United States v. Strock ( 2020 )

19-4331
United States v. Strock
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_______________
August Term, 2020
(Argued: September 24, 2020 Decided: December 3, 2020)
Docket No. 19-4331
_______________
UNITED STATES OF AMERICA,
Appellant,
– v. –
LEE STROCK, CYNTHIA ANN GOLDE, STROCK CONTRACTING, INC.,
Defendants-Appellees,
KENNETH CARTER,
Defendant.
_______________
B e f o r e:
CALABRESI, KATZMANN, and CARNEY, Circuit Judges.
_______________
1
The United States of America appeals from an order of the United States
District Court for the Western District of New York (Geraci, C.J.) dismissing its
claims under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., and federal
common law against defendants-appellees Lee Strock, Cynthia Golde, and Strock
Contracting, Inc (“SCI”). In particular, the government challenges the district
court’s conclusion that the complaint failed to state a claim under the FCA because
it did not adequately allege that the purported misrepresentations—that Strock’s
business qualified as a service-disabled veteran-owned small business
(“SDVOSB”)—were material to the government’s decision to pay that business
under contracts reserved for SDVOSBs. The government also challenges the
district court’s conclusion that the complaint failed to allege defendants-appellees’
knowledge of materiality, as well as its dismissal of the common law claims.
We conclude that the district court’s finding with respect to materiality was
erroneous because it was premised on too restrictive a conception of the FCA
materiality inquiry set out in Universal Health Services, Inc. v. United States ex rel.
Escobar, 136 S. Ct. 1989 (2016). Further, we find that the district court’s conclusion
that the complaint failed to allege defendants-appellees’ knowledge was
erroneous as to Lee Strock, and potentially as to SCI, but not as to Cynthia Golde.
Finally, we conclude that the district court should not have dismissed the common
law claims on jurisdictional grounds because it had original jurisdiction over these
claims under 28 U.S.C. § 1345. Accordingly, we AFFIRM in part, REVERSE in part,
and VACATE in part the district court’s dismissal of the complaint.
_______________
CHARLES W. SCARBOROUGH, Appellate Staff Attorney, for Joseph H.
Hunt, Assistant Attorney General, James P. Kennedy, United
States Attorney for the Western District of New York, Buffalo,
NY, for Appellant.
ROBERT C. SINGER, ESQ., Singer Legal PLLC, Williamsville, NY, for
Defendants-Appellees Lee Strock and Strock Contracting, Inc.
REETUPARNA DUTTA, ESQ. (David A. Short, on the brief), Hodgson
Russ LLP, Buffalo, NY for Defendant-Appellee Cynthia Ann
Golde.
_______________
2
KATZMANN, Circuit Judge:
This case calls upon us to address the materiality inquiry under the False
Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., in light of Universal Health Services,
Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).
Veteran Enterprises Company, Inc. (“VECO”) was putatively owned by
Terry Anderson, a service-disabled veteran. VECO applied for and received
millions of dollars of federal government contracts that are reserved for small
businesses owned by service-disabled veterans (known in this context as “service-
disabled veteran-owned small businesses” or “SDVOSBs”). According to the
government, however, Anderson’s ownership was illusory, and he never
controlled or managed VECO. In fact, the government alleges, the company was
controlled by defendant-appellee Lee Strock, who set up VECO as a front to funnel
contract work to his company, defendant-appellee Strock Contracting, Inc.
(“Strock Contracting” or “SCI”). The government filed suit under the FCA and
federal common law against Strock, SCI, and Cynthia Golde, an employee of both
VECO and SCI.
The United States District Court for the Western District of New York
(Geraci, C.J.) granted defendants’ motion to dismiss the government’s amended
3
complaint, concluding that the government had not adequately pleaded that the
alleged misrepresentation—that VECO qualified as an SDVOSB—was material to
the government’s decision to make payments under the awarded contracts or that
defendants knew of this materiality. Further, the district court dismissed the
common law claims on jurisdictional grounds. Because we find that the district
court’s conclusion as to materiality relied on an unduly restrictive understanding
of the FCA materiality analysis set out in Escobar, and that the complaint
adequately alleges Strock’s knowledge, we reverse in part. Additionally, we
vacate the district court’s dismissal insofar as it relied on these errors to dismiss
the claims against SCI. Finally, we vacate the dismissal of the common law claims.
BACKGROUND
Several statutory provisions authorize awarding government contracts to
SDVOSBs. 15 U.S.C. § 657f(a) and (b) permit contracts to be awarded to SDVOSBs
either on a sole-source basis or based on competition limited to SDVOSBs. 15
U.S.C. § 644(g)(1)(A)(ii) establishes a “[g]overnmentwide goal” that at least three
percent of all contracts awarded during the fiscal year go to SDVOSBs. 38 U.S.C.
§ 8127 establishes a similar program specifically for contracts issued by the
Department of Veterans Affairs (“VA”).
4
As relevant to this appeal, a SDVOSB must be majority-owned by, and its
management and daily operations must be controlled by, one or more service-
disabled veterans. 15 U.S.C. § 632(q)(2)(A); 38 U.S.C. § 8127(k)(3). 1 To be
“controlled” by a service-disabled veteran “means that both the long-term
decision[] making and the day-to-day management and administration of the
business operations must be conducted by one or more service-disabled veterans.”
13 C.F.R. § 125.13(a).
“At the time that a service-disabled veteran-owned small business concern
submits its offer” to perform government contracting work, “it must represent to
the contracting officer that it is a [SDVOSB].” 48 C.F.R. § 19.1403(b). Where
contracts “have been set aside for” SDVOSBs, “[o]ffers received from concerns that
are not [SDVOSBs] shall not be considered,” and “[a]ny award resulting from this
solicitation will be made to a[n] [SDVOSB].” 48 C.F.R § 52.219-27(b)(1), (c)(1)–(2);
see also 48 C.F.R. § 852.219-10(b)(1)–(2).
1 Prior to 2016, and throughout the time period during which the contracts at
issue in this case were awarded, section 8127 had its own definition of SDVOSB instead
of incorporating section 632’s. See 38 U.S.C. § 8127(l) (2016). The definitions, however,
are indistinguishable for purposes of this appeal.
5
Defendant Lee Strock is the owner of defendant Strock Contracting. 2 In 2006,
Strock met defendant Terry Anderson, a service-disabled veteran. The two formed
Veteran Enterprises Company, Inc. (“VECO”), with Anderson as president and
51% owner, Strock as vice-president and 30% owner, and Ken Carter as secretary
and 19% owner. 3 VECO subsequently applied for and received SDVOSB
recognition from the VA. Between 2008 and 2013, VECO was awarded over $21
million in SDVOSB-reserved contracts from the VA, the Army, and the Air Force.
According to the government, however, VECO’s SDVOSB status was a
sham. After another company owned by Strock lost its eligibility for a Small
Business Administration contracting program, Strock “decided to recruit a
service-disabled veteran,” Anderson, “to head a company in order that Lee Strock
and Strock Contracting could earn profits on federal contracts from the VA and
other federal agencies that were set aside for SDVOSBs.” Joint App’x 21 ¶ 30. But
Anderson’s leadership of VECO existed only on paper. Strock, not Anderson,
controlled the day-to-day operations at VECO. Strock decided which contracts
As this appeal is from a motion to dismiss, all facts are drawn from the
2
government’s Amended Complaint, which is the operative pleading.
3 Mr. Carter was initially named as a defendant, but he was dismissed from this
appeal after he passed away. See No. 19-4331, Dkt. No. 30.
6
VECO would bid on; Anderson was not involved. Anderson was not given access
to payroll records. He made no decisions about hiring or firing. He would
“occasionally” attend meetings and perform inspections, but he did little else. Id.
at 25–26 ¶¶ 63–64. Strock owned the building that VECO “leased” as office space,
and Anderson did not even have a key to the office; defendant Cynthia Golde (or
another employee) had to let him in. Nor did Anderson have access to the
company email account, which nonetheless displayed his name as the sender.
Although he was nominally the president, he was not the highest-paid employee;
and although he was purportedly the majority shareholder, he was paid less than
5% of VECO’s profits. VECO also made several “questionable” payments to Strock
Contracting, totaling several hundred thousand dollars. Id. at 31 ¶ 102. The
government claims that, had it known that VECO was not a bona fide SDVOSB, it
would either not have awarded the contracts or would have terminated them.
The government filed suit, asserting violations of the False Claims Act, as
well as common law fraud, unjust enrichment, and payment by mistake. The
district court granted the defendants’ motion to dismiss. The court concluded that
the government had not pleaded with the particularity required by Federal Rule
of Civil Procedure 9(b) that any of the individual defendants knew that VECO did
7
not qualify as an SDVOSB, or knew that such a designation would be material to
the government’s decision to pay VECO. The district court further held that the
complaint did not adequately plead that any misrepresentation was material for
FCA purposes, reasoning that “a misrepresentation is not necessarily material to
the Government’s payment decision just because the Government would not have
awarded the contract but for the misrepresentation.” Id. at 74. 4 The district court
then “decline[d] to exercise jurisdiction over the Government’s common law
claims.” Id. at 75. This appeal followed.
DISCUSSION
I. Standard of Review
“We review the district court’s grant of defendants’ Rule 12(b)(6) motion to
dismiss de novo, accepting all factual claims in the complaint as true and drawing
all reasonable inferences in the plaintiff’s favor.” United States v. Wells Fargo & Co.,
943 F.3d 588, 594 (2d Cir. 2019). 5
4 The district court also held that the complaint did not adequately plead a
conspiracy under the False Claims Act. The government does not challenge this aspect
of the court’s ruling on appeal.
5 Unless otherwise indicated, case quotations omit all internal quotation marks,
citations, footnotes, and alterations.
8
II. The False Claims Act Counts
A. Legal Standard
The False Claims Act imposes liability, as relevant here, on a person who
either “knowingly presents, or causes to be presented, a false or fraudulent claim
for payment or approval,” or who “knowingly makes, uses, or causes to be made
or used, a false record or statement material to a false or fraudulent claim.” 31
U.S.C. § 3729(a)(1)(A)–(B). “Knowingly” means that a person “(i) has actual
knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity
of the information; or (iii) acts in reckless disregard of the truth or falsity of the
information.” Id. § 3729(b)(1)(A). It “require[s] no proof of specific intent to
defraud.” Id. § 3729(b)(1)(B). “Material” means “having a natural tendency to
influence, or be capable of influencing, the payment or receipt of money or
property.” Id. § 3729(b)(4). The government must “plead [its] claims with
plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by,
for instance, pleading facts to support allegations of materiality.” Universal Health
Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2004 n.6 (2016).
B. Materiality
We turn first to whether the government sufficiently alleges that
defendants’ misrepresentations about VECO’s SDVOSB status were material. To
9
be actionable under the FCA, “[a] misrepresentation about compliance with a
statutory, regulatory, or contractual requirement must be material to the
Government’s payment decision.” Id. at 1996. The Supreme Court recently
clarified this materiality requirement in Universal Health Services, Inc. v. United
States ex rel. Escobar, 136 S. Ct. 1989 (2016). In Escobar, the Court explained that the
FCA’s “materiality standard is demanding,” id. at 2003, and “looks to the effect on
the likely or actual behavior of the recipient of the alleged misrepresentation,” id.
at 2002, rather than superficial designations. Thus, a misrepresentation is not
necessarily material because “the Government would have the option to decline
to pay if it knew of the defendant’s noncompliance.” Id. at 2003. Nor is “the
Government’s decision to expressly identify a provision as a condition of
payment . . . automatically dispositive,” although it is “relevant.” Id. Rather,
determining materiality requires an inquiry into at least the following factors:
[P]roof of materiality can include, but is not necessarily limited to,
evidence that the defendant knows that the Government consistently
refuses to pay claims in the mine run of cases based on noncompliance
with the particular statutory, regulatory, or contractual requirement.
Conversely, if the Government pays a particular claim in full despite
its actual knowledge that certain requirements were violated, that is
very strong evidence that those requirements are not material. Or, if
the Government regularly pays a particular type of claim in full
despite actual knowledge that certain requirements were violated,
10
and has signaled no change in position, that is strong evidence that
the requirements are not material.
Id. at 2003–04; see also Bishop v. Wells Fargo & Co., 870 F.3d 104, 107 (2d Cir. 2017)
(per curiam). In addition, we inquire into whether or not the “noncompliance is
minor or insubstantial.” Escobar, 136 S. Ct. at 2003.
Each party argues that Escobar requires resolving the question of whether
defendants’ alleged misrepresentations were “material to the Government’s
payment decision” in its favor. Escobar, 136 S. Ct. at 1996. Central to this dispute is
not, however, any disagreement over Escobar’s definition of the term “material,”
but instead its definition of the term “payment decision.” Id. at 1996. Underlying
the government’s argument is its assumption that the primarily relevant “payment
decision” was the government’s decision to award VECO contracts in the first
instance. Underlying defendants’ claim is the assumption that the only relevant
“payment decision” is the government’s decision to ultimately pay claims under
these contracts.
Because resolving this dispute over the meaning of “payment decision” is
thus essential to our materiality analysis in this case, we address this question first.
Guided by Escobar, and for the reasons that follow, we assign “payment decision”
a broader scope than either party would. In this case, the government’s “payment
11
decision” comprised both the decision to award contracts in the first instance and
the decision to ultimately pay claims under these contracts.
The government’s argument that materiality must be assessed primarily
with regard to the government’s decision to award contracts to VECO is premised
on the fact that its legal theory is one of “fraudulent inducement.” Under this
fraudulent inducement theory, FCA liability attaches not because a defendant has
submitted any claim for payment that is “literally false,” but instead because “the
contract under which payment [is] made is procured by fraud.” United States ex
rel. Longhi v. United States, 575 F.3d 458, 467–68 (5th Cir. 2009); United States ex rel.
Marcus v. Hess, 317 U.S. 537, 543–45 (1943) (finding that contractors who secured
contracts through collusive bidding were liable for claims arising under those
contracts under the FCA), abrogated in part by statute on other grounds. 6 The theory
6 See also, e.g., United States ex rel. Bettis v. Odebrecht Contractors of Cal., Inc., 393
F.3d 1321, 1326 (D.C. Cir. 2005); Harrison v. Westinghouse Savannah River Co., 176 F.3d
776, 787–88 (4th Cir. 1999). We implicitly approved the fraudulent inducement theory in
United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 91 (2d Cir. 2012) (“If the
government made payment based on a false statement, then that is enough for liability
in an FCA case, regardless of whether that false statement comes at the beginning of a
contractual relationship or later.”). We did so even before Feldman, in United States ex rel.
Kirk v. Schindler Elevator Corp., 601 F.3d 94, 114–15 (2d Cir. 2010), rev’d on other grounds,
563 U.S. 401 (2011), when we held that the relator had stated an FCA claim by alleging
that the defendant submitted false certifications with bids and thereby won a
government contract.
12
is based on the notion that “fraud d[oes] not spend itself with the execution of the
contract,” but instead “taint[s]” every claim subsequently brought under the
contract, rendering these claims actionably false. Hess, 317 U.S. at 543; see also
Longhi, 575 F.3d at 468. The government argues that because the falsity of the
claims in a fraudulent inducement case is imported from the falsity of statements
made to obtain the contract in the first instance, “the appropriate focus . . . is on
the likely effect of the defendant’s fraud on the government’s actions at the time it
awarded the contract, not when the government subsequently paid claims.”
Appellant’s Br. 21. In other words, on the government’s view, the primarily
relevant “payment decision” is the decision to award the contract, not the decision
to ultimately pay a claim under the contract.
Escobar, however, precludes understanding the relevant “payment
decision” in this case as so narrowly focused on the government’s decision to
award contracts. In rejecting the view that a contractual, statutory, or regulatory
provision is material only where it is “expressly designated a condition of
payment,” 136 S. Ct. at 2001, and similarly rejecting the view that a provision is
necessarily material where “the Government would be entitled to refuse payment
were it aware of the violation,” id. at 2004, Escobar eschews a materiality analysis
13
that prioritizes the government’s claims about how it would treat a requirement
over how the government actually treats a requirement upon discovering a
violation. Specifically, Escobar identifies as the primary example of such actual
treatment the government’s reaction to noncompliance when a claim for ultimate
payment is made—whether it be “refus[al] to pay claims in the mine run of cases,”
“pay[ment of] a particular claim” despite the government’s actual knowledge that
conditions of payment have been violated, or “regular[] pay[ment of] a particular
type of claim” despite the government’s knowledge of program violations. Id. at
2003. Accordingly, the government’s conduct after claims arise under a contract,
not merely at the time of contract award, is highly relevant to Escobar’s materiality
analysis. The government’s position is thus unpersuasive.
The defendants’ suggestion that the relevant “payment decision” excludes
the government’s initial decision to award a contract, however, is no better. As
noted above, this approach makes little sense in a fraudulent inducement case,
where a defendant’s alleged misrepresentations at the time the government
awarded the contract are what render any subsequent claim under that contract
fraudulent at all. This theory of fraud recognizes that the government’s decision
to enter a contract in some sense undergirds any decision to ultimately pay claims
14
arising under the contract. See Hess, 317 U.S. at 543 (finding contractors’
misrepresentation that they satisfied a non-collusive bidding requirement material
because “[t]he government’s money would never have been placed in the joint
fund for payment to respondents had its agents known the bids were collusive”).
As a result, other circuits addressing FCA fraudulent inducement claims have
assessed materiality at least partly with regard to the government’s decision to
enter a relationship with a defendant in the first instance. See, e.g., United States v.
Luce, 873 F.3d 999, 1008-09 (7th Cir. 2017) (considering as part of its materiality
analysis that a defendant’s misrepresentation concerned a “threshold eligibility
requirement that, by extension, was tied to every” claim); United States ex rel. Miller
v. Weston Educ., Inc., 840 F.3d 494, 504 (8th Cir. 2016) (focusing materiality analysis
on whether a misrepresentation “influenced the government’s decision to enter
into its relationship with” the defendant).
More importantly, Escobar itself supports understanding the government’s
“payment decision” to include the government’s initial decision to enter a contract
in fraudulent inducement cases. Escobar rejected the notion that FCA liability is
limited to instances in which a defendant violates an express condition of payment
in part because such a rule would “undercut[]” the FCA by imposing no liability
15
for “misrepresenting compliance with a condition of eligibility to even participate
in a federal program when submitting a claim.” 136 S. Ct. at 2002. This language
strongly suggests that FCA liability attaches where a defendant’s
misrepresentations impact government decisions about eligibility, and by
extension, that FCA materiality analysis can encompass a misrepresentation’s
impact on the government’s decision to do business with a defendant in the first
instance. This conclusion in no way contradicts Escobar’s focus at other points on
the government’s ultimate payment decision; Escobar taught that “materiality
cannot rest on a single fact or occurrence as always determinative” such that
consideration of both points of decision is entirely appropriate. Id. at 2001; see also
id. at 2003 (explaining that “proof of materiality can include, but is not necessarily
limited to,” the factors explicitly listed in Escobar). Accordingly, we reject the
defendants’ suggestion that the “payment decision” relevant to our materiality
analysis does not include the government’s decision to award VECO contracts in
the first instance.
In sum, we find that, at least in fraudulent inducement cases, the
government’s “payment decision” under Escobar encompasses both its decision to
award a contract and its ultimate decision to pay under that contract. We thus
16
assess whether the complaint sufficiently pleads materiality under the Escobar
factors with a view to both aspects of the government’s decision.
1. Whether the Requirement Was an Express Condition of
Payment
The first factor that Escobar identifies as relevant to materiality is whether
the government “expressly identif[ied] a provision as a condition of payment.” Id.
at 2003. The district court concluded that this factor weighed against a finding of
materiality here because the government “d[id] not allege that it expressly
conditioned payment to VECO on VECO’s compliance with SDVOSB contracting
requirements.” Joint App’x 69. While the district court was correct—as the
government concedes—that SDVOSB compliance was not an express condition of
ultimate payment under any government contract with the defendants, the district
court erred by concluding that this fact was dispositive with regard to this first
factor.
Because, as explained above, materiality must also be assessed with regard
to the government’s decision to award contracts to VECO in the first instance, the
analysis of the first Escobar factor must also include the complaint’s allegations that
the government expressly named SDVOSB compliance as a condition of any
contract award. Indeed, Escobar faults a theory of materiality that places too much
17
emphasis on whether a provision is an express condition of ultimate payment in
part because such emphasis would preclude a finding of materiality in cases where
a defendant “misrepresent[ed] compliance with a condition of eligibility to even
participate in a federal program.” 136 S. Ct. at 2002. In other words, where a
misrepresentation relates to a condition of eligibility, examining only the express
conditions of ultimate payment will obscure the true materiality of a requirement.
Because the government alleges that it expressly designated SDVOSB compliance
a condition of contract eligibility, we thus find that this factor weighs in favor of a
finding of materiality.
2. The Government’s Response to Similar Misrepresentations
The next factor concerns the government’s response to noncompliance with
the relevant contractual, statutory, or regulatory provision. Escobar directs
examination of the government’s reaction to noncompliance both “in the mine run
of cases,” as well as in the “particular” case at issue. Id. at 2003. We turn first to
the adequacy of the complaint’s allegations regarding the government’s response
to noncompliance after it has already awarded a contract (“post-award” conduct),
and then turn to examine the government’s response to noncompliance before it
has awarded a contract (“pre-award” conduct).
18
While we agree with the district court’s ultimate conclusion that the
complaint’s allegations about the government’s post-award conduct do not
strongly support a finding of materiality, our reasoning differs from that of the
district court. The complaint’s primary allegation about the government’s
generalized post-award conduct consists of its claim, based on a number of Office
of Inspector General reports, that “the Government has regularly prosecuted . . .
parties that fraudulently obtain SDVOSB set-aside contracts.” Joint App’x 46 ¶ 150.
The district court discounted these allegations because defendants “cite
evidence”—specifically, a 2009 Government Accountability Office (“GAO”)
report—suggesting that enforcement is sporadic, and because the examples of
enforcement the government identified were “not all . . . FCA cases.” Id. at 69.
Neither reason is persuasive.
First, the district court’s reliance on the GAO report to reach its conclusion
was inappropriate. In considering a motion to dismiss for failure to state a claim,
“the district court is normally required to look only to the allegations on the face
of the complaint.” Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007). While the court
may consider documents that “are attached to the complaint,” “incorporated in it
by reference,” “integral” to the complaint, or the proper subject of judicial notice,
19
id., none of these exceptions justifies the district court’s reliance on the GAO report
here. First, the GAO report was neither attached to the complaint nor incorporated
by reference. Second, the GAO report was not “integral” to the complaint. As
defendants acknowledge, a document is “integral” when the complaint “relies
heavily upon [the document’s] terms and effect.” DiFolco v. MSNBC Cable L.L.C.,
622 F.3d 104, 111 (2d Cir. 2010). Here, the complaint does not rely on the GAO
report at all, so it is not “integral.” Third, while the district court could have taken
judicial notice of the GAO report, it should only have “do[ne] so in order to
determine what statements [it] contained . . . not for the truth of the matters asserted”
therein. Roth, 489 F.3d at 509. The district court’s consideration of the GAO Report
as evidence of the government’s spotty post-award enforcement record was thus
inappropriate in ruling on the motion to dismiss.
The district court’s second justification for discounting the government’s
allegations that it “has regularly prosecuted, both criminally and civilly, parties
that fraudulently obtain SDVOSB set-aside contracts,” Joint App’x 46 ¶ 150, is
unpersuasive for a different reason. The district court suggested that this
allegation was not probative of materiality because “not all of” the cases the
government cited in support of it “appear to be FCA cases.“ Id. at 69. The district
20
court, however, provided no basis for the proposition that post hoc enforcement
efforts, to the extent they are probative of materiality at all, must be from the FCA
context. More importantly, the district court’s focus on what kinds of post hoc
enforcement actions are relevant to materiality obscures the more fundamental
question of whether post hoc enforcement actions are relevant to FCA materiality
analysis at all. This question was not directly addressed by Escobar, which focused
on whether the government “consistently refuses to pay claims,” not whether the
government later pursues damages or criminal prosecution. 136 S. Ct. at 2003.
Nonetheless, Escobar indirectly indicates that allegations of post hoc
prosecutions or other enforcement actions do not carry the same probative weight
as allegations of nonpayment. Escobar emphasized that “[t]he materiality standard
is demanding,” and that the government may not manufacture materiality by
alleging it had an option not to pay after the fact. Id. Allowing the government to
rely on post hoc enforcement efforts to satisfy the materiality requirement would
allow the government to engage in just such materiality manufacturing, and at
relatively low cost. Unlike mid-contract refusals to pay, engaging in post hoc
enforcement does not require the government to risk delay of a project. Instead,
the government needs risk only the cost of litigation, a risk that is mitigated by an
21
opportunity to recoup the cost of a completed project. Thus, while purely post hoc
enforcement actions can carry some weight in a materiality analysis, they are less
probative than allegations that the government actually refuses to make payments
once it determines that the SDVOSB condition has been violated. The
government’s allegations that it prosecutes those who fraudulently obtain
SDVOSB set-aside contracts thus are at best only neutral with regard to a finding
of materiality, particularly in light of the complaint’s failure to allege even a single
instance in which the government actually refused to pay a claim or terminated an
existing contract based on a false SDVOSB representation.
The complaint’s allegations about the post-award actions the government
took in response to the defendants’ particular instances of alleged noncompliance
are no more indicative of materiality. Significantly, the complaint makes no
allegation that the government refused to pay VECO, suspended its contracts, or
debarred it from bidding on future contracts. Instead, the complaint alleges that
the contracting officers might have taken steps to cease payments, terminate the
contracts, or both had they learned that VECO was not a bona fide SDVOSB. Some
of these allegations amount to no more than the suggestion “that the Government
would have the option to decline to pay if it knew of the defendant’s
22
noncompliance,” and are thus not “sufficient for a finding of materiality.” Escobar,
136 S. Ct. at 2003. While other allegations are less conditional and allege what the
government “would have” done had it learned of the noncompliance, such
inherently self-serving and unverifiable claims alone cannot be sufficient to
demonstrate materiality. Thus, the complaint’s allegations about the government’s
post-award behavior provide only weak support for a finding of materiality.
The government’s allegations about its pre-award response to
noncompliance, however, add some support to its allegations of materiality.
Although the government does not specifically allege that it does not award
contracts to entities it knows not to be SDVOSBs, the complaint as a whole
supports such an inference. See Wells Fargo & Co., 943 F.3d at 594 (noting that we
must “draw[] all reasonable inferences in the plaintiff’s favor”). The complaint
outlines the numerous steps the government takes to ensure an applicant is an
SDVOSB before awarding a contract and it identifies multiple contracting officers
or specialists who allegedly would not have awarded contracts to VECO had they
been aware it was not an SDVOSB. Taken together, these allegations lead to a
reasonable inference that, in general, the government does not award contracts to
companies that it knows not to have complied with SDVOSB requirements. This
23
suggests that defendants’ misrepresentations were material to the government’s
decision to enter the contract in the first instance.
Given the government’s allegations that it was not aware of VECO’s
noncompliance, analyzing the government’s response to known noncompliance in
this particular case is not particularly enlightening. Strock nonetheless contends
that this analysis weighs against materiality because there is evidence that the
government awarded VECO contracts despite actual knowledge that VECO was
not in compliance with program requirements. The only record citation Strock
offers in support of this contention, however, is a claim made upon information
and belief in an attorney affidavit that the defendants filed in support of the
motion to dismiss. We once again decline Strock’s invitation to consider a
document that is not attached to, incorporated by, or integral to the complaint, and
find that this factor has no bearing on the materiality analysis at the motion to
dismiss stage of the proceedings.
In sum, the government’s alleged post-award conduct in response to
noncompliance provides at most weak support for materiality with regard to the
government’s decision to ultimately pay under the relevant contracts. The
government’s pre-award conduct, however, better supports materiality with
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regard to the government’s decision to award the relevant contracts. Given both
decisions are part of the government’s “payment decision,” these considerations
taken together indicate that this factor supports materiality, if weakly.
3. Whether Noncompliance Was Minor or Insubstantial
Finally, we examine whether the defendants’ alleged noncompliance was
substantial. Escobar, 136 S. Ct. at 2003. The district court held that this factor
weighed against materiality because the complaint failed to allege that
noncompliance with the SDVOSB condition was substantial as to the
government’s “payment decision,” even though it might have been substantial
with respect to the government’s decision to award the contract. As previously
established, however, this reasoning relies on an unduly narrow understanding of
the scope of the relevant “payment decision.” The complaint plausibly alleges that
defendants’ SDVOSB-status violation was substantial, whether viewed in light of
the government’s decision to award the relevant contracts or ultimately pay out
under those contracts.
The government alleges that performance by an SDVOSB is at the very heart
of the SDVOSB statutory and regulatory regime: “increas[ing] contracting
opportunities for small business concerns owned and controlled by . . . veterans
with service connected disabilities.” Joint App’x 17 ¶ 17 (quoting 38 U.S.C. §
25
8127(a)(1)). Further it alleges that defendants, by misrepresenting their SDVOSB
status, “undercut th[is] express congressional purpose” “[b]y diverting contracts
and benefits . . . intended for service-disabled veterans towards an ineligible
company.” Id. at 13 ¶ 3. These allegations, accepted as true, indicate that VECO’s
noncompliance was substantial from the very inception of its contracts with the
government through their completion.
The defendants’ attempt to minimize their alleged noncompliance by
recasting the relevant contracts as aimed at the construction of government
buildings alone is unpersuasive. First, the defendants’ characterizations cannot, at
the motion to dismiss stage, displace the government’s well-pleaded allegations
about the contracts’ purpose or the allegations that the defendants’ noncompliance
deprived the government of “the intended benefits of a SDVOSB receiving and
performing federal contracts.” Id. Second, the complaint’s characterizations of the
contracts’ purpose are eminently plausible in light of Congress’s own statements
about the purpose of the SDVOSB statutory and regulatory regime. See 38 U.S.C.
§ 8127(a)(1). The substantiality factor thus weighs strongly in favor of materiality.
In sum, we find that two factors—the express nature of the eligibility
condition and the substantiality of the defendants’ alleged noncompliance—weigh
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firmly in favor of materiality, while the third—the government’s response to
noncompliance in this and other cases—only weakly supports materiality. This is
enough to find that the government has plausibly alleged materiality.
C. Knowledge
To find FCA liability, it is not enough for the defendants to have presented
a materially false claim; they must have done so “knowingly,” see 31 U.S.C.
§ 3729(a)(1)(A)–(B), meaning with “actual knowledge of the information, “in
deliberate ignorance of the truth or falsity of the information,” or “in reckless
disregard of the truth or falsity of the information” Id. § 3729(b)(1)(A). In other
words, the government must allege that the defendants “knowingly violated a
requirement that the defendant[s] know[] is material to the Government’s
payment decision.” Escobar, 136 S. Ct. at 1996.
Claims under the FCA are subject to the particularity requirement of Federal
Rule of Civil Procedure 9(b). Id. at 2004 n.6. 7 “Rule 9(b) permits knowledge to be
averred generally,” but plaintiffs, including the government, still must “plead the
7 Strock argues that the complaint’s general failure to comply with Rule 9(b)
offers an independent ground for dismissal. But none of the purported deficiencies
cited by Strock was sufficient to deprive him of the requisite “fair notice” of the
government’s claim, and they thus do not warrant dismissal. United States ex rel.
Chorches v. Am. Med. Response, Inc., 865 F.3d 71, 86 (2d Cir. 2017).
27
factual basis which gives rise to a strong inference of fraudulent intent.” O’Brien v.
Nat’l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). “The requisite strong
inference of fraud may be established either (a) by alleging facts to show that
defendants had both motive and opportunity to commit fraud, or (b) by alleging
facts that constitute strong circumstantial evidence of conscious misbehavior or
recklessness.” Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290–91 (2d Cir. 2006). The
complaint must plead facts supporting scienter as to each defendant. In re DDAVP
Direct Purchaser Antitrust Litig., 585 F.3d 677, 695 (2d Cir. 2009). We address each
defendant in turn.
1. Lee Strock
The district court acknowledged that the complaint alleges that Strock
“decided to establish an SDVOSB to obtain set-aside contracts,” “recruited
Anderson as the ‘figurehead’ president,” and “direct[ed]” VECO employees to
submit false certifications and false claims. Joint App’x 64–65. And the court
further acknowledged that facts alleged by the government “could support an
inference that Strock knew that VECO did not qualify as an SDVOSB, such as that
Strock gave Anderson a 51% share in VECO (the minimum required for veteran
ownership), set up email addresses in Anderson’s name to be managed by other
employees, and established VECO for his and Strock Contracting’s profit.” Id. at
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65. But the court concluded that the complaint nevertheless failed to adequately
allege that Strock knew that VECO’s SDVOSB status was material to the
government.
We respectfully disagree. At a minimum, the complaint adequately alleges
that Strock acted in reckless disregard of whether the SDVOSB-status requirement
was material. First, the complaint alleges “strong circumstantial evidence of . . .
recklessness” as to materiality. Lerner, 459 F.3d at 291. The complaint alleges that
all the contract solicitations at issue prominently advised that only bids from
SDVOSBs would be considered and that firms wishing to bid on such contracts
must certify their SDVOSB status. Moreover, the complaint alleges that Strock
undertook elaborate steps to make it appear that VECO was in fact in compliance
with SDVOSB requirements, such as recruiting Terry Anderson, giving Anderson
the minimum share required for veteran ownership, and setting up email
addresses in Anderson’s name to be managed by other employees. This is strong
circumstantial evidence that Strock acted in reckless disregard of whether VECO’s
SDVOSB status was material to the government’s decision to both award and pay
out under SDVOSB contracts.
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Moreover, the complaint adequately alleges that Strock had “motive and
opportunity to commit fraud.” Lerner, 459 F.3d at 290. As to motive, the complaint
alleges that Strock set up VECO as an SDVOSB to replace the federal contracting
opportunities he lost after Strock Contracting graduated out of the Small Business
Administration contracting program. As to opportunity, the government alleges
that Strock owned the building that VECO “leased” as office space and VECO
made several “questionable” payments to Strock Contracting, totaling several
hundred thousand dollars. In other words, Strock stood to benefit directly from
VECO’s success, and had the wherewithal to do so. Thus, the government has
plausibly alleged at least that Strock acted in reckless disregard of the materiality
of the SDVOSB compliance. The government has therefore met its burden with
regard to Strock’s knowledge.
2. Cynthia Golde
We agree with the district court, however, that the complaint does not
sufficiently allege that Golde individually knew that VECO did not qualify as an
SDVOSB. Some of the allegations against Golde are not indicative of such
knowledge because they do not specify whether Golde was actually involved.
Other allegations relate to behavior too mundane to support an inference of
knowing falsity.
30
Further, while the complaint alleges that Golde presented bids for SDVOSB
set-aside contracts and made requests for payment under such contracts, the
complaint does not specify which bids were made by Golde or which
representations were contained in those bids. We thus cannot infer from these
allegations that Golde knowingly submitted false bids. This point is illustrated by
the only invoice that the complaint specifically alleges that Golde submitted. That
invoice appears to have simply included a certification that “the contract was
performed in accordance with the specifications, terms and conditions of the
contract.” Joint App’x 34 ¶ 113. Such a boilerplate certification, which may not
have even mentioned the SDVOSB requirement, is not likely to have alerted Golde
to any noncompliance. Without any allegations about whether other documents
submitted by Golde contained more explicit misrepresentations, the complaint’s
general allegations that Golde submitted bids or requests for payment are
insufficient to allege knowledge.
A few of the allegations against Golde are slightly more suggestive of
knowledge. For example, Golde was allegedly employed simultaneously by
VECO and Strock Enterprises (a company related to SCI and VECO), and she
discussed moving employees between the two. This could be taken as evidence
31
that Golde was aware that VECO was just a front aimed to provide Strock access
to SDVOSB contracts. But absent more specific allegations of what Golde knew of
Strock’s plans, this is too speculative to support a claim for fraud under Rule 9(b).
Similarly, the allegation that Golde “knew that Lee Strock controlled the day-to-
day and long-term business operations of VECO,” Joint App’x 28 ¶ 82, might
support the inference that Golde knew VECO was not a bona fide SDVOSB. That
inference, however, relies on the assumption—not supported elsewhere in the
complaint—that Golde knew that SDVOSB certification requires that the veteran
not only own but also control the business in question.
Absent more information about which bids Golde submitted, or the content
of those bids, the complaint does not adequately plead knowledge as to Golde
with the particularity required under Rule 9(b). And, unlike Strock, none of the
allegations establish either “motive and opportunity to commit fraud” or “strong
circumstantial evidence of conscious misbehavior or recklessness.” Lerner, 459
F.3d at 290–91. We therefore affirm the district court’s dismissal of the claims
against Golde.
D. Remaining Claims
In addition to the FCA claims against Strock and Golde, the district court
also dismissed the complaint’s FCA claim against Strock Contracting as well as its
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common law claims against all defendants. The district court’s reasons for doing
so were erroneous. First, the district court dismissed the FCA claim against Strock
Contracting, which was based on a theory of vicarious liability, because it found
that the complaint did not state a claim against the individual defendants. As
explained, however, the complaint adequately states a claim against Strock. 8
Second, the district court dismissed the government’s common law claims
on the ground that it could decline to exercise supplemental jurisdiction over
them. However, as the government argues, and as the defendants apparently
concede, the district court had original jurisdiction over these claims under 28
U.S.C. § 1345 (“[T]he district courts shall have original jurisdiction of all civil
actions, suits or proceedings commenced by the United States . . . .”).
The defendants urge that there are nonetheless alternative grounds upon
which to affirm the district court’s judgment as to these claims. However, “this
Court generally will not review an issue the district court did not decide,” Macey
v. Carolina Cas. Ins. Co., 674 F.3d 125, 131 (2d Cir. 2012), and we find that there is
no reason to do so here. Accordingly, we vacate the district court’s dismissal of
these claims and leave it to the district court on remand to determine in the first
8 We express no view about the potential merit of a theory of vicarious liability,
which is not a theory that has yet been adopted in our circuit.
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instance whether dismissal is appropriate on any of the defendants’ proposed
alternative grounds.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s dismissal of the
FCA counts against Golde and REVERSE the dismissal of the FCA counts against
Strock. Further, we VACATE the dismissal of the FCA counts against Strock
Contracting, Inc. and the federal common law claims against all defendants. We
REMAND the case for the district court to consider the adequacy of the latter
claims in the first instance and to conduct additional proceedings consistent with
this opinion.
34