“the court declines to determine whether individual liability is 27 available under § 1102.5.”
How later courts described this case
- “the court declines to determine whether individual liability is 27 available under § 1102.5.”
Written by the judges who cited it.
The opinion
1 UNITED STATES DISTRICT COURT
2 NORTHERN DISTRICT OF CALIFORNIA
3
4
UNITED STATES OF AMERICA, ex rel.,
5 STEVEN FALLON, et al., Case No. 16-cv-06994-PJH
6 Plaintiffs-Relators,
ORDER RE MOTIONS TO DISMISS
7 v. AND MOTION TO STRIKE AND
ORDER TO SHOW CAUSE RE
8 BELL TRANSIT CORP., et al., UNSERVED DEFENDANTS
9 Defendants. RE Dkt. Nos. 83, 84, 99
10
11
12 Before the court is a motion to dismiss filed by defendant Hayward Unified School
13 District (“HUSD”), a motion to dismiss filed by defendant Bell Transit Corp., and a motion
14 to strike filed by plaintiff-relator Steven Fallon (“plaintiff” or “relator”). Having read the
15 parties’ papers and carefully considered their arguments and the relevant legal authority,
16 and good cause appearing, the court hereby rules as follows.
17 BACKGROUND
18 This is a False Claims Act case. Plaintiff-relator Steven Fallon is a former
19 employee of Hayward Unified School District (“HUSD”), and in his complaint, he alleges a
20 five-year scheme by HUSD and others to defraud California and the United States out of
21 millions of dollars paid to HUSD for providing transportation services to disabled
22 students.
23 The operative second amended complaint (“SAC”) was filed on August 24, 2020,
24 naming as defendants HUSD, certain of its employees (the “individual defendants”), and
25 three private entities, Bell Transit Corporation (“Bell Transit”), MCET Affordable
26 Transportation (“MCET”), and Functional Floors (“Functional Floors”). Dkt. 82. MCET
27 and Functional Floors have not appeared in the case and appear not to have been
1 defendants: HUSD employees Matthew Wayne (HUSD associate superintendent during
2 the relevant time period), Miriam Delgadillo (HUSD office specialist), Luci Rogers (HUSD
3 chief financial officer during the relevant time period), and Tammy Watson (HUSD
4 director of special education during the relevant time period). SAC, ¶¶ 20, 22, 25, 27.
5 The false claim allegations fall into three categories: (1) inflating the number of
6 special needs students in need of individual student transportation (SAC, ¶¶ 48-56), (2)
7 splitting transportation bids to avoid the $45,000 threshold for requiring school board
8 approval and competitive bidding (SAC, ¶¶ 57-72), (3) failing to disclose a conflict of
9 interest between a HUSD employee and her son, an employee of Bell Transit (SAC,
10 ¶¶ 73-82).1
11 As to category (1), Fallon alleges that a school district typically uses individual
12 student transportation (also referred to as “taxi transportation”) for approximately 15
13 students out of every 100,000 students. SAC, ¶ 50. However, when Fallon started
14 working at HUSD, he observed that a “disproportionate amount” of students were being
15 transported by taxi. SAC, ¶ 52. Taxi transportation accounted for 42% of HUSD’s
16 transportation budget for the 2015-16 school year. Id. Fallon complained about the
17 problem, and the next year, the number of taxi-transported students fell from 149 to 13.
18 SAC, ¶ 53. In the five years preceding Fallon’s complaint, the number of taxi-transported
19 students had never been below 135. SAC, ¶ 54. Fallon alleges that his complaint
20 revealed that over 90% of the students receiving individual transportation did not actually
21 need it. SAC, ¶ 53.
22 As to category (2), Fallon alleges that the special education taxi contracts were
23 subject to school board approval and competitive bidding requirements if they exceeded
24 $45,000. SAC, ¶ 61. Fallon alleges that defendants Watson and Delgadillo falsely
25
26
1 Fallon also briefly argues that defendants “falsely characterized” the relevant contracts
as independent-contractor contracts, and purports to attach two exhibits in support (see
27
Dkt. 94 at 6, lines 24-25), but no exhibits were actually attached. Because these
1 structured the contracts to avoid those requirements. SAC, ¶ 58.
2 For example, Fallon alleges that, for the 2015-16 school year, defendants Watson
3 and Delgadillo priced Bell Transit’s initial contract at $41,700 to avoid the $45,000
4 threshold, then incrementally increased the contract 16 times over the course of the
5 school year, resulting in a final contract amount of over $2 million. SAC, ¶ 61. Fallon
6 argues that California public contracting law makes it unlawful to “split” a contract or
7 “separate [it] into smaller work orders” for purposes of evading competitive bidding
8 requirements. SAC, ¶ 60 (citing Cal. Pub. Contract Code § 20116). Fallon argues that
9 the bid-splitting rendered the taxi contracts void, and that any claim for payment on those
10 void contracts was false/fraudulent.
11 Fallon also provides an example of a transportation contract for Bell Transit that
12 was submitted to the school board on October 26, 2016, by defendant Wayne, without
13 having been subjected to the required competitive bidding process. SAC, ¶¶ 65-72.
14 As to category (3), Fallon alleges that Bell Transit hired Emmanuel Delgadillo2, the
15 son of HUSD employee Miriam Delgadillo, because Bell Transit knew that Miriam
16 Delgadillo “could control the award and amount of taxi service contracted for by HUSD.”
17 SAC, ¶ 78. Fallon alleges that Bell Transit’s failure to disclose this conflict of interest was
18 a material omission from each transportation contract. SAC, ¶ 81. Fallon also alleges
19 that, through Emmanuel, Bell Transit knew that HUSD was inflating the number of
20 students for whom taxi transportation was needed. SAC, ¶ 82.
21 Separate from the three categories of alleged false claims, Fallon also asserts a
22 cause of action for employment retaliation. Specifically, Fallon alleges that, as a result of
23 reporting the alleged false claims, he was subjected to “severe harassment” including
24 “multiple threats of termination of employment,” and that his job was ultimately eliminated
25 due to a pretextual “budget shortfall.” SAC, ¶ 93.
26
27
2 Fallon also alleges that Emmanuel Delgadillo was an employee of MCET before being
1 Based on the above allegations, Fallon asserts seven causes of action:
2 (1) Presentation of false claims in violation of the federal False Claims Act, 31 U.S.C.
§ 3729(a)(1)(A), against all defendants,
3
(2) Making materially false records or statements in violation of the federal False
4 Claims Act, 31 U.S.C. § 3729(a)(1)(B), against all defendants,
(3) Knowingly concealing or avoiding an obligation to pay (i.e., “reverse false claims”)
5
in violation of the federal False Claims Act, 31 U.S.C. § 3729(a)(1)(G), against all
6 defendants,
(4) Presentation of false claims in violation of the California False Claims Act, Cal.
7
Gov’t Code § 12651(a)(1), against all defendants,
8 (5) Making materially false records or statements in violation of the California False
Claims Act, Cal. Gov’t Code § 12651(a)(2), against all defendants,
9
(6) Knowingly concealing or avoiding an obligation to pay (i.e., “reverse false claims”)
10 in violation of the California False Claims Act, Cal. Gov’t Code § 12651(a)(7),
against all defendants,
11
(7) Retaliation in violation of 31 U.S.C. § 3730(h) and Cal. Labor Code § 1102.5,
12 against defendants HUSD, Wayne, Delgadillo, Rogers, and Watson.
13 HUSD and Bell Transit have both filed motions to dismiss the SAC in its entirety,
14 without leave to amend. Fallon has filed a motion to strike certain arguments made in
15 Bell Transit’s reply, arguing they constitute “new argument.”
16 DISCUSSION
17 A. Legal standard
18 1. Motion to dismiss
19 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests for the
20 legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, 349 F.3d 1191,
21 1199–1200 (9th Cir. 2003). Under Federal Rule of Civil Procedure 8, which requires that
22 a complaint include a “short and plain statement of the claim showing that the pleader is
23 entitled to relief,” Fed. R. Civ. P. 8(a)(2), a complaint may be dismissed under Rule
24 12(b)(6) if the plaintiff fails to state a cognizable legal theory, or has not alleged sufficient
25 facts to support a cognizable legal theory. Somers v. Apple, Inc., 729 F.3d 953, 959 (9th
26 Cir. 2013).
27 While the court is to accept as true all the factual allegations in the complaint,
1 accepted. Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009). The complaint must proffer
2 sufficient facts to state a claim for relief that is plausible on its face. Bell Atl. Corp. v.
3 Twombly, 550 U.S. 544, 555, 558–59 (2007) (citations and quotations omitted).
4 A claim has facial plausibility when the plaintiff pleads factual content that allows
5 the court to draw the reasonable inference that the defendant is liable for the misconduct
6 alleged.” Iqbal, 556 U.S. at 678 (citation omitted). “[W]here the well-pleaded facts do not
7 permit the court to infer more than the mere possibility of misconduct, the complaint has
8 alleged—but it has not ‘show[n]’—that the pleader is entitled to relief.’” Id. at 679. Where
9 dismissal is warranted, it is generally without prejudice, unless it is clear the complaint
10 cannot be saved by any amendment. Sparling v. Daou, 411 F.3d 1006, 1013 (9th Cir.
11 2005).
12 Because at least some of plaintiff’s claims sound in fraud, the complaint must also
13 meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). See
14 Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). Rule 9(b) requires a
15 party alleging fraud or mistake to state with particularity the circumstances constituting
16 fraud or mistake. To satisfy this standard, the “complaint must identify the who, what,
17 when, where, and how of the misconduct charged, as well as what is false or misleading
18 about the purportedly fraudulent statement, and why it is false.” Salameh v. Tarsadia
19 Hotel, 726 F.3d 1124, 1133 (9th Cir. 2013) (citation and internal quotation marks
20 omitted).
21 Review is generally limited to the contents of the complaint, although the court can
22 also consider a document on which the complaint relies if the document is central to the
23 claims asserted in the complaint, and no party questions the authenticity of the
24 document. See Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007). The court may
25 consider matters that are properly the subject of judicial notice, Knievel v. ESPN, 393
26 F.3d 1068, 1076 (9th Cir. 2005); Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th
27 Cir. 2001), and may also consider exhibits attached to the complaint, see Hal Roach
1 documents referenced extensively in the complaint and documents that form the basis of
2 a the plaintiff’s claims. See No. 84 Emp’r-Teamster Jt. Counsel Pension Tr. Fund v. Am.
3 W. Holding Corp., 320 F.3d 920, 925 n.2 (9th Cir. 2003).
4 If dismissal is warranted, it is generally without prejudice, unless it is clear that the
5 complaint cannot be saved by any amendment. Sparling, 411 F.3d at 1013.
6 2. Motion to strike
7 Federal Rule of Civil Procedure 12(f) provides that the court “may strike from a
8 pleading any insufficient defense or any redundant, immaterial, impertinent, or
9 scandalous matter.” Fed. R. Civ. P. 12(f). “The function of a [Rule] 12(f) motion to strike
10 is to avoid the expenditure of time and money that must arise from litigating spurious
11 issues by dispensing with those issues prior to trial.” Whittlestone, Inc. v. Handi-Craft
12 Co., 618 F.3d 970, 973 (9th Cir. 2010).
13 Motions to strike are not favored and “should not be granted unless it is clear that
14 the matter to be stricken could have no possible bearing on the subject matter of the
15 litigation.” Colaprico v. Sun Microsystem, Inc., 758 F. Supp. 1335, 1339 (N.D. Cal. 1991).
16 When a court considers a motion to strike, it “must view the pleadings in light most
17 favorable to the pleading party.” Uniloc v. Apple, Inc., 2018 WL 1640267, at *1 (N.D. Cal.
18 Apr. 5, 2018). A court must deny the motion to strike if there is any doubt whether the
19 allegations in the pleadings might be at issue in the action. In re 2TheMart.com, Inc.,
20 Sec. Litig., 114 F. Supp. 2d 955, 965 (C.D. Cal. 2000). Ultimately, the decision “to grant
21 a motion to strike lies within the sound discretion of the district court.” Rees v. PNC
22 Bank, N.A., 308 F.R.D. 266, 271 (N.D. Cal. 2015).
23 B. Legal Analysis
24 1. HUSD’s motion to dismiss
a. School district immunity
25
In its motion to dismiss, HUSD argues that it is immune from liability under both
26
the federal and state False Claims Act. It argues that California school districts are “arms
27
1 the federal and state versions of the FCA impose liability only on a “person” who makes a
2 false claim, and that a school district is not a “person” for purposes of the statutes.
3 Fallon’s opposition does not contest the immunity of the school district.
4 The Ninth Circuit has indeed concluded that school districts are immune from FCA
5 liability. Stoner v. Santa Clara Office of Educ., 502 F.3d 1116 (9th Cir. 2007).
6 The Stoner court first explained that the FCA subjects to liability any “person” who
7 knowingly presents, or causes to be presented, a false claim for payment to the
8 government. Id. at 1121. Prior to Stoner, the Supreme Court had held that a state
9 agency is not a “person” for FCA purposes. Vt. Agency of Natural Res. v. United States
10 ex rel. Stevens, 529 U.S. 765, 787-88 (2000). The Stoner court applied that reasoning
11 and held that school districts are arms of the state and thus immune to FCA liability.3 502
12 F.3d at 1123.
13 Importantly, the Stoner court specifically concluded that, even if the language of
14 the FCA did not limit liability only to “persons,” the school district would still be immune
15 under the Eleventh Amendment. 502 F.3d at 1123. In other words, there was both a
16 statutory and a constitutional basis for finding the school district immune.
17 The California Supreme Court in Wells v. One2One Learning Foundation also
18 concluded that, under the California False Claims Act, public school districts may not be
19 sued because they are not “persons” under the Act. 39 Cal.4th 1164, 1189-90 (2006).
20 Thus, because HUSD is immune to claims brought under the federal and state
21 False Claims Act, its motion to dismiss is GRANTED on that basis and the first through
22 sixth causes of action against it are DISMISSED without leave to amend.
23 b. Individual immunity
24 While Fallon does not contest the immunity of the school district, he does contest
25 the immunity of the individual school district defendants. The school district defendants
26
27
3 The court notes that this holding applies only to FCA claims involving false claims for
1 are: Matthew Wayne, Miriam Delgadillo, Luci Rogers, and Tami Watson. The SAC states
2 that these defendants are being sued in their individual capacities. SAC, ¶¶ 20, 21, 24,
3 26.
4 HUSD argues that the employees were acting “within the course and scope of
5 their employment,” and thus should be entitled to the same immunity as their public-entity
6 employer.
7 The Ninth Circuit in Stoner addressed the issue of individual defendant immunity
8 for state employees. 502 F.3d 1116. The court concluded that “state employees sued in
9 their individual capacities are persons who may be subject to liability for submitting a
10 false claim to the United States.” 502 F.3d at 1124. As mentioned above, the SAC
11 specifies that the individual HUSD defendants are being sued in their individual, not
12 official, capacities. And because the California FCA is “patterned after” the federal FCA,
13 defendants acting outside the scope of their employment would not be immune under
14 either law. Wells, 39 Cal.4th at 1187.
15 HUSD makes the related argument that, because the school district indemnifies its
16 employees, a suit against the individual employees is “tantamount” to a suit against the
17 district, and thus the same immunity should apply.
18 However, indemnification would apply only if the individual defendants were acting
19 in the scope of their employment. As mentioned above, Fallon alleges that the individual
20 defendants were acting outside of their scope of employment in this case. Moreover, the
21 Stoner court directly addressed the indemnification argument, holding that “the fact that a
22 state may choose to indemnify the employees for any judgment rendered against them”
23 does not change the immunity analysis. 502 F.3d at 1125.
24 Thus, because Fallon alleges that the individual defendants were not acting within
25 the scope of their employment, the court denies HUSD’s motion to the extent that it seeks
26 dismissal of the FCA claims against the individual defendants based on immunity.
27 c. Sufficiency of the pleadings under Rule 9(b)
1 from FCA liability, the court will now address whether the SAC adequately states a claim
2 against the individual HUSD defendants: Wayne, Delgadillo, Rogers, and Watson.
3 HUSD argues that the SAC does not state a claim against defendants Delgadillo
4 or Watson because it uses conclusory terms like “falsely” and “illegally” without actually
5 alleging the “specific content of the false representations.” HUSD addresses the bid-
6 splitting allegations, arguing that they “describe nothing more than internal contract
7 practices by a school district.” Dkt. 84 at 20. Regarding the alleged conflict of interest
8 between Delgadillo and her son Emmanuel, HUSD argues that even if Delgadillo were
9 “inflating” business for Bell Transit, she may have done so because “they were easier to
10 work with and sent them more business.” Dkt. 84 at 21.
11 HUSD argues that the SAC does not state a claim against Rogers because the
12 only allegation is that she “approved the increments” of the 2015-16 contract with Bell
13 Transit. Dkt. 84 at 21.
14 HUSD then discusses the allegations against defendant Wayne. The SAC alleges
15 that he submitted a proposed contract to the school board that “misrepresented and
16 substantially overstated the number of students” transported by Bell Transit in 2015-16,
17 and also “overstated the number of students to be served by Bell Transit in the 2016-17
18 school year.” Dkt. 84 at 21. The SAC further alleges that Wayne submitted the contract
19 for board approval without any public bidding process, even though a public bidding
20 process was required. HUSD argues that these allegations are “not specific enough” to
21 give Wayne “notice of the particular misconduct” alleged. HUSD also argues that the
22 SAC does not allege that Wayne actually presented a fraudulent statement to the
23 government, because Fallon alleges that he “himself prevented Wayne from moving
24 forward with any improper conduct.”
25 Fallon’s opposition argues that Delgadillo and Watson caused false claims to be
26 submitted “by reason of the falsely inflated charges issued in the contract.” Fallon further
27 argues that “defendants” created false records “in the form of falsely characterized
1 contracts issued in violation of state bid-splitting laws are automatically rendered void,
2 making any payment on them illegal. Fallon similarly argues that the “fatal” conflict of
3 interest between HUSD employee Delgadillo and her son Emmanuel at Bell Transit
4 rendered the relevant contracts void.
5 The Ninth Circuit has spelled out the level of detail needed to withstand a Rule
6 9(b) challenge in a false claims case. Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998
7 (9th Cir. 2010). In Ebeid, a plaintiff-relator filed suit against a physician who owned a
8 health-care business, based on the generalized claim that the physician was “engaged in
9 the unlawful corporate practice of medicine,” thus making all of the business’s Medicare
10 claims fraudulent. 616 F.3d at 995. The court concluded that these allegations lacked
11 the particularity required by Rule 9(b), as they were instead a “global indictment” of the
12 defendant’s business. Id. at 1000. However, the Ebeid court also explained the level of
13 specificity that would be needed, and took a position that was less exacting than some
14 other circuits.
15 Specifically, at the time Ebeid was decided, some circuits had taken the position
16 that a plaintiff-relator must identify “representative examples of false claims to support
17 every allegation.” The Ebeid court rejected that approach, and instead “join[ed] the Fifth
18 Circuit in concluding, in accord with general pleading requirements under Rule 9(b), that
19 it is sufficient to allege ‘particular details of a scheme to submit false claims paired with
20 reliable indicia that lead to a strong inference that claims were actually submitted.’” 616
21 F.3d at 998-99 (“In our view, use of representative examples is simply one means of
22 meeting the pleading obligation.”).
23 Thus, the relevant standard for analyzing the SAC’s allegations is whether they
24 allege “particular details of a scheme” to submit false claims, along with “reliable indicia
25 that lead to a strong inference that claims were actually submitted.” The court will now
26 apply the Ebeid standard to the three categories of alleged wrongdoing, as set forth in the
27 ‘background’ section of this order.
i. Alleged wrongdoing – category (1)
1
Category (1) covers the complaint’s allegations that HUSD employees were
2
inflating the number of special needs students in need of taxi transportation. See SAC,
3
¶¶ 48-56.
4
The alleged “falsity” is straightforward here – the number of students needing
5
transportation. Fallon alleges that the individual HUSD defendants falsely overstated the
6
number of students needing individual transportation.
7
Also, the fact that the number of individually-transported students was so
8
drastically decreased after Fallon’s complaint serves as “reliable indicia” that false claims
9
were actually submitted. As alleged in the SAC, no fewer than 135 students per year
10
received individual transportation from 2011 to 2016. Then, after Fallon complained, the
11
number dropped to 13 the next year. SAC, ¶¶ 53-54.
12
HUSD takes issue with Fallon attributing a “monetary” motive to the individual
13
defendants without more specificity, but the Ninth Circuit has actually held that a plaintiff-
14
relator “need not allege that the individual defendants personally profited from such false
15
submissions.” Stoner, 502 F.3d at 1124. The FCA requires only a false submission, it
16
does not require the person making a false submission “to obtain a personal benefit from
17
the wrongful act.” Id.; see also U.S. v. Bourseau, 531 F.3d 1159, 1167 (9th Cir. 2008)
18
(“No proof of specific intent to defraud is required. The requisite intent is the knowing
19
presentation of what is known to be false, as opposed to innocent mistake or mere
20
negligence.”).
21
As to the allegations of category (1), Fallon has adequately stated a claim for
22
“presentation” of false claim under section 3729(a)(1)(A) and making a “false record or
23
statement” under section 3729(a)(1)(B) (and their state law equivalents)4 as to
24
defendants Delgadillo and Watson, who are alleged to have “handled exclusively” the taxi
25
contracts. SAC, ¶ 57. HUSD’s motion to dismiss is DENIED to the extent that it seeks
26
dismissal of those claims.
27
1 As to defendant Wayne, the complaint alleges that he presented documents to the
2 school board that “overstated” the number of students needing/receiving transportation.
3 SAC, ¶ 67. Because this case is still in the pleading stage, the court concludes that
4 Fallon has adequately alleged the “particular details of a scheme” to submit false claims,
5 along with “reliable indicia that lead to a strong inference” that the claims were actually
6 submitted, and Wayne’s inflation of numbers is alleged to be part of the same scheme as
7 Delgadillo and Watson’s alleged inflation of numbers. Accordingly, HUSD’s motion to
8 dismiss is DENIED to the extent it seeks dismissal of the category (1)-related claims for
9 “presentation” of false claim under section 3729(a)(1)(A) and making a “false record or
10 statement” under section 3729(a)(1)(B) (and their state law equivalents) as to defendant
11 Wayne.
12 The complaint does not allege that defendant Rogers was involved in any alleged
13 number-inflation. Thus, HUSD’s motion to dismiss is GRANTED as to defendant Rogers
14 as to all claims related to category (1). However, out of an abundance of caution, the
15 court will grant leave to amend, to allow plaintiff to have one additional opportunity to
16 state a claim against defendant Rogers relating to the alleged inflation of the number of
17 students needing individual taxi transportation.
18 ii. Alleged wrongdoing – category (2)
19 Category (2) covers the allegations that the HUSD defendants split bids to avoid
20 the $45,000 threshold for requiring school board approval and competitive bidding. See
21 SAC, ¶¶ 57-72.
22 In contrast to category (1), the alleged “falsity” in category (2) is not as
23 straightforward. While it is true that California public contracting law prohibits the splitting
24 of projects for the purpose of evading competitive bidding, it does not automatically follow
25 that submission of an unlawfully-split contract is “false” or “fraudulent.”
26 While there is no controlling authority on point, the parties’ arguments focus on a
27 relevant case from the D.C. Circuit, U.S. ex rel. Siewick v. Jamieson Science and
1 was a “revolving door” restriction on former government employees working on
2 government contracts. The Siewick relator argued that every contract on which the
3 former government employee worked was “tainted” by the revolving door violation, and
4 thus “self-destructed into voidness.” Id. at 1375, 1376. The court rejected that argument,
5 holding instead that any revolving door violation merely gave the government the option
6 to void the contract. Id. at 1377. The court explained that the government could have
7 many reasons for continuing to honor the contract: “the officials authorized to decide
8 might regard the violation as minor, they might think that the criminal penalties provide
9 ample punishment of the present violation and deterrence of future ones, [or] they might
10 be concerned that disaffirmance would unduly impede future transactions with the
11 contracting firm.” Id. In short, “longrun interests often argue against pushing legal rights
12 to the hilt.” Id.
13 A state appeals court reached a similar conclusion in another case, concluding
14 that improper contracts may be “declared void,” but are not automatically rendered void.
15 San Bernadino County v. Superior Court, 239 Cal.App.4th 679 (2015).
16 Fallon does cite case law for the proposition that the competitive bidding
17 requirement in this case is different than the “revolving door” rules in Sienick.
18 Specifically, Fallon cites a California Supreme Court case from 1942 stating that
19 municipal contracts approved without the required competitive bidding process are “void”
20 and “cannot be ratified.” Miller v. McKinnon, 20 Cal.2d 83, 88 (1942). However, other
21 than providing a citation to Miller, Fallon does not connect the dots and provide examples
22 of courts applying Miller to the context of the False Claims Act. Based on the arguments
23 made in the papers, HUSD’s motion is GRANTED as to the category (2)-related
24 allegations against all individual defendants. However, Fallon is granted leave to amend.
25 iii. Alleged wrongdoing – category (3)
26 Category (3) covers the allegations that the HUSD defendants failed to disclose a
27 conflict of interest between HUSD employee Miriam Delgadillo and her son Emmanuel,
1 The alleged “falsity” is not straightforward here. Fallon’s theory is that the failure
2 to disclose the conflict of interest rendered it void, and therefore false. In that sense, this
3 theory is similar to the competitive bidding theory. And Fallon has also cited case law
4 where the California Supreme Court held that a contract affected with a “prohibited”
5 financial conflict of interest is “void from its inception.” Lexin v. Superior Court, 47 Cal.4th
6 1050, 1073 (2010). However, the Lexin court also acknowledged that not every conflict
7 of interest renders a contract void. Some alleged conflicts might be only “remote”
8 interests, and some might implicate only “minimal” interests, and in those instances, the
9 contracts would not automatically be rendered void. Id.
10 More importantly, as with category (2), Fallon provides no support for connecting
11 the dots between an allegedly-invalid contract and a False Claims Act cause of action.
12 As a result, the court GRANTS HUSD’s motion to the extent it seeks dismissal of the
13 category (3) allegations against the individual defendants. Again, out of an abundance of
14 caution, the court grants plaintiff leave to amend.
15 d. Reverse false claims
16 The court addresses the “reverse false claims” causes of action separately
17 because they can be dismissed as a whole, regardless of the allegation categories. A
18 “reverse” FCA claim is called “reverse” because, rather than fraudulently taking money
19 from the government, these claims cover the fraudulent failure to return money owed to
20 the government. The Ninth Circuit has explained that a “reverse” FCA claim cannot be a
21 simple repackaging of a standard FCA claim, because “Congress intended the reverse
22 false claims provision to apply only to existing legal duties to pay or deliver property.”
23 U.S. v. Bourseau, 531 F.3d 1159, 1169 (9th Cir. 2008) (internal citation omitted).
24 The reverse FCA causes of action in this case are merely repackaged versions of
25 standard FCA claims. Fallon claims that defendants wrongfully claimed money from the
26 government, and then claims that the retention of that falsely-claimed money is itself a
27 reverse claims act violation. That is not what the statute was intended to cover.
1 like. In that case, the defendant was a Medicare provider, and received estimated
2 “interim” payments from the government throughout the year for covered Medicare
3 services. At the end of each reporting period, the provider was required to report any
4 “overpayments” made by the government. A bench trial established that the defendant
5 had “concealed and decreased amounts they were obligated to repay to Medicare,” and
6 thus were liable for a reverse FCA claim. 531 F.3d at 1170. That is not the situation
7 alleged in the SAC, and thus, HUSD’s motion is GRANTED to the extent it seeks
8 dismissal of both the federal and state reverse FCA causes of action. Because this
9 deficiency could not be cured by amendment, no leave to amend is granted.
10 e. Retaliation
i. School district liability
11
12 HUSD argues that its immunity from FCA liability should also provide immunity
13 from liability for a retaliation claim. As mentioned above, Fallon did not actually contest
14 the district’s immunity.
15 HUSD largely relies on the reasoning of the Ninth Circuit’s opinion in Stoner.
16 However, the case does not apply with the same force here. As discussed above, the
17 Stoner court found that school districts were immune from FCA liability for two reasons:
18 (1) the FCA “presentation” and “false records” provisions limit liability only to “a person”
19 who violates the statute, and a school district was not a person, and (2) the Eleventh
20 Amendment precludes liability against an arm of the state.
21 In the context of retaliation claims, argument (1) does not apply, because the Ninth
22 Circuit has held that section 3730(h) applies to “employers,” not just to “persons.”
23 Hopper v. Lockheed Martin Corp., 668 F.3d 1037, 1044 (9th Cir. 2012). While a school
24 district is not a “person,” it can be an “employer.”
25 Argument (2) does appear to apply to the school district. That said, HUSD cites a
26 Ninth Circuit case where the court did not find a school district to be automatically
27 immune from retaliation liability under section 3730, and instead examined the facts to
1 Because Fallon did not challenge the school district’s immunity, the court
2 considers Fallon to have waived any opposition to the argument, and the court will
3 GRANT HUSD’s motion to dismiss the retaliation claim against the school district without
4 leave to amend. The court does not reach the merits of whether a school district is
5 automatically immune from retaliation liability under section 3730.
6 ii. Individual liability
7 The next issue is the viability of Fallon’s retaliation claims against the individual
8 HUSD defendants.
9 As mentioned above, the federal FCA retaliation statute has been interpreted to
10 impose liability only on an “employer” who retaliates against an employee. HUSD argues
11 that the individual defendants were not Fallon’s “employer,” and thus cannot be subjected
12 to liability under the FCA. However, HUSD cites no controlling case law for this
13 proposition under federal law. In fact, it again cites Hopper, which undercuts its
14 argument, because in Hopper, a retaliation claim against an individual defendant (the
15 school principal) went all the way to a jury. 91 F.3d at 1269.
16 However, even if individual defendants can be theoretically held liable for
17 retaliation under federal law, the complaint still lacks any specific retaliation-related
18 allegations against any individual defendants. For that reason, HUSD’s motion to dismiss
19 the seventh cause of action is GRANTED as to the individual defendants, though Fallon
20 will be given leave to amend this claim as to the individual defendants.
21 The state-law retaliation analysis is different. The state retaliation law originally
22 limited its applicability to an “employer,” but it was amended in 2014 to also cover “any
23 person acting on behalf of an employer.” Cal. Labor Code § 1102.5(a). However, even
24 after the amendment, courts have been unwilling to conclude that individual employees
25 may be liable for retaliation. See Minor v. FedEx Office & Print Services, 182 F.Supp.3d
26 966, 990 (N.D. Cal. 2016) (“the court declines to determine whether individual liability is
27 available under § 1102.5.”); see also United States ex rel. Lupo v. Quality Assurance
1 the California Supreme Court were ever to consider the issue, it would hold that there can
2 be no individual liability under section 1102.5.”). That said, there is no controlling Ninth
3 Circuit authority on the issue.
4 Even putting aside the immunity issue, the complaint does not allege any specific
5 retaliation-related conduct by the individual defendants. For that reason, the state-law
6 retaliation claim is DISMISSED, but out of an abundance of caution, Fallon will be given
7 leave to amend his state law retaliation claim against the individual defendants.5
8 2. Bell Transit’s motion to dismiss
9 Some of the issues raised by Bell Transit’s motion were already addressed above
10 in the context of HUSD’s motion, so the court will not repeat the analysis here. For
11 instance, the reverse FCA claims are dismissed for the same reasons explained above.
12 And the claims arising out of categories (2) and (3) of the false claim allegations (i.e., the
13 public bidding-related and conflict of interest-related allegations) are dismissed, with
14 leave to amend, for the same reasons.
15 Other issues raised by HUSD – specifically, issues of immunity and retaliation –
16 are not implicated by Bell Transit’s motion, so they will not be discussed here.
17 The only remaining issues raised by this motion revolve around the sufficiency of
18 the category (1) allegations (i.e., inflating the number of special needs students in need of
19 taxi transportation) as asserted against Bell Transit.
20 A threshold issue raised by Bell Transit is the argument that Emmanuel Delgadillo
21 never actually worked for Bell Transit. Bell Transit first hints at this argument in a
22 footnote in their motion (Dkt. 83 at 9, n.1), and then in the reply, it states that Emmanuel
23 “in fact never worked at Bell Transit, see infra II.G,” but there is no section II.G – the reply
24 goes from section II.F to section III. Dkt. 98 at 12.
25 The presumed reason why Bell Transit mentions this issue only obliquely is that it
26
5 HUSD also argues that the federal and state retaliation claims should be dismissed for
27
failure to state claims in separate counts as required by Rule 10(b). The court declines to
1 appears to concede that “the time to contest factual allegations is not now.” Dkt. 83 at 9,
2 n.1. However, even taking the allegations as true that Emmanuel was an employee of
3 Bell Transit, the basis for charging Bell Transit with knowledge of the alleged inflation
4 scheme is not adequately alleged in the complaint.
5 In fact, the overall problem with the allegations against Bell Transit is that, even if
6 the court finds the inflation-related allegations to state a claim, those allegations do not
7 make clear how Bell Transit was involved in the actual presentation of a false claim (or
8 any related false records/statements). While Bell Transit may have benefitted from any
9 false inflation of student transportation needs made by HUSD, Fallon has not adequately
10 alleged facts showing that Bell Transit was involved in either presenting a false claim, or
11 causing a false claim to be presented, or causing a false record to be made or used. For
12 that reason, Bell Transit’s motion to dismiss is GRANTED. For the same reasons
13 described above in the context of HUSD’s motion, Fallon is granted leave to amend his
14 first, second, fourth, and fifth causes of action against Bell Transit. Fallon is not granted
15 leave to amend on his third and sixth causes of action for reverse false claims.
16 3. Fallon’s motion to strike
17 After Bell Transit filed its reply brief, Fallon filed a motion to strike Bell Transit’s
18 allegedly-new arguments regarding the requirements of state contracting law. Bell
19 Transit filed an opposition/response stating that the arguments were responsive to
20 arguments raised in Fallon’s opposition brief, but also expressing its willingness to
21 withdraw the challenged arguments, because the specifics of state contracting law are
22 not critical to its argument that the complaint should be dismissed.
23 The court did not rely on the challenged arguments, and thus Fallon’s motion to
24 strike is DENIED as moot.
25 CONCLUSION
26 For the foregoing reasons, the court rules as follows. HUSD’s motion to dismiss is
27 GRANTED on all claims asserted against HUSD, without leave to amend.
1 and DENIED in part. Specifically, HUSD’s motion to dismiss is DENIED as to defendants
2 Delgadillo, Watson, and Wayne on the first, second, fourth, and fifth causes of action, to
3 the extent those causes of action are based on the allegation that defendants inflated the
4 number of students needing individual transportation. HUSD’s motion to dismiss is
5 GRANTED, with leave to amend, as to all individual defendants on the remaining portions
6 (i.e., the bid-splitting allegations and the conflict-of-interest allegations) of the first,
7 second, fourth, and fifth causes of action.
8 HUSD’s motion to dismiss is GRANTED, without leave to amend, as to the third
9 and sixth causes of action (reverse false claims) asserted against all individual
10 defendants. HUSD’s motion to dismiss is GRANTED, with leave to amend, as to all
11 individual defendants on the seventh cause of action for retaliation.
12 Bell Transit’s motion to dismiss is GRANTED, with leave to amend, as to the first,
13 second, fourth, and fifth causes of action. Bell Transit’s motion to dismiss is GRANTED,
14 without leave to amend, as to the third and sixth causes of action.
15 Fallon’s motion to strike is DENIED as moot.
16 Fallon shall have 21 days from the date of this order to file a third amended
17 complaint to cure the deficiencies noted in this order. No new claims or parties may be
18 added without leave of court or the agreement of all parties. The court also sets a case
19 management conference for May 20, 2021, at 2:00 p.m.
20 The court hereby enters an ORDER TO SHOW CAUSE why defendants MCET
21 and Functional Floors should not be dismissed for plaintiff’s failure to timely serve them
22 the original, first amended, and second amended complaints in violation of Fed. R. Civ.
23 P. § 4(m). A written response to the OSC or a dismissal of these defendants must be
24 filed within 7 days from the date of this order.
25 IT IS SO ORDERED.
26 Dated: March 15, 2021
27 /s/ Phyllis J. Hamilton