UNITED STATES OF AMERICA v. MAGEE WOMENS RESEARCH INSTITUTE AND FOUNDATION

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

UNITED STATES OF AMERICA )

)

MICHELLE RUGGERI,

) 2:19-CV-862-NR

individually, )

)

)

Plaintiff,

)

)

v.

)

)

MAGEE-WOMENS RESEARCH )

INSTITUTE AND FOUNDATION; )

UNIVERSITY OF PITTSBURGH; )

)

UNIVERSITY OF PITTSBURGH )

MEDICAL CENTER; and UPMC )

MAGEE-WOMENS HOSPITAL, )

)

)

Defendants. )

OPINION

Relator Michelle Ruggeri brings this action against Defendants

Magee-Womens Research Institute and Foundation (the “Foundation”), the

University of Pittsburgh (the “University”), UPMC, and UPMC Magee-Womens

Hospital (the “Hospital”), alleging substantive violations of and retaliation under the

False Claims Act. Each Defendant has moved to dismiss the Second Amended

Complaint. For the following reasons, the Court will grant the motion of UPMC and

the Hospital (ECF 118) in its entirety; grant the motion of the University (ECF 112)

in part; and deny the motion of the Foundation, with some narrowing of the theories

of liability that may proceed (ECF 115).

BACKGROUND

I. The Foundation receives grant funding from the National Institutes

of Health.

Accepting as true the well-pled allegations in the Second Amended Complaint,

the Foundation is a nonprofit corporation and research institute focused on women’s

health research and education. ECF 90, ¶ 53. Though the Foundation is an

independent entity with its own board of directors, it doesn’t have its own employees.

¶¶ 54-55. Instead, UPMC and Magee-Womens Hospital essentially “lease”

employees to the Foundation and provide office and research space and

administrative services, including payroll, HR, email, and research support. ¶¶

26, 55-56. The Foundation, in turn, reimburses UPMC and the Hospital for providing

the employees, space, and services. ECF 90-2, p. 77; ECF 90-3, p. 86.

At the time of the relevant conduct here, the Foundation received 73% of its

funding from grants awarded by the National Institutes of Health. ECF 90, ¶ 51.

Recipients of NIH grants must abide by certain requirements outlined in the Uniform

Grant Guidance (2 C.F.R. § 200 ) and NIH’s Grants Policy Statement. ECF 90,

¶ 89. As relevant here, NIH grant recipients: (1) must have adequate financial

management and internal controls systems, as stated in 2 C.F.R. § 200.302 and 45

C.F.R. § 75.302 (ECF 90, ¶¶ 93-96); (2) must not mismanage funds by improperly

transferring costs to federal grants ( ¶¶ 99-105); and (3) must report income

generated by a grant-supported activity ( ¶¶ 107-109).

A grant recipient makes representations and certifications to NIH over the

lifecycle of a grant, including that the recipient will comply with NIH guidelines and

that making false or misrepresentative statements to NIH can result in penalties.

¶ 115. As a prerequisite to receiving a disbursement, a recipient must provide NIH

with financial and project performance reports and budgets, including a certification

that the reports are true. ¶¶ 118-133. NIH may adjust its disbursements

depending on the representations in the progress reports. ¶¶ 132-34.

II. Ms. Ruggeri’s employment as the Foundation’s Director of Grants and

Contracts.

In September 2017, the Hospital hired Ms. Ruggeri as the Foundation’s

Director of Grants and Contracts to “revamp” the Foundation’s internal accounting

and compliance systems. ¶¶ 32, 288. Ms. Ruggeri discovered that the Foundation

lacked internal accounting controls and engaged in improper accounting practices

that potentially violated NIH’s Grants Policy Statement. ¶ 35. She undertook

reform measures to bring the Foundation into compliance, including meeting with

executives and directors of the Foundation, the University, and UPMC; halting

improper accounting practices; and attempting to implement a new accounting

system. ¶ 288.

Ms. Ruggeri alleges that her superiors—including Dr. Yoel Sadovsky, the

Executive Director of the Foundation and a board member ( ¶ 63), Michael

Annichine, the CEO of the Foundation and a board member ( ¶ 64), and Sara

Arvay, Senior Director of the Foundation ( ¶ 67)—resisted her efforts. ¶¶ 290-

304. Frustrated with their stonewalling, on April 2, 2018, Ms. Ruggeri drafted an

Assessment of Grant Compliance, shared it with her superiors, and then, going

outside the chain of command, delivered it to Dr. Robert Edwards, a Department

Chair at the University and a member of the Foundation’s board. ¶¶ 38, 306-14.

In this assessment, Ms. Ruggeri “detailed specific failures and applicable regulations

that created potential liability under the False Claims Act and included

recommendations for addressing them.” ¶¶ 315-17. Hours after delivering her

assessment to Dr. Edwards, Mr. Annichine terminated Ms. Ruggeri’s employment.

¶ 319.

III. Ms. Ruggeri alleges three institutional deficiencies that she asserts

amount to FCA violations.

Ms. Ruggeri points to three schemes and certifications that Defendants

committed in violation of the FCA.

First, she alleges that the Foundation failed to maintain an adequate

accounting and financial system. Under Grants Policy Statement § 8.3.1, grant

recipients agree to maintain a financial management system that complies with the

standards and requirements set forth in 2 C.F.R. § 200.302 and 45 C.F.R. § 75.302.

ECF 90, ¶¶ 93-96; Grants Policy Statement § 8.3.1. But Ms. Ruggeri alleges

that the Foundation’s system was “outdated and obsolete,” “cumbersome,” and highly

limited in its ability to produce reports, trace expenditures, and budget, such that the

budgets and reports that the Foundation submitted to NIH “could not be accurate.”

¶¶ 98, 167-75. Defendants violated the FCA by fraudulently inducing NIH to

award grants and disburse funds by falsely certifying that the Foundation’s system

was compliant, and by making false certifications to NIH every time an inaccurate

budget or report was submitted. ¶¶ 97-98.

Second, Ms. Ruggeri pleads that Defendants improperly spent federal grant

money on unauthorized costs for unrelated projects in a “spenddown” scheme. Under

the Grants Policy Statement, a grant recipient generally may not transfer costs from

non-federal grant accounts to federal grant accounts, unless the cost was incurred

specifically for that federal award and benefitted the account receiving the federal

award. ¶¶ 101-106; 2 C.F.R. § 200.405(a). Ms. Ruggeri alleges that the

Foundation routinely transferred costs—namely, employee salaries—from unrelated

accounts with a budget deficit to federal award accounts with a budget surplus. ECF

90, ¶¶ 186-247. In other words, the Foundation, with the sign-off of employees of the

University, charged costs to federal grant accounts for work performed on unrelated

projects. Thus, the Foundation and the University submitted factually false claims

to NIH and falsely certified compliance. ¶ 106.

Third, Ms. Ruggeri alleges that the Foundation failed to report “program

income”—that is, income that was directly generated by the grant-supported activity

or earned through the grant—to NIH. ¶ 107. Ms. Ruggeri alleges that the

Foundation received program income in the form of costs saved, but either

underreported or failed to report those funds. ¶¶ 265-73.

IV. Procedural background.

In July 2019, Ms. Ruggeri brought this action on behalf of the United

States against Defendants for substantive violations of the False Claims Act, and

individually for retaliation. ECF 2 (Complaint); ECF 14 (First Amended Complaint).

The government spent more than three years purportedly investigating Ms. Ruggeri’s

allegations before ultimately declining to intervene in the matter. ECF 56. Ms.

Ruggeri decided to go it alone (ECF 60) and filed a Second Amended Complaint

(“SAC”) (ECF 90).

Each Defendant individually moved to dismiss the SAC, but incorporated the

other Defendants’ motions and briefs by reference. ECF 112; ECF 115; ECF 118. The

Foundation focused on Ms. Ruggeri’s failure to state a claim for a substantive FCA

violation (ECF 116), while the University (ECF 113) and UPMC and the Hospital

(ECF 119) focused on FCA retaliation. The Court held oral argument on the motions

on February 28, 2024. ECF 134. The motions are now ready for disposition.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a complaint must make “a

short and plain statement of the claim showing that the pleader is entitled to relief,

in order to give the defendant fair notice of what the claim is and the grounds upon

which it rests.” , 809 F.3d 780, 786 (3d Cir. 2016)

(cleaned up). “Thus, to survive a motion to dismiss, a complaint must state a claim

to relief that is plausible on its face by providing facts which permit the court to infer

more than the mere possibility of misconduct.”

, No. 19-855, 2021 WL 3513860, at *3 (W.D. Pa. Aug. 10, 2021)

(Kelly, M.J.) (cleaned up). “A claim has facial plausibility when the plaintiff pleads

factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” , 556 U.S. 662, 678

(2009). But “[w]here a complaint pleads facts that are merely consistent with a

defendant's liability, it stops short of the line between possibility and plausibility of

entitlement to relief.” (cleaned up).

A plaintiff alleging substantive violations of the FCA must meet the

heightened pleading standard in Rule 9(b).

, 579 U.S. 176, 195 n.6. (2016). Rule 9(b) states that “[i]n

alleging fraud or mistake, a party must state with particularity, the circumstances

constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a

person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).

To satisfy Rule 9(b) in the context of an FCA violation, the relator must “allege

particular details of a scheme to submit false claims paired with reliable indicia that

lead to a strong inference that claims were actually submitted.”

, 754 F.3d 153, 156 (3d Cir. 2014) (cleaned up). A relator need

not show “representative samples of the alleged fraudulent conduct” at the pleading

stage. at 156-57 (cleaned up). But “an inference of illegality based on facts that

could plausibly have either a legal or illegal explanation would be insufficient to meet

Rule 9(b)’s burden, because a relator must establish a strong inference that false

claims were submitted[,] and the possibility of a legitimate explanation undermines

the strength of the inference of illegality.” , 903 F.3d

78, 92 (3d Cir. 2018) (cleaned up).

By contrast, a claim for FCA retaliation is not subject to Rule 9(b)’s heightened

standard because “the retaliation provisions do not require the plaintiff to have

developed a winning qui tam action; they only require that the plaintiff engage in

acts made in furtherance of an FCA action.”

, No. 15-6547, 2019 WL 6880006, at *19 (D.N.J. Feb. 21, 2019) (cleaned

up). Thus, the pleading standard of Rule 8 governs FCA retaliation claims.

DISCUSSION & ANALYSIS

The FCA “imposes civil liability for making a false or fraudulent ‘claim,’ or a

false record or statement material to such a claim, to obtain payment from the federal

government.”

, 5 F.4th 315, 324 (3d Cir. 2021) (citing 31 U.S.C. § 3729(a)(1)(A)-(G),

(b)(2)). As relevant here, the FCA makes it unlawful for a defendant to:

• Knowingly present, or cause to be presented, a false or fraudulent claim for

payment or approval;

• Knowingly make, use, or cause to be made or used, a false record or

statement material to a false or fraudulent claim;

• Conspire to commit a violation;

• Knowingly make, use, or cause to be made or used, a false record or

statement material to an obligation to pay or transmit money or property

to the Government, or knowingly conceal or decrease an obligation to pay

or transmit money.

31 U.S.C. § 3729(a)(1)(A)-(C), (G). Ms. Ruggeri alleges that the three

institutional deficiencies—inadequate accounting system, spenddown scheme, and

failure to report program income—violated these four FCA provisions.

I. The Court will dismiss UPMC and Magee-Womens Hospital.

At the outset, the Court will grant UPMC and the Hospital’s motion. The only

basis of liability for these Defendants—respondeat superior—fails. ECF 90, ¶¶ 341,

348. Though UPMC and the Hospital technically employed the key players in this

case, including Dr. Sadovsky, Mr. Annichine, Ms. Arvay, and Ms. Ruggeri herself, the

SAC only pleads that these employees acted for the benefit of the Foundation, not

UPMC and the Hospital. ECF 90, ¶¶ 52, 56, 63-69.

“[T]he Third Circuit, following Supreme Court guidance, employs traditional

common law theories of the employment relationship when considering the proper

parties in FCA retaliation claims.” , No. 18-

1626, 2019 WL 1359740, at *4 (E.D. Pa. Mar. 25, 2019). So to impute the actions and

knowledge of the employees to UPMC and the Hospital, Ms. Ruggeri must establish

that each employee was acting “(1) in the course of his employment and (2) for the

benefit of the corporation.” , 614 F. Supp. 40, 44 (E.D. Pa.

1984); , 256 F. Supp. 3d 563, 584 (W.D. Pa. 2017) (Conti,

J.) (“It is well established that traditional vicarious liability rules ordinarily make

principals or employers vicariously liable for acts of their agents or employees in the

scope of their authority or employment.” (cleaned up)).

But each allegation of wrongdoing shows that at all relevant times the

employees were acting for the benefit of the Foundation, so they never acted on behalf

of UPMC or the Hospital. , ECF 90, ¶¶ 63-69 (explaining various roles and duties

at the Foundation), 156 (alleging Dr. Sadovsky, Mr. Annichine, and Ms. Arvay

directed activities at the Foundation), 174 (explaining deficiencies in the

Foundation’s accounting system), 176 (detailing Mr. Annichine’s refusal to

implement new accounting software as CEO of the Foundation), 232 (alleging

conversations between University PIs and “Magee Foundation’s Grants team” to

carry out improper cost transfers). The SAC specifically pleads that the Foundation

“remains legally responsible for the actions of its staff[,]” further supporting that the

employees were acting for the Foundation, not the other Defendants. ¶ 332.

The Foundation’s IRS Form 990s, which the SAC incorporates, confirm that

the relevant individuals, while employed ( ., paid) by UPMC, were essentially

loaned out to the Foundation. As such, they acted “in support of the mission” of the

Foundation, and the Foundation was financially responsible for these employees’

salaries based on the work that they performed for the Foundation:

All individuals who work in support of the mission of [the Foundation]

are employed either by the University of Pittsburgh or [UPMC]. [The

Foundation] is billed by each organization for the cost of salary and

fringe benefits corresponding to the effort these individuals expend in

support of the [Foundation’s] mission. [The Foundation] records such

costs as compensation on its financial statements. Payroll taxes are filed

by the employer organizations.

ECF 90-2, p. 77; ECF 90-3, p. 86. The Forms also provide that the Foundation

reimbursed the University and UPMC for 100% of the salaries of both Dr. Sadovsky

(as Executive Director) and Mr. Annichine (as CEO). ECF 90-2, p. 82; ECF 90-3, p.

79. Dr. Sadovsky split his time evenly between medical research and fulfilling “his

Executive Director responsibilities[,]” and Mr. Annichine spent “100%” of his time

“supporting the mission of [the Foundation][.]” These descriptions reflect the

picture created by the SAC—that the employees worked for the benefit of the

Foundation.

To establish liability under the FCA, Ms. Ruggeri must allege that UPMC and

the Hospital “had [a] role” in the false claims scheme, not a mere association with the

Foundation. , 708 F. Supp. 2d 505, 523-24 (E.D.

Pa. 2010) (emails showing employees of parent company “were involved in

determining what technical documentation to supply to the government” could not

support theory that parent company “had any role” in false claims scheme). Since

the SAC fails to allege with specificity any action taken for the benefit of UPMC and

the Hospital, the employees’ actions and knowledge cannot be imputed to those

employers. Thus, there is no basis to hold UPMC and the Hospital liable. The Court

will grant their motion to dismiss.

II. Substantive violations of the False Claims Act.

“A False Claims Act violation includes four elements: falsity, causation,

knowledge, and materiality.” , 855

F.3d 481, 487 (3d Cir. 2017). Defendants argue that the SAC fails to establish falsity

under the pleading standard of Rule 9(b) and materiality as outlined by the Supreme

Court in .

A. Allegations about the Foundation’s inadequate accounting

system.

Ms. Ruggeri alleges that the Foundation fraudulently induced NIH to award

grants and disburse funds by falsely certifying that the Foundation’s accounting

systems complied with the Grants Policy Statement and federal regulations. She

therefore sets forth two theories of FCA liability: fraudulent inducement, and false

certification (both express and implied).1 Ms. Ruggeri has sufficiently pled particular

details about the Foundation’s financial system to survive the motion-to-dismiss

stage under both theories of liability.

As alleged in the SAC, the Foundation committed itself to complying with the

Grants Policy Statement and incorporated federal laws and regulations, including 45

C.F.R. § 75.302, when it accepted NIH funds. ECF 90, ¶ 93. Those provisions state

that an award recipient’s financial system must be “sufficient to permit the

preparation of reports required by general and program-specific terms and

conditions; and the tracing of funds to a level of expenditures adequate to establish

1 “To prevail on a fraudulent inducement claim under the False Claims Act, a plaintiff

must show that (1) there was a knowingly false or fraudulent statement; (2) that the

statement was material; and (3) that it caused the government to pay out money or

to forfeit moneys due ( , a ‘claim’).” , 593 F. App’x at 143. “Under the

‘express false certification’ theory, an entity is liable under the FCA for falsely

certifying that it is in compliance with regulations which are prerequisites to

Government payment in connection with the claim for payment of federal funds.”

, 29 F. Supp. 3d 553, 561 (W.D. Pa. 2014)

(Hornak, C.J.) (cleaned up). Under an implied false certification theory, liability

“attaches when a claimant seeks and makes a claim for payment from the

Government without disclosing that it violated regulations that affected its eligibility

for payment.” at 562 (cleaned up).

that such funds have been used according to the Federal statutes, regulations, and

the terms and condition of the federal award.”

But the Foundation’s financial system couldn’t do that—it couldn’t trace

budget expenditures, couldn’t produce accurate monthly reports, and couldn’t be used

to verify that account funds were being properly spent. ¶¶ 93, 161-76. Ms.

Ruggeri alleges that, by signing and presenting grant applications and post-award

reports to NIH to receive disbursements, despite knowing that its accounting system

was non-compliant, the Foundation both induced NIH to disburse funds that it

otherwise wouldn’t have and made false certifications of compliance. ¶¶ 116-34.

Those details provide “reliable indicia that lead to a strong inference” that the

Foundation submitted false claims to NIH. , 754 F.3d at 156 (cleaned up).

The Foundation argues that the SAC fails to allege that its accounting system

or budgets violated any federal regulations. ECF 116, pp. 6-7. But the SAC pleads

that a grant recipient’s “failure to establish adequate control systems constitutes a

material violation of the award.” ECF 90, ¶ 95.

The well-pled facts explain that the Foundation repeatedly certified in its grant

applications and reports that its system was sufficient ( ¶¶ 113-31) even though its

system was anything but ( ¶¶ 161-76). That’s enough to plead falsity under the

relevant pleading standard. , No. 11-1987, 2013

WL 3052882, at *5 (N.D. Cal. June 17, 2013) (denying motion to dismiss where

“Plaintiff alleges that each application for an NIH grant requires that the applicant

affirm its compliance with various financial management system requirements and

that in response to the Financial Questionnaire, [Defendant] expressly affirmed the

existence of financial systems it did not have in place” (cleaned up)).2

B. Allegations about the spenddown scheme.

Next, Ms. Ruggeri alleges that Defendants are liable for making factually false

claims to NIH via the Foundation’s “spenddown” scheme by improperly transferring

costs to federal grant accounts. A claim is factually false “when the claimant

misrepresents what goods or services that it provided to the Government.”

, 500 F. Supp. 3d 345, 358 (E.D. Pa. 2020)

(cleaned up).

The SAC adequately alleges that the Foundation misrepresented how it spent

federal dollars by detailing the Foundation’s practice of overspending on accounts and

transferring those excessive costs (often employee “effort,” ., salary) to federal

accounts that did not accrue them. ECF 90, ¶¶ 189, 201, 204, 217-64. That process

violated both Grants Policy Statement § 7.5, which states that cost transfers to

federal awards “solely to cover cost overruns are not allowable,” and federal

regulations requiring that any salaries paid by federal awards “be based on records

that accurately reflect the work performed.” ¶¶ 103-05, 218, 224; ECF 124, p. 16

(citing 45 C.F.R. § 75.430(h)(i)(1)). It also means that the Foundation billed the

federal accounts for “effort” that was not actually performed for those accounts. That

is a “factually false” claim.

The Foundation argues that Ms. Ruggeri hasn’t pointed to any specific cost

transfers that were improper under the policy statement or federal regulations ( ,

2 The Foundation also argues that the Grants Policy Statement allows it to re-budget

and provides it with budget flexibility, depending on several factors. ECF 116, p. 7.

The allegations in the SAC concerning the accounting system, though, clearly plead

that the discrepancies with the budgets were a product of inadequate controls, not

allowable re-budgeting considerations. ECF 90, ¶¶ 91-98, 161-75. Discovery may

bear out a different story, but the Court is constrained to accept as true the

allegations in the SAC at this stage.

from non-federal accounts to unrelated federal accounts). ECF 116, pp. 8-12; ECF

136, 12:1-15:7. Not so.

Ms. Ruggeri describes a federal account ledger evidencing thousands of dollars

in improper cost transfers. ECF 90, ¶¶ 250-64; ECF 136, 44:1-45:8 (describing

transfer of employee salary into federal grant account where employee purportedly

did not work on that federal account). She also alleges that NIH audited the

Foundation and found repeat cost-transfer violations, resulting in NIH forbidding the

Foundation from transferring costs to federal accounts without prior approval. ECF

90, ¶¶ 43-44. Those specific, well-pled allegations, coupled with the allegation that

NIH grants made up about 73% of the Foundation’s funding, create reliable indicia

that these spenddown cost transfers from non-federal accounts to federal accounts

were widespread and improper. This claim survives against the Foundation.

This theory of liability may also proceed against the University. According to

the SAC, University employees, known as Principal Investigators (or “PIs”),

contributed to the spenddown scheme by misrepresenting employee “effort” spent on

federal accounts. ¶¶ 27, 355. These PIs were responsible for signing and

submitting Personnel Activity Reports (“PARs”), which reflect the work performed by

each employee on a given NIH grant account. ¶ 105. The SAC alleges with

specificity that PIs routinely modified the amount of “effort” employees worked on the

federal accounts to accommodate the cost transfers. ¶¶ 106, 186-264. The PIs

then submitted the PARs to an internal University system and were approved by the

University, resulting in overpayment on the federal accounts. ¶¶ 27, 106, 240-46.

Thus, as alleged, the University misrepresented the services it provided on the

federal grant accounts.

C. Allegations about failure to report program income.

Unlike the first two institutional deficiencies, Ms. Ruggeri’s claim about the

Foundation’s failure to report program income does not survive the pleading

standard. She alleges that Defendants failed to book program income as accounts

receivable to avoid restrictions on, and the potential return of, unspent grant funds.

¶¶ 265-69. She thus charges Defendants with making “reverse false claims,”

where a person or company wrongfully retains money it should have paid to the

government. ¶ 273;

, 839 F.3d 242, 247 (3d Cir. 2016) (citing 31 U.S.C. § 3729(a)(1)(G)).

This theory of liability comes up short for at least three reasons.

First, saved costs are not the same as “program income,” which is defined in

Policy Statement § 8.3.2 as “gross income that was directly generated by the grant-

supported activity or earned as a result of the award.” ECF 124, p. 15 (quoting Grants

Policy Statement § 8.3.2) (cleaned up). Ms. Ruggeri argues that this definition is

“broad enough” to encompass costs saved, but the Policy Statement reflects that

“program income” refers to funds generated by sales, charges, fees, and royalties

through the federal account. Grants Policy Statement § 8.3.2; ECF 90, ¶ 107; ECF

124, p. 15.

Second, even if costs saved do qualify as program income, the theory still fails

because Ms. Ruggeri doesn’t allege “particular details of a scheme to submit false

claims paired with reliable indicia that lead to a strong inference that claims were

actually submitted.” , 754 F.3d at 156 (cleaned up). She points to just one

vague email in which a Foundation employee states that the Foundation isn’t “doing

the [accounts receivable] reclass [journal entry] for milestone based invoices,” but

that doesn’t provide sufficient information under the pleading standard to show a

knowingly false scheme to avoid reporting program income. ECF 90, ¶¶ 271-72.

Third, as Ms. Ruggeri concedes, a grant recipient does not always have to

return excess funds to NIH. ¶ 108. But for a reverse false claim theory to apply,

“there must be a clear obligation or liability to the Government, which cannot be

premised on a future discretionary act.”

, 660 F. Supp. 3d 381, 407 (E.D. Pa. 2023). Since Ms. Ruggeri

can only allege that NIH “would likely have required [the Foundation] to return

program income[,]” but not that a clear obligation to return that income existed, her

reverse false claim theory fails. ECF 90, ¶ 111.

D. Materiality.

Defendants argue that even if Ms. Ruggeri states plausible theories of liability,

she fails to plead materiality. The Court disagrees.

An FCA violation is actionable only if the misrepresentation is “material to the

Government’s payment decision.” , 579 U.S. at 192. “This requirement helps

ensure that the False Claims Act does not become an all-purpose antifraud statute or

a vehicle for punishing garden-variety breaches of contract.” , 855 F.3d at

489 (cleaned up).

The FCA defines “material” as “having a natural tendency to influence, or be

capable of influencing, the payment or receipt of money or property.” 31 U.S.C. §

3729(b)(4). This standard is “demanding.” , 579 U.S. at 194. “A

misrepresentation cannot be deemed material merely because the Government

designates compliance with a particular statutory, regulatory, or contractual

requirement as a condition of payment. Nor is it sufficient for a finding of materiality

that the Government would have the option to decline to pay if it knew of the

defendant’s noncompliance.”

That said, it is relevant for purposes of materiality if the government deems

compliance as a condition of payment, if the defendant knew that the government

doesn’t pay in similar cases of non-compliance, and if the government’s behavior is

influenced by any such violations. , 579 U.S. at 194-95.

Here, considering these factors that the Supreme Court has deemed to be

relevant as to materiality, Ms. Ruggeri has met her burden at the motion-to-dismiss

stage.

First, aspects of the scheme detailed in the SAC concern compliance

requirements that NIH considered as conditions for receiving award disbursements—

and thus such violations can “meet the FCA [materiality] standard.” , 2013

WL 3052882, at *7; , 579 U.S. at 190-91. Indeed, the Grants Policy Statement

says that failure to have adequate controls is a “material violation” of the award. ECF

90, ¶¶ 95, 275 (quoting Grants Policy Statement § 8.3.1).

Second, the SAC also pleads that the Foundation knew that in other similar

cases of non-compliance, the government refused to pay or took adverse action. In

fact, Ms. Ruggeri alleges that she was hired to “revamp” the Foundation’s grant

department “due to concerns regarding internal controls and regulatory compliance”

following the initiation of a government investigation into the Foundation’s practices.

ECF 90, ¶¶ 32, 147. The SAC also pleads that the government has pursued actions

against NIH grant recipients for similar schemes to the one alleged here. For

example, and as pled in the SAC, the government intervened in a relator’s FCA action

against Columbia University where its financial reporting system did not have a

suitable means for verifying the accuracy of reporting costs for time and effort, such

that Columbia University overcharged grant accounts for work that was not actually

performed.3 , 579 U.S. at 195 (“evidence that the defendant knows that

3 ECF 90, ¶ 279 (citing Press Release, Department of Justice, Manhattan U.S.

Attorney Settles Civil Fraud Claims Against Columbia University and Affiliated

Public Health Program for Submitting False Claims in Connection with Aids and Hiv

(sic) Treatment-Related Grants (Oct. 28, 2014), https://www.justice.gov/usao-

sdny/pr/manhattan-us-attorney-settles-civil-fraud-claims-against-columbia-

the Government consistently refuses to pay claims in the mine run of cases based on

noncompliance” may establish materiality). If the Foundation and University didn’t

independently know about these other cases, the SAC alleges that Ms. Ruggeri, at

least at one point in time, told them. ECF 90, ¶¶ 38, 308-09, 332.

Third, perhaps the strongest evidence of materiality is the government’s

response after NIH learned of the Foundation’s compliance issues, including the mis-

allocation of costs. As pled in the SAC, during the government’s investigation into

Ms. Ruggeri’s allegations, NIH reviewed eight federal grants, which reflected 589 cost

transfers between them all. ECF 90, ¶ 284. NIH randomly sampled ten of those

transfers, and found each one violated NIH regulations and requirements. As a

result, “NIH forbade [the] Foundation from using cost transfers without prior written

consent.” ¶ 285. Moreover, NIH substantially reduced its awards to the

Foundation after Ms. Ruggeri’s allegations surfaced, underscoring that these

infractions were material. ¶ 286; , 579 U.S. at 195 (it is “very strong

evidence” that a requirement is not material “if the Government pays a particular

claim in full despite its actual knowledge that certain requirements were violated”).

As the Foundation argues, the relevant inquiry is “what [] NIH did, or did not

do, vis-à-vis the Foundation once it learned of” Ms. Ruggeri’s allegations. ECF 116,

p. 18. And as pled in the SAC, NIH altered how it awards, manages, and disburses

grant funds to the Foundation in a material way, suggesting that the false

representations here “go[] to the very essence of the bargain” between the Foundation

university-

and#:~:text=Columbia%20also%20agreed%20to%20pay,HIV%20projects%20around

%20the%20world); ¶ 278 (citing Press Release, Department of Justice,

Harvard University Agrees to Pay Over $1.3 Million to Resolve Allegations of

Overcharging NIH Grants (Apr. 27, 2020), https://www.justice.gov/usao-

ma/pr/harvard-university-agrees-pay-over-13-million-resolve-allegations-

overcharging-nih-grants).

and NIH, and affected NIH’s payment decision. , 855 F.3d at 489 (cleaned

up). Thus, Ms. Ruggeri has satisfied the materiality prong at the pleading stage.

E. Conspiracy.

A conspiracy to violate the FCA is a violation of the FCA itself. 31 U.S.C. §

3729(a)(1)(C). To state a claim for FCA conspiracy, a relator “must describe the

general composition of the conspiracy, its broad objectives, and the general roles in

the conspiracy.” , 660 F. Supp. 3d at 405-06. Specifically, Ms.

Ruggeri “must allege (1) a conspiracy to get a false or fraudulent claim allowed or

paid; and (2) an act in furtherance of the conspiracy.” at 406 (cleaned up).

The SAC establishes that a conspiracy to violate the FCA existed between the

Foundation and the University. As detailed above, University PIs and Foundation

employees manipulated employee “effort” on federal grant accounts to accommodate

improper cost transfers. In her allegations, Ms. Ruggeri quotes several emails

between and among Foundation employees and PIs establishing that the Foundation

routinely initiated cost transfers to cover deficits in other accounts. ECF 90, ¶¶ 227-

246. Based on these interactions, “[t]he Court can infer the existence of an

agreement” between the University and the Foundation.

, 596 F. Supp. 3d 522, 541 (E.D. Pa. 2022)(cleaned up). And based

on the exhaustive details of account ledgers showing the transfers, including the

results of the NIH audit that allegedly revealed a consistent improper practice, the

SAC likewise establishes the steps taken in furtherance of the conspiracy. ECF 90,

¶¶ 42-43, 248-264; , 660 F. Supp. 3d at 406. The conspiracy

claim therefore survives as to the Foundation and the University.

III. Retaliation under the False Claims Act.

In her second cause of action, Ms. Ruggeri alleges that Defendants terminated

her employment in retaliation for her efforts to stop the purported FCA violations.

To state such a claim, she must plead that (1) she engaged in protected conduct and

(2) she was discriminated against because of her protected conduct.

, 55 F.4th 188, 194 (3d Cir. 2022).4 The Court

concludes that Ms. Ruggeri has met her burden as to the Foundation, but not the

University.

A. Ms. Ruggeri engaged in protected activity when she delivered

her report to a non-officer board member.

The FCA “protect[s] lawful acts in furtherance of either an action under the

FCA or other efforts to stop 1 or more violations of’ the Act.” , 55 F.4th at

195 (cleaned up). Protected activity “includes investigation for, initiating of,

testimony for, or assistance in a False Claims Act suit, which can include internal

reporting and investigation of an employer’s false or fraudulent claims.”

, 668 F. Supp. 3d 368, 373 (E.D. Pa. Apr. 6,

2023) (cleaned up).

But it isn’t enough for the employee to investigate mere non-compliance—she

must specifically investigate FCA fraud. (“An employee’s investigation of nothing

more than his employer’s non-compliance with federal or state regulations does not

constitute protected conduct.” (cleaned up)). Additionally, if a relator’s job entailed

duties related to compliance, like Ms. Ruggeri’s, her acts must have exceeded her job

responsibilities to receive FCA protection, such as by “act[ing] outside of [her] chain

of command or [her] job duties.” , 55 F.4th at 195. This inquiry is “fact

intensive.”

Ms. Ruggeri engaged in protected activity on April 2, 2018, when she prepared

her Assessment of Grant Compliance, shared it with her superiors, and then hand-

4 She must also show that the underlying FCA claim that she was addressing was at

least “viable.” , 857 F.3d 497, 508 (3d

Cir. 2017); at 508 n.56. Because the Court has already concluded that the SAC

adequately alleges FCA violations by the Foundation and the University, Ms. Ruggeri

has satisfied this prong.

delivered it to Dr. Edwards, who was a Foundation board member. ECF 90, ¶¶ 314-

18. In taking this action, importantly, Ms. Ruggeri stepped outside the chain of

command: she went past her supervisors, taking her report directly to a board

member, Dr. Edwards. ¶¶ 305-314; , 111 F. Supp. 3d 9,

20 (D.D.C. 2015) (plaintiff in finance division went outside chain of command when

he reported concerns of FCA violations to COO and head of another department);

, 677 F.3d 1228, 1239-40 (D.C. Cir. 2012) (employee

stepped outside chain of command when she raised FCA allegations with her boss’s

supervisor).5 By sharing a report with Dr. Edwards directly, Ms. Ruggeri engaged in

activity beyond her normal compliance duties.

Further, the report went beyond describing mere non-compliance and

specifically outlined FCA liability. For example, the report detailed that two

universities were fined for failing to comply with NIH guidelines in the same manner

as the Foundation. ECF 90-1, p. 2. It also warned, “It should be clearly understood

that the federal government has no interest in [the Foundation’s] best interests. [The

government’s] sole focus is the appropriate use of federal monies according to the

statute.” at 6-7; ECF 90, ¶¶ 315-16.6 Given this content, the report from

5 Ms. Ruggeri described Dr. Edwards as “effectively next up in the chain of

command[.]” ECF 90, ¶ 39. But because making reports to board members directly

was “outside of [Ms. Ruggeri’s] ordinary reporting structure[,]” the Court views this

action as stepping outside the chain of command. , No. 19-

1235, 2019 WL 6530990, at *6 (E.D. Pa. Dec. 4, 2019).

6 To be clear, the other asserted reporting activities outlined in the SAC do not

constitute protected activity. First, they addressed compliance issues, not fraud.

, ECF 90, ¶¶ 157 (Ms. Ruggeri was hired “to bring Magee Foundation into

compliance with federal regulations.”), 288 (describing specific efforts to achieve

compliance). Second, as alleged, Ms. Ruggeri’s efforts mirrored, rather than

exceeded, the scope of her job duties. ECF 90-6, pp. 8-9 (describing Ms. Ruggeri’s job

responsibilities).

Ms. Ruggeri to Dr. Edwards constitutes protected activity for purposes of bringing a

FCA retaliation claim.

B. The Foundation was on notice of Ms. Ruggeri’s protected

activity and retaliated against her because of it.

To show that she was discriminated against “because of” protected conduct,

Ms. Ruggeri must allege that “(1) [her] employer had knowledge [she] was engaged

in protected conduct; and (2) that [her] employer’s retaliation was motivated, at least

in part, by the employee’s engaging in protected conduct.”

, 253 F.3d 176, 186 (3d Cir. 2001) (cleaned up). She must plead

facts “that plausibly showed [Defendant] was on notice [she] tried to stop

[Defendant’s] alleged FCA violations.” , 55 F.4th at 195.

Ms. Ruggeri has done so with respect to the actions she took on April 2, 2018.

In an April 2, 2018, email to Ms. Arvay, Dr. Sadovsky, and Mr. Annichine, Ms.

Ruggeri put her superiors on notice that the Foundation’s issues were not merely

compliance-based, but fraudulent. The email highlighted the difference between

“grant compliance” and the “need[] to pass the scrutiny” of a federal audit, and

warned that “the government is . . . only concerned with the correct spending of the

federal dollars and that this spending meets statutory requirements.” ECF 90, ¶ 309.

In the same email, she attached her assessment, in which she stressed that

institutions have been “fined” for similar issues. ECF 90, ¶¶ 37-38; ECF 90-1, p. 2.

That establishes knowledge.

The Foundation terminated Ms. Ruggeri’s employment hours after she

reported to Dr. Edwards. ECF 90, ¶ 319. The temporal proximity of these events—

Ms. Ruggeri’s putting her superiors on notice about potential FCA liability, escalating

her concerns beyond the chain of command to Dr. Edwards, and the termination of

her employment, all on the same day—suggests that the termination of her

employment was motivated by her protected activity.

, No. 20-6117, 2024 WL 219395, at *13 (E.D. Pa. Jan. 18, 2024) (“A

plaintiff may establish a causal connection through the unusually suggestive

temporal proximity of the adverse action to the protected activity[.]” (cleaned up)).

It also doesn’t matter that the Foundation didn’t directly employ Ms. Ruggeri.

The text of the FCA protects individuals from retaliation “ lawful acts

done by the employee[.]” 31 U.S.C. § 3730 (emphasis added). In interpreting the

phrase “because of” in this context, the Third Circuit held that “retaliation claims

under the FCA require proof of ‘but-for’ causation.” ,

879 F.3d 71, 78 (3d Cir. 2018). Thus, it’s enough for the SAC to show that the

Foundation was responsible for the retaliatory action even if it didn’t pay Ms.

Ruggeri’s salary. , 55 F.4th at 197 (cause of action for retaliation existed

where defendant contractor instructed its subcontractor to terminate plaintiff’s

employment following FCA allegations).

The foregoing is enough to plead FCA retaliation as to the Foundation, but not

against the other Defendants. There are no allegations that UPMC, the Hospital, or

the University had knowledge of the protected activity or engaged in the retaliatory

conduct, including in making the decision to terminate Ms. Ruggeri. ECF 90, ¶¶ 63-

69, 71 (alleging Dr. Edwards’s involvement with the Foundation was limited to his

role “[a]s a member of the Magee Foundation board”), 322 (alleging that the

Foundation “remains legally responsible for the actions of its staff”), 365-66 (pleading

that University’s involvement in retaliatory conduct against Ms. Ruggeri was limited

to Dr. Edwards’s “direct[ing] Relator’s termination” after receiving her report);

Section I, above. The multiple hats that different individuals wore at other times

isn’t enough to impute knowledge of Ms. Ruggeri’s report to UPMC, the Hospital, and

the University. , 568 F.3d 100,

106-07 (3d Cir. 2009) (“[N]ot all facts known by an agent are imputed to the

principal[,]” rather the agent’s knowledge is imputed to the principal where the

knowledge falls within the scope of the agent’s duties to the principal and if that

knowledge is “important to the function the employee is employed to perform.”).

For these reasons, the retaliation claim, while viable against the Foundation,

must be dismissed as to the other Defendants.7

CONCLUSION

In sum, the Court finds that Ms. Ruggeri has stated a claim for substantive

FCA violations against the Foundation and the University, and a claim for FCA

retaliation against the Foundation. Thus, for the reasons above, the Court will grant

UPMC and the Hospital’s motion to dismiss (ECF 118) and will grant the University’s

motion to dismiss (ECF 112) as to Count 2 only. The Court will deny the Foundation’s

motion (ECF 115), but as noted above, any FCA claims predicated on the “program

income” fraud may not proceed and are effectively dismissed.

Additionally, as Ms. Ruggeri has amended her complaint twice since

commencing this action almost five years ago, the Court finds that amendment would

be inequitable.

, No. 19-132, 2020 WL 3316780, at *13 (W.D. Pa. June 18, 2020) (Ranjan, J.)

(inequity would result by giving plaintiff a “third bite of the apple” (citation omitted)),

, 849 F. App’x 36 (3d Cir. 2021). It would also be futile because the SAC

establishes that the individual employees were at all relevant times working for the

benefit of the Foundation (or, in the case of the PIs in Count 1, the University).

Amendment cannot transform the nature of that work to extend liability to the other

Defendants on the dismissed claims. (inability to “cure” deficiency “through

7 To the extent Ms. Ruggeri argues that UPMC and the Hospital are liable for

retaliation because the UPMC Director of Human Resources joined Mr. Annichine in

the room to terminate her employment (ECF 90, ¶¶ 40, 340), that argument fails

because the SAC doesn’t allege that the Director of Human Resources had any

knowledge about Ms. Ruggeri’s protected activity and any involvement in making the

decision to terminate her employment.

additional factual development” made amendment futile). So these dismissals are

with prejudice. An appropriate order follows.

DATED: April 24, 2024 BY THE COURT:

/s/

United States District Judge