Opinion ID: 31536
Heading Depth: 2
Heading Rank: 5

Heading: Fraud in the Inducement Theory of Liability

Text: 35 Entering into a contract with no intention of performing may constitute fraud in the inducement. FCA liability has in certain cases been imposed when the contract under which payment is made was procured by fraud. See Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 787 (4th Cir.1999), citing United States ex rel. Marcus v. Hess, 317 U.S. 537, 543-44, 63 S.Ct. 379, 87 L.Ed. 443 (1943), as the most prominent of cases in which FCA liability was imposed when the contract was obtained originally through false statements or fraudulent conduct. 36 Willard argues that his complaint states a valid claim under the FCA based on the theory of fraud in the inducement because Humana entered [into] contracts to serve [the outlying] counties with no intention of actually enrolling Medicare participants there. The district court held that Willard's fraud in the inducement claim failed to comply with the particularity in pleading requirement imposed by Rule 9(b) of the Rules of Civil Procedure. 37 The requirements of Rule 9(b) apply to claims under the FCA. United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir.1997), Bly-Magee v. California, 236 F.3d 1014, 1018 (9th Cir.2001); United States ex rel. LaCorte v. SmithKline Beecham Clinical Labs., Inc., 149 F.3d 227, 234 (3d Cir.1998); Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1476 (2d Cir.1995). Under Rule 9(b), [i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. This court has stated that Rule 9(b) requires that the plaintiff allege the particulars of time, place, and contents of the false representations, Williams v. WMX Techs., 112 F.3d 175, 179 (5th Cir.1997), as well as the identity of the person making the misrepresentation and what that person obtained thereby, otherwise referred to as the who, what, when, where, and how of the alleged fraud. Thompson, 125 F.3d at 903. 38 Malice, intent, knowledge, and other condition of mind of a person may be averred generally. Fed.R.Civ.P. 9(b). This second sentence of Rule 9(b) relaxes the particularity requirement for conditions of the mind, such as scienter. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir.1994). As this court has explained, in order to adequately plead scienter, a plaintiff must set forth specific facts that support an inference of fraud. Id. Facts that show a defendant's motive to commit the fraud may sometimes provide a factual background adequate for an inference of fraudulent intent. Id. 39 The district court observed that Willard's fraud in the inducement claim is a one-sentence allegation, devoid of any factual information that arguably did not even meet the pleading requirements of Federal Rule of Civil Procedure 8(a), and certainly [did] not meet the requirements of Rule 9(b). The district court noted: 40 Willard does not assert a single fact to support his allegation that Humana entered into a contract with the HCFA with no intent to perform it. Willard does not allege who was involved in the negotiations, or where or when the negotiations took place, or that he has any basis for his allegation. Willard does not allege any facts as to what was said before, during, or after the contract negotiations to indicate that the contract was entered with no intent on Humana's part to enroll eligible participants from rural counties. 41 At best, Willard arguably complied with the loosened 9(b) requirement as to state of mind. Although Willard's complaint offered no specificity relevant to Humana's intent at the time when the contract was entered into, Willard did offer subsequent statements of Humana officials suggesting they were strongly averse to serving the rural counties. However, the trial court correctly held that Willard did not come close to setting forth the particulars of time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby, otherwise referred to as the who, what, when, where, and how of the alleged fraud. Willard merely makes a general assertion that Humana had to agree to serve the rural counties in order to obtain the contract, although Willard does not assert this commitment was ever memorialized in writing. Willard does not allege when or how this commitment was made or who at Humana made it. 42 It is true that the pleading requirements of Rule 9(b) may be to some extent relaxed where, as is arguably the case here, the facts relating to the alleged fraud are peculiarly within the perpetrator's knowledge. ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002). Although we have held that fraud may be pleaded on information and belief under such circumstances, we have also warned that this exception must not be mistaken for license to base claims of fraud on speculation and conclusory allegations. Id. at 350 n. 67. In addition, even where allegations are based on information and belief, the complaint must set forth a factual basis for such belief. Id. 43 First, Willard failed to argue in his briefs to this court that the facts were peculiarly within Humana's knowledge and therefore his pleadings should have been held to a lower standard by the district court on the issue of fraud in the inducement. Second, even if this court were inclined to consider this argument sua sponte, Willard's one-sentence allegation fails to set forth a factual basis even upon information and belief that provides the particularity required by Rule 9(b). 44 In addition, this court may consider alternative grounds for upholding the district court's decision. Henderson v. Century Fin. Co., Inc., 577 F.2d 997, 1002 n. 5 (5th Cir.1978). We observe that Willard's fraud in the inducement theory also fails to state a cognizable claim because there is no regulatory violation. In United States v. Shah, 44 F.3d 285, 293 (5th Cir. 1995), this court noted, Generally, `there is no inference of fraudulent intent not to perform from the mere fact that a promise made is subsequently not performed.' (footnote omitted). See also Restatement (Second) of Torts § 530(1). However, where substantial nonperformance is coupled with other probative factors, such as `where only a short time elapses between the making of the promise and the refusal to perform it, and there is no change in the circumstances,' an intent not to perform when the promise was made may, in appropriate circumstances, be properly inferred. 37 Am.Jur.2d, Fraud and Deceit, § 478 (footnotes omitted). Shah, 44 F.3d at 293 n. 14. 45 Therefore, the requisite intent must be coupled with prompt, substantial nonperformance to demonstrate fraud in the inducement. It must be shown that the defendant promptly followed through on its intent not to perform by substantially failing to carry out its obligations under the contract. Willard has not alleged that no Medicare eligible participants were enrolled by Humana in the rural counties or that the percentage of Medicare eligible participants enrolled in the rural counties was lower (much less substantially lower) than that in Harris County. It would be illogical to find fraud where a party secretly did not intend to perform the contract when it was signed, but in actuality did perform, as the civil law generally regulates actions, not thoughts alone. This requirement is also necessary because the government must suffer an injury in fact for there to be standing. Berge v. Bd. of Trustees of Univ. of Ala., 104 F.3d 1453, 1458 (4th Cir.), cert. denied, 522 U.S. 916, 118 S.Ct. 301, 139 L.Ed.2d 232 (1997). Clearly, an intention devoid of an action cannot cause an injury in fact. 46 Accordingly, in addition to Willard's fraud in the inducement claim not passing the Rule 9(b) bar, the claim is also deficient in light of the district court's correct determination that Willard failed to state a cognizable claim that Humana violated an applicable regulation or provision of the contract. 2 47