United States of America v. Wayne

Background

This False Claims Act case was brought by Steven Fallon, a former employee of Hayward Unified School District. He alleged a five-year scheme involving transportation services for disabled students and claimed that the scheme caused California and the United States to pay millions of dollars to the school district.

The third amended complaint asserted six causes of action: two under the federal False Claims Act, two under the California False Claims Act, federal retaliation under 31 U.S.C. § 3730(h), and state-law retaliation under California Labor Code § 1102.5. The alleged false claims fell into three categories: allegedly inflating the number of students needing individual transportation; splitting transportation bids to avoid a $45,000 approval and competitive-bidding threshold; and alleging that Bell Transit lacked a state Public Utilities Commission license to transport special-education students. The complaint also alleged that Fallon faced retaliation after reporting the alleged misconduct.

Legal standard

The defendants sought dismissal under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Because some claims involved alleged fraud, the court also applied Rule 9(b), which requires the complaint to describe the circumstances of the alleged fraud in detail, including who, what, when, where, and how. The court generally considered whether the complaint’s factual allegations, rather than merely conclusory statements, supported a plausible claim.

Rulings on the HUSD defendants’ motion

The court denied the motion to dismiss the federal and California False Claims Act claims against Wayne, Delgadillo, and Watson to the extent they were based on the alleged inflation of the number of students receiving individual transportation. The court relied on allegations that the number of students receiving taxi transportation was unusually high, that Wayne presented documents to the school board allegedly overstating the number of students, and that the number fell from 149 to 13 after Fallon complained. The court concluded that these allegations sufficiently supported an inference that false claims were submitted and that the alleged falsity was material to payment.

The court granted the motion to dismiss the same category of False Claims Act claims against Rogers because the complaint did not allege that Rogers was involved in inflating the student numbers. The court granted that dismissal without leave to amend.

The court granted the motion to dismiss the claims based on the bid-splitting allegations against all HUSD defendants, without leave to amend. Fallon had not provided authority connecting the cited California contract case to the federal or California False Claims Acts, and his opposition did not address those allegations. The court also granted the motion to dismiss the claims based on the new licensing allegations against all HUSD defendants, without leave to amend, because Fallon had not included those allegations earlier and had not justified the delay. The order’s conclusion also describes the dismissal of the remaining portions of the first four causes of action as including bid-splitting and conflict-of-interest allegations.

As to federal retaliation, the court denied the motion to dismiss the claim against Wayne, Watson, and Rogers. The court found that Fallon adequately alleged protected activity, the defendants’ awareness of that activity, and conduct that could reasonably deter employees from reporting potential False Claims Act violations. The alleged conduct included eliminating or reorganizing Fallon’s job, threatening or undermining his employment, causing harassing calls, imposing workplace impediments, and sending emails that implicitly threatened termination.

The court granted the motion to dismiss the state-law retaliation claim against Wayne, Watson, and Rogers, without leave to amend. It concluded that California Labor Code § 1102.5 should not be applied to impose individual liability on these employee-defendants. The court did not consider retaliation arguments concerning the school district because the third amended complaint did not name the district as a defendant on those claims or in the caption.

Rulings on Bell Transit’s motion

The court granted Bell Transit’s motion to dismiss in its entirety, without leave to amend. Regarding the inflated-number allegations, the court found that Fallon did not identify Bell Transit’s role in presenting or causing the presentation of false claims, and that the opposition relied on a conclusory statement unsupported by factual allegations. The court also dismissed the bid-splitting allegations for the same failure to connect the cited California authority to the False Claims Act. The licensing allegations were not considered because they were new allegations that Fallon had not been given permission to add, and the court dismissed them as described in its analysis.

Result

The case continued only on four false-claims causes of action, under the federal and California False Claims Acts, based on the alleged inflation of student-transportation numbers against Wayne, Delgadillo, and Watson. It also continued on the federal False Claims Act retaliation claim against Wayne, Watson, and Rogers. The court scheduled a case-management conference for September 16, 2021.