U.S. v. Strock

  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. ROBERT KATZMANN, C.J. 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 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”). 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). 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 percent owner, Strock as vice-president and 30 percent owner, and Ken Carter as secretary and 19 percent 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 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