United States of America v. Wayne

Background

This was a False Claims Act case brought by Steven Fallon, a former employee of Hayward Unified School District (HUSD). Fallon alleged a five-year scheme involving transportation services for disabled students. The alleged misconduct had three parts: overstating the number of students needing individual transportation; splitting transportation contracts to avoid a $45,000 threshold for school-board approval and competitive bidding; and failing to disclose a conflict of interest involving HUSD employee Miriam Delgadillo and her son, Emmanuel, whom Fallon alleged worked for Bell Transit. Fallon also alleged that he faced harassment and that his job was eliminated after he reported the alleged false claims.

The operative second amended complaint asserted seven causes of action: three under the federal False Claims Act, three under the California False Claims Act, and one retaliation claim under federal and California law. HUSD and Bell Transit moved to dismiss the complaint. Fallon moved to strike arguments in Bell Transit’s reply brief.

Court’s analysis

The court applied Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Because the claims involved alleged fraud, the court also applied Rule 9(b), which requires the complaint to describe the alleged fraud with particularity. The court followed the Ninth Circuit’s standard that a False Claims Act complaint must allege particular details of a scheme and reliable indications that false claims were actually submitted.

The court held that HUSD was immune from liability under both the federal and California False Claims Acts. It therefore granted HUSD’s motion to dismiss the first through sixth causes of action against HUSD without leave to amend. The court did not extend that immunity to the individual HUSD defendants because Fallon alleged that they were sued in their individual capacities and had acted outside the scope of their employment. The court denied HUSD’s motion to dismiss the False Claims Act claims against the individual defendants on that immunity ground.

As to the alleged inflation of student transportation numbers, the court found that Fallon adequately pleaded claims for presenting false claims and making false records or statements, under both federal and state law, against Delgadillo and Watson. It also found the allegations sufficient against Wayne at the pleading stage. The court granted HUSD’s motion as to Rogers on those allegations because the complaint did not allege that Rogers participated in inflating the numbers, but it granted leave to amend that claim.

The court granted HUSD’s motion as to the bid-splitting allegations against all individual defendants, with leave to amend. It also granted HUSD’s motion as to the conflict-of-interest allegations against all individual defendants, with leave to amend. The court concluded that the complaint did not adequately connect the alleged contract violations to false claims under the False Claims Acts.

The court dismissed the federal and state reverse-false-claim causes of action against the individual defendants without leave to amend. It explained that a reverse-false-claim theory concerns a fraudulent failure to return money that is legally owed to the government, and that Fallon’s allegations merely repackaged claims that defendants had improperly obtained government money.

On retaliation, the court granted HUSD’s motion to dismiss the retaliation claim against HUSD without leave to amend because Fallon did not oppose HUSD’s immunity argument. The court expressly did not decide whether a school district is automatically immune from retaliation liability. The court granted HUSD’s motion to dismiss the retaliation claims against the individual defendants, with leave to amend, because the complaint did not allege specific retaliation-related conduct. The state-law retaliation claim against the individual defendants was also dismissed with leave to amend.

The court granted Bell Transit’s motion to dismiss the first, second, fourth, and fifth causes of action, with leave to amend. Those claims concerned presenting false claims and making false records or statements under federal and California law. The court found that the complaint did not adequately allege how Bell Transit participated in presenting or causing false claims or false records, even assuming the allegations about the student-transportation inflation scheme were sufficient. The court granted Bell Transit’s motion to dismiss the third and sixth causes of action, the federal and state reverse-false-claim claims, without leave to amend.

The court denied Fallon’s motion to strike as moot because it did not rely on the challenged arguments in deciding the motions to dismiss.

Disposition

HUSD’s motion to dismiss was granted and denied in part. HUSD itself was dismissed from all claims without leave to amend. The motion was denied as to Delgadillo, Watson, and Wayne on the first, second, fourth, and fifth causes of action to the extent those claims were based on alleged inflation of the number of students needing individual transportation. The motion was granted, with leave to amend, as to the remaining portions of those causes of action against the individual defendants, and granted, without leave to amend, as to the third and sixth causes of action against them. It was granted, with leave to amend, as to the seventh cause of action against the individual defendants and granted, without leave to amend, as to the retaliation claim against HUSD.

Bell Transit’s motion to dismiss was granted, with leave to amend, as to the first, second, fourth, and fifth causes of action, and granted, without leave to amend, as to the third and sixth causes of action. Fallon’s motion to strike was denied as moot. Fallon had 21 days to file a third amended complaint. The court also ordered Fallon to show cause within seven days why MCET Affordable Transportation and Functional Floors should not be dismissed for failure to timely serve them. Judge Hamilton set a case-management conference for May 20, 2021.