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United States ex rel. McGrath v. Microsemi Corp.

United States District Court, D. Arizona

September 30, 2015

United States of America ex rel. Mark McGrath, Relator,
Microsemi Corporation, et al., Defendants

          For Mark McGrath, ex rel, United States of America, Plaintiff: Andrew S Friedman, LEAD ATTORNEY, Phoenix, AZ; Catherine C Jobe, Samuel L Boyd, LEAD ATTORNEYS, Boyd & Associates PC, Dallas, TX.

         For Microsemi Corporation, White Electronic Designs Corporation, doing business as, Microsemi Power and Electronics Group, Defendants: Anne Michelle Chapman, David B Rosenbaum, LEAD ATTORNEYS, Osborn Maledon PA, Phoenix, AZ; Jeffrey H Reeves, LEAD ATTORNEY, Irvine, CA; Sean S Twomey, LEAD ATTORNEY, Irvine, CA; James L Zelenay, Jr., Los Angeles, CA.

         For United States of America, Movant: Patrick Michael Klein, II, LEAD ATTORNEY, U.S. Attorneys Office, Washington, DC; Todd Frederick Lang, LEAD ATTORNEY, Phoenix, AZ.


         Honorable Diane J. Humetewa, United States District Judge.

         Pending before the Court is a Motion to Dismiss Relator's First Amended Complaint (" AC" ) with prejudice by defendants Microsemi Corporation and White Electronic Designs Corporation (" WEDC" ) (Doc. 34) pursuant to Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 9(b).[1]

         I. Background

         A. Procedural

         On April 29, 2013, Relator Mark McGrath commenced this action against Defendants in the name of the United States Government pursuant to the False Claims Act (" FCA" ), 31 U.S.C. § 3729 et seq. After twice extending the seal at the behest of the government, the Honorable Neil V. Wake, to whom this case was previously assigned, ordered that Relator to " be prepared to actively prosecute this case beginning March 1, 2014, if the Government does not intervene by then." Ord. (Doc. 17) at 1:22-24. As that order also required, on February 28, 2014, the government notified the Court that it would not be intervening. Not. (Doc. 18). A few days later, on March 3, 2014, Relator filed his First Amended Complaint (" AC" ) (Doc. 19), and on March 11, 2014, Judge Wake ordered that the case be unsealed. Ord. (Doc. 22). However, on May 23, 2014, Judge Wake subsequently ordered the resealing of the complaint, the AC and their respective attachments all be resealed. Ord. (Doc. 37). Therefore, all cites to the complaint herein are to the redacted version (Doc. 38).

         B. Factual[2]

         Stripped of its rhetoric and hyperbole, the AC alleges as follows. Relator was employed with WEDC from June 2009 to May 2011. AC (Doc. 38) at 4, ¶ 1. Defendant WEDC " develops and manufactures microelectronic and display components and systems for high technology products used in military and commercial markets." ( Id. at 9, ¶ 5). Some of those technologies are " protected from disclosure or export to foreign persons . . . by the federal International Traffic in Arms Regulation (" ITAR" ),[3] 22 C.F.R. § § 120-130, promulgated pursuant to the Arms Export Control Act (" AECA" ), . . . and Export Administration Regulations (" EAR" ), 15 C.F.R. § § 730-774[.]" ( Id. ) (footnote added). " A small percentage of Microsemi's products are specifically designed for defense applications and are therefore ITAR-controlled." Decl'n (Doc. 34-1) at 8. Similarly, Defendant Microsemi, with employees world-wide, manufactures a wide range of high technology products for use in a variety of markets, such as aerospace, defense and communications. AC (Doc. 38) at 5, ¶ 4. In May 2010, Microsemi completed its acquisition of WEDC, with the latter becoming a wholly owned subsidiary of the former. ( Id. at 4-5, ¶ 3). After this acquisition, Relator was " in charge of the information technology [(" IT" )] team." ( Id. at 4, ¶ 1).

         During the acquisition process, some discussion ensued between Microsemi and WEDC given what Relator describes as " the extensive use of ITA documents throughout WEDC's computer network." AC (Doc. 38) at 22, ¶ 27. Microsemi informed Relator that it was " fully-versed in ITAR" due to having a " lot of facilities that perform ITAR-related work[.]" ( Id. ) Nonetheless, Relator and his IT team became concerned about possible ITAR violations. ( Id. at 22, ¶ 28). Both WEDC and Microsemi had their own separate " SharePoint" platforms. ( Id. at 23, ¶ 29). " SharePoint is a widely used browser-based collaboration and document management platform from Microsoft." ( Id. ). On May 24, 2010, Relator was informed that Microsemi was going to start migrating " WEDC servers and personal computers to Microsemi's network domain." ( Id. at 23, ¶ 30). Also, WEDC was going to start routing all of its e-mails through Microsemi servers." ( Id. ). On May 26, 2010, during a conference call with Microsemi, Relator expressed concern that if WEDC's " servers were migrated to Microsemi's network domain[,]" there was a risk of " unauthorized exposure" to WEDC's " ITAR-protected information[.]" ( Id. at 24, ¶ 31). In July 2010, Relator continued to express concern to Microsemi " about data falling into unauthorized hands." ( Id. at 24, ¶ 33).

         Relator " learned[,]" in the fall of 2010, " that Microsemi domain administrators had access to all devices on the Microsemi domain and if unauthorized domain administrators in other countries or divisions had access to confidential data, it could easily be stolen without anyone knowing." AC (Doc. 38) at 26, ¶ 37. On October 5, 2010, Dan Tarantine, WEDC's President and General Manager, called Relator asking " about the status of WEDC ITAR documents and whether they were exposed to individuals in other facilities." ( Id. at 27, ¶ 38). Relator answered in the affirmative, explaining that " WEDC was in the process of migrating its servers and computers to the Microsemi domain[,]" meaning " that all domain administrators would have access to all data on WEDC computers." ( Id. ).

         The next day, Relator had a face-to-face meeting with Mr. Tarantine and WEDC's Network Administrator " to discuss network vulnerability vis-a-vis ITAR documents as a result of migrating WEDC's system to the Microsemi domain." AC (Doc. 38) at 28, ¶ 39. During this meeting, Microsemi's General Manager was contacted to discuss this " potential exposure" issue and how Microsemi " might be mitigating [it]." ( Id. at 28, ¶ 39). The WEDC employees advised Microsemi that they had been able to access the server of a Microsemi facility in California and were " easily" able to download some of its files. ( Id. ). Additionally, servers in Ireland and Israel were accessible. ( Id. ). Among other things, Microsemi's GM advised that he would be contacting that California facility's security officer, who had previously held an IT-related position. ( Id. )

         Shortly thereafter, several government agencies became involved. On October 7, 2010, Relator, WEDC's GM, Mr. Tarantine, and its Network Administrator, Mr. Luna, as well as Microsemi's Human Resources and Facility Security Officer, met with a Special Agent with the Federal Bureau of Investigation. This group informed the Special Agent of the allegedly " pervasive security breaches." AC (Doc. 38) at 28, ¶ 40. The next day, Relator and Messrs. Tarantine and Luna had another meeting. This time a Special Agent from the Defense Security Service (" DDS" ) was present, as well as representatives from the Department of Homeland Security and from Immigration and Customs Enforcement. ( Id. at 29, ¶ 41). " The outcome was a decision that WEDC should continue operating as normal to allow time for" the Special Agent " to contact the State Department." ( Id. )

         Later in October 2010, a WEDC business analyst informed Relator that a firewall had been installed between WEDC and Microsemi. AC (Doc. 38) at 32, ¶ 47. Relator responded by sending an e-mail entitled " 'Immediate Domain Separation Notification[.]'" ( Id. ) Relator cited ITAR violations as the reason for the " 'physical domain separation[.]" ( Id. ) Microsemi was displeased, believing that Relator should have contacted it prior to commencing the domain separation. ( Id. at 33, ¶ 50). And, in any event, Microsemi did not want to maintain more than one domain. ( Id. at 34, ¶ 50).

         As part of the ongoing governmental investigation, the decision was made to shut down WEDC's server " because the firewall was not sufficient to protect the data." AC (Doc. 38) at 34, ¶ 50. On October 25, 2010, Microsemi's Chief Executive Officer received an e-mail from DDS stating " that WEDC was to immediately start the physical domain separation process." ( Id. at 35, ¶ 51). On that same date, the three foreign nationals who could potentially access ITAR-controlled information stored on Microsemi's United States systems, " were removed as domain administrators and given a lower access level[.]" Decl'n, exh. 2 (Doc. 34-1) at 9.

         By letter dated November 11, 2010, pursuant to 22 C.F.R. § 127.12(c), Microsemi submitted an " Initial Notification of Voluntary Disclosure of Microsemi[]: Relating to possible Access to Technical Data by foreign nationals[.]" Decl'n, exh. 1 (Doc. 34-1) at 4; see also AC (Doc. 38) at 17, ¶ 21. Microsemi provided this notification to the Office of Defense Trade Controls Compliance (" DTCC" ). Microsemi informed DTCC of a " possible gap in IT systems that may have enabled there foreign national employees from Ireland, Israel and the United Kingdom to gain access to servers that contain ITAR-controlled information without authorization from [DDTC]." ( Id. ) (emphasis added). Microsemi further informed DTCC that it had " no reason to believe that violations involved proscribed countries or nationals from proscribed countries occurred, or that any foreign national actually accessed ITAR-controlled data, or that any 'deemed export' occurred with respect to such data." ( Id. ). After " conducting a full review of ITAR-related activities and [Microsemi's] IT systems[,]" Microsemi indicated that it would be submitting a complete report " consistent with the requirements of Section 127.12." ( Id. ).

         In a February 15, 2011 letter, Microsemi supplemented its initial notification to DTCC. In submitting this " voluntary disclosure of possible inadvertent [ITAR] violations[,]" Microsemi confirmed that due to an " IT gap[,] . . . three foreign national IT employees located outside the United States . .., had access to serves in the United States that contain ITAR-controlled information." Decl'n, exh. 2 (Doc. 34-1) at 7. Microsemi informed the DTCC that " [b]ecause of their status as domain administrators on [its] IT systems, there three foreign nationals had the ability to access unclassified ITAR-controlled information residing on Microsemi servers in the United States." ( Id. ). Microsemi further informed the DTCC that after an internal review, " [a]ll available information suggest[ed] that there was no unauthorized access[,]" and that " the gap in the IT systems was an oversight that had not been addressed in [its] policies and procedures, and specifically the technology control plans that apply to ITAR-controlled data." ( Id. at 8).

         This lawsuit ensued, wherein Relator alleges that " Microsemi violated the [FCA] by causing WEDC and other subsidiary entities or corporate divisions to make false claims for payment for shipment of ITAR- and EAR-protected components for use in numerous military programs, while Microsemi was simultaneously exporting protected technical data through a single Microsemi network domain, without legal authority." AC (Doc. 38) at 21, ¶ 26. Relator claims that during his employment with WEDC, he discovered that WEDC had violated the FCA " from at least 2009 and was continuing to do so when he departed in May 2011. ( Id. at 9-10, ¶ 6). Tracking the language of the FCA, Relator alleges that " [b]y knowingly seeking payment for goods where Microsemi violated the contractual and legal requirements governing the export of defense articles and services, Microsemi presented or caused false claims to be presented by WEDC, . .., for payment or approval and used or caused to be used false statements or records material to false or fraudulent claims, all in violation of 31 U.S.C. § § 3729(a)(1)(A) and (a)(1)(B)." ( Id. at 11, ¶ 9). Relator alleges " actual damages to the United States from 2008 until 2011 of " approximate[ly] . . . $1.6 billion or more." ( Id. at 41, ¶ 66).

         II. Discussion

         A. Governing Legal Standards

         The Ninth Circuit has held that " [t]he heightened pleading standard of Rule 9(b) governs FCA claims." Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 2011) (citing Bly-- Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001)). " Rule 9(b) provides that '[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.'" Id. (at 1054-1055) (quoting Fed.R.Civ.P. 9(b)). " To satisfy Rule 9(b), a pleading must identify 'the who, what, when, where, and how of the misconduct charged,' as well as 'what is false or misleading about [the purportedly fraudulent] statement, and why it is false.'" Id. at 1055 (quoting Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010) (internal quotation marks and citations omitted)). Rule 9(b)'s particularity requirement serves several purposes. It " give[s] notice to defendants of the specific fraudulent conduct against which they must defend[; ] it also " deter[s] the filing of complaints as a pretext for the discovery of unknown wrongs[.]" Bly-Magee, 236 F.3d at 1018) (internal quotation marks and citations omitted). In this way, too, defendants are " protect[ed] . . . from the harm that comes from being subject to fraud charges[.]" Id. (internal quotations, citations and alternations omitted). Finally, Rule 9(b) " prohibits plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis." Id. (internal quotation marks and citations omitted).

         " Because Rule 8(a) requires the pleading of a plausible claim," the Ninth Circuit in Cafasso, held " that claims of fraud or mistake--including FCA claims--must, in addition to pleading with particularity, also plead plausible allegations." Cafasso, 637 F.3d at 1055 (citation omitted). This is in keeping with the view that a motion to dismiss a complaint under Rule 9(b) for failure to plead fraud with the particularity, is the " functional equivalent" of a Rule 12(b)(6) motion for failure to state a claim. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003). For these reasons, and because Defendants are seeking dismissal under both Rule 9(b) and Rule 12(b)(6), the Court will outline the pleading standards of Rule 12(b)(6) as well.

         A motion to dismiss pursuant to Rule 12(b)(6) challenges the legal sufficiency of a complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). A complaint must contain a " short and plain statement showing that the pleader is entitled to relief[.]" Fed.R.Civ.P. 8(a)(2). " All that is required are sufficient allegations to put defendants fairly on notice of the claims against them." McKeever v. Block, 932 F.2d 795, 798 (9th Cir. 1991). Rule 8 requires " more than an unadorned, the-defendant-unlawfully-harmed-me accusation[,]" however. Iqbal, 556 U.S., at 678 (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2009)). A complaint that provides " labels and conclusions" or " a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. Nor will a complaint suffice if it presents nothing more than " naked assertions" without " further factual enhancement." Id. at 557.

         A complaint need not contain detailed factual allegations to avoid a Rule 12(b)(6) dismissal, but it must plead " enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S., at 570. " A complaint 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." Iqbal, 556 U.S., at 678 (citing Twombly, 550 U.S., at 556). " The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that defendant has acted unlawfully." Id. " Where 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." Id. (internal quotation marks and citation omitted).

         " The Court may find a claim plausible when a plaintiff pleads sufficient facts to allow the Court to draw a reasonable inference of misconduct, but the Court is not required 'to accept as true a legal conclusion couched as a factual allegation.'" Harris v. County of Orange, 682 F.3d 1126, 1131 (9th Cir. 2012) (quoting Iqbal, 556 U.S., at 678 (internal quotation marks and citation omitted)). Likewise, a complaint that provides " labels and conclusions" or " a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S., at 555. Nor will a complaint suffice if it presents nothing more than " naked assertions" without " further factual enhancement." Id. at 557. " Determining whether a complaint states a plausible claim for relief will, . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S., at 679 (citation omitted). These essential Iqbal/Twombly pleading requirements will guide the Court's analysis " to determine whether the factual allegations, which are assumed to be true, 'plausibly give rise to an entitlement to relief.'" Landers v. Quality Communications, Inc., 771 F.3d 638, 641 (9th Cir. 2014) (quoting Iqbal, 556 U.S., at 679), cert. denied., 135 S.Ct. 1845, 191 L.Ed.2d 754 (April 20, 2015).

         B. False Claims Act

         " The FCA was enacted during the Civil War in response to overcharges and other abuses by defense contractors." Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1047 (9th Cir. 2012) (internal quotation marks and citation omitted). " The purpose of the FCA was to [combat] widespread fraud by government contractors who were submitting inflated invoices and shipping faulty goods to the government." Id. (internal quotation marks and citation omitted). " The Supreme Court has refused to adopt a restrictive reading of the statute, however, holding that the FCA is a 'remedial statute [that] reaches beyond 'claims' which might be legally enforced, to all fraudulent attempts to cause the Government to pay out sums of money.'" United States ex rel. Modglin v. DJO Global Inc., 48 F.Supp.3d 1362, 1385 (C.D.Cal. 2014) (quoting United States v. Neifert-- White Co., 390 U.S. 228, 233, 88 S.Ct. 959, 19 L.Ed.2d 1061 (1968)) (other citation omitted). By the same token, however, " the FCA is not a catchall anti-fraud provision--it 'attaches liability, not to the underlying fraudulent activity or to the government's wrongful payment, but to the claim for payment.'" United States ex. rel. Campie v. Gilead Sciences, Inc., 2015 WL 106255, at *14 (N.D.Cal. Jan. 7, 2015) (" Campie I " ) (quoting Cafasso, 637 F.3d at 1055) (other citation and internal quotation marks omitted).

         " As one enforcement mechanism, the FCA authorizes private parties, known as 'relators,' to bring civil qui tam suits on the government's behalf against entities who have allegedly defrauded the government." Hartpence, 792 F.3d at 1123 Id. (quoting 31 U.S.C. § 3730(b)(1)). " In these suits, the relators seek reimbursement of the defrauded amounts on the government's behalf." Id. " Where, as here, the government declines to intervene in the suit, the relator stands to receive between 25% and 30% of any recovery." Id. (citing 31 U.S. § 3730(d)(2)).

         In his one count AC, Realtor alleges that Defendants violated 31 U.S.C. § § 3729(a)(1)(A) and (B). Those statutes " create[] liability for any person who, inter alia, '(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.'" Hooper, 688 F.3d at 1047 (quoting 31 U.S.C. § 3729(a)(1)). The FAC defines " knowingly" as having " actual knowledge of information[,]" or acting in either " deliberate ignorance" or " reckless disregard" of the " truth or falsity of the information[.]" 31 U.S.C. § 3729(b).

         " The FCA does not define false." United States v. Bourseau, 531 F.3d 1159, 1164 (9th Cir. 2008). " Rather, courts decide whether a claim is false or fraudulent by determining whether a defendant's representations are accurate in light of applicable law." Id. (citation omitted). The prerequisites for liability under 31 U.S.C. § § 3729(a)(1)(A) and (B) " are virtually identical, with the only difference being whether Defendants submitted a false claim or made a statement material to such a claim[.]" United States ex rel. Bailey v. Gatan, Inc., 2015 WL 1291384, at *4 (E.D.Cal. March 20, 2015). Therefore, in its analysis the Court will not distinguish between the two. See id (jointly addressing two such claims).

         There are several theories of FCA liability. " The prototypical false claims action alleges a factually false claim, i.e., an explicit lie in a claim for payment, such as an overstatement of the amount due." Modglin, 48 F.Supp.3d at 1387 (citations omitted). " Factually false claims arise when 'the government payee has submitted 'an incorrect description of goods or services provided or a request for reimbursement for goods or services never provided.''" Guardiola, 2014 WL 4162201, at *3 (quoting United States ex rel. Conner v. Salina Reg'l Health Ctr., Inc., 543 F.3d 1211, 1217 (10th Cir .2008)) (citing Mikes v. ...

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