This January, the Eastern District of Pennsylvania rejected a
subcontractor's doomsday allegations that a general contractor
had submitted false claims for defective construction work on a
project to build a new school on the Marine Corps Base in Quantico,
Virginia. In Chowns Group LLC v. John C. Grimberg Co., the
court held that notwithstanding the subcontractor's assertions
that the defects were so severe as to create a "catastrophic
safety hazard," the alleged non-compliance was not material to
the government's decision to pay. The subcontractor, a company
called Chowns, also brought a novel retaliation claim under Section
13730(h)(1) of the False Claims Act (FCA), claiming that the
general contractor, Grimberg, terminated Chowns in retaliation for
Chowns' complaint about the construction defects to the
government. Both claims failed and were dismissed at the pleadings
stage.
The court found Chowns had adequately alleged falsity under an
implied false certification theory, as well as knowledge. As to
falsity, Grimberg submitted claims for payment certifying the work
both complied with contract specifications and had been performed
in a good and workmanlike manner when it allegedly was not. As to
knowledge, allegations regarding meetings between Grimberg and
Chowns when Chowns raised concerns about the defaults, Chowns
informing the onsite government representative of the defects in
the project, and Grimberg directing Chowns to remediate the various
defects were deemed sufficient.
However, Chowns failed to adequately allege materiality. The court
emphasized that "[w]here a contractor fails to disclose
noncompliance with a condition of payment, it does not commit a
material violation if the government routinely pays such
claims." The court further rejected Chowns' arguments that
the "catastrophic" nature of the construction defect
showed its materiality, holding that "[t]he materiality
inquiry turns not on the magnitude of the defect, but on the effect
the misstatement or omission had on the government's decision
to pay." Indeed, "[t]hat the defect was material to the
value of the product or service provided does not necessarily make
the misrepresentation that the work conformed to the contract
specifications material." Ultimately, the government continued
to make payments after it was aware of the defects, which proved
fatal for Chowns' claim.
The court also dismissed the retaliation claim because Chowns
lacked standing. The court agreed with the Central District of
California's interpretation of the FCA's retaliation
provision, finding that both the congressional history and the
plain language of the statute showed Congress intended retaliation
under the FCA to only be actionable by individuals, not
corporate entities. Further, even if Chowns had standing, the court
held that it failed to state a retaliation claim because a claim
for retaliation must allege that the plaintiff engaged in protected
conduct – such as complaining about fraudulent conduct or
false claims – but Chowns only complained about construction
defects and poor workmanship.
We at Qui Notes will continue to report on FCA cases of note,
particularly where courts, as here, appropriately require FCA
plaintiffs to adequately plead each element of an FCA claim. Since
the plaintiff had not done so here, the court appropriately
rejected the attempt "to transform a construction contract
dispute into a False Claims Act action," and rightly
determined that the claims should not proceed past the pleadings
stage.
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