Faulkner v. Leland Stanford Junior University

Background

Jonathan Faulkner brought this qui tam action under the federal False Claims Act on behalf of the United States against The Board of Trustees of the Leland Stanford Junior University, referred to in the opinion as Stanford. The United States declined to intervene. Faulkner’s allegations concerned Stanford’s operation and management of a User Lodging Facility for visitors and researchers associated with the SLAC National Accelerator Laboratory, which Stanford operated under contracts with the Department of Energy.

According to the complaint, a 2001 agreement stated that Stanford would operate the lodging facility, use room revenue to pay specified construction and operating costs, charge a reasonable rate sufficient to recover those costs, refrain from competing with local hotels, and give priority to SLAC users and Department of Energy reviewers. The agreement anticipated daily room charges in the range of $50 to $60. Faulkner, who worked for Stanford and was the facility’s general manager, alleged that Stanford charged substantially higher rates from 2009 through 2018, used the facility as a profit-generating venture, concealed the profits from the Department of Energy, and did not always give priority to SLAC users and Department of Energy reviewers.

The complaint asserted two False Claims Act claims: one alleging that Stanford presented false or fraudulent claims for payment under 31 U.S.C. § 3729(a)(1)(A), and another alleging that Stanford made or used false records or statements in connection with claims for payment under § 3729(a)(1)(B). Faulkner proceeded under an implied-certification theory, meaning he argued that Stanford’s requests for payment falsely implied compliance with material contractual requirements.

Legal standard

Stanford moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally sufficient claim. Because the False Claims Act claims involved alleged fraud, the court applied Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity, including the who, what, when, where, and how of the alleged misconduct.

The court explained that a False Claims Act claim requires a false statement or fraudulent conduct, the required intent, materiality, and government payment or loss. A claim may be based on implied certification when a payment request makes specific representations about goods or services and fails to disclose noncompliance with a material legal or contractual requirement.

False claim

The court held that the complaint did not adequately allege that Stanford made a false claim to the Department of Energy. Faulkner relied partly on allegations made only on “information and belief,” but the complaint did not provide the factual basis for those allegations. The court found that this did not satisfy Rule 9(b).

The court also rejected Faulkner’s argument that the agreement required Stanford to charge no more than the amount needed to recover specified costs. The agreement required “reasonable” rates “sufficient to recover” certain costs, but did not prescribe specific rates or prohibit increased rates over time. As pleaded, the complaint therefore did not sufficiently identify a false statement or claim made to the Department of Energy, or provide enough facts to support an inference that false claims were part of Stanford’s alleged profit-making scheme.

Materiality

The court separately held that the complaint did not sufficiently plead materiality. Under the False Claims Act, a misrepresentation is material if it has a natural tendency to influence, or is capable of influencing, the government’s payment decision. The court emphasized that the materiality requirement is demanding and that the Act is not a general method for enforcing ordinary contract breaches.

Even assuming that Faulkner adequately alleged violations of the agreement, the court found that he did not plead facts showing that the alleged conduct was material to Stanford’s management-and-operating contract with the Department of Energy or explaining why the False Claims Act was an appropriate way to enforce the alleged agreement violations. The court also noted that an audit-related allegation raised in Faulkner’s opposition was not included in the complaint and was itself asserted on information and belief without a factual basis.

Disposition

Judge Virginia K. DeMarchi granted Stanford’s Rule 12(b)(6) motion to dismiss the complaint with leave to amend. The court allowed Faulkner to file an amended complaint addressing the deficiencies identified in the order, and set December 20, 2024, as the deadline for doing so.