Iqbal And Qui Tam Relators

On May 18th, 2009, the Supreme Court handed down an important decision for relators, even though it had nothing to do with the FCA. In Ashcroft v. Iqbal, — U.S. —, 129 S.Ct. 1937 (2009), the Court perhaps significantly enhanced the ability of defendants to succeed on motions to dismiss qui tam complaints. While it is still far too early to get a definite read as to how district courts will apply the Iqbal test to qui tam complaints, there are a few cases where that already has happened, as well as dozens of other cases reflecting the application of the Iqbal test to all manner of litigation. The bottom line, as discussed below, is that invoking Conley v. Gibson, 355 U.S. 41 (1957), may no longer afford much protection to relators facing motions to dismiss.

The Iqbal Decision

Respondent Iqbal was a Pakistani citizen and Muslim who had been arrested and detained several months after the 9/11 attacks. He subsequently sued a number of federal officials alleging that while in federal custody in this country, he was subjected to conditions of privation by being assigned to a high-security prison because he was an Arab Muslim. Motions to dismiss were filed by the defendants, including John Ashcroft and former FBI director Robert Mueller, alleging that the complaint failed to state a claim. The district court denied the motion; the Second Circuit affirmed.

Much of the Court’s opinion by Justice Kennedy is concerned with the criteria for suing federal officials under Bivens. This aspect does not interest FCA litigators. The second focus of the opinion zeroed in on the standards for granting a 12(b)(6) motions. The Court developed a new test to apply in passing upon such motions, drawn apparently from Kennedy’s earlier opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The big question after Twombly had come down was whether the tests applied by the Court in that case were limited in application to antitrust matters or would be applied more generally. Iqbal resolved that issue by applying these tests in effect to all litigation in federal courts.

There are two prongs to the Iqbal test, both of which are important in qui tam cases. First, the Court was emphatic in imposing a stiffer test on complaints in order to satisfy Rule 8(a)(2). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’ ” (Iqbal at 1949, citing to Twombly at 555). “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of “further factual enhancement.’ ” Id. (Twombly at 557). So the first point to bear in mind for qui tam complaint draftsmen is that you enter into a danger zone if you simply assert that defendant violated the FCA and rely upon quoting the pertinent provision(s) of the Act to substantiate the allegation. This is because the Court will consider such a tactic as asserting a legal conclusion, and district courts are not required to accept as true legal conclusions as they are factual allegations for purposes of resolving motions to dismiss. Iqbal at 1949-50.

The second prong of the Iqbal test is far more significant for relators and defendants. “[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. at 1950. How, might one ask, is a district court to make such plausibility determinations? Should district judges rely upon hermeneutics, memetics, plain meaning, semiotics or phenomenology as their epistemological paradigm? The Court’s answer to that query is straightforward, if somewhat disturbing: this undertaking will be “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. (emphasis added). Moreover, “where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]’-‘that the pleader is entitled to relief.’ ” (Quoting Rule 8(a)(2)). The Court suggests that district judges start with reviewing pleadings for legal conclusions and then apply the plausibility standard to what remains.

A number of suggestive thoughts crossed my mind as I read this language. First, this gives a whole bunch of even greater discretion to district judges to bounce complaints they do not like or want to go to trial on. Next, what standard would a reviewing Circuit Court apply to such plausibility findings? Would it be something akin to “clearly erroneous” or whatever? Further, the Court seems to have rewritten or deconstructed Conley v. Gibson, supra, which was somewhat more positive in impact: unless there was no possible way the plaintiff could achieve relief, the complaint ought not to be dismissed. While generally speaking I have found district judges to be far sharper and more realistic (i.e., manifesting more “common sense”) in their decision-making than Court of Appeals judges or Supreme Court Justices, if I were a relator’s counsel a dark cloud of uncertainty would certainly be engulfing me at this point.

As mentioned above, there are only a few FCA-related cases so far which have applied the Iqbal standards. Many more will be forthcoming, as I expect virtually every motion to dismiss filed in a qui tam case to make the plausibility argument. The court’s holding in United States ex rel. Wood v. Applied Research Associates, Inc., 2009 WL 2030240 (2d. Cir. July 13, 2009), a reverse FCA case, is extremely interesting in its handling of the Iqbal standards. This decision makes the key linkage for qui tam cases: plausibility and Rule 9(b). As I read the decision, it is evident that the court felt Iqbal justified it in applying Rule 9(b) in a very strict fashion. That is to say, it was no longer sufficient to satisfy 9(b) by the traditional “who, when, where, etc.” tests, but there had to be sufficient facts plead in sufficient detail to establish plausibility of the claim as well.

By contrast, in United States ex rel. Lusby v. Rolls-Royce Corp., 2009 WL 1855179 (7th Cir. June 30, 2009), Judge Easterbrook (along with Judges Posner and Wood) cited Iqbal but hardly made a fuss over it. The panel seemed far more concerned with the usual standards of whether the complaint pled particulars of the fraud and thereby avoided unsubstantiated allegations, more in accordance with the usual 9(b) approach. As long as the allegations were not vague and clued in the defendant as to the alleged fraud, that was sufficient. Id. at *5.

Several non-FCA opinions are also interesting given the formative stage we are entering into in applying the Iqbal standards. In Fannie Mae v. U.S. Property Solutions, L.L.C., 2009 WL 1968330 (S.D. Tex. July 6, 2009), defendant had filed a fraud counterclaim against plaintiff Fannie Mae. While the gist of the case involved how properly to plead “fraudulent intent,” the district court concentrated on the first prong of Iqbal (pleading legally-conclusory statements) as the basis for denying Fanny Mae’s motion to dismiss the counterclaim. Again, a linkage to Rule 9(b) was evident in the court’s analysis. Id. at *5. In Owens v. District of Columbia, 2009 WL 1916280 (D.D.C. July 6, 2009), a pro se employment rights case, the district court focused on a fragment from the Iqbal decision: there must be pled ‘factual matter’ that permits the court to infer ‘more than the mere possibility of misconduct.’ ” Id. at *4; Iqbal at 1950. However, the district court in Ante v. Office Depot business Services, 2009 WL 1689604 (N.D. Cal. June 15, 2009), reminds us of a most important consideration: Iqbal “does not impose a ‘probability requirement’ “… Id. at *6.

Conclusions

So, where does all this leave us?: “probability” is not “plausibility” and Conley is either turned on its head or deconstructed entirely. Short of recommending we all become logical positivists and well versed in Wittgenstein’s theories of language, what certainly early conclusions can be drawn. First, Rule 9(b) will become even more of a hurdle for relators than it is now, especially if enough facts must be pled to establish plausibility. One interesting suggestion has come from Gregory P. Joseph (JosephNYC.com; last read on 7/23/09) that Iqbal will encourage district judges to freeze or limit discovery until pending motions to dismiss are decided. See his blog article: Post-Iqbal, Limited Discovery at Best is Appropriate Pending Decision on 12(b)(6)Motion in Complex Cases. In addition, the Supreme Court’s decision seems to add another argument to those seeking to dismiss qui tam complaints: courts must be the gatekeepers to prevent unnecessary and expensive discovery against defendants. And since relators are not even the government, but sometimes benighted individuals, the courts should be inclined to dismiss even borderline cases to spare this waste of resources.

All of which means your guess is as good as mine–but it should be interesting to see how courts apply the plausible standard. Each court will likely give its own unique twist to the Supreme Court’s language and much litigation on this point will be the result.

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