San Francisco Unified School District ex rel. Contreras v. Laidlaw Transit, Inc.

Opinion

California’s False Claims Act (CFCA) (Gov. Code, § 12650 et seq.)^[1] permits the recovery of civil penalties and treble damages from any person who knowingly presents a false claim for payment to the state or a political subdivision. Qui tarn^[2] plaintiffs William Padilla, Manuel Contreras, and the Environmental Law Foundation (plaintiffs) sued defendants Laidlaw Transit, Inc., and Laidlaw Transit Services, Inc. (collectively, Laidlaw), under the CFCA, seeking to recover funds on behalf of the San Francisco Unified School District (District). Plaintiffs allege Laidlaw violated the CFCA by submitting claims for payment to the District at times when Laidlaw knew it was in breach of various terms of its contract to provide student bus transportation services. The trial court sustained Laidlaw’s demurrer and ultimately dismissed the action, but we reverse. Under the CFCA, a vendor impliedly certifies compliance with its express contractual requirements when it bills a public agency for providing goods or services. Allegations that the implied certification was false and had a natural tendency to influence the public agency’s decision to pay for the goods or services are sufficient to survive a demurrer.

BACKGROUND^[3]

Plaintiffs Padilla and Contreras are former Laidlaw employees. Plaintiff Environmental Law Foundation is a California nonprofit organization “dedicated to the preservation and enhancement of human health and the environment.” In May 2007, plaintiffs filed a complaint against Laidlaw alleging

In July 2008, plaintiffs filed their second amended and operative complaint (Complaint), seeking damages and civil penalties on behalf of the District for false claims, records, and statements presented by Laidlaw in violation of the CFCA (§ 12651, subd. (a)(1), (2) & (7).)^[4] Plaintiffs also sought for themselves an award of a portion of the damages and penalties, as well as payment of their attorney fees, expenses, and costs of suit.

According to the Complaint, Laidlaw has for a number of years provided bus transportation services under a series of contracts with the District. The Complaint describes certain requirements imposed on Laidlaw in the contract effective between August 16, 2005, and August 15, 2010 (Contract). Those requirements include provisions that Laidlaw: (1) provide school buses meeting state and federal standards relating to pupil transportation; (2) maintain its buses in “ ‘excellent mechanical condition and appearance’ ” and replace all vehicles “ ‘which are deemed to be unfit for providing the required service’ ”; (3) maintain an extra 10 percent of each type of bus as a spare fleet; (4) provide buses meeting or exceeding specified state and federal safety standards; (5) provide buses meeting a specified particulate matter emissions standard or equipped with a specified emission control device and diesel buses with a “ ‘closed crankcase emission control system’ (6) not authorize “ ‘overnight park-out’ ” of any buses without prior authorization; and (7) employ a “ ‘Fleet Maintenance Supervisor’ ” to “ ‘establish and maintain a complete and effective preventative maintenance program with complete and accurate records on each vehicle.’ ” Each of those provisions is a material term of the Contract. The District agreed to provide payment on a monthly basis “for services satisfactorily performed by [Laidlaw] after receipt of properly documented invoices.”

The Complaint further alleges that “Laidlaw has been in breach of one or more of these material terms throughout the term of the Contract and at the time Laidlaw has presented invoices, claims or demands for payment to [the District].” The Complaint contains numerous specific allegations describing how the buses utilized by Laidlaw were in inadequate and/or unsafe operating

The Complaint’s first cause of action alleges that Laidlaw violated section 12651, subdivision (a)(1), by knowingly presenting false “claims” to the District for payment or approval. It asserts, “[w]hen Laidlaw submitted monthly invoices for payment, [it] impliedly certified that [it] had met each and every material term of the [C]ontract.” The second cause of action alleges that Laidlaw violated the CFCA by knowingly falsifying records and/or statements “in order to get false claims paid or approved by [the District].” The third cause of action alleges that Laidlaw violated former section 12651, subdivision (a)(7), by using “false record[s] or statements] to conceal, avoid[,] or decrease an obligation to pay or transmit money or property to [the District].” (See Stats. 2007, ch. 577, § 5.)

Laidlaw demurred to the Complaint.^[5] The trial court sustained with leave to amend the demurrer on the first two causes of action and overruled the demurrer on the third cause of action. Plaintiffs did not amend their Complaint, but they dismissed the third cause of action. The trial court entered a judgment of dismissal and this appeal followed.

DISCUSSION

Plaintiffs contend the trial court erred in sustaining Laidlaw’s demurrer to their first cause of action for violation of section 12651, subdivision (a)(1).^[6] We review the Complaint de novo to determine whether it alleges facts

The determination of whether Laidlaw’s alleged conduct violated the CFCA is a question of law subject to our independent review. (Rothschild, supra, 83 Cal.App.4th at p. 493.) In making the determination, “we apply well-established rules of statutory construction. The goal of statutory construction is to ascertain and effectuate the intent of the Legislature. [Citation.] Often, the words of the statute provide the most reliable indication of legislative intent. [Citation.] However, when the statutory language is itself ambiguous, we must examine the context in which the language appears, adopting the construction that best harmonizes the statute internally and with related statutes. [Citation.] ‘ “When the language is susceptible of more than one reasonable interpretation ... we look to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.” ’ [Citation.]” (Id. at p. 496.)

The CFCA imposes liability on any person who “[k]nowingly presents or causes to be presented to an officer or employee of the state or of any political subdivision thereof, a false claim for payment or approval.” (Former § 12651, subd. (a)(1); Stats. 2007, ch. 577, § 5.)^[7] There is no dispute that

Similar language appears in an analysis of the CFCA before its enactment, prepared by the Center for Law in the Public Interest (Center), which was the “source” of the bill in the California Assembly and also the drafter of the federal enactment. (See Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Assem. Bill No. 1441 (1987-1988 Reg. Sess.) as amended Sept. 8, 1987, pp. 1, 5; see also State ex rel. Harris v. PricewaterhouseCoopers, LLP (2006) 39 Cal.4th 1220 , 1230 [ 48 Cal.Rptr.3d 144 , 141 P.3d 256 ] (Harris) [stating that the Center “participated in drafting both the current federal and California false claims statutes”]; Altus, supra, 36 Cal.4th at p. 1296 [describing the Center as the “principal drafter of the statute”].) The analysis, which was provided to the author of the bill and was before the Senate and Assembly Judiciary Committees, states “a false claim may take many forms, the most common being a claim for goods or services not provided, or provided in violation of a contract term, statute or regulation.” (Center, Cal. False Claims Act Section-by-Section Analysis (1987) p. 4, italics added; see also Armenta ex rel. City of Burbank v. Mueller Co. (2006) 142 Cal.App.4th 636 , 648 [ 47 Cal.Rptr.3d 832 ] [relying on the Center’s analysis in interpreting the CFCA]; Laraway v. Sutro & Co. (2002) 96 Cal.App.4th 266 , 275 [ 116 Cal.Rptr.2d 823 ] [same].)^[8]

Other federal decisions also provide support for an implied certification theory of CFCA liability. In Ab-Tech Constr., Inc. v. U.S. (1994) 31 Fed.Cl. 429 , 434 (Ab-Tech), the court concluded payment vouchers submitted by a government contractor constituted “an implied certification” of the contractor’s continuing adherence to the requirements for participation in a minority-owned business program. The court stated that the federal act “extends ‘to all fraudulent attempts to cause the [government to pay out sums of money.’ [Citation.]” (Id. at p. 433; see also U.S. ex rel. Hendow v. University of Phoenix (9th Cir. 2006) 461 F.3d 1166 , 1170 (Hendow) [noting that the federal FCA is not limited to “facially false or fraudulent claims for payment”; rather, the federal FCA is “ ‘intended to reach all types of fraud, without qualification, that might result in financial loss to the [government’ ”]; Pomona, supra, 89 Cal.App.4th at p. 802.) Similarly, in Hendow, at pages 1168, 1176-1177, the court concluded the plaintiffs had stated a claim under the federal FCA where a university submitted requests for funds from the federal government despite being in violation of a provision of a program

In U.S. ex rel. Fallon v. Accudyne Corp. (W.D.Wis. 1995) 921 F.Supp. 611 , 615, 620 (Fallon), it was alleged that a government contractor inadequately tested military hardware. The district court denied the defendant’s motion for summary judgment, concluding “[i]f a contractor knowingly fails to perform testing as required by a contract, and tenders the untested goods, making a claim for full payment, it has surely submitted a false claim. Under such circumstances a false claim may arise from not advising of a failure to perform a material part of the contract.” (Id. at p. 621; see also U.S. ex rel. Holder v. Special Devices, Inc. (C.D.Cal. 2003) 296 F.Supp.2d 1167 , 1175-1177 (Holder) [violation of federal FCA may be based on false implied certification where contract required compliance with federal laws and specific regulations were incorporated into the contract]; cf. U.S. ex rel. Willard v. Humana Health Plan of Texas Inc. (5th Cir. 2003) 336 F.3d 375 , 383 [no violation of federal FCA where regulations allegedly violated were not referenced in contract].)^[9]

Laidlaw argues a request for payment constitutes an implied certification of contract compliance giving rise to potential liability only where the contract requires such a certification as a prerequisite to payment. Laidlaw cites U.S. ex rel. Hopper v. Anton (9th Cir. 1996) 91 F.3d 1261 (Hopper), where it was alleged that the Los Angeles Unified School District accepted federal funding for special education programs but did not observe regulatory guidelines related to the program. (Id. at pp. 1264—1265.) The Ninth Circuit held the plaintiff could not show the school district had made a false claim for payment because the federal government did not require certification of compliance with the regulations as a prerequisite for obtaining the funding. (Id. at pp. 1266-1267.) However, Hopper did not consider whether a false implied certification relating to compliance with express contractual requirements could state a violation of the federal FCA.^[10] In this case, the District’s

Laidlaw asserts that plaintiffs’ construction of the CFCA “would enable any private party to sue based on any purported breach of any public entity’s contract.” That plainly is not the case. First, because the CFCA achieves its ends by providing an incentive for whistleblowers to come forward and disclose evidence of fraud, the qui tarn plaintiff must be the “original source” of the information underlying the suit. (See Pacific Bell, supra, 142 Cal.App.4th at pp. 746, 748, 755-756; § 12652, subdivision (d)(3)(A); see also Harris, supra, 39 Cal.4th at p. 1231.) Second, as discussed below, the implied certification of compliance with the breached contract provision “must be material to the government’s decision to pay out moneys to the claimant.” (Hendow, supra, 461 F.3d at p. 1172; see also Pomona, supra, 89 Cal.App.4th at p. 802.) And, third, the contractor must have the requisite knowledge, rendering the failure to disclose the contractual noncompliance fraudulent. (See Shaw, supra, 213 F.3d at p. 533 [the federal

On the other hand, if this court were to accept Laidlaw’s position, we would exclude a large category of fraud from the CFCA. Laidlaw does not deny that plaintiffs have alleged a fraudulent course of conduct, in that Laidlaw is alleged to have intentionally and secretly denied the District substantial benefits under the Contract. Nevertheless, under Laidlaw’s interpretation, the CFCA would provide no remedy against government contractors that intentionally breach their contracts, often in a manner eluding detection. (See Fallon, supra, 921 F.Supp. at p. 621 [noting that it is particularly appropriate to impose liability where a contractor has concealed its failure to provide testing required under a contract, “since proper performance of such requirements is not generally apparent from the goods themselves”].) Under Laidlaw’s interpretation, the CFCA would provide no incentive to whistleblowers to reveal the type of fraud alleged in this case, despite the fact that the “prospect of reward may be the only means of inducing such private parties to come forward with their information.” (Harris, supra, 39 Cal.4th at p. 1231.)

It is reasonable for governmental entities to assume that contractors seeking payment are in compliance with the material terms of their contracts. If a contractual provision turns out to be unduly onerous or a contractor needs more time to comply, the contractor does not expose itself to liability under the CFCA if it informs the governmental entity of the problem and seeks an accommodation. But if that same contractor is aware of the noncompliance and chooses to seek payment without informing the government, then it is a fraud appropriately within the scope of the CFCA. To exclude such fraud would be contrary to this court’s obligation to construe the CFCA “ ‘broadly so as to give the widest possible coverage and effect to the prohibitions and remedies it provides.’ ” (Pomona, supra, 89 Cal.App.4th at pp. 801-802.) The act is “ ‘intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.’ [Citation.]” (Id. at p. 802.)

In California, the Pomona court adopted the test for materiality described in Berge, supra, 104 F.3d at pages 1459-1460; that is, an alleged falsity satisfies the materiality requirement where it has the “ ‘ “natural tendency to influence agency action or is capable of influencing agency action.” ’ [Citation.]” (Po mona, supra, 89 Cal.App.4th at p. 802.) The parties agree that test applies in this case.^[14]

Our conclusion that the allegations in the Complaint are sufficient to withstand a demurrer does not mean that every breach of a contract term that is in some sense “material” necessarily satisfies the materiality requirement for a CFCA claim. That is, a false implied certification relating to a “material” contract term may not always be “material” to the government’s decision to pay a contractor. Materiality is a mixed question of law and fact (Pomona, supra, 89 Cal.App.4th at p. 802), and a showing in a motion for summary judgment or at trial that the alleged breach would not have affected the payment decision will defeat a CFCA claim. The decision in Berge, supra, 104 F.3d 1453 , the source of the “natural tendency” test adopted by Pomona, is instructive. There, the defendants appealed from denial of their motion for judgment as a matter of law following a jury verdict finding them liable under the federal FCA. (Berge, at p. 1455.) The defendants were funded by the National Institutes of Health (NIH) to conduct research regarding a common cause of birth defects. (Ibid.) The qui tarn plaintiff alleged the defendants had made false statements to the NIH in annual progress reports including, among other things, assertions about the amount of data that had been computerized. (Id. at p. 1456.) The Fourth Circuit reversed denial of the motion for judgment because there was no substantial evidence from which a reasonable jury could conclude the defendants’ errors and omissions “were materially capable of influencing” the government’s funding decision. (Id. at pp. 1461-1462.) The court pointed out that the program officer with responsibility for the grant testified that “the principal purpose of the project was the