[00:00:01] Speaker 01: This honorable court is in session again. [00:00:05] Speaker 01: Case number 19-7139, United States of America, ex-rail Paul Acemino and Paul Acemino Appellant versus International Business Machines Corporation, a Delaware corporation. [00:00:17] Speaker 01: Mr. Singh for the Appellant, Ms. [00:00:19] Speaker 01: Mundell for the Amicus Curiae United States, Ms. [00:00:22] Speaker 01: Stetson for the Appellee. [00:00:25] Speaker 00: Good morning, counsel. [00:00:26] Speaker 00: Mr. Singh, please proceed when you're ready. [00:00:29] Speaker 03: Good morning, may it please the court, the Jim they're saying for the appellant Paul Semino. [00:00:34] Speaker 03: This is a false claims at case at the pleading stage. [00:00:38] Speaker 03: Our complaint alleges that IBM's fraud caused the IRS to agree to a contract that would not have otherwise accepted at a price it would not have otherwise agreed to pay. [00:00:49] Speaker 03: The principal question before the court is whether that allegation is plausible based on the well-planned facts in the complaint and based on three sets of [00:00:59] Speaker 03: allegations, it clearly is. [00:01:01] Speaker 03: The first is that IBM was trying to induce the IRS to sign a contract by fraud. [00:01:08] Speaker 03: When IBM manufactured the false compliance penalties, its goal was to create leverage that could be used to pressure the IRS into a new contract. [00:01:20] Speaker 03: In order for that not to cause the IRS to enter into a contract, something would have had to go wrong with IBM's scheme. [00:01:27] Speaker 03: And there's nothing in the complaint that suggests anything went wrong. [00:01:30] Speaker 03: In fact, this brings me to the second key fact, which is that IBM got exactly the deal you would expect it to get if its fraud succeeded perfectly. [00:01:39] Speaker 03: Just after IBM presented its fake audit report to the IRS, the agency signed a new contract [00:01:46] Speaker 03: And there's a clear relationship between the lies IBM told and the deal the IRS signed. [00:01:51] Speaker 03: The IRS overpaid by about 87 million, which is close to the amount that IBM falsely said was owed. [00:01:58] Speaker 03: And the connections don't stop there. [00:02:00] Speaker 03: For example, if you look at paragraph 139 of the complaint, which is on Joint Appendix 38, you'll see that IBM asserted the IRS owed penalties for 2,353 of a certain license. [00:02:13] Speaker 03: In the new contract, IBM billed for exactly 2,353 of that license in the first year and then 25 for each subsequent year. [00:02:23] Speaker 03: IBM's misrepresentations are certainly at least one plausible explanation for those charges. [00:02:29] Speaker 03: You can draw a straight line between the lies they told about false compliance penalties and the deal that they ultimately got. [00:02:36] Speaker 06: Can you can you draw you said there's at least a line can you can you demonstrate that there is but for causation between those two things. [00:02:48] Speaker 03: We certainly allege it, which is what we have to do. [00:02:50] Speaker 03: And when you say demonstrate, I want to be really clear. [00:02:52] Speaker 03: This is the pleading stage. [00:02:53] Speaker 03: We don't have to prove the allegations. [00:02:55] Speaker 03: And we've alleged it explicitly and repeatedly that the IRS would not have signed this deal but for the fraud. [00:03:01] Speaker 06: Can you point to where you have specifically alleged causation? [00:03:06] Speaker 06: Sure. [00:03:07] Speaker 03: So the ultimate allegation of causation, you'll find it in paragraphs 31, 37, 131, and 142. [00:03:14] Speaker 03: Can you repeat the numbers, please? [00:03:19] Speaker 03: Sure. [00:03:20] Speaker 03: The easiest place to find this actually, Your Honor, is if you have our reply brief on page five of the reply brief, all of the relevant paragraph citations are going to be on that page. [00:03:33] Speaker 03: And so if you look at the top, you'll see the citations to the ultimate allegation of causation. [00:03:40] Speaker 03: And then if you look at those bullet points, you'll see the well played facts that support those allegations. [00:03:49] Speaker 00: What's the particular paragraph that comes closest to saying but for? [00:03:55] Speaker 03: Sure, so I will take you first to paragraph 31. [00:04:02] Speaker 03: The materially false and inflated audit findings, and this is Joint Appendix 14, the materially false and inflated audit findings presented to the IRS and IBM's representation that it would waive those penalties if the IRS entered into a new deal cause in substantial material part, the IRS to enter into the license when it otherwise would not have. [00:04:22] Speaker 03: And that last phrase at the end there is but for causation, right? [00:04:26] Speaker 03: And similar language appears if you go down to paragraph 131. [00:04:31] Speaker 03: That's about the audit findings specifically. [00:04:34] Speaker 03: And it says it caused the IRS to enter the license when it otherwise would not have. [00:04:38] Speaker 03: Paragraph 142 is about the specific promise to waive the fake penalties. [00:04:44] Speaker 03: And it says that caused the IRS to enter into the license when it otherwise would not have. [00:04:50] Speaker 03: And when you look at how closely tied the lies are to the ultimate deal, you would normally infer that it succeeded. [00:04:57] Speaker 03: But there is more. [00:04:59] Speaker 03: And this is again referring to the things. [00:05:00] Speaker 03: This is my third key set of facts. [00:05:02] Speaker 03: And this is the stuff in the bullets on page five of the reply brief. [00:05:06] Speaker 03: We have observations that support the inference of causation. [00:05:09] Speaker 03: So for example, IBM employee Chris Shum, who was in the room where it happened, said that the key government decision maker was concerned and scared about the audit findings. [00:05:20] Speaker 03: IBM's own internal accounts of the negotiations say that false compliance charges, well they don't call them false, but they say the compliance charges drove a large part of the deal. [00:05:32] Speaker 03: So they have internally booked this as something that's attributable to the penalties that they were asserting. [00:05:39] Speaker 03: And so you know that they played a material role and the IBM believe they played a material role and knew they played a material role. [00:05:47] Speaker 00: Can I understand one factual detail in the allegations? [00:05:51] Speaker 00: So when you say that the allegations say that Chris Shum was aware [00:05:58] Speaker 00: that the IRS was concerned. [00:05:59] Speaker 00: I think you said that the key person was concerned. [00:06:02] Speaker 00: And in order to bring in the key person, you're folding in paragraph, is it five? [00:06:08] Speaker 00: I can't remember the exact paragraph. [00:06:09] Speaker 00: So you're melding those two paragraphs together to say that paragraph 127 in talking about the IRS actually is referring not just to the IRS as an entity, but is referring to a particular person. [00:06:19] Speaker 00: And that's the supervisor with whom the subsequent meeting happened. [00:06:23] Speaker 03: Yes, that's right. [00:06:24] Speaker 03: The Shum paragraph is paragraph 127. [00:06:28] Speaker 03: But if you look at that paragraph in context, both in the context of paragraph five, but also its surrounding paragraphs. [00:06:34] Speaker 03: Paragraph 126, which is the paragraph right before, is talking about the meeting that happens with Jim McGrain, where the audit findings are presented to him. [00:06:45] Speaker 03: And then paragraph 127 says, for Shum, an employee who was present at that meeting [00:06:51] Speaker 03: said that he was concerned and scared. [00:06:54] Speaker 03: In context, this is clearly about Jim McGrain's mindset. [00:06:57] Speaker 03: And of course, it must have been at the relevant time, because the thing that McGrain is asserted to be, the IRS is asserted to be scared of, is the Deloitte findings, which were presented in that meeting to McGrain. [00:07:08] Speaker 03: When we're talking about the IRS here, we're talking about the decision makers who were in the room, and not just the agency in some vague, undefined sense. [00:07:18] Speaker 03: And I think that that's really what we need to win the causation debate at the pleading stage. [00:07:24] Speaker 03: Again, the pleading stage. [00:07:26] Speaker 03: The other side can, of course, come up with their evidence about why this didn't matter to the IRS. [00:07:32] Speaker 03: And we'll talk about that down the line after discovery. [00:07:35] Speaker 03: But in terms of evaluating the sufficiency of the allegations, it's hard to imagine allegations that are more clear. [00:07:42] Speaker 03: And the line for finding them plausible should be relatively low, especially when this case isn't like Twombly. [00:07:48] Speaker 03: Where the court was looking at conduct that might be innocent, might be culpable. [00:07:53] Speaker 03: We really don't want to open a can of worms of discovery about something that might be innocent. [00:07:58] Speaker 03: IBM's conduct was highly culpable. [00:08:01] Speaker 03: Even they're not contesting the sufficiency of those allegations. [00:08:06] Speaker 03: The things we say they did wrong are wrong. [00:08:09] Speaker 03: You shouldn't do those things. [00:08:11] Speaker 03: And so I think allowing this case to move to discovery doesn't raise any of the concerns that were motivating the court in cases like Twamford. [00:08:19] Speaker 02: You're saying, are you, you jumped over your argument about a substantial factor. [00:08:27] Speaker 02: Is that just because the court started you with but for causation or can we consider that be abandoned at this point? [00:08:35] Speaker 03: Oh, I wouldn't consider anything abandoned that was in our briefs. [00:08:39] Speaker 03: We think we'll meet any standard of causation. [00:08:43] Speaker 03: And we think that if you believe we meet the district court's standard, which I think we do, you don't have to reach the question of what the actual legal standard is. [00:08:50] Speaker 03: Mostly, I just don't want to make bad law on the subject in this case by suggesting that because we meet the higher standard, that is the standard. [00:08:58] Speaker 03: But if you're going to reach that question, for the reasons we've set forth in the brief, and I'm happy to talk about them, [00:09:03] Speaker 03: we think that the right standard is either to say that you only need materiality in a fraudulent inducement case or substantial factor causation. [00:09:12] Speaker 02: No, I was not actually mentioning it because I thought there was anything to it. [00:09:18] Speaker 03: I understand. [00:09:20] Speaker 02: Just wanted to see if we could narrow and clarify matters. [00:09:25] Speaker 00: Can I ask you a conceptual question? [00:09:26] Speaker 00: So let's suppose that but for causation is the right standard. [00:09:30] Speaker 00: Then if there is but for causation is a necessary ingredient of a claim, what does materiality add? [00:09:39] Speaker 00: Because but for causation means the decision wouldn't have been made but for the consideration at issue. [00:09:46] Speaker 00: Materiality says, was the consideration at issue significant? [00:09:50] Speaker 00: If the decision wouldn't have been made but for this consideration at issue, then how could it not be significant? [00:09:57] Speaker 03: I agree. [00:09:59] Speaker 03: If we win causation on a but for standard, I think we win materiality. [00:10:03] Speaker 00: But I guess, I assumed you would agree because that helps you. [00:10:07] Speaker 00: But the way you presented the arguments in your brief, it seemed like what you were saying is there's a materiality requirement, but there's not a causation requirement. [00:10:16] Speaker 00: And I almost wonder whether that seems backwards because [00:10:20] Speaker 00: If there is a causation requirement, then arguably, there need not be. [00:10:24] Speaker 00: It's unclear what materiality is adding. [00:10:26] Speaker 00: But if there is materiality, causation still adds something, at least BOT4 causation does, because BOT4 causation requires that it be an essential ingredient. [00:10:35] Speaker 03: That's correct. [00:10:36] Speaker 03: So let me just be clear about where this whole materiality thing came from. [00:10:39] Speaker 03: Materiality has been a subject of recent interest after the Supreme Court's 2016 decision in Escobar. [00:10:46] Speaker 03: And that was a case about implied certification. [00:10:48] Speaker 03: And the genesis of this was that the defendants worried that if you could bring a false claims case based on the violation of any regulation, [00:10:58] Speaker 03: or any requirement that might be relevant to payment, it would be expansive liability. [00:11:04] Speaker 03: And the Supreme Court said, the way we're going to sort which regulations and violations matter from which ones don't is we're going to look at materiality. [00:11:12] Speaker 03: So in those implied certification cases, it's only the violation of a material condition of payment that's gonna get you to liability. [00:11:21] Speaker 03: And so in some cases, you need that, you need to sort [00:11:24] Speaker 03: that out. [00:11:25] Speaker 03: But that's in a case where there's probably no causation. [00:11:28] Speaker 03: There's no causation requirement whatsoever. [00:11:31] Speaker 00: Right. [00:11:31] Speaker 03: But in most FCA cases that are not fraudulent inducement, everyone agrees there's no causation requirement. [00:11:36] Speaker 00: Right. [00:11:37] Speaker 00: But if fraudulent inducement requires, I mean, in a normal, I guess the way I look at it is in a non-fraudulent inducement case, there's a materiality requirement because [00:11:46] Speaker 00: The question is whether the claim is false. [00:11:49] Speaker 00: There's no causation that attaches to that, but it still has to be material because you wouldn't want to give effect to something that's false, but it's trivial. [00:11:57] Speaker 00: But in a fraudulent inducement case, the very notion of fraudulent inducement requires inducement, which means, at least I know you disagree with this, but at least arguably requires causation. [00:12:07] Speaker 00: And then once you have causation, query whether materiality is adding something to the causation in an inducement case. [00:12:15] Speaker 03: I don't think it does. [00:12:16] Speaker 03: I think that once you have causation, you basically have materiality plus. [00:12:20] Speaker 03: I read materiality to mean potential causation, maybe likely causation, but once you have actual causation, you've crossed the bridge, I think. [00:12:31] Speaker 00: Okay, if my colleagues don't have any further questions, then we'll. [00:12:34] Speaker 02: Well, I guess I have one, if I may. [00:12:36] Speaker 02: So, but I think, is it fair to say that, and I'm just saying that your contention about [00:12:44] Speaker 02: plausibility, if it comes down to, or at least entails the plausibility that the government contracting parties were intimidated by the prospect that they might be sued, [00:13:04] Speaker 02: and agreed to a contract that they would not otherwise have agreed to, but for the threat of being litigated, that there was, I believe it was also true that they must not have looked at information that was in some column of a spreadsheet that was not emphasized to them, and just went along with this because they were [00:13:33] Speaker 02: Personally, these two or three individuals were scared that the agency could be sued. [00:13:43] Speaker 03: I'm not completely sure that I understand the question. [00:13:45] Speaker 03: Our allegations certainly encompass some of those facts that you've said. [00:13:49] Speaker 03: What I would say is when you ask what we have to show as a matter of law, I think what we have to show is that the IRS behaved the way it did because of the defendant's conduct. [00:14:01] Speaker 03: That is, had the defendants not lied about these penalties, had not threatened to sue, had not [00:14:08] Speaker 03: You know offered to waive them if they accepted a new deal The deal would not have been consummated as it was I don't necessarily I don't what I don't want to To give the impression is that we have to win all those things, right? [00:14:23] Speaker 03: If any action [00:14:26] Speaker 03: have caused the IRS's conduct. [00:14:28] Speaker 03: I think the IRS signed the deal, and that conduct is fraudulent. [00:14:32] Speaker 03: I think we're good. [00:14:34] Speaker 03: And so it may be, as I said, the subjective motivations, it may be that they were scared. [00:14:41] Speaker 03: We've got an allegation to that effect. [00:14:44] Speaker 03: But even if it shows that they were worried about litigation, [00:14:50] Speaker 03: only, but they thought they might win, you know, we think that's still enough, right. [00:14:54] Speaker 03: So I just want to make sure that I'm clear about what I mean. [00:14:58] Speaker 02: You're portraying a government contracting process that is so sloppy or capricious that a couple of people being worried about being scared causes the government to enter into a quarter of a billion dollar arrangement. [00:15:14] Speaker 03: I do think that there's an argument that the IRS was not terribly sophisticated in this contracting process. [00:15:22] Speaker 03: And if you notice, we cited in our reply brief, and this is mentioned in the complaint as well, there was an investigation. [00:15:28] Speaker 03: Congress had hearings about the IRS's IT contracting process specifically that found it to be vulnerable to fraud. [00:15:36] Speaker 03: But I'm not trying to blame the government here. [00:15:38] Speaker 03: What I'm saying is that [00:15:40] Speaker 03: The government's contracting folks generally do not assume that their contractors are going to just lie to them. [00:15:48] Speaker 03: They tend to take statements that are made by contractors at something close to face value. [00:15:54] Speaker 03: And that's in part because there are lots of protections, including the False Claims Act, that protect the government when the contractors do lie. [00:16:01] Speaker 03: And so while I think it's almost always the case in every government contracting fraud case that had the government been more vigilant, it might have been able to find something that would have allowed it to escape the bad deal. [00:16:15] Speaker 03: I don't think that that's [00:16:17] Speaker 03: how our society and Congress and the False Claims Act look at these issues at all. [00:16:22] Speaker 03: And I'm not trying to insinuate that the government was bad here. [00:16:27] Speaker 03: What I'm trying to say is that they were lied to, and the lies are the most clear and plausible explanation for why they did what they did. [00:16:34] Speaker 02: And the lies were told to the frontline contracting party and his supervisor. [00:16:42] Speaker 02: Anyone else? [00:16:44] Speaker 02: Does the supervisor, do you allege that the supervisor has the sole authority to sign off on the deal? [00:16:51] Speaker 03: I don't know if that allegation is in the complaint. [00:16:55] Speaker 03: I believe that that is a true fact, but I don't know if that allegation is specifically in the complaint. [00:17:00] Speaker 03: We say that Jim McGrain was the head of software acquisitions and was in charge of this deal. [00:17:06] Speaker 03: I don't know. [00:17:06] Speaker 03: I believe he may have had to consult with the actual chief information officer, but I don't think that's in the complaint and I wouldn't want to speak out of school. [00:17:14] Speaker 00: Thank you. [00:17:15] Speaker 02: Thank you. [00:17:17] Speaker 00: Thank you, Mr. Singh. [00:17:18] Speaker 00: We'll hear from the government. [00:17:21] Speaker 05: Morning, your honor. [00:17:22] Speaker 05: I may please the court. [00:17:23] Speaker 05: My name is Amanda Mandel on behalf of the United States. [00:17:26] Speaker 05: This court should reverse the district court for two main reasons. [00:17:29] Speaker 05: First, because it aired with respect to its causation analysis, as Mr. Singh has discussed in some detail, and also because it aired in respect to its materiality analysis. [00:17:38] Speaker 05: And just with respect to causation, I want to make clear the government's position here is that at a bottom line, the district court's conclusion that but for causation is required, we do agree with that. [00:17:47] Speaker 05: We also agree that this court doesn't need to decide that issue itself if the court concludes that the allegations of the complaint properly establish and plead but for causation. [00:17:56] Speaker 05: But we do have some concerns with the path that the court took to get to that conclusion. [00:18:01] Speaker 05: And so to the extent that this court is going to reaffirm the continuing validity of the fraudulent inducement theory as we think that it should, we would just ask that the court not introduce any ambiguity or imprecision that we find inherent in the district court's opinion. [00:18:15] Speaker 05: In particular, we think that the court, in trying to reach the spot for causation conclusion, seems as though it was reaching for something beyond what is typically required in a fraudulent inducement case. [00:18:26] Speaker 05: And that is to say that courts have long recognized this as an established theory of liability under the False Claims Act. [00:18:32] Speaker 05: And no court, not the Supreme Court in Marcus v. Hess or this court in Bettis or any other court of appeals, has really struggled to either parse out the elements of fraudulent inducement [00:18:42] Speaker 05: or struggled to apply them in the way that the district court did here. [00:18:45] Speaker 05: And when the court did announce but for causation, it then took the extra step to say that even that level of causation, quote, understates the stringency of the FDA's causation standards. [00:18:57] Speaker 05: And so we have some concerns that the court was sort of looking beyond what is typically required in the fraudulent inducement context to establish but for causation, and then resorting to various cases that are inapplicate, like in the damages context, to shore up that analysis. [00:19:11] Speaker 05: And here, really what was required is exactly what Mr. Singh has discussed with the court in his opening argument, which is that had these fraudulent statements not been made, had the trumped up audit findings not been presented, and the false promise to waive the $91 million penalty not been made, the government wouldn't have entered into this contract. [00:19:28] Speaker 05: That's pleaded explicitly in several places in the complaint. [00:19:31] Speaker 05: And then there are several allegations, as Mr. Singh highlighted, that make that allegation plausible. [00:19:36] Speaker 05: The fact that the IRS wasn't thinking about renewing this contract to begin with, [00:19:41] Speaker 05: that the $91 million compliance penalty was at a pain point sufficient to force the government to enter into this, quote, compliance deal. [00:19:49] Speaker 05: But the IRS was, of course, concerned or scared of these audit findings. [00:19:52] Speaker 05: And then, of course, it would not have entered into the license had it known that those representations were false. [00:19:58] Speaker 05: So we think for those reasons, not just did the district court misapply this inducement element to the allegations of the complaint, but really, it sort of overcomplicated needlessly the inquiry there. [00:20:09] Speaker 05: With respect to materiality, though, we think the district court erred in two main areas. [00:20:14] Speaker 00: First, can I just ask you the same conceptual question? [00:20:19] Speaker 00: If we buy your argument that there's but for causation as a requirement, what does materiality add? [00:20:26] Speaker 00: Because even in your brief, when you explain why materiality is adequately pled, you just basically rely on what was explained with respect to but for causation. [00:20:35] Speaker 00: And I guess conceptually, it seems like but for causation means that the consideration that issue is essential to the decision. [00:20:42] Speaker 00: Materiality [00:20:43] Speaker 00: asks is the consideration at issue significant to the decision? [00:20:48] Speaker 00: And I get that there's a different temporal reference point that materiality comes ex ante and but for causation comes ex post. [00:20:53] Speaker 00: And suppose maybe somebody could conjure up the hypothetical that makes use of that temporal distinction. [00:21:00] Speaker 00: But as a real world matter in the mind run of cases, does the government think that materiality adds something about for causation in the fraudulent inducement context? [00:21:10] Speaker 05: No, Your Honor, and Your Honor is correct. [00:21:12] Speaker 05: It's very hard to imagine. [00:21:13] Speaker 05: It's not impossible to imagine a scenario where if but for causation is established here, then the allegations would somehow fail on a materiality aspect. [00:21:22] Speaker 05: At the end of the day, if the government wouldn't have entered into the contract absent those fraudulent statements, we know that those fraudulent statements were important or significant to the government to establish materiality. [00:21:31] Speaker 05: That's just a feature of fraudulent inducement as a theory of liability. [00:21:34] Speaker 05: That isn't present in these other typical FDA false statement submission cases. [00:21:40] Speaker 00: Which are governed by Escobar, where the court explained the significance of materiality. [00:21:45] Speaker 05: Exactly right, Your Honor. [00:21:47] Speaker 05: And so here, the reason we've sort of split up our analysis is just because that's exactly what the district report did. [00:21:51] Speaker 05: It sort of parsed out these elements as separate pieces when really what satisfied but for causation and complaints certainly satisfies materiality. [00:21:59] Speaker 05: And there's one other point that I would make with respect to that materiality point is that when doing that assessment, [00:22:03] Speaker 05: In addition to failing to conduct that holistic analysis, the court did make reference to the government's declination decision in this case not to participate. [00:22:11] Speaker 05: And we think this court should hold that that is simply not relevant at the materiality stage, because there are many reasons, non-merit-wise, that the government might not participate. [00:22:19] Speaker 05: It certainly doesn't give any information about whether the government thinks the statement is material or not. [00:22:24] Speaker 06: So was it not entitled even to some respect, as the district court said? [00:22:29] Speaker 05: You think it's just simply irrelevant? [00:22:31] Speaker 05: That's exactly right, Your Honor. [00:22:32] Speaker 05: And that sort of makes sense for two reasons. [00:22:35] Speaker 05: One, we know that False Claims Act allows for relators like Mr. Cimino to bring these claims without the government's participation. [00:22:41] Speaker 05: And so it would be very odd if courts could take into account the government's declination decision as a reflection of materiality and make it even incrementally more difficult for a relator to bring those to. [00:22:51] Speaker 05: And then secondly, of course, it simply ignores the reality of the government system, which is we simply cannot participate in every single False Claims Act case and all the other cases that we litigate in this country. [00:23:01] Speaker 05: And so the fact that the government doesn't participate doesn't necessarily mean that it's a comment on the merits. [00:23:06] Speaker 05: It could be a resource-specific problem. [00:23:08] Speaker 05: And it certainly doesn't mean that even if it's a merit-related decision, that it's a comment on materiality, as opposed to some other aspect of the case that's sort of difficult to discern at the pleading stage. [00:23:19] Speaker 05: Your Honor, unless there are other questions, we just urge that this court reverse. [00:23:23] Speaker 00: Thank you, Ms. [00:23:24] Speaker 00: Mundell. [00:23:25] Speaker 05: Thank you. [00:23:26] Speaker 00: Ms. [00:23:26] Speaker 00: Detson? [00:23:29] Speaker 04: Good morning, your honors, and may it please the court. [00:23:31] Speaker 04: My name is Kate Stetson. [00:23:32] Speaker 04: I represent IBM. [00:23:34] Speaker 04: I'm going to start, actually, where Mr. Singh did, which is that this is a false claims act at the pleading stage. [00:23:39] Speaker 04: But what that means, I think, is significant. [00:23:42] Speaker 04: Because as we know, after Twombly, Iqbal, Escobar, the pleading stage has some teeth. [00:23:48] Speaker 04: And there are a few basic factors that I think are relevant here. [00:23:52] Speaker 04: One of them draws on Judge Rao's first question. [00:23:55] Speaker 04: which is that it's not enough at the pleading stage to allege conclusions. [00:23:59] Speaker 04: You have to allege facts backing up those conclusions. [00:24:02] Speaker 04: And you have to allege those facts as being more than consistent with the prospect of liability. [00:24:07] Speaker 04: They actually have to point towards liability. [00:24:10] Speaker 04: In response to one of the questions Judge Ginsburg raised, this court under Iqbal is also instructed to take its common sense and experience into account when it's reviewing a motion to dismiss [00:24:21] Speaker 04: and the allegations in a complaint. [00:24:23] Speaker 04: And then, of course, there's a third thing that I don't think has come up at all yet in the argument, which is that a fraud plaintiff, including a False Claims Act plaintiff, needs to satisfy Rule 9b. [00:24:33] Speaker 04: So that's the additional [00:24:35] Speaker 04: test that these allegations need to be put through. [00:24:39] Speaker 04: So I want to pick up, Chief Judge Srinivasan, on your question about causation and materiality, because I do think as a conceptual matter, they tend to collapse into each other in a case like this, but I want to offer one view on how materiality could work [00:24:56] Speaker 04: as a backstop in the analysis. [00:24:58] Speaker 04: And that is essentially with reference to what the district court did. [00:25:02] Speaker 04: There are many cases at the dismissal stage, D'Agostino, Nargall, Petrados, Sanford Brown to name four, that find that a representation to the government could not have been material when the government continued to pay on the contract. [00:25:20] Speaker 04: So I think while conceptually, when you're talking about the point at which you're reviewing this, Chief Judge Srinivasan, you made the point about the temporal difference. [00:25:28] Speaker 04: That temporal difference kind of gets erased with the passage of time. [00:25:32] Speaker 04: But I think where materiality, where that analysis is helpful, is in this court testing the conclusion against the facts. [00:25:41] Speaker 04: What this court said in McBride is, since we have the evidence available to us, we might as well make use of it, essentially. [00:25:48] Speaker 04: And what we know in this case and what the district court held, and I want to be very clear about this, this was not some kind of singular, non-holistic materiality overview. [00:25:59] Speaker 04: This was a multi-step commentary, which it then capped off with a reference to declination. [00:26:06] Speaker 04: And I want to be clear on that as well. [00:26:07] Speaker 04: I'll get to that in a moment. [00:26:09] Speaker 04: But when the district court talked about materiality, and you can find this at Joint Appendix 416 to 417, it made a few different observations. [00:26:19] Speaker 04: One was that the IRS paid all or a substantial portion of the fees, as even the complaint alleged. [00:26:25] Speaker 04: And most of those were paid after the case was filed. [00:26:29] Speaker 04: And you can cross-check that against Joint Appendix 320 and 336, which set out the schedule for payments. [00:26:39] Speaker 04: The IRS agreed to add six months to the contract. [00:26:44] Speaker 04: It took the contract out to its maximum time under the available contract. [00:26:48] Speaker 04: That's a Joint Appendix 336 as well. [00:26:52] Speaker 02: Wasn't all of this occurring while the government was considering whether to bring a case? [00:27:01] Speaker 04: It was, and I think that's a point that Mr. Cimino makes in his briefing is that these were just allegations rather than actual knowledge, as was the court's quote in Escobar. [00:27:12] Speaker 04: But I would respond that in Petrados, in Sanford Brown, in McBride, and I think in D'Agostino, all the courts had there was allegations. [00:27:22] Speaker 04: And the 10th Circuit in Janssen actually answered exactly this question. [00:27:25] Speaker 02: I'm interested in a separate question or different inference. [00:27:29] Speaker 02: If the IRS [00:27:31] Speaker 02: If the government, if justice receives the information suggesting there may be a case here and it investigates that, surely it must tell the IRS or if the IRS asks, must say, look, just keep on paying on the contract. [00:27:49] Speaker 02: We haven't reached a decision. [00:27:51] Speaker 02: Because we may not bring a case here. [00:27:53] Speaker 02: Indeed, we may conclude it's fine. [00:27:55] Speaker 02: We just don't know. [00:27:56] Speaker 02: So you have no basis for just stopping payment in the middle of the contract. [00:28:01] Speaker 04: I don't, first of all, that's certainly not an argument that Mr. Semino has offered here. [00:28:06] Speaker 04: But second, more to the point. [00:28:07] Speaker 02: No, it's a question about an argument that you're making, that there's somehow significance to the IRS continuing to abide by the contract. [00:28:17] Speaker 04: Yes. [00:28:17] Speaker 04: My point is that Mr. Singh hasn't alleged that the IRS was somehow hamstrung from stepping out of the contract. [00:28:24] Speaker 02: I'm not saying they're hamstrung either. [00:28:26] Speaker 02: I'm saying that it would be [00:28:27] Speaker 02: It's a peculiar point for you to be making. [00:28:30] Speaker 02: It's not persuasive because it would require the IRS to have stopped paying on a contract that the Justice Department had not concluded was fraudulent. [00:28:41] Speaker 04: Under the regulations that govern this contract, Judge Ginsburg, and you can find this at Joint Appendix 320 and the references to the regulations there, [00:28:51] Speaker 04: the IRS could terminate this contract for convenience. [00:28:54] Speaker 04: So it didn't need to wait around for the government to tell them whether there was some massive fraud that had been operated on it. [00:29:00] Speaker 02: And more to the point, the other- What would be more inconvenient than terminating the contract in the middle? [00:29:06] Speaker 02: I mean, the idea that it would be convenient for the IRS to stop paying and lose the benefit of the services in the contract, [00:29:15] Speaker 04: Oh, no. [00:29:16] Speaker 02: Quite beside the point. [00:29:18] Speaker 04: I hear your point, but I don't think that's what terminating for convenience means in government contract speak. [00:29:24] Speaker 04: I think what it means is at the IRS's election. [00:29:27] Speaker 00: So it may well have been... But even if it was at the IRS's election, if they terminate, they don't get the services anymore, right? [00:29:35] Speaker 00: That's correct. [00:29:36] Speaker 00: Yes. [00:29:37] Speaker 00: From their standpoint, I think an IRS could conclude [00:29:41] Speaker 00: There may well be something nefarious going on here. [00:29:42] Speaker 00: We haven't completely figured it out yet, but it would actually be inconvenient for us to lose the services right now in the middle of tax season. [00:29:48] Speaker 00: I can't remember exactly when this occurred, but it would be inconvenient for us to stop the stream of services. [00:29:55] Speaker 04: Well, the IRS would have had to conclude that in 2014, 2015, 2016, and 2017. [00:30:00] Speaker 04: And then, of course, with the extension that it tacked onto the contract. [00:30:05] Speaker 04: So there is a point at which I think if we're going to engage in this hypothetical that the IRS could have made it convenient to them simply by contracting with somebody else. [00:30:13] Speaker 04: And this, after all, was not that this is not the kind of line of thought [00:30:17] Speaker 04: that the court thought was significant in any of the other cases that I've mentioned, Petrados, Dagestino in particular, those involved actual allegations of bad drugs and bad devices on the market. [00:30:30] Speaker 04: And I don't think that it would have been the case that an agency would have thought, I need to wait and see how this DOJ investigation shakes out before I take this bad drug off the market. [00:30:41] Speaker 04: The IRS had the independent authority to end this contract if it chose to and it didn't. [00:30:45] Speaker 02: Is there any reason to think in the record that it was dissatisfied with the contract? [00:30:50] Speaker 04: No, there's no evidence in the record to think that it was dissatisfied with the contract. [00:30:54] Speaker 04: That's actually one of our points, is that it continued to renew the option years, 2014 through 2010. [00:31:00] Speaker 02: I think it's irrelevant either way, frankly. [00:31:03] Speaker 02: I mean, the idea that somehow they attach significance to what the IRS did or didn't do when the matter is up in the air strikes me as mistaken on both sides. [00:31:16] Speaker 04: Well, I, I take your point. [00:31:18] Speaker 04: I think I would say that among the other notes that the district court drew from from this set of facts is that what one thing we might think is that if the IRS had been overcharged by $87 million [00:31:32] Speaker 04: that the IRS would have sought return of that money. [00:31:35] Speaker 04: And I don't think, and Mr. Singh hasn't alleged that it was somehow precluded from seeking return of that money until the DOJ finished its investigation. [00:31:43] Speaker 00: At this point, all we're trying to figure out is whether the allegations in the complaint are sufficient, right? [00:31:47] Speaker 00: I mean, I think a lot of things are saying presumably will be brought out and might well be persuasive at the end of the day. [00:31:52] Speaker 00: But in terms of what's in the complaint and gets past the pleading stage, I'm curious about your reaction to the [00:31:59] Speaker 00: to paragraph 127, the one about Chris Sham. [00:32:02] Speaker 00: And it just says, you're talking about a particular IBM employee. [00:32:06] Speaker 00: So it's not a generalized allegation. [00:32:07] Speaker 00: It's pointing at a particular individual in a particular context, the exchange they had with the supervisor. [00:32:13] Speaker 00: And it specifically relates to the Deloitte findings. [00:32:17] Speaker 00: And it says that Sham was aware that the IRS was very concerned. [00:32:21] Speaker 00: And that just seems like that's a fact that goes to materiality. [00:32:26] Speaker 00: Very concerned seems material. [00:32:27] Speaker 00: It seems like a reasonable facsimile for material. [00:32:30] Speaker 00: And it's a specific individual who knew, who was aware that the relevant decision maker was very concerned. [00:32:39] Speaker 00: Is that not enough, though? [00:32:40] Speaker 04: I think Mr. Singh is using that paragraph to support both his materiality and causation arguments. [00:32:49] Speaker 04: I would urge the court to look at that paragraph, not the characterization in the opening brief or the reply brief. [00:32:56] Speaker 04: Here is what that paragraph says. [00:32:58] Speaker 04: Mr. Shum was at the meeting during the course of his employment with IBM. [00:33:03] Speaker 04: Mr. Shum was aware [00:33:05] Speaker 04: that the IRS was very concerned and scared. [00:33:09] Speaker 04: Now what that has morphed into by the time of the reply brief is because he was at the meeting, Mr. Shum was aware that Mr. McGrain was concerned and scared. [00:33:20] Speaker 04: That is a bridge too far in terms of inferring from that broad [00:33:24] Speaker 04: vague statement and one paragraph of the complaint. [00:33:28] Speaker 04: If Mr. Shum had been at the meeting, if Mr. Shum thought that Mr. McGrain himself was concerned and scared, and to Judge Ginsburg's point that Mr. McGrain even had authority to sign off on a quarter billion dollar contract in the first place, you would think that would be in the first amended complaint. [00:33:45] Speaker 00: Well, just to pinpoint exactly what the allegation must be dealing with, [00:33:49] Speaker 00: You're right to say it says during the course of his employment. [00:33:52] Speaker 00: And so in some sort of abstract sense, it could have been, I don't know how long Sean worked there. [00:33:56] Speaker 00: Let's say he worked there for 50 years. [00:33:58] Speaker 00: It could have been at some point in the course of his employment. [00:33:59] Speaker 00: But what he was concerned and scared about was the false Deloitte findings. [00:34:03] Speaker 00: That's what the allegation says. [00:34:04] Speaker 00: So it particularly relates to the very falsity that's the gravamen of the complaint, which is temporally confined. [00:34:14] Speaker 00: It's a finite point in time. [00:34:16] Speaker 00: It's the particular Deloitte findings, and it has to do with the very meeting. [00:34:18] Speaker 00: I'm not even sure that this allegation is necessary, but in terms of whether it's sufficient, it seems like it's pretty detailed about a particular employee having a particular concern about a particular falsity. [00:34:30] Speaker 04: I think it is certainly not sufficient. [00:34:34] Speaker 04: It's necessary to Mr. Singh's argument because this is the hook on which he hangs everything else. [00:34:39] Speaker 04: All of the other paragraphs that Mr. Singh mentioned in response to your question, Judge Rao, are legal conclusions. [00:34:45] Speaker 04: Paragraph 31, paragraph 131, paragraph 142, all of those are, IRS would not have done this but for X. [00:34:53] Speaker 04: So what he needs is the thing that shows that link in concern and simply saying that an employee was aware during the course of his employment. [00:35:02] Speaker 04: that the IRS was scared of the audit. [00:35:05] Speaker 04: First of all, that's far too general. [00:35:07] Speaker 04: And second of all, to make the point the district court did, being concerned about the audit doesn't take that last necessary step to show that the IRS actually accepted the results of the audit. [00:35:21] Speaker 04: And we actually know from multiple details in the complaint that the IRS had repeatedly rejected the audit before it came to this December 19th meeting. [00:35:29] Speaker 04: So I think you have to blink away a lot of other signals in the complaint that Mr. McGrain, the supervisor of Mr. Kravitz, who had already rejected, excuse me, for lack of substantiation, the audit results on two separate occasions, that Mr. McGrain would have been so hornswoggled by this that he would say, I'm terribly frightened of this audit. [00:35:51] Speaker 04: I'm not going to ask about the assumptions that underlie this audit. [00:35:55] Speaker 04: I'm not going to check with Mr. Kravitz, who presumably is not [00:35:59] Speaker 04: somewhere who's unreasonable. [00:36:00] Speaker 00: I'm sorry, I cut you off. [00:36:03] Speaker 00: Go ahead. [00:36:03] Speaker 00: Finish that thought, please. [00:36:04] Speaker 00: No, please. [00:36:05] Speaker 00: Please go. [00:36:06] Speaker 00: Don't you have to also blink away, though, in pointing the other direction, what IBM was doing? [00:36:11] Speaker 00: Because, I mean, the entire point here of IBM's scheme was predicated on the idea that the $91 million would matter. [00:36:18] Speaker 00: And it seems like you have to sort of blink that away, just in terms of the allegations and complaint. [00:36:23] Speaker 00: I'm not suggesting what's got to be proved at the end of the day, obviously. [00:36:26] Speaker 00: or even whether it gets past summary judgment, of course. [00:36:29] Speaker 00: But just in terms of getting past the complaint, the entire object of IBM's scheme was predicated on the idea that this was going to matter. [00:36:36] Speaker 00: And it seems like you need to blink all that away to read just the allegations in the complaint in the way that you do. [00:36:43] Speaker 04: But it can't be enough, Chief Judge Srinivasan, to argue that IBM thought this would matter. [00:36:48] Speaker 00: It may not be enough, but boy, IBM is a sophisticated enterprise. [00:36:53] Speaker 00: Based on the allegations, they went to all this work to try to make sure that the IRS was going to continue the contract because the IBM, at least one employee thought the IRS was very concerned about it. [00:37:06] Speaker 00: that suggests that IBM would have had to have been pretty darn wrong about something that it understands pretty darn well? [00:37:13] Speaker 04: Well, I think the allegations in the complaint show that IBM was pretty darn wrong about its audit when it was rejected twice for lack of substantiation by Mr. Kravitz. [00:37:25] Speaker 04: So IBM's intent, you know, under the facts of the complaint, which we have to allege or we have to accept as true at this stage, [00:37:32] Speaker 04: The facts that are in the complaint was that IBM was very determined to put one over on the IRS. [00:37:39] Speaker 04: What's missing from the complaint is any suggestion that the IRS, the person responsible for signing that who, as Mr. Singh conceded, we don't even know is Mr. McGrain, that that person accepted the audit results and that that led to the signing of the contract. [00:37:56] Speaker 04: That is the missing [00:37:58] Speaker 04: big plank in the bridge that they're missing for causation purposes. [00:38:01] Speaker 04: And the reason that matters is because particularly in a fraud case where we are asking all fraud plaintiffs, including this relator, to plead with specificity, simply saying there was a guy who was in a meeting who worked and during the course of his employment, he got the impression that the IRS was scared of this audit. [00:38:20] Speaker 04: That can't possibly be enough to satisfy Rule 9B. [00:38:23] Speaker 04: I don't think it satisfies Rule 8. [00:38:25] Speaker 04: But when you add that additional layer of rigor, if that is the paragraph that we're talking about, then that is completely insufficient. [00:38:35] Speaker 00: Thank you. [00:38:35] Speaker 00: I'll make sure my colleagues don't have further questions for you. [00:38:39] Speaker 00: Thank you, Ms. [00:38:39] Speaker 00: Detson. [00:38:40] Speaker 00: Thank you. [00:38:41] Speaker 00: Mr. Singh, we'll give you rebuttal time. [00:38:44] Speaker 03: Thanks. [00:38:45] Speaker 03: I'll just talk briefly about about two points. [00:38:48] Speaker 03: The first is this question of continued payments and Judge Ginsburg, I think your insight that it's not relevant is exactly correct at this stage to draw any inference from continued payments when the validity of the contract has not been adjudicated [00:39:04] Speaker 03: would be a mistake, and especially so at the pleading stage. [00:39:08] Speaker 03: Ms. [00:39:09] Speaker 03: Stetson mentioned a number of cases. [00:39:11] Speaker 03: One of the ones she said had only allegations, the McBride case, was of course at summary judgment. [00:39:16] Speaker 03: We talked about that case in depth in our brief, and there were litany of facts weighing against materiality. [00:39:22] Speaker 03: The other cases she talks about, some of them were at the pleading stage, Petratus and D'Agostino. [00:39:27] Speaker 03: We've addressed those in our brief as well, and they involve some peculiar considerations relevant to the FDA, [00:39:33] Speaker 03: but also there was substantially more in the complaint itself about what the government knew about the allegations. [00:39:39] Speaker 03: And that just isn't here in this record. [00:39:41] Speaker 03: So again, as a matter of adjudicating the pleading stage, I think it is, you would have to draw a strong pro-defense inference about materiality, which is just something you're not allowed to do. [00:39:51] Speaker 03: All the reasonable inferences go our way at this stage of the proceedings. [00:39:56] Speaker 03: The second point that I would talk about is this question about the Chris Shum allegations and just what's necessary. [00:40:04] Speaker 03: And Judge Siernevastan, I think you're right that you have to blink away that IBM was trying to get away with this. [00:40:09] Speaker 03: And you also have to blink away that really the proof is in the pudding. [00:40:12] Speaker 03: The deal has the fraudulent charges in it. [00:40:15] Speaker 03: The thing that IBM was trying to get the IRS to do [00:40:19] Speaker 03: to believe was that it owed these charges. [00:40:22] Speaker 03: Why would the IRS have paid an extra 87 million if it hadn't been convinced that it was required to do so? [00:40:30] Speaker 03: And so once you take that fact into account, there really is no plausible explanation for why this deal went down the way it did, other than fraud. [00:40:38] Speaker 03: But that's not the standard. [00:40:39] Speaker 06: I don't have to eliminate every other- What about just government negligence or oversight? [00:40:46] Speaker 06: trying a lot of money but there's a lot of money in government contracting [00:40:52] Speaker 03: Your honor, I think that if we are, even if you, so two things about that. [00:40:57] Speaker 03: First, I don't have to eliminate every other plausible explanation. [00:41:02] Speaker 03: I just have to show that we have one of them and we have one. [00:41:05] Speaker 03: The fact that the IBM said you owe these penalties and then the IRS want to pay these penalties is pretty good evidence that the IRS was convinced when previously it didn't believe it owed them. [00:41:18] Speaker 03: But even if you're right, the explanation you're positing of negligence isn't a defense for IBM. [00:41:26] Speaker 03: You don't get to defraud the government because you think they're not gonna catch you. [00:41:31] Speaker 03: That's not how this works. [00:41:33] Speaker 03: Unless the IRS on its own initiative believed these mines without any input from IBM, you would not say that this is exculpatory. [00:41:41] Speaker 03: And there's no way that you could look at our complaint and say it alleges that. [00:41:45] Speaker 03: And so at the pleading stage, I just don't think that there's any way for that to be the kind of obvious alternative explanation to use the Supreme Court's language from Twombly that would eliminate liability in this case of the pleading stage. [00:42:00] Speaker 03: Unless the court has any other questions, I'm grateful for your time. [00:42:03] Speaker 03: I urge you to reverse. [00:42:05] Speaker 00: Thank you, counsel. [00:42:06] Speaker 00: Thank you to all counsel. [00:42:08] Speaker 00: We'll take this case under submission.