9th Circuit Finds Failure to Report Subject Inventions Not a False Claim under False Claims Act

In Cafasso, United States ex rel., v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (C.A. 9 2011), Mary Angela Cafasso brought a qui tam action in Ninth Circuit Court of Appeals alleging False Claims Acts (“FCA”) violations and retaliation by General Dynamics C4 Systems, Inc. (“GDC4S”).  Ms. Cafasso worked as the chief scientist/technologist at GDC4S, a technology company that services the military. GDC4S was a participant in the Advanced Telecommunications & Information Distribution Research Program (“ATIRP”) and as a result had contracted with the Army to assign to the United States certain rights to “subject inventions” developed in performance of military contracts. These rights included a royalty-free right to use or have used on its behalf subject inventions, as well as the right to allow the Government to take over prosecution of the subject invention should GDC4S not pursue patenting of the subject invention.  ATIRP required from GDC4S timely disclosure of applicable subject inventions to the government to ensure these rights are secured. Ms. Cafasso worked in the office that identified, documented, and protected GDC4S’s intellectual property. Her responsibilities included ensuring that GDC4S complied with ATIRP’s requirements by, among other things, disclosure of subject inventions.

In early 2004, Ms. Cafasso discovered that GDC4S had applied for a patent of an invention, but the USPTO had preliminarily rejected the application subject to a response from GDC4S. Rather then responding to the Patent Office – or telling the government so that it could protect its rights in the invention by preparing its own response – GDC4S opted to abandon the patent application through non-response. Ms. Cafasso reported her findings to her supervisor and others in the office, but no corrective action was taken. She asked for an audit or internal review and none occurred.

Thereafter, GDC4S eliminated her office and terminated her employment. After being told of her termination and before leaving, Ms. Cafasso discovered numerous instances where subject inventions had not been properly disclosed to the U.S. or where GDC4S had abandoned prosecution of its patent application to the detriment of the government’s rights to the invention.  Further, Ms. Cafasso copied almost eleven gigabytes of data from company computers in anticipation of bringing a qui tam action, allegedly relating to these findings.

After her departure, GDC4S realized that she had taken the internal documents and filed for and obtained a temporary restraining order in state court, seeking to recover documents on the basis of the confidentiality agreement executed by both parties at the start of Ms. Cafasso’s employment. Two days later, Ms. Cafasso filed a qui tam action in federal district court.  In her qui tam action, Ms. Cafasso alleged that by refusing to prosecute these patent applications or properly disclose other subject inventions, GDC4S had claimed ownership of the new technology as its own trade secret and had denied the government its opportunity to protect its interest in the invention. As such, she alleged that the government was likely to pay twice for a second contractor to again develop the same technology. She further alleged that GDC4S defrauded the government by withholding disclosure of subject inventions, which GDC4S had agreed to disclose under the patent rights clause of its contract with the Army. She further claimed that as a result of her inquiries into GDC4S’ alleged fraud, GDC4S retaliated against her by terminating her department and her position.

Ms. Cafasso was then given permission by the district judge to notify the state court of the pending qui tam action. Ms. Cafasso used the permission given by the district court judge to have the state court lift the temporary restraining order. When the District Court learned that Ms. Cafasso used its order to disrupt the state court suit, it vacated the orders that it had issued. GDC4S then filed an answer and counterclaim and after an acrimonious period of discovery – including Ms. Cafasso’s refusal to identify which documents, out of thousands, supported her FCA claim or were privileged. Because of her lack of specificity, GDC4S filed a motion for judgment on the pleadings in accordance with FRCP 12(c). Ms. Cafasso sought to then file a 733-page second amended complaint and the district court rejected it for failing to state a “short and plain statement of the claim.” The district court entered judgment on the pleadings finding for GDC4S.

On appeal, the Ninth Circuit first addressed the district court’s dismissal of Ms. Cafasso’s qui tam claim.  Specifically, the Ninth Circuit noted that FCA attaches liability not the underlying fraudulent activity or to the government’s wrongful payment, but to the “claim” of payment. United States v. Rivera, 55 F.3d 703, 709 (1st Cir. 1995). The Ninth Circuit concluded that Ms. Cafasso’s complaint alleges no false claim. Specifically, the non-disclosure of a subject invention does not establish that GDC4S falsely attempted to retain or obtain government money or property. Ms. Cafasso had not alleged that the GDC4S had falsely asserted that it was entitled to obtain or retain government property and thus there was no “claim” of payment.

Additionally, the Ninth Circuit then dismissed the notion that the complaint warrants an inference that false claims were part of the scheme alleged. Specifically, the Ninth Circuit stated that an obvious alternative explanation was that GDC4S’s withholding of information might have been a breach of contract such that the non disclosure was not necessarily a fraudulent claim. Finally, the Ninth Circuit rejected Ms. Cafasso’s attempts to argue that GDC4S may have charged the government directly for use of intellectual property that the government already had the right to use for free. Thus, because the Court of Appeals concluded that Ms. Cafasso’s pleadings contained none of the “circumstances” needed to allege fraudulent conduct, the district court’s dismissal of Ms. Cafasso’s qui tam claim was affirmed.

The Ninth Circuit next affirmed the district court’s grant for summary judgment to GDC4S on its counterclaim that Cafasso’s appropriation of documents and files violated a confidentiality agreement executed at the start of her employment. Ms. Cafasso conceded that her conduct – taking eleven gigabytes of company documents – fell within the scope of the confidentiality agreement she signed. She, however, made a plea to the court to adopt a public policy exception that would allow qui tam relators to disclose such documents in an FCA action. The Ninth Circuit acknowledged the possible merit of her proposal, but concluded that it would not adopt the exception in the case of Ms. Cafasso’s grabbing of tens of thousands of documents – which they considered overboard and unreasonable. As such, the Ninth Circuit held that if they were to adopt the exception in this situation, it would make all confidentiality agreements unenforceable as long as the employee later files a qui tam action.

Significance for Government Contractors

While the False Claims Act provisions are routinely applied for claims for money from the Government, Cafasso uniquely attempts to use claims of improper IP protection as a basis for a false claim.  Specifically, the assertion was based upon a failure to report subject inventions under the Bayh-Dole patent rights clauses in the relevant contracts.  While the normal remedy in such situations is for the Government to determine whether it will exercise its option to take title under these same patent rights clauses as was done in Campbell Plastics Engineering & Mfg., Inc. v. Army, 389 F.3d 1243 (Fed. Cir. 2004), or to withhold a final payment for the contract, Cafasso attempted to use this withholding of information to find a third type of remedy: increasing the Government’s rights in technical data.  While ultimately unsuccessful when attempting to tie technical data rights and undisclosed subject inventions, Cafasso does leave unanswered whether such a false claim action could have been brought on other grounds.  For instance, during the contract closeout period, it is customary for the Government to withhold from final payment up to $50,000.  See, e.g. DFARS 252.227-7038(k)(Dec. 2007).  As such, what is left unanswered is whether providing a false reporting statement would be actionable under the False Claims Act or what other liability could be brought under the False Claims Act for failure to comply with the complex web of IP rights included in Government procurement.

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