Court Opinion

ID: 4233129
Source: CourtListenerOpinion
Date Created: 2017-12-28 18:00:35.68755+00
Date Added: 2024-06-11T14:43:18.575654
License: Public Domain

FILED
                                                        United States Court of Appeals
                                                                Tenth Circuit

                                                            December 28, 2017
                                   PUBLISH                  Elisabeth A. Shumaker
                                                                Clerk of Court
                  UNITED STATES COURT OF APPEALS

                               TENTH CIRCUIT

 UNITED STATES OF AMERICA EX
 REL. BRANDON BARRICK,

             Plaintiff/Relator -
             Appellant,
       v.                                             No. 16-4136
 PARKER-MIGLIORINI
 INTERNATIONAL, LLC; PARKER
 INTERNATIONAL, INC., also known
 as PMI Foods-USA; COTTONWOOD
 TRADING, LLC; FORTUNA FOODS,
 LLC, JOHN AND JANE DOES 1-10,

             Defendants - Appellees.

        APPEAL FROM THE UNITED STATES DISTRICT COURT
                  FOR THE DISTRICT OF UTAH
                   (D.C. NO. 2:12-CV-00381-DB)

Ann Marie Taliaferro (James C. Bradshaw and Mark R. Moffat, Brown, Bradshaw
& Moffat, L.L.P., and Robert B. Cummings, The Salt Lake Lawyers, Salt Lake
City, Utah, with her on the briefs), Brown, Bradshaw & Moffat, L.L.P., Salt Lake
City, Utah, for Appellant.

Mark R. Gaylord (Tesia N. Stanley and Tyler M. Hawkins with him on the brief),
Ballard Spahr LLP, Salt Lake City, Utah, for Appellees.

Before TYMKOVICH, Chief Judge, EBEL, and LUCERO, Circuit Judges.

TYMKOVICH, Chief Judge.
      Brandon Barrick brought this action under the False Claims Act on behalf

of the United States, alleging his former employer Parker-Migliorini International

(PMI) illegally smuggled beef into Japan and China. At the time of the scheme,

China banned all imports of U.S. beef, and Japan imposed heightened standards,

under which certain types of U.S. beef would have been banned.

      The False Claims Act prohibits false or fraudulent claims for payment to

the United States. 31 U.S.C. § 3729(a)(1)(A). The Act authorizes enforcement

either by the Attorney General, id. § 3730(a), or by private individuals like

Barrick, called “relators,” who bring qui tam actions in the government’s name,

id. § 3730(b)(1). 1 Section 3729(a)(1)(G) of the Act also creates liability for so-

called “reverse false claims.” These claims reverse the typical claim under the

Act: instead of creating liability for wrongfully obtaining money from the

government, the reverse-false-claims provision creates liability for wrongfully

avoiding payments that should have been made to the government. But, crucially,

liability under the reverse-false-claims provision requires the existence of an

“obligation”—defined as an “established duty”—to pay money to the government.

Id. § 3729(a)(1)(G).

      1
        See Rockwell Int’l Corp. v. United States, 549 U.S. 457, 463 n.2 (2007)
(“Qui tam is short for ‘qui tam pro domino rege quam pro se ipso in hac parte
sequitur,’ which means ‘who pursues this action on our Lord the King’s behalf as
well as his own.’”).

                                         -2-
      In this case, Barrick alleges PMI cheated the government out of the

inspection fees that would have been paid if PMI had complied with federal law.

The United States Department of Agriculture (USDA) charges an hourly rate for

the process of inspecting and certifying meat for export to a country only if the

country has higher standards than the United States. In order to smuggle beef

into Japan and China, PMI lied about the beef’s destination. PMI gave sham

destinations—Moldova or several Central American countries—which have

import standards equal to or less than the United States. Based on these sham

destinations, the USDA provided its usual (free) inspection rather than the

appropriate heightened (reimbursable) inspection.

      In Barrick’s view, an “obligation” to pay the government arises when the

USDA is informed that meat is being exported to a country with inspection

standards higher than those in the United States. Thus, the government should

have been paid for the inspections that would have occurred if PMI had accurately

reported the destination countries.

      We disagree. Barrick cannot allege there was an “established duty” to pay

the government for inspections for the smuggled beef. First, the obligation would

never have arisen for the beef smuggled to China, where it was altogether banned.

The relevant regulations do not impose a charge for ascertaining whether a given

destination country bans the import of U.S. meat, which is where the process

would have ended. Second, the obligation for the beef smuggled to Japan did not

                                         -3-
rise to the level of an “established duty.” An established duty is one owed at the

time the improper conduct occurred, not a duty dependent on a future

discretionary act. Here, the obligation would not have arisen absent a third-party

meat supplier’s independent wrongful conduct. This is because the meat supplier

supplies the destination country to the USDA, thus controlling the type of

inspection performed. But PMI did not use meat suppliers who were eligible to

export beef to Japan. So, for an obligation to arise, the supplier would have had

to report an accurate—and illegal—destination country to the USDA, even though

the supplier was not eligible to export to that country. This conduct does not

create an established duty under the Act.

      Therefore, because we do not find Barrick can adequately plead the

existence of such an “obligation” by PMI as the statute requires, we AFFIRM the

district court’s denial of Barrick’s motion for leave to amend.

                                 I. Background

      We begin with an overview of USDA regulations governing the inspection

and certification of meat destined for export. Then, we summarize Barrick’s

allegations, the applicable provision of the False Claims Act, and the grounds for

the district court’s denial of leave to amend.

                                         -4-
      A. The Export Certification Process

      Federal law requires the USDA to inspect and certify meat destined for

export. See 21 U.S.C. §§ 615–618; 9 C.F.R. §§ 322.2, 322.4. The USDA

delegates the responsibility for performing these inspections to the Food Safety

and Inspection Service (FSIS). 9 C.F.R. § 300.2. The export certification process

normally involves the following three steps.

      First, a supplier completes an export application and provides it to a FSIS

employee. FSIS Directive 9000.1, Export Certification (U.S.D.A. 2006), at 1.

This application indicates the destination country, the establishment from which

the product is exported, and the name of the products being exported. FSIS Form

9060-6 (“Application for Export Certificate”).

      Second, the FSIS employee verifies the information on the application and

performs a physical inspection. This step includes verifying the product meets

the requirements of the destination country. FSIS Directive 9000.1, at 1–2, 4–6.

The FSIS employee does so by consulting the “Export Library,” a list of

requirements officially communicated to FSIS by various countries. FSIS

Directive 9000.1, at 3; USDA, Export Library (Sept. 1, 2017),

https://www.fsis.usda.gov/wps/portal/fsis/topics/international-affairs/exporting-pr

oducts/export-library-requirements-by-country. After verifying the information

on the application, the FSIS employee signs the application and issues an export

certificate. FSIS Form 9060-5 (“Export Certificate of Wholesomeness”).

                                        -5-
      Third, a FSIS certifying official compares the completed export certificate

and the signed application. This step includes verifying again that the

information is consistent with the destination country’s requirements. If the

certifying official deems the export certificate accurate, he signs it. The product

is then eligible for export. FSIS Directive 9000.1, at 2, 7–8.

      Domestic meat quality standards provide a baseline for exported American

meat. For some countries, that is enough—meat that satisfies U.S. law is good

enough for them. Other countries, however, impose additional requirements.

When that is the case, “[o]nly facilities and products which meet those specific

requirements are eligible to export products to that country.” FSIS, Export

Certification, at 41-25 (Apr. 14, 2017),

https://www.fsis.usda.gov/wps/wcm/connect/338f8b52-09e6-477f-bb5b-

da6c4f3a996e/42_IM_Export_Certification.pdf?MOD=AJPERES.

      Another division of the USDA, the Agricultural Marketing Service,

administers Export Verification and Quality System Assessment (EV/QSA)

Programs, which ensure these specific requirements are met. Id. The Marketing

Service reviews and approves companies as eligible suppliers under the EV/QSA

programs, and maintains lists of approved suppliers. Id. Suppliers must also

maintain lists of products intended for export, which are approved by the

Marketing Service. Id. Again, only eligible products from eligible suppliers can

be exported to countries that require an EV/QSA program.

                                           -6-
      The export certification process is more thorough for products exported to

countries that require an EV/QSA program. When the FSIS employees review the

export applications—the second step of the process—they must always check the

requirements of the destination country. Id. at 41-27. If they see the destination

country requires an EV/QSA program, they take additional steps, including

ensuring that the facility is eligible to export to that country and that the product

is eligible for export to that country. Id.

      Another difference is that the export certification process can entail charges

if suppliers export to countries that require an EV/QSA program.

      The USDA distinguishes between “basic export services” and “voluntary

reimbursable services.” The distinction is that FSIS charges suppliers for

voluntary reimbursable services, but not for basic export services. See FSIS

Directive 9000.1 at 3 (“When export certification services are performed in an

official establishment[], the issuance of export certificates that are required by 9

CFR Part 322 and 381.104 through 381.111 are not reimbursable services.”); see

also FSIS Directive 12,600.1, Voluntary Reimbursable Inspection Services

(U.S.D.A. 2007), at 2, 3 (same). “Only the execution of certifications that are in

addition to FSIS regulatory requirements[] (e.g., additional certifications that are

required by the importing country . . . ) are considered reimbursable services.”

FSIS Directive 12,600, at 3. Thus, since it is part of the typical FSIS inspection,

                                              -7-
“[b]asic export services include verifying . . . that country requirements are met

for the applicable products.” Export Certification, at 41-33.

      But—and this is the central issue in this case—verifying compliance with

an EV/QSA program is a reimbursable expense. Id. at 34; see also 9 C.F.R.

§ 350.3(b) (authorizing inspectors to make certifications regarding livestock for

export where conditions are in addition to those imposed by U.S. law), 9 C.F.R.

§ 350.7 (requiring export applicants to pay fees and charges for inspections under

Part 350).

      In this context, the trigger for the charge is when the FSIS employee looks

at the Export Library—FSIS’s list of requirements for various countries—and sees

the country in question requires an EV/QSA program. The charge cannot be

triggered before then, since the FSIS employee always consults the Export

Library as a matter of routine. But the additional steps the employee must then

carry out—for example, checking that the facility is an eligible supplier and that

the product is eligible for export under the relevant EV/QSA program—would

incur a fee, since they are not part of the normal export certification process.

      B. PMI’s Scheme

      PMI’s business includes exporting meat to local wholesale markets around

the world. When PMI exports meat outside the United States, it places an order

with an eligible supplier, informing the supplier of the destination country. See

App. 245–46, 267. Based on that destination, the supplier applies for the proper

                                          -8-
export certificate and obtains the proper inspection from FSIS. Thus, by

supplying the destination, PMI controls which inspection occurs.

      The complaint alleges PMI smuggled beef into Japan and China to avoid

complying with those countries’ import restrictions. After receiving an order

from Japan or China, PMI would place an order with a meat supplier. At the time

of the scheme, China banned all imports of U.S. beef, and Japan required an

EV/QSA program because it banned beef from cattle slaughtered over 30 months

in age. So, if the actual destination was Japan, PMI would inform the supplier the

destination was a Central American country. If the actual destination was China,

PMI would inform the supplier the destination was Moldova. FSIS would inspect

the meat for free, since the sham destination countries named by PMI all have

standards equal to or less than the United States.

      Meat destined for Japan would be shipped to Central America, repackaged

and passed off as local beef, and shipped to Japan. PMI allegedly referred to this

method of getting meat into Japan as the “Japan Triangle.” App. 241. Meat

destined for China would be shipped to Hong Kong, never making it to Moldova,

and smuggled from there into China. PMI allegedly referred to this method of

getting meat into China as the “LSW Channel.” App. 242.

      At the time, U.S. beef heading to Hong Kong had to comply with an

EV/QSA program. FSIS would only give an Export Certificate for Hong Kong to

eligible products produced by eligible suppliers—everything meeting the

                                         -9-
requirements of the EV/QSA program. So PMI did not want the product

inspected as if it was going to Hong Kong—it could only have shipped eligible

products from eligible suppliers and would have had to pay for any inspections.

But Hong Kong would not have accepted the beef in question because it would

not have been an eligible product. That is why PMI claimed the meat was

destined for Moldova.

      C. Procedural Background

      Barrick worked for PMI as a financial analyst from 2007 to 2012. In 2012,

Barrick filed his original False Claims Act complaint under seal, providing the

government with a copy so the United States could determine whether to

intervene. After reviewing the sealed complaint, the FBI initiated a criminal

investigation into PMI. This investigation led PMI to plead guilty to violating 21

U.S.C. § 611(b)(5), for knowingly making a false statement in a certificate

required under USDA regulations. This is a misdemeanor, and PMI paid a

million dollar fine.

      In 2015, the government declined to intervene in this action, so Barrick

proceeded as a relator on the government’s behalf. Barrick raised three claims

under the False Claims Act: a reverse false claim, a conspiracy claim, and a

retaliatory firing claim. After the district court dismissed Barrick’s complaint for

various pleading deficiencies, Barrick sought leave to amend his complaint. The

district court allowed Barrick to proceed with his retaliatory filing claim, but

                                        -10-
denied leave to amend on the reverse false claim and the conspiracy claim,

explaining amendment would be futile: Barrick failed to allege PMI had avoided

an obligation to pay the government. In the district court’s view, PMI’s scheme

was not about avoiding inspection fees; it was about getting banned meat into

China and Japan. PMI never would have paid the inspection fees, since they

never wanted the meat inspected—the whole point was that the meat would not

have passed inspection under the applicable standards. And the beef headed to

China could not have been inspected, since China banned all U.S. beef. So there

would never have been an obligation to pay inspection fees. The district court

certified the denial of the motion to amend as a final order under Federal Rule of

Civil Procedure 54(b), from which Barrick now appeals.

      On appeal, we are only concerned with the substantive False Claims Act

claims, not the retaliation claim, which remains before the district court.

                                   II. Analysis

      Barrick argues the district court erred by finding that amending the

complaint would be futile because Barrick failed to allege the existence of an

obligation. “‘A proposed amendment is futile if the complaint, as amended,

would be subject to dismissal.’” Barnes v. Harris, 783 F.3d 1185, 1197 (10th Cir.

2015) (quoting Full Life Hospice, LLC v. Sebelius, 709 F.3d 1012, 1018 (10th Cir.

2013)). “A complaint is subject to dismissal under [Federal Rule of Civil

Procedure] 12(b)(6) if the plaintiff fails to allege facts that would ‘allow[ ] the

                                         -11-
court to draw the reasonable inference that the defendant is liable for the

misconduct alleged.’” Fields v. City of Tulsa, 753 F.3d 1000, 1012–13 (10th Cir.

2014) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Although we

generally review for abuse of discretion a district court’s denial of leave to amend

a complaint, when this denial is based on a determination that amendment would

be futile, our review for abuse of discretion includes de novo review of the legal

basis for the finding of futility.” Barnes, 783 F.3d at 1197 (quoting Cohen v.

Longshore, 621 F.3d 1311, 1314 (10th Cir. 2010)).

      A. The Reverse-False-Claims Provision

      As explained above, the reverse-false-claims provision, 31 U.S.C.

§ 3729(a)(1)(G), reverses the typical claim under the False Claims Act: instead of

creating liability for wrongfully obtaining money from the government, the

reverse-false-claims provision creates liability for wrongfully avoiding payments

that should have been made to the government.

      Since the last time our court addressed this provision, in U.S. ex rel.

Bahrani v. Conagra, Inc., 624 F.3d 1275, 1279 (10th Cir. 2010) and U.S. ex rel.

Bahrani v. Conagra, Inc., 465 F.3d 1189 (10th Cir. 2006), Congress has amended

it. 2 Before 2009, the reverse-false-claims provision imposed liability on any

person who “knowingly makes, uses, or causes to be made or used, a false record

      2
       For clarity, we note that all subsequent references to Conagra refer to the
2006 case.

                                         -12-
or statement to conceal, avoid, or decrease an obligation to pay or transmit money

or property to the Government.” 31 U.S.C. § 3729(a)(7) (1994). The 2009

amendments changed the statute in two significant ways.

      First, Congress added a second route to liability. The reverse-false-claims

provision now imposes liability on any person who:

      [1] knowingly makes, uses, or causes to be made or used, a false record
      or statement material to an obligation to pay or transmit money or
      property to the Government, or [2] knowingly conceals or knowingly
      and improperly avoids or decreases an obligation to pay or transmit
      money or property to the Government.

31 U.S.C. § 3729(a)(1)(G) (bracketed numbers added for clarity). This second

route to liability expands on the first by not requiring a “false record or

statement.” Simply “knowingly and improperly avoid[ing] . . . an obligation to

pay or transmit money or property to the Government” is enough. But, under

either clause of this provision, there must exist an “obligation to pay . . .

money . . . to the government.”

      Second, Congress added a definition for the term “obligation,” which the

statute had not previously defined. As amended, “obligation” means “an

established duty, whether or not fixed, arising from an express or implied

contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or

similar relationship, from statute or regulation, or from the retention of any

overpayment.” 31 U.S.C. § 3729(b)(3) (emphasis added).

                                          -13-
      For our purposes, “established” is the key word in this definition. As the

Fifth Circuit recently explained, “‘established’ refers to whether there is any duty

to pay . . . .” U.S. ex rel. Simoneaux v. E.I. duPont de Nemours & Co., 843 F.3d

1033, 1037 (5th Cir. 2016); accord U.S. ex rel. Petras v. Simparel, Inc., 857 F.3d

497, 505 (3d Cir. 2017) (“[A]n ‘established duty’ more likely refers to one owed

at the time that the alleged improper conduct under the FCA occurred. . . . [T]he

term does not include a duty that is dependent on a future discretionary act.”).

Under this interpretation, a duty to pay must be formally “established” before

liability can arise under the False Claims Act. Simoneaux, 843 F.3d at 1038–40;

see also Petras, 857 F.3d at 506 (“[F]or a reverse FCA claim, the definition of an

‘obligation’ refers to one existing at the time of the improper conduct to pay the

Government funds, the amount of which may not be fixed at the time of the

improper conduct.”). In other words, there is no liability for obligations to pay

that are merely potential or contingent.

      We have not previously addressed the definition of “obligation” added by

the recent False Claims Act amendments, but in prior cases we explained that

potential obligations were not actionable under the statute prior to amendment.

See Conagra, 465 F.3d at 1195–97, 1203. In Conagra, we explained that a

plaintiff must allege the defendant “had an existing legal obligation to pay or

transmit money or property to the government.” Id. at 1195 (quoting Kennard v.

Comstock Res. Inc., 363 F.3d 1039, 1048 (10th Cir. 2004)). And “the obligation

                                           -14-
must arise from some independent legal duty.” Id. That meant that “potential

obligations . . . are not properly the subject of a suit under [the reverse-false-

claims provision.]” Id. at 1196 (quoting U.S. ex rel Huangyan Imp. & Exp. Corp.

v. Nature’s Farm Prod., Inc., 370 F. Supp. 2d 993, 1000 (N.D. Cal. 2005)). We

also explained that where government officials were afforded discretion to

determine whether to charge fees, the obligation was “contingent” and thus

outside the scope of the provision. Id. at 1203.

      Nothing in the statute’s new definition of “obligation” abrogates our

previous approach.

      B. Application to PMI’s Scheme

      PMI contends that the allegations do not support a cause of action under

either clause of § 3729(a)(1)(G). We agree with the district court that they do

not. Barrick cannot allege there was an “established duty” to pay the government

for inspections for the smuggled beef.

      China is the easier case. There were no eligible suppliers for China during

this period, since China banned all U.S. beef. During the normal phase of the

inspection process—for which no charge applies—the FSIS employee would

discover from the Export Library that China prohibited imports of U.S. beef. The

inspection would never have reached a stage where charges could be incurred.

      The fact that the meat stopped in Hong Kong, a permissible export

destination, before traveling to China does not affect our analysis. The Act does

                                          -15-
not require that suppliers pay for an inspection to comply with import standards in

a country that is merely a stop en route to their destination country. Thus, the

fact that a shipment of meat might have stopped in Central America or New

Zealand or Indonesia does not matter for analytical purposes.

      Japan requires several more analytical steps, however, but no obligation to

pay the government would have arisen in that context either. Barrick does not

allege PMI used suppliers eligible to export to Japan. Quite the opposite: he

alleges the point of the scheme was to smuggle banned beef (that is, ineligible

products from ineligible suppliers) into Japan.

      Because the suppliers were ineligible, two things would need to happen for

inspection fees to arise for the beef smuggled to Japan, even supposing PMI

accurately reported the destination to its ineligible suppliers.

1.    PMI and the supplier would have to agree to export to Japan even though

      the supplier is ineligible. In other words, without the supplier’s collusion,

      no inspection fees would arise. If the supplier declined on the grounds that

      it was ineligible to ship to Japan, no inspection fees would arise.

2.    Despite the illegality of the arrangement, the supplier would have to

      accurately list Japan as the destination on the export application. So, after

      deciding to break the law, the supplier would have to decide to tell that to

      FSIS in order for any inspection fees to arise. If the supplier listed a

                                         -16-
      destination country with standards equal to or less than the U.S. standards,

      no fees would arise.

Only if these two things happened would any inspection fees arise. If they did

happen, some amount of fees would have arisen: the FSIS employee would look

at the export application, and access the Export Library to determine Japan’s

requirements. At this point, the FSIS employee would see that Japan requires an

EV program, triggering inspection fees. But the inspection would be extremely

short: the FSIS employee would look to see if the supplier is eligible, find it is

not, and reject the application.

      The key is that for an obligation to arise here, it requires not only the

supplier’s complicity in an illegal scheme, but the supplier’s willingness to list

the true destination—and be found out easily. This requires at least the two

assumptions above—if PMI or the third-party supplier decided not to go through

with any of those steps, no inspection fees would arise.

      The obligation to pay is thus potential and contingent, as we explained in

Conagra, because it depends on multiple assumptions, as well as a third party’s

wrongful acts. That is, even if PMI had told an ineligible supplier it wished to

export beef to Japan, there would not have been an inspection unless the supplier

cooperated in the smuggling. But, in order to create liability, the obligation must

be formally established at the time of the improper conduct, not dependent on a

                                         -17-
future discretionary act—let alone two acts, let alone implausible ones, let alone

by a third party.

      Barrick contends our decision in Conagra, 465 F.3d 1189, supports his

interpretation of the Act. In Conagra, the plaintiff alleged employees of Conagra,

a meat and hide exporter, routinely altered USDA export certificates. If an export

certificate contained a substantive deficiency—for example, “the destination of

the product”—USDA regulations required FSIS to issue a new certificate, for

which they would charge Conagra. Id. at 1193. Rather than obtain replacement

certificates, Conagra employees would alter or forge export certificates to avoid

fees the company would otherwise have to pay. Id. at 1194. We found the

USDA’s requirement that Conagra obtain replacement certificates in certain

situations and pay an accompanying fee constituted an “obligation” under the

statute. Id. When Conagra employees determined changes were necessary, it

triggered an established duty to pay the USDA to issue new certificates. Absent

Conagra altering the certificates, they would have had to pay the USDA for new

certificates. The wrongful act is at one remove from the obligation.

      But Conagra is not on point. Absent PMI lying about the destination

country, the obligation would not have arisen automatically. For China, the

obligation would never have arisen—even if the supplier had colluded in the

scheme and accurately listed China as the destination, the export application

would have been rejected without incurring a charge. For Japan, the wrongful act

                                        -18-
would be at two removes—at least—from the obligation. Absent PMI’s

misrepresentation about Japan as the destination country, (1) the supplier would

have to collude illegally in the scheme, and (2) the supplier would have to report

accurately the illegal destination to the FSIS employee. In contrast, the

obligation at Conagra was automatic: Conagra employees determining that

changes to the certificates were necessary triggered a legally established duty to

pay the USDA to issue new certificates. Under the relevant law, Conagra’s

determination was both a necessary and a sufficient condition for a monetary

obligation.

      In sum, the obligation in this case is not an “established duty” and the

alleged fraudulent conduct does not create liability under the False Claims Act.

                                III. Conclusion

      We therefore AFFIRM the district court’s denial of Barrick’s motion for

leave to amend because Barrick’s proposed amendment would be futile. The

complaint, as amended, would be subject to dismissal under Federal Rule of Civil

Procedure 12(b)(6), because Barrick fails to allege facts that would allow the

court to draw the reasonable inference that the defendant is liable under the False

Claims Act’s reverse-false-claims provision. Such an inference would require

alleging that there was an “established duty” to pay the government—which, for

the reasons explained, Barrick cannot do.

                                        -19-