Paul A. Cimino v. International Business Machines Corporation ( 2021 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 9, 2020 Decided July 6, 2021
No. 19-7139
UNITED STATES OF AMERICA, EX REL. PAUL A. CIMINO,
AND
PAUL A. CIMINO,
APPELLANT
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:13-cv-00907)
Tejinder Singh argued the cause for appellant. With him
on the briefs was Daniel H. Woofter.
Amanda L. Mundell argued the cause for amicus curiae the
United States in support of appellant. With her on the brief
were Joseph H. Hunt, Assistant Attorney General, Timothy J.
Shea, United States Attorney, and Charles W. Scarborough,
Attorney.
2
Catherine E. Stetson argued the cause for appellee. With
her on the brief were Jonathan L. Diesenhaus and Matthew J.
Higgins.
Steven P. Lehotsky, Tara S. Morrissey, James C. Stansel,
Melissa B. Kimmel, Alan Charles Raul, and Virginia A. Seitz
were on the brief for amici curiae the Chamber of Commerce
of the United States of America and the Pharmaceutical
Research and Manufacturers of America in support of appellee.
Before: SRINIVASAN, Chief Judge, RAO, Circuit Judge,
and GINSBURG, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge RAO.
Concurring opinion filed by Circuit Judge RAO.
RAO, Circuit Judge: This case involves the False Claims
Act (“FCA”) and an alleged fraud perpetrated against the
Internal Revenue Service (“IRS”). According to relator Paul
Cimino, the International Business Machines Corporation
(“IBM”) violated the FCA by (1) using a false audit to
fraudulently induce the IRS to enter into a $265 million license
agreement for software the IRS did not want or need, and (2)
presenting false claims for payment for software that the IRS
never received. The district court dismissed Cimino’s
complaint, finding that he did not adequately plead his
fraudulent inducement and presentment claims.
This appeal requires us to clarify whether causation is an
element of fraudulent inducement under the FCA, and if so,
what standard governs it. In light of Supreme Court precedents
interpreting the FCA to incorporate the common law, we hold
that but-for causation is necessary to establish a fraudulent
inducement claim under the FCA. We hold that Cimino
3
plausibly pleaded causation, as well as materiality, and
therefore he may proceed with his fraudulent inducement
claims on remand. We affirm, however, the dismissal of
Cimino’s presentment claims because he failed to plead them
with the requisite particularity.
I.
Since 1863, the False Claims Act has imposed liability for
fraud against the government. Act of Mar. 2, 1863, ch. 67, 12
Stat. 696 (codified as amended at 31 U.S.C. § 3729 et seq.).
Congress enacted the FCA to “stop[] the massive frauds
perpetrated by large contractors during the Civil War.”
Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct.
1989, 1996 (2016) (cleaned up). Congressional investigations
“painted a sordid picture of how the United States had been
billed for nonexistent or worthless goods, charged exorbitant
prices for goods delivered, and generally robbed in purchasing
the necessities of war.” United States v. McNinch, 356 U.S.
595, 599 (1958). A person violates the FCA, among other
ways, if he “knowingly presents, or causes to be presented, a
false or fraudulent claim for payment or approval” by the
government or “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). A violator
faces civil penalties up to $10,000 per claim and treble
damages. Id. § 3729(a)(1).
The FCA expands who can prosecute fraud against the
government by allowing private persons to bring a qui tam
action on the government’s behalf. See id. § 3730(b). These so-
called relators “serve as a posse of ad hoc deputies to uncover
and prosecute frauds against the government.” U.S. ex rel.
Grubbs v. Kanneganti, 565 F.3d 180, 184 (5th Cir. 2009)
(cleaned up). The FCA incentivizes relators to come forward
4
with knowledge of false claims by sharing between ten and
thirty percent of any money recovered by the government, with
the precise percentage dependent upon the relator’s
contribution to the suit. See 31 U.S.C. § 3730(d).
To commence a qui tam action under the FCA, a relator
files his complaint under seal, providing the government an
opportunity to investigate the claims and determine whether to
intervene. Id. § 3730(b)(2). If the government intervenes, it
assumes “primary responsibility for prosecuting the action,”
but if the government declines, the relator may proceed with
the case on his own. Id. § 3730(c)(1), (c)(3).
This qui tam action began when Paul Cimino filed a
complaint alleging that IBM violated the FCA. As a former
senior sales representative for IBM, Cimino helped sell
software to the IRS. Based on knowledge acquired on the job,
Cimino alleged that IBM fraudulently induced the IRS to enter
a $265 million license agreement for “unwanted, unneeded”
software. J.A. 6 ¶ 1. Because we must accept Cimino’s factual
allegations as true at the motion to dismiss stage, we recite the
facts as he alleges.
Pursuant to a 2007 license agreement, the IRS used IBM’s
software, paying between $23 and $30 million annually. As the
license agreement neared its expiration in 2012, IBM learned
that the IRS was not interested in renewing the agreement
because it was not using all the software purchased from IBM.
For the upcoming tax season, the IRS intended to negotiate an
extension only for the software that it needed.
Faced with the possibility of losing significant revenue,
IBM allegedly devised a scheme to pressure the IRS into
another long-term deal. IBM planned to conduct a “friendly”
audit, anticipating that the IRS was overusing the software and
5
therefore would owe a significant amount in compliance
penalties. IBM would then leverage the penalties by offering to
waive them in exchange for a new agreement. IBM retained
Deloitte LLP to perform the audit.
Contrary to IBM’s expectations, Deloitte’s initial audit
showed the IRS was not significantly overusing the licenses
and owed only $500,000 in compliance penalties—a relatively
small amount for a contract of this size. IBM never released
these audit results to the IRS. Instead, IBM worked with
Deloitte to manipulate the results. For example, IBM counted
licenses on discontinued servers as in constant use, even though
they were never used. Deloitte first presented the number of
overused licenses from this manipulated audit to Adam Kravitz
at the IRS. Cimino alleged that “Kravitz rejected the audit
findings because, in his words, ‘IBM cannot substantiate that
the IRS is out of compliance.’” J.A. 27 ¶ 88. IBM then
manipulated the audit again to show an outstanding $292
million in compliance penalties. IBM shared this number with
the IRS, despite the fact that one IBM employee considered the
number “ridiculous,” and another “was ‘not comfortable
representing’ that number to the IRS.” J.A. 28 ¶ 92. In
November 2012, IBM presented another audit to Kravitz
showing the IRS owed at least $91 million in compliance
penalties, but Kravitz again rejected the findings.
Waiting until Kravitz was on vacation in December, IBM
approached IRS officials who were “less knowledgeable about
the audit.” J.A. 34 ¶ 123. Deloitte presented the false audit
showing the IRS was overutilizing the software to several IRS
officials including Kravitz’s boss, Jim McGrane, who served
as the IRS’s Deputy Chief Information Officer and led the
IRS’s software acquisitions. A week later, IBM met with
McGrane and told him that, if the IRS did not enter the new
license agreement, it would owe $91 million and that IBM had
6
retained lawyers to collect the penalties. But if the IRS entered
into a new license agreement, IBM promised to waive the
penalties. Chris Schumm, an IBM employee at the meeting,
believed “[d]uring the course of his employment” that “the IRS
was very concerned and ‘scared’ of the false” audit and that the
audit’s “findings were a substantial factor in the IRS’s decision
to renew the [agreement].” J.A. 36 ¶ 127. After learning about
the extent of compliance penalties revealed by Deloitte’s audit,
McGrane approved a new license agreement in which the IRS
agreed to pay IBM $265 million for a period of five years.
Once the new agreement was in place, IBM allegedly did
not make good on its promise to waive the compliance
penalties. IBM instead disguised the compliance penalties as
an $87 million fee for prospective licenses and support, which
“were, upon information and belief, never actually provided to
the IRS.” J.A. 38 ¶ 140. The IRS continued to pay IBM under
the license agreement for the next several years, and it paid
most of the $265 million contract price. In 2015, the IRS
extended the license agreement for another six months at a cost
of over $16 million.
Cimino filed his complaint against IBM under seal in June
2013—about six months after the IRS signed the new license
agreement. Cimino’s amended complaint asserts that IBM
violated the FCA in two ways. First, IBM fraudulently induced
the IRS to enter the agreement by using the false audit and the
false compliance penalties premised upon it. Second, IBM
presented false claims when it charged the IRS for prospective
licenses it never provided. After a four-year investigation, the
government declined to intervene in the case, and Cimino’s
complaint was unsealed. IBM moved to dismiss.
The district court dismissed Cimino’s complaint in full.
With respect to fraudulent inducement, the court held that
7
Cimino had to plead but-for causation, meaning that the IRS
would not have entered the agreement but for IBM’s false
audit. According to the court, Cimino failed to do so because
he never alleged that the IRS accepted the false audit’s
findings. The court also held Cimino failed to plausibly plead
the false audit was material to the IRS, because it paid IBM
most of the $265 million license agreement and extended the
agreement for an additional $16 million despite its knowledge
of possible fraud. As for presentment of a false claim, the court
again found it implausible that the IRS “sat by idly in the face
of” IBM’s alleged fraud and paid millions for purportedly
nothing in return. J.A. 419. Alternatively, the court held
Cimino improperly pleaded this claim because he did not assert
that he lacked access to relevant records, as required to plead
“upon information and belief.”
Cimino timely appealed the dismissal of his complaint.
Although it had earlier declined to intervene, the government
filed an amicus brief in support of Cimino.
II.
We begin with Cimino’s claim that IBM fraudulently
induced the IRS to enter into a new license agreement with
IBM. The FCA makes it unlawful to “knowingly present[], or
cause[] to be presented, a false or fraudulent claim for payment
or approval” to the government. 31 U.S.C. § 3729(a)(1)(A).
Under longstanding Supreme Court precedent, a violation of
the FCA occurs when a person fraudulently induces the
government to enter a contract and later submits claims for
payment under that contract. See U.S. ex rel. Marcus v. Hess,
317 U.S. 537 (1943), superseded by statute on other grounds,
Act of Dec. 23, 1943, ch. 377, 57 Stat. 608, 609; see also U.S.
ex rel. Bettis v. Odebrecht Contractors of Cal., Inc., 393 F.3d
1321, 1326–27 (D.C. Cir. 2005). Although the text of the FCA
8
prohibits only false or fraudulent claims, the Court has placed
a common law gloss on the statute, interpreting it to also
prohibit fraudulent inducement. This means that “each claim
submitted to the Government under a contract which was
procured by fraud” is false “even in the absence of evidence
that the claims were fraudulent in themselves.” Bettis, 393 F.3d
at 1326.
Before assessing whether Cimino properly pleaded
fraudulent inducement, we must first answer the threshold
question of whether causation is required to make out a
fraudulent inducement claim, and if so, the proper standard of
causation to apply. We hold that causation is required for a
fraudulent inducement claim. Our inquiry here focuses on
actual causation, which we determine under a but-for standard.
A.
Cimino argues that causation is not required to make out a
claim for fraudulent inducement under the FCA.1 While this
circuit has not explicitly addressed the requirement of
causation, the nature of the common law tort of fraudulent
inducement as well as the Supreme Court’s decisions
interpreting the FCA make clear that a successful claim for
fraudulent inducement requires demonstrating that a
1
In the proceedings below, Cimino waived his argument that
causation is not required, but preserved his argument regarding the
proper standard for causation. Because we need not determine the
standard for causation if causation is not required, we excuse
Cimino’s waiver and first explain why causation is required for
fraudulent inducement.
9
defendant’s fraud caused the government to enter a contract
that later results in a request for payment.2
At common law, causation is an integral part of fraudulent
inducement, which is a species of fraud. “Fraudulent
inducement occurs when a party is induced through fraudulent
misrepresentations to enter a contract.” 37 C.J.S. Fraud § 111
(June 2021 update); cf. 28 WILLISTON ON CONTRACTS § 70:220
(4th ed. July 2020 update). The ordinary meaning of
inducement incorporates a causation requirement. To “induce”
means to “bring about, bring on, produce, cause, give rise to.”
Induce, OXFORD ENGLISH DICTIONARY 888 (2d ed. 1989)
(emphasis added). As the government explains, “fraudulent
inducement has a built-in causation requirement.” Gov’t
Amicus Br. 12. If a fraudster’s misrepresentations do not cause
a party to enter a contract, no fraudulent inducement has
occurred.
The Supreme Court has recognized that in prohibiting
false or fraudulent claims, the FCA in effect incorporated a
common law tort along with its common law requirements. In
general, “the term ‘fraudulent’ [in the FCA] is a paradigmatic
example of a statutory term that incorporates the common-law
2
The First Circuit has explained that a fraudulent inducement claim
under the FCA requires causation. See D’Agostino v. EV3, Inc., 845
F.3d 1, 9 (1st Cir. 2016). Other circuits have implicitly recognized
that the requirements of fraudulent inducement include causation.
See U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370,
376 (4th Cir. 2008) (explaining that fraudulent inducement requires
a “fraudulent course of conduct … that caused the government to
pay out money or to forfeit moneys due (i.e., that involved a
‘claim’)”) (emphasis added) (cleaned up); see also U.S. ex rel.
Longhi v. United States, 575 F.3d 458, 467 (5th Cir. 2009); U.S. ex
rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1174 (9th Cir.
2006).
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meaning of fraud.” Escobar, 136 S. Ct. at 1999; see also id. at
1999 n.2 (explaining that “we presume that Congress retained
all other elements of common-law fraud that are consistent
with the statutory text [when] there are no textual indicia to the
contrary”). More specifically, when the Court recognized a
claim for fraudulent inducement, it explained that contractors
“caused the government to pay claims” under a contract that
was “the result of the fraudulent bidding,” “taint[ing] … every
step thereafter taken.” Hess, 317 U.S. at 543. The contractors’
fraud caused, i.e. induced, the government to enter a contract,
which then resulted in payments of claims.
Consistent with the common law and the Supreme Court’s
interpretation of the FCA, causation is a necessary element of
fraudulent inducement. Because the fraud must be in the
inducement, liability under the FCA for fraudulent inducement
must turn on whether the fraud caused the government to
contract.
Cimino raises several arguments to resist this conclusion.
First, Cimino argues the text of the FCA indicates that the
common law requirement of causation does not apply to
fraudulent inducement claims. He notes the FCA expressly
requires causation when a defendant causes someone else to
violate the FCA. See 31 U.S.C. § 3729(a)(1)(A) & (B). And the
FCA permits treble damages for “the amount of damages
which the Government sustains because of the act of” the
defendant. Id. § 3729(a)(1) (emphasis added). According to
Cimino, these explicit causation requirements preclude a
requirement of causation for fraudulent inducement.
Cimino’s negative implication argument cannot carry the
day. To begin with, claims for fraudulent inducement rest not
on the text of the FCA, but on the recognition that the statute
encompasses this common law claim, along with its common
11
law requirements, which include causation. Similarly, the
negative implication canon “may have less force where the
exclusion is a common law rule.” Norman Singer & Shambie
Singer, 2B SUTHERLAND STATUTORY CONSTRUCTION § 50:5
(7th ed. Nov. 2020 update). Under the presumption against
change in common law, “[a] statute will be construed to alter
the common law only when that disposition is clear.” Antonin
Scalia & Bryan A. Garner, READING LAW 318 (2012)
(emphasis omitted). When Congress has abrogated the
common law in the FCA, it has done so clearly. See 31 U.S.C.
§ 3729(b)(1)(B) (altering the common law scienter
requirement); Escobar, 136 S. Ct. at 1999 n.2. When
interpreting the FCA, the Supreme Court has imposed common
law requirements even when the statute does not explicitly
require them. See Escobar, 136 S. Ct. at 2002 (requiring
materiality under 31 U.S.C. § 3729(a)(1)(A), although that
provision makes no mention of it, and other provisions
explicitly require materiality, such as § 3729(a)(1)(B)).
Nothing in the text or structure of the FCA is inconsistent with
applying the common law requirement of causation for
fraudulent inducement.
Second, Cimino contends that causation is not required
because the nexus between a defendant’s fraud and the
government’s payment decision is covered by the element of
materiality, which suffices in lieu of causation. Although
related, materiality and causation are not the same. The FCA
defines materiality 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). Causation here refers to
whether fraud in fact caused the government to enter into a
contract. To be sure, both materiality and causation require
considering the effect of a defendant’s fraud on the
government’s decision to enter a contract. But a statement
could be material—that is, capable of influencing the
12
government’s decision to enter a contract—without causing the
government to do so. See D’Agostino v. EV3, Inc., 845 F.3d 1,
7–8 (1st Cir. 2016); see also U.S. ex rel. Petratos v. Genentech
Inc., 855 F.3d 481, 491 (3d Cir. 2017) (rejecting the conflation
of materiality and causation in the FCA). Fraudulent
inducement requires materiality and causation, separate
elements that we cannot conflate.
Cimino finally resorts to the FCA’s broader purpose of
redressing fraud. He argues that, if causation is required, a
contractor may lie to the government to obtain a contract but
dodge liability if his lie does not cause the government to enter
the contract. He maintains it would be “more consistent with
the FCA’s broad remedial purpose to hold those defendants
accountable.” Cimino Br. 35. The FCA, however, is not “an
all-purpose antifraud statute.” Allison Engine Co. v. U.S. ex rel.
Sanders, 553 U.S. 662, 672 (2008). Even putting aside the
difficulty of determining which statutes are remedial (all
statutes seek to remedy some problem), the FCA does not make
actionable every misrepresentation to the government. Nor can
generalized purposes surmised from the FCA overcome the
conclusion, drawn from the common law and our precedents,
that a fraudulent inducement claim under the FCA requires a
showing of causation.
B.
Next we turn to the proper standard for causation and
explain that Cimino was required to plead actual causation
under a but-for standard. Accordingly, we reject Cimino’s
argument that he needed to plead only proximate cause under
the substantial factor test.
Like other torts, fraud requires both actual and proximate
cause, and as already explained, fraudulent inducement under
13
the FCA incorporates the common law causation requirement.
Actual and proximate cause, however, are often confused.
Actual cause, also called cause-in-fact or factual cause,
concerns whether a defendant’s conduct resulted in the
plaintiff’s harm. It refers to the ordinary understanding of
causation, which asks for “proof that the defendant’s conduct
did in fact cause the plaintiff’s injury.” Univ. of Tex. Sw. Med.
Ctr. v. Nassar, 570 U.S. 338, 346 (2013). Proximate cause, also
called legal cause, concerns whether a defendant should be held
legally liable for the conduct that caused the plaintiff’s harm.
Only some factual causes are legally cognizable. CSX Transp.,
Inc. v. McBride, 564 U.S. 685, 701 (2011). Although a
defendant’s conduct may have actually caused the plaintiff’s
harm, he is liable only if his actions are also the legal, i.e.
proximate, cause of the plaintiff’s harm.
To make out a claim under the FCA, Cimino must first
plead actual cause because it is a well-established principle that
actual cause precedes any analysis of proximate cause. Dan B.
Dobbs, et al., DOBBS’ LAW OF TORTS § 198 (2d ed. June 2020
update). Such factual or actual cause has traditionally been
governed by the but-for test: “The traditional way to prove that
one event was a factual cause of another is to show that the
latter would not have occurred ‘but for’ the former.” Paroline
v. United States, 572 U.S. 434, 449–50 (2014). As the Supreme
Court has instructed, “[t]his ancient and simple ‘but for’
common law causation test … supplies the ‘default’ or
‘background’ rule against which Congress is normally
presumed to have legislated when creating its own new causes
of action.” Comcast Corp. v. Nat’l Ass’n of African Am.-Owned
Media, 140 S. Ct. 1009, 1014 (2020). We have applied a but-
for test when assessing whether a defendant’s fraud caused the
government damages under the FCA. See U.S. ex rel. Schwedt
v. Plan. Rsch. Corp., 59 F.3d 196, 200 (D.C. Cir. 1995).
14
Indeed, actual cause is practically synonymous with but-for
cause.
Therefore, to plead fraudulent inducement, Cimino had to
allege actual cause under the but-for test.3 Here that means he
would have to provide sufficient facts for the court to draw a
reasonable inference that IBM’s false audit caused the IRS to
enter the license agreement.
Cimino urges us to adopt a different approach. He argues
that he need not plead facts to allege actual cause at all, so long
as he pleads facts plausibly demonstrating proximate cause,
which he maintains should be analyzed under the substantial
factor test. And Cimino contends that his complaint satisfies
this test because, even if other factors also influenced the IRS’s
decision to enter the agreement, he alleged that IBM’s false
audit was a substantial factor in that decision. But Cimino
cannot simply skip over a showing of actual cause and rely only
on proximate cause. Irrespective of whether Cimino properly
pleaded proximate cause, he was also required to plead actual
cause under the but-for standard.
Resorting again to “the policies animating the FCA,”
Cimino argues that we should interpret this remedial statute
broadly by pulling within its orbit any fraudulent actions that
were a substantial factor in the government’s decision—not
just those that were a but-for cause. Cimino Br. 39. Liberal
3
Cimino also gestures to the fact that but-for causation fails when
there are multiple sufficient causes, and that the substantial factor test
is applied “[w]hen each of two or more causes would be sufficient,
standing alone, to cause the plaintiff’s harm.” DOBBS’ LAW OF
TORTS § 189. Cimino, however, fails to identify what the additional
sufficient cause of the IRS’s harm might be, so that exception has no
bearing on this case.
15
construction of remedial statutes “needlessly invites judicial
lawmaking,” an invitation we decline. Scalia & Garner,
READING LAW 364. Remedial statutes, like any other, should
be interpreted to include all they fairly contain, not more and
not less.
Cimino has presented no compelling reason to deviate
from the ordinary common law rule. Therefore, he must allege
but-for causation as a necessary element of a claim for
fraudulent inducement under the FCA.
III.
We next consider the dismissal of Cimino’s fraudulent
inducement and presentment claims under the FCA, which we
review de novo. Winder v. Erste, 566 F.3d 209, 213 (D.C. Cir.
2009). A complaint survives a motion to dismiss if it
“contain[s] sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)). To qualify as plausible, the pleaded
facts must “allow[] the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Id.“[B]ecause the False Claims Act is self-evidently an anti-
fraud statute,” a complaint filed under it must also meet the
heightened pleading standard of Federal Rule of Civil
Procedure 9(b). U.S. ex rel. Totten v. Bombardier Corp., 286
F.3d 542, 551–52 (D.C. Cir. 2002). When alleging fraud, a
relator “must state with particularity the circumstances
constituting fraud or mistake,” although “[m]alice, intent,
knowledge, and other conditions of a person’s mind may be
alleged generally.” FED. R. CIV. P. 9(b). Therefore, a relator
must plead his FCA claim with both plausibility and
particularity. We hold that Cimino satisfied these standards
16
with respect to both causation and materiality for fraudulent
inducement, but failed to plead with particularity his
presentment claims.
A.
To make out a claim for fraudulent inducement under the
FCA, a plaintiff must plead both causation and materiality.
We conclude that Cimino adequately pleaded but-for
causation because he alleged facts that plausibly demonstrate
the IRS would not have entered the agreement but for IBM’s
fraudulent conduct. Cimino asserted that “the IRS would not
have entered into the License had it known that [IBM’s]
representations were false,” J.A. 37 ¶ 131, and supported this
conclusion with factual allegations. Cf. Iqbal, 556 U.S. at 679(explaining that “[w]hile legal conclusions can provide the
framework of a complaint, they must be supported by factual
allegations”). He also alleged that, before the renewal
negotiations began, the IRS wanted to reduce its software
spending. The IRS thought it was underutilizing its IBM
licenses and was not interested in renewing the entire license
agreement.
Next, Cimino outlined the scheme that IBM concocted to
induce the IRS to renew the license agreement. Cimino asserted
that IBM devised a false audit showing the IRS was
overutilizing its licenses and would owe significant compliance
penalties—contrary to the IRS’s expectations. IBM then
presented this audit to several IRS officials, including
McGrane. Although Cimino did not explicitly allege that
McGrane, or any IRS official, accepted the audit, he came
close; he alleged that IBM’s “false representations [of
compliance penalties] were relied upon by the IRS when it
agreed to enter into the License.” J.A. 37 ¶ 131. Moreover,
17
Cimino described the pivotal meeting at which IBM used the
false audit to induce the IRS to enter the agreement. A week
after the presentation of the audit, IBM told McGrane that it
would waive the $91 million in compliance penalties if the IRS
entered into the license agreement, but otherwise would seek
to collect the penalties. McGrane signed off on the license
agreement. One IBM employee present at this meeting thought
the IRS was “very concerned” and “scared” of the audit.4 A few
weeks later, the IRS executed a new $265 million license
agreement, despite previously seeking to reduce its software
spending with IBM.
When we take these factual allegations together, they
permit us to “draw the reasonable inference” from Cimino’s
complaint that but for IBM’s false audit, the IRS would not
have entered the agreement. Iqbal, 556 U.S. at 678; see also
Owens v. BNP Paribas, S.A., 897 F.3d 266, 272 (D.C. Cir.
2018) (explaining that we should “draw all reasonable
inferences in favor of the plaintiffs”). Cimino raises more than
just general concerns of the IRS about the audit. His factual
allegations “nudge[]” his theory that IBM’s false audit caused
the IRS to enter the agreement “across the line from
conceivable to plausible.” Twombly, 550 U.S. at 570.
The district court doubted that IBM could obtain the new
license agreement from the IRS by approaching McGrane
when Kravitz, who had twice rejected the audit, was on
vacation. But that disbelief did not merit dismissal in light of
4
After highlighting the IRS’s fear of the audit, Cimino alleged that
the audit’s findings were a “substantial factor” in the IRS’s decision
to renew the license agreement. J.A. 36 ¶ 127. The district court ruled
that this allegation of the incorrect legal standard was “by itself
fatal.” J.A. 415. We need not assume, however, the truth of Cimino’s
legal conclusions. Iqbal, 556 U.S. at 680. Instead, we focus on the
facts he pleaded.
18
Cimino’s allegations. “[O]f course, a well-pleaded complaint
may proceed even if it strikes a savvy judge that actual proof
of the facts alleged is improbable.” Id. at 556.
On the facts alleged at the pleading stage, along with the
reasonable inferences drawn from those allegations in
Cimino’s favor, we find Cimino plausibly alleged that, but for
IBM’s false audit, the IRS would not have entered into the
license agreement. Whether Cimino can prove those
allegations remains to be seen.
We also conclude that Cimino plausibly pleaded
materiality for fraudulent inducement under the FCA.
Materiality means a defendant’s fraud has “a natural tendency
to influence” or was “capable of influencing” the government’s
payment decision. 31 U.S.C. § 3729(b)(4). For a claim of
fraudulent inducement, a defendant’s fraud is material if it was
capable of influencing the government’s decision to enter into
a contract.
Cimino plausibly pleaded materiality, with largely the
same facts that supported his allegations of causation. Cimino
maintained that, prior to the audit, the IRS thought it was
underutilizing IBM’s software and did not want to renew the
agreement. In order to maintain the valuable agreement, IBM
presented a false audit showing that the IRS was overutilizing
the software and represented that the IRS would owe
compliance penalties if it did not renew the agreement. The
false audit was thus capable of influencing the IRS’s decision
to renew the agreement.
IBM focuses on the fact that the IRS continued to pay for
the licenses and extended the license agreement despite its
19
purported knowledge of Cimino’s allegations of fraud.5 To be
sure, in the context of the presentment of false claims, “if the
Government pays a particular claim in full despite its actual
knowledge [of the fraud], that is very strong evidence” of
immateriality. Escobar, 136 S. Ct. at 2003. We have also
observed that continued payment of claims the government
knows might be fraudulent suggests the fraud was not material
to the government. See U.S. ex rel. McBride v. Halliburton Co.,
848 F.3d 1027, 1034 (D.C. Cir. 2017).
The question here, however, is whether Cimino plausibly
pleaded materiality for his fraudulent inducement claims. He
did so. The district court’s dismissal boils down to a disbelief
that the IRS would pay IBM millions of dollars after learning
that it had been hoodwinked. But Federal Rule of Civil
Procedure 12(b)(6) requires us to accept Cimino’s factual
allegations as true, and those allegations plausibly plead that
IBM’s false audit was material to the IRS’s decision to renew
the license agreement. It is plausible that, had the IRS known
IBM’s audit was false, it would not have renewed the
agreement. It is also plausible that the IRS could have later
learned of IBM’s fraud and continued to pay for the licenses
for any number of reasons that do not render IBM’s fraud
immaterial. For example, the IRS may have felt obligated to
pay until it received a legal determination that it was relieved
of the agreement’s terms. “Rule 12(b)(6) does not
countenance dismissals based on a judge’s disbelief of a
5
It is not clear that the IRS’s knowledge of IBM’s alleged fraud was
properly before the district court, as Cimino did not allege that
knowledge in his complaint. See Trudeau v. FTC, 456 F.3d 178, 183
(D.C. Cir. 2006). IBM suggests we could take judicial notice of this
fact. Because it does not change our conclusion, we assume without
deciding that the district court properly considered the IRS’s
knowledge of IBM’s alleged fraud.
20
complaint’s factual allegations.” Twombly, 550 U.S. at 556(cleaned up). At a later stage in the litigation, evidence of the
IRS’s continued payment under the license agreement might be
used to demonstrate that IBM’s false audit was not material to
the IRS. See McBride, 848 F.3d at 1034. But the resolution of
these questions is for another day.6
We hold that Cimino plausibly pleaded causation and
materiality and therefore reverse the district court’s dismissal
of his fraudulent inducement claims.
B.
In addition to fraudulent inducement, Cimino claimed that
IBM presented false claims to the IRS when it billed the IRS
for $87 million in compliance penalties disguised as new
licenses and technical support. That is, Cimino alleged that
IBM billed the government for services IBM did not in fact
provide.
We agree with the district court that Cimino did not
adequately plead the presentment of false claims. To satisfy the
particularity demanded by Rule 9(b) for a presentment claim, a
relator must plead details about the presentment, including
when the false claims were presented and who presented those
claims. See U.S. ex rel. Williams v. Martin-Baker Aircraft Co.,
389 F.3d 1251, 1257 (D.C. Cir. 2004). Although a relator may
plead allegations upon “information and belief,” he may do so
only when “the necessary information lies within the
defendant’s control,” and the allegations are “accompanied by
6
The Chamber of Commerce and Pharmaceutical Research and
Manufacturers of America as amici suggest that finding materiality
here will open the floodgates to meritless FCA suits. But we are not
resolving the merits of whether the fraud alleged here is material and
hold only that Cimino plausibly pleaded materiality.
21
a statement of the facts upon which the allegations are based.”
Kowal v. MCI Commc’ns Corp., 16 F.3d 1271, 1279 n.3 (D.C.
Cir. 1994).
Cimino failed to plead with particularity IBM’s
presentment of false claims because he alleged only that IBM
billed the IRS about $87 million for licenses that “were, upon
information and belief, never actually provided to the IRS.”
J.A. 38 ¶ 140. He neither pinpointed when the false claims were
presented other than sometime during the agreement’s five
years, nor identified who presented the false claims other than
“IBM.” See Williams, 389 F.3d at 1257 (rejecting as
insufficient allegations that false claims were presented during
an “open-ended time span” by “management”). Moreover,
Cimino’s allegation upon information and belief was
impermissible because he failed to identify what necessary
information lies within IBM’s control or to flesh out any facts
upon which his allegation that IBM never provided the
software was based. See Kowal, 16 F.3d at 1279 n.3. We hold
that Cimino fell short of plausibly alleging that IBM presented
false claims to the IRS.
***
For the foregoing reasons, we affirm the dismissal of
Cimino’s presentment claims and reverse the dismissal of
Cimino’s fraudulent inducement claims and remand for further
proceedings.
So ordered.
RAO, Circuit Judge, concurring: The panel opinion
correctly applies our precedents to the issues raised by the
parties. I write separately to question whether the False Claims
Act (“FCA”) creates a cause of action for fraudulent
inducement.
The text of the FCA does not readily suggest liability for
fraudulent inducement as a separate cause of action. The FCA
imposes liability for fraudulent claims, but it says nothing
about fraudulently induced contracts. See United States v.
Bornstein, 423 U.S. 303, 311 (1976) (“The language of the
statute focuses on false claims, not on contracts.”). As relevant
here, a person violates the FCA if he “knowingly presents, or
causes to be presented, a false or fraudulent claim for payment
or approval,” 31 U.S.C. § 3729(a)(1)(A), or when he
“knowingly makes, uses, or causes to be made or used, a false
record or statement material to a false or fraudulent claim,” id.§ 3729(a)(1)(B). Both provisions require a false claim, which
is defined as “any request or demand, whether under a contract
or otherwise, for money or property.” Id. § 3729(b)(2). The
plain meaning of the FCA requires a request for payment that
is false or fraudulent.
As one commentator has posited, “[b]ecause the statute is
keyed to the presentation of fraudulent ‘claims,’” the text of the
FCA “says nothing about, and thus does not impose liability
for, non-fraudulent and non-false claims submitted under
fraudulently induced contracts.” C. Kevin Marshall,
Fraudulent-Inducement Actions & the FCA’s Statute of
Limitations, 62 GOV’T CONTRACTOR 19 ¶ 133, May 13, 2020.
If Congress had wanted to create liability for fraudulent
inducement, it easily could have employed more expansive
language. See, e.g., Major Fraud Act of 1988, Pub. L. No. 100-
700, 102 Stat. 4631 (codified as amended at 18 U.S.C. § 1031)
(criminalizing “[m]ajor fraud against the United States” by
imposing liability for a scheme “to obtain money or property
2
by means of false or fraudulent pretenses, representations, or
promises”).
With little discussion of the statutory text, our cases have
suggested that fraudulent inducement under the FCA is a
separate cause of action. Liability for fraudulently induced
contracts may exist even though the claims made pursuant to
the contract are genuine. As we have explained, “every claim
submitted under a fraudulently induced contract constitutes a
‘false claim’ within the meaning of the Act (i.e., is
automatically tainted), even without proof that the claims were
fraudulent in themselves.” U.S. ex rel. Bettis v. Odebrecht
Contractors of Cal., Inc., 393 F.3d 1321, 1323 (D.C. Cir.
2005). This result does not naturally follow from the text of the
FCA, which repeatedly refers to a “false or fraudulent claim”
and makes no mention of creating liability for bona fide claims
arising from a contract induced by fraud.
We located the origin of a fraudulent inducement cause of
action under the FCA in a 1943 Supreme Court decision, U.S.
ex rel. Marcus v. Hess, 317 U.S. 537 (1943), superseded by
statute on other grounds, Act of Dec. 23, 1943, ch. 377, 57 Stat.
608, 609. See Bettis, 393 F.3d at 1326. The Court in Hess,
however, does not explicitly discuss fraudulent inducement or
state that such a cause of action exists under the FCA separate
from the presentation of false claims. Instead, the Court
determined that contractors who induced the government to
contract under collusive bids could be subject to liability under
the FCA. Hess, 317 U.S. at 543. Without any citation, the Court
concluded “[t]his fraud did not spend itself with the execution
of the contract,” and so “[i]ts taint entered into every swollen
estimate which was the basic cause of payment” by the
government. Id. The Court focused on the supposed
congressional intent of “reach[ing] any person who knowingly
assisted in causing the government to pay claims which were
3
grounded in fraud,” and relied on statements in the legislative
history that the FCA’s purpose was to protect “against those
who would ‘cheat the United States.’” Id. at 544 (cleaned up).
Despite the discussion of these sweeping purposes, Hess
could be understood to involve actual false claims within the
plain meaning of the FCA because the inflated prices appeared
on the claims themselves. See Brief for Petitioner at 10, 12–13,
Hess, 317 U.S. 537 (No. 173), 1942 WL 54207; Brief for
Respondent at 9–11, Hess, 317 U.S. 537 (No. 173), 1942 WL
54208. In any event, Hess is hardly a model of clarity regarding
the existence of a fraudulent inducement cause of action.
In following Hess, however, we, as well as other courts,
have read that decision as recognizing a cause of action for
fraudulent inducement under the FCA, without proof that
claims are false or fraudulent. See Bettis, 393 F.3d at 1326–27
(recognizing fraudulent inducement under the FCA but holding
no fraudulent inducement occurred); see also, e.g., U.S. ex rel.
Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1173 (9th Cir.
2006); Harrison v. Westinghouse Savannah River Co., 176
F.3d 776, 787 (4th Cir. 1999). Yet these decisions do not set
forth a textual basis for fraudulent inducement under the FCA.
And while we have recognized that a fraudulent inducement
claim may exist under the FCA, no case in this circuit has found
such liability. See Bettis, 393 F.3d at 1327; U.S. ex rel. Schwedt
v. Plan. Rsch. Corp., 59 F.3d 196, 199 (D.C. Cir. 1995).
Although we are bound by the holdings of the Supreme Court
and prior panels of this court, it is unclear whether the cases
cited above definitively establish a separate cause of action for
fraudulent inducement under the FCA, one that is unconnected
to the presentation of a false or fraudulent claim.
Furthermore, reconsideration of a fraudulent inducement
cause of action may be warranted because it exists in some
4
tension with recent Supreme Court decisions. When
interpreting the FCA, the Court has focused on the specific
language of the statute. See Cochise Consultancy, Inc. v. U.S.
ex rel. Hunt, 139 S. Ct. 1507, 1512–14 (2019); Universal
Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989,
2001–02 (2016). Indeed, the Court has explicitly disclaimed
reliance on the FCA’s purpose and warned against “threat[s] to
transform the FCA into an all-purpose antifraud statute.”
Allison Engine Co. v. U.S. ex rel. Sanders, 553 U.S. 662, 672
(2008); accord Escobar, 136 S. Ct. at 2003. Fraudulent
inducement may be one of those threats that has gone
unnoticed.
Finally, I note that the creation of causes of action under
the FCA may pose particular separation of powers problems.
In other contexts, the Supreme Court has trimmed or eliminated
judge-made causes of action that lacked a basis in statute,
recognizing “the tension between [courts inferring causes of
action or remedies] and the Constitution’s separation of
legislative and judicial power.” Hernandez v. Mesa, 140 S. Ct.
735, 741 (2020); see also Alexander v. Sandoval, 532 U.S. 275,
287 (2001) (“Raising up causes of action where a statute has
not created them may be a proper function for common-law
courts, but not for federal tribunals.”) (cleaned up). In addition,
the FCA expands who can prosecute false claims against the
government through the qui tam procedure. Others have raised
serious constitutional questions about placing the execution of
the laws in private hands because it contravenes Article II’s
vesting of all executive power in the President. See Riley v. St.
Luke’s Episcopal Hosp., 252 F.3d 749, 760–63 (5th Cir. 2001)
(en banc) (Smith, J., dissenting); Constitutionality of the Qui
Tam Provisions of the False Claims Act, 13 Op. O.L.C. 207,
211, 1989 WL 595854 (1989) (explaining that the Framers put
“the power to execute the law … in hands that are both
independent of the legislature and politically accountable to the
5
people”). Fraudulent inducement under the FCA thus may
reflect a judicial expansion of a statutory cause of action
layered on top of congressional expansion of prosecution
outside the executive branch.
The plain meaning of the FCA, the Supreme Court’s recent
FCA decisions, and the lack of clarity in the precedents
recognizing fraudulent inducement are all reasons for
reconsidering, in an appropriate case, whether fraudulent
inducement is a separate cause of action under the FCA.