United States District Court, D. Arizona
United States of America ex rel. Mark McGrath, Relator,
Microsemi Corporation, et al., Defendants
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,
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.
United States of America, Movant: Patrick Michael Klein, II,
LEAD ATTORNEY, U.S. Attorneys Office, Washington, DC; Todd
Frederick Lang, LEAD ATTORNEY, Phoenix, AZ.
Diane J. Humetewa, United States District Judge.
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).
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).
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"
), 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).
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).
" 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. ).
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. )
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. )
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).
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
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. ).
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).
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).
Governing Legal Standards
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.
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.
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).
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. §
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.
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).
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.