IBM Wins Dismissal of FCA Qui Tam Suit Alleging It Used Faked Audit to Pressure IRS to Renew Software License

October 17, 2019Insight
Dinsmore on FCA

On Sept. 30, IBM won dismissal of a federal False Claims Act (FCA) qui tam suit, Cimino v. IBM, No. 13-cv-00907 (APM), 2019 U.S. Dist. LEXIS 168059 (D.D.C. Sept. 30, 2019). In the suit, Relator Paul A. Cimino alleged IBM, assisted by Deloitte LLP, fabricated audit findings regarding Internal Revenue Service (IRS) usage of IBM-licensed software to coerce IRS into renewing its software enterprise license. The district court found Cimino’s fraudulent inducement claim lacking because he failed to show both that IBM’s alleged conduct actually caused IRS to renew, and that the conduct was material to the IRS decision to pay IBM for the new license.

Cimino allegedly became aware in 2011, while an IBM senior sales representative, that IRS was not using all the products under the license and intended to negotiate a limited extension for certain software rather than renew the entire license. Id. at *3. The potential revenue loss if IRS didn’t renew, he alleged, led IBM to concoct a scheme to coerce renewal. Id. at *3–4.

The scheme allegedly began with IBM offering IRS a “friendly compliance audit”; the resulting usage data would enable IRS to economize by selecting only the software it needed for renewal. Id. at *4. IBM allegedly expected the audit would show significant software overusage by IRS, occasioning contractual penalties IBM could use to pressure IRS for renewal. Id. IBM’s Deloitte-assisted audit, though, yielded a mere $500,000 in overusage penalties. Id. at *5–6. IBM allegedly suppressed those results, asking Deloitte to manipulate the audit to generate a larger penalty. Id. at *6. The revised audit yielded a $19 million penalty; further manipulations raised it to $292 million. Id. at *7–8. After additional iterations, IBM allegedly presented IRS with a final penalty of $91 million, which it offered to waive if IRS renewed the license. Id. at *8. IRS finally renewed for five years, at $265 million—which Cimino alleged included $86 million of the supposedly waived $91 million penalty, secretly added by IBM as fraudulent user-license and technical-support costs. Id.

In June 2013, Cimino filed his FCA suit. After multiple government-requested extensions of the initial 60-day seal period and some four years of investigation, the government declined to intervene. Id. at *11. Cimino’s first amended complaint, filed July 2018, alleged three FCA claims:  that IBM (1) knowingly presented or caused to be presented a fraudulent claim for payment to the IRS, see 31 U.S.C. § 3729(a)(1)(A); (2) made, used, or caused to be made or used a false record or statement material to IBM’s fraudulent claim, see id. § 3729(a)(1)(B); and (3) conspired to commit violations of §§ 3729(a)(1)(A) and (1)(B), see id. § 3729(a)(1)(C). IBM subsequently filed a 12(b)(6) motion to dismiss. Cimino, 2019 U.S. Dist. LEXIS 168059, at *11.

The district court’s holding focused on Cimino’s claim that IBM fraudulently induced IRS’s license renewal by means of the falsified audit. Id. at *15–26. First, the court found Cimino’s claim failed as to causation. Id. at *15–22. Cimino argued the verb “induce” only required him to plead facts plausibly showing the falsified audit was a “substantial factor” in the IRS renewal decision, while IBM contended a stricter “but for” standard applied. Id. at *16. The court found “even [IBM] understates the stringency of the FCA’s causation standard”: “The clear weight of authority among the circuit courts” requires a showing the allegedly false statement proximately caused the government’s loss. Id. at *16–17 (citing, inter alia, United States v. Luce, 873 F.3d 999, 1009–74 (7th Cir. 2017)). The court further pointed to support for this standard from the Third, Fifth, Seventh, and Ninth Circuits. Id. at *17. Examining Cimino’s complaint as to causation, the court found the “conclusory allegation” that the audit was “a substantial factor” in IRS’s renewal decision “fatal” to Cimino’s claim, and noted his factual pleadings plausibly showed only that the renewal decision came after presentation of the audit findings to IRS, not that the decision was induced by the audit. Id. at *20–22.

The district court also found the claim failed as to materiality. Id. at *22–24. Under the FCA, information is material if it has a “natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Id. at *22 (quoting 31 U.S.C. § 3729(b)(4)). The court noted the relevance of “what actually occurred”—that is, “the government’s . . . payment decisions”—to determining materiality, id. at *22–24 (quoting United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027, 1032, 1034 (D.C. Cir. 2017)), and cited Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), where the Supreme Court held that “if the government regularly pays a given type of claim . . . despite its actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material,” id. at *22–23 (quoting 136 S. Ct. at 2004).

The court similarly found that Cimino’s allegation that IBM induced IRS to renew by making a false promise to “waive” $91 million in penalties also failed as to causation and materiality. Id. at *24–26.

Finally, regarding Cimino’s assertion that the allegedly fraudulent $91 million in penalties supported false presentment liability, id. at *26–27 (citing 31 U.S.C. § 3729(a)(1)(A)), the court found materiality not satisfied, id. at *26. In the midst of the contract, “IRS knew . . . about [Cimino’s] accusation that IBM had disguised the $91 million”; the court found it implausible, had the accusation been material, that IRS “sat idly,” making no effort to recover that sum and instead “continu[ing] to pay IBM for the duration of the contract and beyond.” Id.