Following remand, Fifth Circuit affirms second dismissal of implied certification claims

by Ben Vernia | September 4th, 2013

On August 20, in U.S. ex rel. Steury v. Cardinal Health, Inc.,, the Court of Appeals for the Fifth Circuit affirmed the district court’s dismissal of a qui tam whistleblower’s claims that her former employer, Cardinal Health, sold defective intravenous fluid pumps to the Department of Veterans Affairs.

In 2010, the Court had declined to address the actionability of “implied certifications” under the False Claims Act. After the Court remanded the case to permit the relator to amend her complaint, she did so – alleging that the company breached an implied certification of merchantability and provided worthless goods, but the district court found the amended one lacking, too, and she appealed. (The complaint at issue was the third one filed; the district court had dismissed the second and the relator amended it without a trip to the Fifth Circuit.)

After first noting that the district court had erred in reasoning that the Fifth Circuit’s opinion rejected implied certification as a theory, the Court concluded that the relator had not provided a basis for her allegation that merchantability was a “standard condition” of government contracts, and that she had not alleged how the pumps had deviated from the government’s specifications. The Court further noted that its earlier opinion had rested in part on its conclusion that Federal Acquisition Regulations – including those which permitted the government to accept substandard goods – demonstrated that the government could override implied merchantability provisions with express warranties. The relator also failed to identify any caselaw or regulation that imported an implied warranty into a government contract, and she alleged in a conclusive fashion that the merchantability warranty was a condition of payment under the contract.

The Court refused to consider the legal merit of her worthless goods theory, on the grounds that her allegations lacked particularity. She failed to allege that any of the pumps at issue was ever found to be deficient or worthless, that any of the pumps caused injury, or resulted in suit against the VA.

In a concurring opinion, Judge Stephen A. Higginson urged the rejection of the theory of implied certification as too convoluted and artificial, and suggested instead that courts return to a more common-sense interpretation of the False Claims Act.

Comment: The Fifth Circuit may have handed FCA defendants in a broad range of cases a significant new defense here. Declining to infer a warranty of merchantability in government contracts will put the onus on government contracting officers to over-specify their contracts or forgo any remedy under the FCA. Although Judge Higginson’s concurrence is better reasoned and offers some interesting insights into the problems caused by metastasis of implied certification cases, his criticism of the relator’s complaint for failing to allege an intent to deceive ignores the FCA’s definition of scienter, as well as the much broader “common-sense” interpretation of schemes to defraud. See, for example, the mail and wire fraud statutes, 18 USC 1341 and 1343.

The courts’ willingness to engage in interpretive gymnastics appears to arise from a peculiar reluctance to permit declined FCA cases to move past the pleading stage. This case is a good example of the cost of that approach: the case was originally filed in 2007, and resulted in two Court of Appeals decisions.

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