. Marcy v. Rowan
Cos., 520 F.3d 384, 388 (5th Cir. 2008). In addition, claims brought under the
FCA must comply with the particularity requirements of Rule 9(b). United
States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903
(5th Cir. 1997). Rule 9(b) requires, at a minimum, “that a plaintiff set forth the
‘who, what, when, where, and how’ of the alleged fraud.” Id.; see also United
States ex rel. Rafizadeh v. Cont’l Common, Inc., 553 F.3d 869, 872-73 (5th Cir.
2008).
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We review a district court’s denial of leave to amend a pleading for abuse
of discretion. See Del Prado v. B.N. Dev. Co., 602 F.3d 660, 663 (5th Cir. 2010).
III. DISCUSSION
Steury has expressly limited the issues on appeal to: (1) whether Steury
stated a claim under the FCA “when she alleged that the defendant sold the
Veterans Administration medical equipment that it knew was defective and
unsafe”; and if not, (2) whether the district court erred in granting final
judgment without allowing her an opportunity to amend her complaint.
A. Failure To State A Claim
The FCA is the Government’s “primary litigation tool” for recovering losses
resulting from fraud. Marcy, 520 F.3d at 388. Under certain circumstances, the
FCA permits “suits by private parties on behalf of the United States against
anyone submitting a false claim to the government.” United States ex rel.
Branch Consultants v. Allstate Ins. Co., 560 F.3d 371, 376 (5th Cir. 2009).
Specifically, the FCA imposes civil penalties and treble damages on any person
who, inter alia, “knowingly makes, uses, or causes to be made or used, a false
record or statement material to a false or fraudulent claim.” 1 31 U.S.C.
1
Although the 2009 amendments to the FCA generally apply only to conduct on or
after May 20, 2009, § 3729(a)(1)(B) applies retroactively to all claims pending on or after June
7, 2008 (that is, just before the Supreme Court’s decision in Allison Engine Co. v. United States
ex rel. Sanders, 553 U.S. 662, 665 (2008)). See Fraud Enforcement & Recovery Act of 2009,
Pub. L. 111-21, § 4(f)(1), 123 Stat. 1617, 1625 (2009); see also S. Rep. No. 111-10, at 10 (2009),
reprinted in 2009 U.S.C.C.A.N. 430, 437-38 (expressing legislative intent to overrule Allison
Engine). In Allison Engine, the Supreme Court held that a false record or statement
implicated the FCA only when it was made with the specific “purpose of getting a false or
fraudulent claim” paid by “the Government itself.” Allison Engine, 553 U.S. at 668-69.
Steury’s complaint was pending on June 7, 2008. We therefore assess Steury’s claim under
the current § 3729(a)(1)(B). See United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d
94, 113 (2d Cir. 2010) (applying § 3729(a)(1)(B) to claim filed in 2005 but pending on June 7,
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§ 3729(a)(1)(B) (2009). The terms “knowing” and “knowingly” mean that a
person “(i) has actual knowledge of the information; (ii) acts in deliberate
ignorance of the truth or falsity of the information; or (iii) acts in reckless
disregard of the truth or falsity of the information.” Id. § 3729(b)(1)(A)(i)-(iii).
Proof of “specific intent to defraud” is not required. Id. § 3729(b)(1)(B). The
term “material” means “having a natural tendency to influence, or be capable of
influencing, the payment or receipt of money or property.” Id. § 3729(b)(4); see
also United States ex rel. Longhi v. United States, 575 F.3d 458, 470 (5th Cir.
2009). The term “claim” means “any request or demand, whether under a
contract or otherwise, for money or property . . . that . . . is presented to an
officer, employee, or agent of the United States . . . .” Id. § 3729(b)(2). We have
summarized that to state a claim under the FCA, a plaintiff must allege: (1) a
false statement or fraudulent course of conduct; (2) made or carried out with the
requisite scienter; (3) that was material; and (4) that is presented to the
Government. See Longhi, 575 F.3d at 467.
In an effort to “streamline” this appeal, Steury presses only one
substantive contention: that Cardinal made a false certification (i.e., a false
statement) to the Veterans Administration that the Signature pumps complied
with the warranty of merchantability.2 Steury does not assert that Cardinal
actually (i.e., expressly) made this certification. See Thompson, 125 F.3d at 902
2008).
2
Steury has not briefed, and indeed has expressly disclaimed, other challenges to the
district court’s decision. Steury therefore has waived other potential challenges. See, e.g.,
FED . R. APP . P. 28(a)(9)(A) (requiring appellant’s brief to include appellant’s contentions and
the reasons for them); Procter & Gamble Co. v. Amway Corp., 376 F.3d 496, 499 n.1 (5th Cir.
2004) (“Failure adequately to brief an issue on appeal constitutes waiver of that argument.”).
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(recognizing that when the Government expressly conditions “payment of a claim
upon a claimant’s certification of compliance with, for example, a statute or
regulation, a claimant submits a false or fraudulent claim when he or she falsely
certifies compliance with that statute or regulation”). Instead, Steury alleges
that Cardinal impliedly, and falsely, certified compliance with the warranty of
merchantability simply by requesting payment for the Signature pumps.3
The implied-certification theory of liability under the FCA “is based on the
notion that the act of submitting a claim for reimbursement itself implies
compliance with governing federal rules that are a precondition to payment.”
Mikes v. Straus, 274 F.3d 687, 699 (2d Cir. 2001). This Court has not yet
recognized the implied-certification theory. See, e.g., Marcy, 520 F.3d at 389
(declining to resolve issue that would “require us to determine whether implied
certifications may be claims under the Act”). We need not resolve the issue
today, because in any event the factual allegations in Steury’s amended
complaint provide no basis for implying a false certification.
3
Cardinal asserts that Steury did not base her implied-certification theory of liability
specifically on the warranty of merchantability before the district court. We recognize the
fundamental principle that a plaintiff may not raise an entirely new issue for the first time
on appeal, see, e.g., Martinez v. Tex. Dep’t of Criminal Justice, 300 F.3d 567, 574 (5th Cir.
2002), but we do not find that Steury has raised an entirely new issue. As discussed above,
Steury’s complaint alleges that “Cardinal Health is obligated to provide safe, reliable, and
quality-tested products, which perform to their specifications, to the Government,” and that
“[a] claimant submits a false or fraudulent claim within the meaning of the FCA when he
submits a claim for payment to the Government for products that contain defective parts.” For
its part, the district court analyzed whether “Cardinal Health violated the FCA simply by
selling defective pumps.” Although Steury and the district court did not expressly refer to the
warranty of merchantability by name, the issue was fairly presented to and considered by the
district court. We will decide Steury’s appeal on the merits.
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The FCA is not a general “enforcement device” for federal statutes,
regulations, and contracts. Thompson, 125 F.3d at 902; see also Mikes, 274 F.3d
at 699 (observing that FCA “was not designed for use as a blunt instrument to
enforce compliance”). Not every breach of a federal contract is an FCA problem.
We have thus repeatedly upheld the dismissal of false-certification claims
(implied or express) when a contractor’s compliance with federal statutes,
regulations, or contract provisions was not a “condition” or “prerequisite” for
payment under a contract. See, e.g., Marcy, 520 F.3d at 389-90 (upholding
dismissal); Willard, 336 F.3d at 381 (same); see also Thompson, 125 F.3d at 902-
03 (remanding for fact determination as to whether payment was “conditioned”
on certification). This prerequisite requirement seeks to maintain a “crucial
distinction” between punitive FCA liability and ordinary breaches of contract.
United States v. Southland Mgmt. Corp., 326 F.3d 669, 680 (5th Cir. 2003) (en
banc) (Jones, J., specially concurring). The prerequisite requirement recognizes
that unless the Government conditions payment on a certification of compliance,
a contractor’s mere request for payment does not fairly imply such certification.
See Mikes, 274 F.3d at 700 (observing that a mere claim for payment does not
suggest fraud unless it can be said that the defendant submitted the claim
“while knowing . . . that payment expressly is precluded because of some
noncompliance by the defendant”); United States ex rel. Siewick v. Jamieson Sci.
& Eng’g, Inc., 214 F.3d 1372, 1376 (D.C. Cir. 2000) (“Courts have been ready to
infer certification from silence, but only where certification was a prerequisite
to the government action sought.”).
Courts have at times located the prerequisite requirement in the
materiality prong of FCA analysis. See, e.g., Marcy, 520 F.3d at 389 (“A material
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claim is one that is required to be made in order to receive the relevant
government benefit.”). Although the FCA now defines the term “material”
somewhat more expansively (i.e., as having a “natural tendency to influence, or
be capable of influencing, the payment or receipt of money or property”), we do
not think that our false-certification precedents are obsolete. The prerequisite
requirement has to do with more than just the materiality of a false certification;
it ultimately has to do with whether it is fair to find a false certification or false
claim for payment in the first place. As already discussed, when payment is not
conditioned on a certification of compliance, it is not fair to infer such
certification from a mere request for payment. Similarly, even if a contractor
falsely certifies compliance (implicitly or explicitly) with some statute,
regulation, or contract provision, the underlying claim for payment is not “false”
within the meaning of the FCA if the contractor is not required to certify
compliance in order to receive payment. See Southland Mgmt., 326 F.3d at 675
(“There is no liability under this Act for a false statement unless it is used to get
[a] false claim paid.”). In short, a false certification of compliance, without more,
does not give rise to a false claim for payment unless payment is conditioned on
compliance.4
In this case, we find no indication that the Government conditioned
payment for the Signature pumps on a certification that the Signature pumps
complied with the warranty of merchantability. Steury does not allege that the
particular contracts between Cardinal and the Government impose a warranty
4
As we have recognized in the past, whether payment is conditioned on compliance
will depend on the specific statutes, regulations, and contracts at issue in a particular case.
See Thompson, 125 F.3d at 902-03 (remanding for factual development).
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of merchantability. Steury instead draws our attention to certain Federal
Acquisition Regulations (FAR), see 48 C.F.R. § 12.404(a), but the regulations do
not sustain her claim. Section 12.404(a) explains that the standard warranty
clause in federal commercial acquisition contracts, see id. § 52.212-4(o), includes
a warranty of merchantability and a warranty of fitness for a particular purpose.
Id. § 12.404(a). The warranties may be excluded or limited, however, by express
warranty. Id. § 12.404(b)(2); see also id. § 12.302(a) (recognizing that clauses in
§ 52.212-4 may be “tailor[ed] . . . to adapt to the market conditions for each
acquisition”). Thus, Cardinal is not even necessarily subject to an implied
warranty of merchantability under the FAR. Moreover, the FAR expressly
condition payment for commercial items on acceptance (as opposed to compliance
with the warranty of merchantability), see id. § 52.212-4(i) (providing that
“payment shall be made for items accepted by the Government . . . .”), and the
FAR also permit the Government to seek a range of remedies in the event it
receives noncompliant items from a contractor, including acceptance, price
reduction or replacement. See id. §§ 46.407(b)-(d), (f), 52.246-2(k), (l). As we
have recognized on previous occasions, the Government’s ability to seek a range
of remedies in the event of noncompliance suggests that payment is not
conditioned on a certification of compliance. See Willard, 336 F.3d at 382-83;
Marcy, 520 F.3d at 389-90. That the government may accept (and pay) for
noncompliant commercial items under the FAR confirms that payment is not
conditioned on compliance with the warranty of merchantability. Were private
litigants able to pursue FCA claims whenever the Government acquired
noncompliant commercial items, the Government’s ability to pursue the range
of remedies contemplated by the FAR would be substantially compromised.
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To conclude, we hold that Cardinal did not make an implied certification
that the Signature pumps complied with the warranty of merchantability simply
because the Government’s standard commercial-acquisition contract includes a
warranty of merchantability. We do not suggest, however, that a knowing
delivery of defective goods to the Government will never implicate the FCA.
Particular government contracts may specifically condition payment on a
certification of compliance with the warranty of merchantability. Other courts
have suggested that the knowing provision of “worthless” goods or services to the
Government may violate the FCA. See, e.g., Mikes, 274 F.3d at 703; United
States ex rel. Roop v. Hypoguard USA, Inc., 559 F.3d 818, 824 (8th Cir. 2009);
United States ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1053 (9th
Cir. 2001). Steury has not yet pursued or briefed these theories, however, so we
need not address them here. Finally, although we have held that a knowing
attempt to deceive the Government about the nature of commercial items may
violate the FCA, see United States v. Aerodex, Inc., 469 F.2d 1003, 1008 (5th Cir.
1972) (finding that deliberate mislabeling may implicate FCA), the district court
was correct in concluding that Steury has so far failed to allege this type of claim
with particularity. Steury’s amended complaint lacks any factual heft as to
whether and how Cardinal knowingly deceived the Veterans Administration
about the potential risks of the Signature pumps. See id. Indeed, the complaint
does not even specifically allege that a Signature pump at a Veterans
Administration hospital has been defective. An equally likely inference from
Steury’s amended complaint is that the Veterans Administration tried and
tested the Signature pumps, understood their potential risks, and decided to
continue purchasing and using them anyway.
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B. Amendment
A district court should “freely give leave” to amend a complaint “when
justice so requires.” F ED. R. C IV. P. 15(a)(2). Denial of leave to amend may be
warranted for undue delay, bad faith or dilatory motive on the part of the
movant, repeated failure to cure deficiencies, undue prejudice to the opposing
party, or futility of a proposed amendment. See Rosenblatt v. United Way of
Greater Houston, 607 F.3d 413, 419 (5th Cir. 2010) (citing Foman v. Davis, 371
U.S. 178, 182 (1962)). We have held that a district court abuses its discretion,
however, when it gives no reasons for denying a timely motion to amend, at least
when the defendant would not be unduly prejudiced by the amendment. See
Griggs v. Hinds Junior Coll., 563 F.2d 179, 180 (5th Cir. 1977) (per curiam); see
also State of Louisiana v. Litton Mortg. Co., 50 F.3d 1298, 1302-03 (5th Cir.
1995) (observing that “[a] decision to grant leave is within the discretion of the
court, although if the court lacks a substantial reason to deny leave, its
discretion is not broad enough to permit denial” (quotations omitted)).
In this case, the district court granted Steury leave to amend her
complaint but nonetheless entered a final judgment before her time to amend
expired (or even began for that matter). The district court’s entry of final
judgment may have been intentional or it may have been a mistake; either way,
it was an abuse of discretion to reverse course without providing any reason
whatever. It is true that Steury has already amended her complaint once, but
this was done shortly after Cardinal was served and before Cardinal filed an
answer. It does not appear that Steury has unduly delayed this action, or that
she is pursuing it in bad faith. Cardinal has not shown that it would suffer
undue prejudice if Steury were permitted to amend her complaint, and we
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cannot say that the defects in Steury’s complaint are necessarily “incurable” or
that amendment would be futile. See Great Plains Trust Co. v. Morgan Stanley
Dean Witter & Co., 313 F.3d 305, 329-30 (5th Cir. 2002). Nor do we see any
other “special circumstances” that would justify dismissal of Steury’s complaint
without leave to amend. Cates v. Int’l Tel. & Tel. Corp., 756 F.2d 1161, 1180 (5th
Cir. 1985). Cardinal contends that Steury should have pursued a postjudgment
motion to amend under Rule 59 or 60. See F ED. R. C IV. P. 59, 60. This may have
been a prudent and even desirable strategy, but we know of no rule requiring it
instead of an appeal. See Rosenzweig v. Azurix Corp., 332 F.3d 854, 864 (5th Cir.
2003) (“When a district court dismisses an action and enters a final judgment,
however, a plaintiff may request leave to amend only by either appealing the
judgment, or seeking to alter or reopen the judgement under Rule 59 or 60.”).
Accordingly, we vacate the final judgment and remand with instructions to give
Steury ten days to file an amended complaint.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
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