FCA fraudulent inducement claim requires but-for causation – appeals court

A man stands near an IBM logo at the Mobile World Congress in Barcelona, Spain, February 25, 2019. REUTERS/Sergio Perez

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(Reuters) – A whistleblower must plead but-for causation in order to bring a fraudulent inducement claim under the federal False Claims Act, a federal appeals court has ruled, allowing a case accusing International Business Machines Corp of defrauding the government to go forward.

A D.C. Circuit Court of Appeals panel on Tuesday rejected former IBM sales representative Paul Cimino’s argument that he did not have to allege but-for causation, but nonetheless reversed a lower court’s ruling dismissing the lawsuit, finding that Cimino had met the pleading standard.

IBM and its attorney Cate Stetson of Hogan Lovells did not immediately respond to requests for comment. Nor did Cimino’s lawyer, Tejinder Singh of Goldstein & Russell.

Cimino filed his lawsuit in 2013 in Washington federal court under the False Claims Act, which allows whistleblowers to sue companies on the government’s behalf to recover taxpayer money paid out based on fraudulent claims.

He alleged that IBM falsified an audit to show that the Internal Revenue Service owed the company $91 million in penalties for overuse under the terms of the agency’s existing software license in order to pressure the IRS to renew the license for $265 million.

In 2018, the U.S. Department of Justice declined to intervene in the case.

In 2019, U.S. District Judge Amit Mehta concluded that Cimino’s lawsuit failed because he had not alleged that the IRS would not have entered into the license agreement but for IBM’s misleading audit. The judge’s conclusion was based in part on the fact that the IRS continued to pay IBM after the lawsuit was filed.

On appeal, Cimino argued that but-for causation was not a necessary element of a fraudulent inducement claim under the FCA.

Circuit Judge Neomi Rao noted that the court had never directly addressed the question, but said that common law principles weighed against Cimino.

“Because the fraud must be in the inducement, liability under the FCA for fraudulent inducement must turn on whether the fraud caused the government to contract,” she wrote.

However, the court found that Mehta had dismissed case simply because he “doubted” Cimino’s allegations, when at the pleading stage they must be taken as true.

“But that disbelief did not merit dismissal in light of Cimino’s allegations,” Rao wrote, reversing the denial of Cimino’s fraudulent inducement claim.

Rao was joined by Circuit Judge Sri Srinivasan and Senior Circuit Judge Douglas Ginsburg.

The case is Cimino v. International Business Machines Corp, U.S. Court of Appeals for the D.C. Circuit, No. 19-7139.

For Cimino: Tejinder Singh of Goldstein & Russell

For IBM: Cate Stetson of Hogan Lovells

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