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Citynet, LLC v. Frontier West Virginia, Inc.

United States District Court, S.D. West Virginia, Charleston

March 30, 2018

CITYNET, LLC, on behalf of the United States of America, Plaintiff/Relator,
v.
FRONTIER WEST VIRGINIA INC., a West Virginia Corporation, and KENNETH ARNDT, individually, and DANA WALDO, individually, and MARK McKENZIE, individually, and KELLY GOES, individually, and JIMMY GIANATO, individually, and GALE GIVEN, individually, Defendants.

          MEMORANDUM OPINION AND ORDER

          JOHN T. COPENHAVER, JR. UNITED STATES DISTRICT JUDGE.

         Pending are two motions to dismiss the complaint, one filed by defendants Frontier West Virginia Inc. (“Frontier”), Kenneth Arndt, Dana Waldo, and Mark McKenzie (collectively, “the Frontier Defendants”) on August 23, 2016, and the other filed by Kelley Goes, Jimmy Gianato, and Gale Given (collectively, “the State Employees”) on August 23, 2016.

         I. Introduction

         Relator, Citynet, LLC (“Citynet”), a West Virginia limited liability company with its principal place of business in West Virginia, instituted this action by filing a Qui Tam complaint on behalf of the United States on May 7, 2014, under seal. On June 17, 2016, the United States declined to intervene in the case, which was then placed on the active docket. Citynet thereafter filed the first amended Qui Tam complaint, which is the operative complaint and will be referred to herein simply as the complaint.

         At all times relevant herein, Frontier was a West Virginia corporation with its principal place of business in West Virginia; Kenneth Arndt was a citizen of West Virginia and General Manager and Senior Vice President of Southeast Region at Frontier Communications Corporation; Dana Waldo was a citizen of West Virginia and Senior Vice President and General Manager of Frontier; Mark McKenzie was a citizen of West Virginia and employee of Frontier; Kelly Goes was a citizen of West Virginia and Secretary of the West Virginia Department of Commerce (“DOC”); and Jimmy Gianato was a citizen of West Virginia and Director of the West Virginia Division of Homeland Security and Emergency Management. First Amended (“Am.”) Qui Tam Complaint (“Compl.”) at ¶¶ 8-11, 13-14. Gale Given was employed as Regional President of Verizon covering the state of West Virginia from July 1, 2010, to July 1, 2012, when she became the West Virginia State Technology Officer. Id. at ¶ 12.

         In the complaint, Citynet alleges nine counts under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et. seq. Counts I through IV allege the presentation of false claims, § 3729(a)(1)(A); Counts V through VIII allege the making of false records, § 3729(a)(1)(B); and Count IX alleges a conspiracy to present false claims and make false records, § 3729(a)(1)(C). Counts I through III, V through VII, and IX are against all defendants, while Counts IV and VIII are against only Frontier and Mr. McKenzie.

         Citynet alleges that under the American Recovery and Reinvestment Act (“ARRA”), which became law in February 2009, $4, 700, 000, 000 in federal funds were appropriated to the Broadband Technology Opportunities Program (“BTOP”) in order to expand broadband technology. First Am. Qui Tam Compl. at ¶ 1. Citynet claims that the grant program “was designed to allow for the construction of open access middle-mile broadband networks.” Id.

         Citynet contends that Frontier, Mr. Arndt, Mr. Waldo, Mr. McKenzie, Ms. Goes, and Mr. Gianato assisted the West Virginia Executive Office (“the WVEO”) in the submission of its application for $126, 323, 296 in funds from the BTOP grant for a project titled “West Virginia Statewide Broadband Infrastructure Project - Middle-mile.” Id. at ¶¶ 2, 27. According to Citynet, the WVEO grant application contained numerous misrepresentations, some of which were based on information provided to WVEO by Frontier and its representatives. Id. at ¶ 2. During the application process, thirty-four proposals, including one from Citynet, were submitted to the National Telecommunications and Information Administration (“the NTIA”) for consideration under BTOP. Id. at ¶ 22. In addition, Frontier as well as its subsidiary, Citizens Telecommunications Company of West Virginia (“CTC”), submitted proposals to fund last mile projects, which would provide broadband fiber to Community Anchor Institutions (“CAIs”). Id. at ¶¶ 24, 26.

         The WVEO proposal contained three parts: “1) the provision of 1, 064 Cisco routers to each of the CAIs; 2) the construction of, and upgrade to, the State's emergency microwave tower system; and 3) the construction of a 2, 429 mile ‘open-access' Middle-Mile network that would provide broadband service to the 1, 064 CAIs throughout the state.” Id. at ¶ 28. According to Citynet, the WVEO application, at Ms. Goes' direction, took Frontier's and CTC's last mile applications, with Frontier's knowledge, and simply “regenerated them as its own Middle-Mile project in order to make it more attractive to the NTIA.” Id. at ¶ 30. Specifically, Citynet alleges that Frontier, Mr. McKenzie, Ms. Goes, Mr. Gianato, and others, helped to prepare the WVEO grant application with the intent that Frontier would receive the grant funds, if awarded to the WVEO. Id. at ¶ 31.

         In addition, Frontier and Verizon also helped the state determine the amount of new fiber to be constructed if the grant was awarded to the WVEO. Id. at ¶ 32; see Ex. 5 to First Am. Qui Tam Compl. (Emails between Mark Luker and Jimmy Gianato regarding the amount of fiber to be constructed, stating, in part, “Based on the estimates from Verizon and Frontier, the fiber is new fiber that does not exist today”). While the grant applications were being submitted, Frontier was in merger negotiations with Verizon, and both Frontier and Verizon further assisted the State in drafting its application by providing construction plans and engineering information to the WVEO. First Am. Qui Tam Compl. at ¶ 35. In fact, during the merger negotiations between Verizon and Frontier, Frontier and the state had contemplated that it would receive a grant, and that a considerable portion of it would go to Frontier. Id. at ¶ 36. On January 14, 2010, the State informed Frontier that it would be required to make a capital investment of $250-$300 million in West Virginia if the merger were to be approved by the West Virginia Public Service Commission. Id. at ¶ 37; see also Ex. 7 to First Am. Qui Tam Compl. (Email from Dan McCarthy to Kelley Goes regarding the capital planned when Frontier takes control of Verizon's West Virginia Operations).

         Citynet alleges that the WVEO application contained false statements that were included to insure that the state would receive the grant and that Frontier, Mr. Arndt, Mr. McKenzie, Ms. Goes and Mr. Gianato and others caused the false statements in the WVEO grant application. First Am. Qui Tam Compl. at ¶ 38. Citynet first alleges that the WVEO grant application misrepresented that “the fiber would comprise a single interconnected network by connecting each CAI to Frontier's local central offices, which in turn would allow other service providers to connect at the Frontier Central Office to provide their Last-Mile services to consumers.” Id. at ¶ 39. By connecting the fiber from CAIs to central offices, which are the locations that Frontier maintains equipment to route calls to and from end users, other service providers would have been able to connect at the central office to provide last mile services to consumers. Id. at ¶ 40. Citynet also alleges that the WVEO application misrepresented that no part of the “‘service layer' (i.e. Last-Mile)” would be funded from the grant. Id. at ¶ 41.

         Citynet next alleges that the WVEO application misrepresented that the 1, 064 CAIs in the application did not already have fiber service when in fact 416 of the CAIs “already had existing fiber, no longer were in existence or had received other stimulus, ” meaning that only 648 CAIs needed new fiber. Id. at ¶¶ 43-44. Because only 648 CAIs needed new fiber, the amount of new fiber miles to be built decreased from 2, 429 in the application to 915 and then was decreased again to 536. Id. at ¶ 45.

         Citynet also contends that the decreased figure of 536 miles of fiber to be built was inflated because miles were “double counted” and the application also misrepresented the distances of fiber necessary to reach many of the CAIs. Id. at ¶ 45. Specifically, Citynet states that the estimation of fiber to be built on “hundreds of” CAIs were grossly inflated. Id. at ¶ 46. For example, Citynet contends that the WVEO application estimated that 73, 250 feet of new fiber would be required to provide broadband service to the CAI “Hygenia Facilities Foundation” in Boone County, but that the pertinent location construction request (“LCR”) indicates that only 1, 201 feet of fiber was constructed. Id. The double-counting of miles that Citynet alleges refers to the fact that the miles of fiber was inflated in the application by including the miles to connect the Central Office to two CAIs, when only one CAI was directly connected to the Central Office. Id. at ¶ 47. For example, while the Martinsburg Correctional Center in Berkeley County is located next to the Eastern Regional Jail, Frontier estimated to the state that it would take 10, 000 feet of fiber to connect to the Correctional Center and 10, 000 additional feet of fiber to connect to the Eastern Regional Jail. Id. at ¶ 48. Instead, Citynet alleges that it only took 6, 650 feet of fiber to connect to the Correctional Center and 794 feet of fiber to connect the Eastern Regional Jail to the Correctional Center. Id. “By double-counting the build back to the Central Office for both jobs, ” Citynet alleges that “Frontier inflated the estimated mileage by 10, 000 feet on this job alone.” Id. Citynet contends that the amount of new fiber needed was double-counted on at least fifty-eight projects. Id. at ¶ 50.

         Finally, Citynet contends that the proposed fiber distances for the CAIs were also misrepresented in the WVEO application by “simply inputting the same number for several projects.” Id. at ¶ 51. For example, Citynet alleges that the WVEO application had thirty-six CAIs that required the same 4, 390 feet of new fiber, with five new poles, 3, 882 feet of aerial fiber and 508 feet of buried fiber. Id. at ¶¶ 51-52.

         Citynet also alleges that defendants misrepresented that a middle mile network did not exist in West Virginia, when in actuality, Mr. Arndt had informed the state representatives that “90% of the stimulus project either existed or would be completed shortly after the Frontier acquisition of Verizon.” See Ex. 11 to First Am. Qui Tam Compl. (Email from Kenneth Arndt to Kelley Goes, Jimmy Gianato and others stating that “90% of the stimulus project either exists or will be completed shortly after the acquisition is closed”). Additionally, defendants certified that the project complied with the “Notice of Funds Availability and Solicitation of Applications” (“NOFA”) requirements because no private entity could afford to build the $42, 000, 000 proposed network and that it would not be built but for the grant. First Am. Qui Tam Compl. at ¶ 54. Despite this certification, defendants knew that Frontier had already committed to spend $279, 000, 000 in West Virginia to upgrade facilities and infrastructure so that the Verizon merger would be approved. Id.

         Other misrepresentations that Citynet claims defendants made in the WVEO application include the statement that the broadband services could be resold by the state to businesses and individuals when they could not be resold, meaning that “the CAIs that received broadband under the WVEO project would be the ultimate end-user of only Frontier/ Verizon services which in turn made the project a Last-Mile project.” Id. at ¶ 55. Also, while defendants stated that the WVEO application was a middle mile solution, Ms. Goes advised Citynet that $40 million of the grant funds would be given to Frontier “to construct ‘tails' to government facilities from the nearest Frontier hub or similar facility and that the construction of the ‘Last-Mile' tails would constitute the full extent of fiber construction under the WVEO's plan.” Id. at ¶ 56. Citynet claims that “the overall effect of the misrepresentations in the WVEO grant application led to the grant being awarded to the WVEO for the sole benefit of Frontier.” Id. at ¶ 57.

         Around February 12, 2010, the WVEO was awarded $126, 323, 296 from the BTOP Grant for the WVEO grant application entitled “West Virginia Statewide Broadband Infrastructure Project - ‘Middle-Mile.'” Id. at ¶ 58. By accepting the grant, the recipient (here, the WVEO) agreed to comply with certain terms and conditions, including: “1) the [DOC] Financial Assistance Standard Terms and Conditions; 2) Award Specific Special Award Conditions; 3) Line Item Budget; 4) 15 C.F.R. Part 24, Uniform Administrative Requirements for Grants and Agreements to States and Local Governments; 5) OMB Circular A-87, Cost Principals for State, Local and Indian Tribal Governments; 6) OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations; 7) [DOC] Pre-Award Notification Requirements for Grants and Cooperative Agreements; and 8) DOC American Recovery and Reinvestment Act Award Terms.” Id. at ¶ 59. The Special Award Conditions stated “This award supports the work described in the recipients proposal entitled West Virginia Statewide Broadband Infrastructure Project - ‘Middle Mile' dated 8-20-09 and revision dated 2/5/10 for budget narrative which is incorporated into the award by reference.” Id. at ¶ 60.

         According to Citynet, the proposed budget narrative contained potential categories of costs of the project to be identified by the applicant, with a summary of the items in each category. Id. at ¶ 61. The addendum to the Budget Narrative provided that, “If indirect costs . . . and/or fringe benefits are included in the budget, please provide a copy of your existing Negotiated Indirect Cost Recovery Agreement (NICRA), if available. If the NICRA is not available or is not consistent with the rates/calculations in the budget, please provide an explanation of how the amounts were calculated. Please clearly list the manner in which indirect costs are calculated in the budget.” Id. at ¶ 62. No indirect costs were identified in the WVEO grant application. Id. at ¶ 63.

         In addition, other terms and conditions that the WVEO agreed to comply with upon receipt of the grant funds, including the DOC Financial Assistance Standard Terms and Conditions, the ARRA Award Terms, 74 FR 33104, and the DOC Pre-Award Notification Requirements for Grants and Cooperative Agreements, did not permit payment of indirect costs not included in a line-item budget. Id. at ¶¶ 64-66. Citynet alleges that Frontier was a sub-recipient of the grant pursuant to a Memorandum of Understanding (“MOU”) entered between the parties on October 1, 2010. Id. at ¶¶ 69-70. The MOU stated that if awarded the grant, Frontier as a sub-recipient of the grant would construct 915 miles of fiber contemplated in the WVEO application, and would “establish a middle-mile broadband network to over 1, 000 points of interest throughout West Virginia.” Id. at ¶¶ 70-71. As a sub-recipient of the grant, Frontier also agreed to comply with the Special Award Conditions, all other laws, rules and regulations that governed the grant award and with all accounting requirements in the NOFA, as well as to ensure that the WVEO would be invoiced for eligible grant costs and that costs not eligible under the grant would be billed to the WVEO separately. Id. at ¶¶ 72-74.

         Citynet alleges that Frontier did not construct the middle mile network proposed in the WVEO application and that it agreed to construct in the MOU, but instead it began to build the last mile project it proposed in its joint application with CTC, which was not given funds under the BTOP grant. Id. at ¶ 75. According to Citynet, Frontier did not need to build the 915-mile network that was proposed in the WVEO application because a “vast majority of the proposed Middle-Mile network already existed.” Id. at ¶ 76. Because Frontier did not build the existing middle mile network with funds from the grant, the “open access” requirement did not apply to it, meaning that Frontier could deny its competitors access to the existing network. Id. at ¶ 76. Citynet further alleges that Frontier did not want to build an open-access middle mile network because “it would allow competition from other broadband services providers” which “would be catastrophic to Frontier's business.” Id. at ¶ 77. Instead of constructing fiber from one of its Central Offices to another Central Office, or from the CAI back to the Central Office, as provided for in the WVEO application, Citynet alleges that Frontier “merely constructed fiber from the CAI to Frontier's nearest utility pole (i.e., driveways to local streets).” Id. at ¶ 78. Citynet alleges that the decision to do this was “unilaterally made by [Mr.] Gianato.” Id. at ¶ 79.

         In support of the contention that the WVEO grant application proposed building fiber from Central Office to each CAI, Citynet alleges that “areas of potential affect maps” (“APE maps”) were provided to the NTIA that identified the routes for the fiber to be built to each CAI and the footage of fiber that would be required for each CAI. Id. at ¶ 80. The APE maps showed that fiber would be built from the Central Office to the CAI. Id. at ¶ 81. After the construction was completed, Frontier submitted “as-built” maps that were not typically used in the industry, which showed that the fiber was not built back to the Central Office, as proposed, but instead, a “‘service drop' was installed from the CAI to the nearest utility pole.” Id. at ¶¶ 82-83. By using the “service drop” method instead of building the fiber back to the Central Office, “the fiber built [was rendered] useless to third parties thus defeating the open access conditions set forth in the grant award.” Id. at ¶ 84.

         Citynet contends that Frontier admitted to the Federal Communications Commission that the facilities constructed with the grant funds were last mile and not middle mile facilities. Id. at ¶ 85; see Ex. 14 to First Am. Qui Tam Compl. (Comments of Frontier before the Federal Communications Commission).

         Citynet also alleges that Frontier “billed the . . . grant for material and labor it did not provide, and for fiber lengths that were not constructed.” First Am. Qui Tam Compl. at ¶ 86. One way Frontier did this was by using excessive maintenance coils to conceal the fact that it did not construct the fiber it alleged it did. Id. at ¶ 87. For example, for one CAI, Frontier billed the state for constructing 1, 380 feet of fiber, but its engineering map shows that it only built 735 feet of fiber and placed an additional 600 feet of fiber in maintenance coils. Id. at ¶ 88. Citynet alleges that Frontier routinely placed excessive amounts of fiber in maintenance coils in order to “inflate its invoices in an attempt to draw down the surplus BTOP funds.” Id. at ¶ 90. As a result, Frontier used the WVEO grant funds to “1) expand its existing network within its service territory; 2) ensure that its competitors would not have access to the network; and 3) lock the State (the CAIs) into doing business with Frontier in perpetuity.” Id. at ¶ 91.

         In total, Frontier submitted invoices totaling $41, 531, 832.25 to the state. Id. Although Frontier only built 590 miles of fiber, the total cost was $856, 939 more than the amount Frontier represented it would cost to build the 1, 793 miles of fiber contemplated in the grant application. Id. at p. 18 n.1. In their own grant applications, Frontier and CTC estimated that fiber construction would cost $24, 816 per mile, but Frontier received triple that amount for the 536 miles of fiber it built. Id. at ¶ 93. According to Citynet, Frontier “devised a plan to expend all of the $42, 000, 000 of the budgeted BTOP funds by: 1) charging for impermissible ‘loadings' that were nothing more than prohibited indirect costs; 2) fabricating the amount of fiber built by utilizing maintenance coils; 3) fabricating the amount of fiber built after the length of the maintenance coils had already been considered in total; 4) double-billing for ‘Facility Build-Outs' that were already contemplated as part of the original construction estimate; and 5) billing for inappropriate ‘invoicing fees' that were not allowed under the grant.” Id. at ¶ 92.

         Ms. Given and Mr. Gianato allegedly assisted Frontier in this plan by: “1) knowingly approving improper ‘loading' and ‘invoice processing fee' charges; 2) failing to verify Frontier's invoices and the corresponding charges; 3) failing to verify that Frontier completed the work billed for; and 4) purposefully holding Frontier's invoices for up to eighteen (18) months at a time before processing them so that the other service providers would not be able to determine whether there would be surplus BTOP funds available.” Id. at ¶ 94. According to Citynet, most of these events occurred after Ms. Given became the State Technology Officer. Id.

         Citynet alleges that Frontier “caused the federal government to pay 365 Frontier invoices that included prohibited indirect costs.” Id. at ¶ 95. Citynet contends that because the WVEO application did not include indirect costs on the line item budget, it was prohibited from collecting it under the NOFA, ARRA Award Terms, 74 FR 33104 and the Special Award Conditions. Id. at ¶ 101. Frontier allegedly attempted to obtain reimbursement for indirect costs before Ms. Given became the Chief Technology Officer, but these requests were denied by Col. Michael Todorovich. Id. at ¶ 96. He advised the Grant Implementation Team and the West Virginia Office of Technology (“WVOT”) that indirect costs were not reimbursable under the grant. Id.; see Ex. 17 to First Am. Qui Tam Compl. (Memorandum from Michael Todorovich, PI/PD, regarding Reimbursement Process dated February 14, 2012). Col. Todorovich additionally refused access to the grant funds except for payment of construction that was already completed. First Am. Qui Tam Compl. at ¶ 97.

         According to Citynet, the WVOT developed a protocol that was used to process the vendor invoices that were submitted for payment from the grant funds. Id. at ¶ 98. The process provided that the vendor would first submit the invoice for review by the WVOT, where a WVOT employee would match it against the original LCR and approve it. Id. Next, the invoice was sent to Col. Todorovich, who would ensure that the invoice was properly approved by the WVOT and that there were sufficient grant funds to pay the invoice. Id. The invoice was sent to the Governor's accountant for review and then was entered into the Department of Treasury's Automated Standard Application for Payments (“ASAP”). Id. Once the invoice is entered into ASAP, the funds were dispersed to the WVOT, and it then forwarded the funds to Frontier. Id.

         On July 1, 2012, Ms. Given, the former Regional President of Verizon for the area covering West Virginia, was appointed as the new State Technology Officer. Id. at ¶¶ 12, 99. She immediately took control of approving Frontier's invoices for the grant project. Id. After Ms. Given became the State Technology Officer, Citynet alleges that Frontier began submitting invoices with a “Loadings” charge. Id. at ¶ 100. According to Frontier's invoices, the loadings charge was for “allocated indirect costs such as vehicles, accounting, administration, etc.” Id. at ¶ 101 (emphasis omitted). Citynet contends that the loadings charge was an indirect cost, which was in violation of the various award conditions previously mentioned. Id. Despite being an indirect charge unauthorized under the grant, Ms. Given approved the Frontier invoices containing the loading fee, which in some instances was higher than the original cost estimate for the entire build. Id. at ¶¶ 102-103. In total, Frontier submitted 365 invoices containing the improper loadings fee, totaling $4, 553, 387.31. Id. at ¶ 104. The state budget and the budget narrative provided by the state did not include indirect costs and the grant award was not amended to permit indirect costs to be reimbursed by the grant. Id. at ¶ 106.

         Citynet also contends that Frontier submitted 327 invoices for payment from grant funds that included facility build out fees and invoice processing fees that were unlawful. Id. at ¶ 107. The facility build out (“FBO”) fees included on the Frontier invoice allegedly “consisted of the cost of construction inside the CAI to allow the facility to accept the newly placed fiber.” Id. at ¶ 108. Citynet alleges that once Ms. Given was hired as the State Technology Officer, Frontier began submitting invoices with the FBO charge. Id. at ¶ 109. While Frontier claims that the FBO charge was not part of the original grant estimate because “the need for the FBO was not discovered until the project was under way, ” Citynet contends that the WVEO listed “DMARC Const. Cost” in the original grant proposal, with a unit cost of $9, 750 for 250 units, which was the equivalent of FBO costs, and therefore was part of the original estimate in the WVEO proposal. Id. at ¶¶ 109-10. Citynet contends that Frontier “created the fiction” that the charge was not originally part of the estimate so that they could be double-billed for the “DMARC Const. Cost” and the FBO costs. Id. at ¶ 111.

         Frontier also allegedly added “significant ‘invoice processing fees'” to the FBO invoices after Ms. Given became the State Technology Officer. Id. at ¶ 112. Mr. McKenzie allegedly provided the state with a list of the costs associated with processing a FBO invoice. Id. at ¶ 113. In the breakdown of costs, Mr. McKenzie claimed it took sixteen employees four hours to process one FBO invoice, at a cost of $1, 808 or $452 per hour to Frontier. Id.; see also Ex. 20 to First Am. Qui Tam Compl. (Letter from Mark McKenzie to Gale Given dated January 29, 2013 regarding “Frontier Incremental Processing Costs - FBO Invoices”). On February 25, 2013, Mr. Waldo advised Ms. Given that it would cost Frontier $596, 640 to process 330 FBO invoices. First Am. Quit Tam Compl. at ¶ 114. Since the state had paid the full amount for 27 invoices, Mr. Waldo additionally advised Ms. Given that it would only charge $1, 340.20 per invoice, or $335.05 per hour, for the remaining invoices. Id.; see also Ex. 21 to First Am. Qui Tam Compl. (Letter from Dana Waldo to Gale Given dated February 25, 2013 regarding “invoicing for BTOP Projects Including Facilities Build-Out Work”). Frontier charged the invoice fee in several instances when it performed no work. First Am. Qui Tam Compl. at ¶ 115. In total, Frontier submitted 84 invoices with a 1, 808 invoice fee and 243 invoices with a $1, 340 invoice fee, totaling $593, 888.20, despite the fact that the processing fee is an indirect cost that was prohibited under the terms of the grant award. Id. at ¶¶ 116-119.

         Citynet also alleges that Frontier “and/or” Ms. Given and Mr. Gianato held hundreds of invoices for months, which caused other service providers to be unsure whether surplus BTOP funds would be available. Id. at ¶ 120. Once Ms. Given began working at the WVOT, the WVOT held the invoices “until it could rush the processing and approval of a large number of the invoices at one time.” Id. at ¶ 121. Additionally, the state began to pay a $5.00 processing fee per invoice so that each of Frontier's invoices would be paid within twenty-four hours of its approval by Ms. Given's office. Id. at ¶ 122.

         Citynet also alleges that “mitigation plan” fraud took place during the course of construction. Id. at ¶ 123. According to it, the NTIA asked the WVEO and Frontier to develop a “mitigation plan” so that the project construction would be completed on schedule. Id. at ¶ 124. Frontier drafted the mitigation plan, which Citynet alleges falsely misrepresented that the construction to the CAIs was delayed because of environmental issues and because of a fiber shortage from the 2011 tsunami in Japan. Id. at ¶ 125. As a result, the mitigation plan stated that due to environmental issues and fiber shortage, a reduction of CAIs receiving fiber was necessary, thereby reducing the 1, 064 CAIs to 668 and the 915 miles of fiber to 590. Id. In reality, the reduction in the number of CAIs and the miles of fiber to be built was not a result of delays, but because the CAIs already had fiber when the WVEO grant application was submitted. Id. at ¶ 126.

         Citynet finally contends that Mr. Waldo made misrepresentations about the grant award. First, he stated that West Virginia's national ranking for broadband connectivity would rise from being one of the bottom five states to one of the top five states after the project was completed. Id. at ¶ 127. Instead, West Virginia was ranked 48th in broadband access by the FCC prior to the grant award, and 53rd after the completion of the grant project, behind every other state, the District of Columbia, Guam and Puerto Rico. Id. at ¶ 131. Mr. Waldo also misrepresented to the West Virginia Legislature that Frontier had constructed a middle mile network and that it had negotiated several interconnection agreements with broadband wholesalers and last mile providers for them to use the middle mile network. Id. at ¶ 128. In its quarterly BTOP report, it was revealed that no agreements were being negotiated or were ever entered into with broadband wholesalers or last mile providers. Id. at ¶ 129.

         II. The Complaint

         Based on the foregoing facts, Citynet's complaint alleges nine violations of the False Claims Act. Count I alleges that defendants violated 31 U.S.C. § 3729(a)(1)(A) by “knowingly present[ing], or caus[ing] to be presented, to the United States Government, at least 646 false or fraudulent claims for payment or approval by seeking payment from funds restricted to an approved NTIA grant award for construction of a . . . middle-mile network for work that Frontier provided constructing a non-approved Last-Mile project.” Id. at ¶ 134. It additionally alleges that Frontier “authorized, ratified and benefited from all of the violations of the False Claims Act committed by its various officers, agents and employees.” Id. at ¶ 135. As a result, Citynet alleges that the government and the public have been damaged in an amount not less than $41, 531, 832.25. Id. at ¶ 136.

         Counts II through IV also allege violations of § 3729(a)(1)(A). Count II alleges a violation for defendants “knowingly present[ing], or caus[ing] to be presented, to the United States Government, at least 365 false or fraudulent claims for payment or approval by seeking payment of no less than $4, 553, 387.31 in prohibited Loadings and Indirect Costs under the BTOP award grant.” Id. at ¶ 141. Due to the violation, Citynet alleges that the government and the public have been damaged in the amount of $4, 553, 387.31. Id. at ¶ 143. Count III alleges that defendants violated § 3729(a)(1)(A) by knowingly presenting or causing to be presented to the government, 327 false and fraudulent claims for payment by seeking $593, 888.20 in prohibited FBO Invoice Fees and Indirect Costs under the grant award. Id. at ¶ 148. Count IV alleges that Frontier and Mr. McKenzie knowingly presented or caused to be presented to the government false and fraudulent claims by seeking payment for materials and services not provided for under the grant award. Id. at ¶ 155. The materials and services include, but are not limited to: 1) excessive maintenance coils in the “as-built” amounts; 2) falsification of the length of the fiber build; and 3) falsification of the number of fiber strands provided on jobs. Id.

         Counts V through VIII allege violations of § 3729(a)(1)(B). Count V alleges that “[d]efendants knowingly made, used, or caused to be made or used, 646 false records or statements material to false or fraudulent claims that were presented to [the government] for payment from funds restricted to an approved NTIA grant award for construction of a mile middle-mile network for work that Frontier provided constructing a non-approved Last-Mile project.” Id. at ¶ 162. Count VI alleges a violation of § 3729(a)(1)(B) for defendants knowingly making, using, or causing to be made or used, 365 false records or statements material to false or fraudulent claims that were presented to the government for payment of prohibited Loadings charges and Indirect Costs under the grant. Id. at ¶ 169. Count VII alleges a violation for knowingly making, using or causing to be made or used, 327 false records or statements material to false or fraudulent claims presented to the government for payment of prohibited FBO Invoicing Fees under the grant. Id. at ¶ 176. Count VIII alleges that Frontier and Mr. McKenzie made, used or caused to be made or used, false records or statements material to false or fraudulent claims presented to the government for payment for materials and services not provided under the grant. Id. at ¶ 183.

         Count IX alleges a conspiracy by defendants to commit violations of § 3729(a)(1)(A) and (B), in violation of § 3729(a)(1)(C). Id. at ¶ 190. It alleges that defendants engaged in conduct including “1) providing false records and information for use in the State's grant application and subsequent claims for payment; 2) falsifying the need for a Mitigation Plan; 3) engaging in conduct to hide the fraudulent claims submitted to the United States from being discovered; 4) assisting other Defendants in submitting fraudulent claims; 5) agreeing to engage in a pattern of conduct to allow the fraudulent claims to be submitted to, and paid by, the United States; and 6) advising other Defendants on how to submit fraudulent claims to be paid by the United States.” Id.

         In all Counts, Citynet seeks three times the amount of damages sustained by the government, and a civil penalty for each violation, both pursuant to § 3729(a)(1). Id. at ¶ 193. Citynet additionally seeks its fees and costs pursuant to § 3729(a)(3)., all statutory, legal, and equitable relief to which it is entitled, pre and post-judgment interest, and any other relief the court deems appropriate. Id. at ¶ 194; id. at p. 32.

         III. The Motions to Dismiss

         The State Employees, Kelley Goes (improperly named “Kelly” in the complaint), Jimmy Gianato, and Gale Given, filed a joint motion to dismiss. The State Employees argue that the complaint should be dismissed as to them because: (1) they are not persons subject to liability under the False Claims Act; (2) they are immune from suit pursuant to the Eleventh Amendment; (3) they are entitled to qualified immunity and are therefore immune from suit; and (4) that Citynet's claims are jurisdictionally barred because they are based on public information. Defendants' Goes, Gianato, and Given's Memo. in Supp. of Mot. to Dismiss (“State Employees' Memo. in Supp. of Mot. to Dismiss”).

         The Frontier Defendants, Frontier, Kenneth Arndt, Dana Waldo and Mark McKenzie, filed a separate joint motion to dismiss. They allege that the complaint should be dismissed as to them because: (1) all claims have failed to state a claim pursuant to Fed.R.Civ.P. 12(b)(6); (2) Counts one and five are subject to dismissal pursuant to the False Claim's Act public disclosure bar; and (3) Count nine does not plead sufficient facts in order to satisfy the plausibility standard and the particularity standard of Fed.R.Civ.P. 9(b). Frontier Defendants' Memo. in Supp. of Mot. to Dismiss at 1-2.

         Citynet responded to both motion to dismiss, to which both sets of defendants have replied. In addition, the court granted Citynet leave to file a surreply to Frontier's reply, to which Frontier responded.

         On June 21, 2017, Citynet filed a motion to file a second surreply in opposition to the Frontier Defendants and Gale Given's motion to dismiss. In the second surreply, Citynet wishes to discuss the Office of Inspector General's June 2017 report (“OIG Report”) which they contend found that “Frontier charged invoice processing fees that were unreasonable, unallowable and unsupported, and that Frontier built a significantly greater amount of maintenance coils than had been previously disclosed.” Citynet's Mot. to File a Second Surreply at 1-2. Citynet argues that the court should take judicial notice of the OIG Report for purposes of the pending motions to dismiss. Id. at 3 (citing Fed.R.Evid. 201 and United States v. Savannah River Nuclear Sols., LLC, No. 1:16-cv-00825-JMC, 2016 WL 7104823, at *8 (D.S.C. Dec. 6, 2016) (finding that a court may take judicial notice of OIG Report findings)).

         The State Employees and the Frontier Defendants both filed responses in opposition to Citynet's motion to file a second sur-reply to which Citynet replied. The State Employees state that the OIG Report is not relevant to the arguments set forth in their motion to dismiss and actually supports their argument that the claims in the complaint were publicly disclosed. State Employees' Resp. to Mot. to File Surreply at 3. Because the OIG Report was released after Citynet's complaint was filed, it cannot qualify as a public disclosure. The Frontier Defendants contend that while the court can take judicial notice of the OIG Report itself, it may not take judicial notice for the truth of the information contained in the report.

         Because the court has reviewed the OIG Report and determined its use at this stage would not change the court's ruling on the motions to dismiss, the court need not reach the determination as to whether the court may take judicial notice of the facts contained therein. Accordingly, Citynet's motion to file a second surreply is denied.

         IV. Applicable Law

         Federal Rule of Civil Procedure 8(a)(2) requires that a pleader provide “a short and plain statement of the claim showing . . . entitle[ment] to relief.” See also Erickson v. Pardus, 127 S.Ct. 2197, 2200 (2007). Rule 12(b)(6) correspondingly permits a defendant to challenge a complaint when it “fail[s] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6).

         The required “short and plain statement” must provide “‘fair notice of what the . . . claim is and the grounds upon which it rests.'” Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957), overruled on other grounds, Twombly, 127 S.Ct. at 1969)); see also Anderson v. Sara Lee Corp., 508 F.3d 181, 188 (4th Cir. 2007). Additionally, the showing of an “entitlement to relief” amounts to “more than labels and conclusions.” Twombly, 127 S.Ct. at 1965. It is now settled that “a formulaic recitation of the elements of a cause of action will not do.” Id.; Giarratano v. Johnson, 521 F.3d 298, 304 (4th Cir. 2008).

         The complaint need not, however, “make a case” against a defendant or even “forecast evidence sufficient to prove an element” of the claim. Chao v. Rivendell Woods, Inc., 415 F.3d 342, 349 (4th Cir. 2005) (quoting Iodice v. United States, 289 F.3d 270, 281 (4th Cir. 2002)). Instead, the opening pleading need only contain “[f]actual allegations . . . [sufficient] to raise a right to relief above the speculative level.” Twombly, 127 S.Ct. at 1965; Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (noting the opening pleading “does not require ‘detailed factual allegations, ' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation”). Stated another way, the complaint must allege “enough facts to state a claim to relief that is plausible on its face.” Twombly, 127 S.Ct. at 1974; Giarratano, 521 F.3d at 302. The decision in Iqbal provides some guidance concerning the plausibility requirement:

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. . . .
. . . But 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.”

129 S.Ct. at 1949-50.

         As noted in Erickson, the Supreme Court has consistently interpreted the Rule 12(b)(6) standard to require a district court to “accept as true all of the factual allegations contained in the complaint.” 127 S.Ct. at 2200 (quoting Twombly, 127 S.Ct. at 1965); see also S.C. Dep't of Health & Envtl. Control v. Commerce & Indus. Ins. Co., 372 F.3d 245, 255 (4th Cir. 2004) (quoting Franks v. Ross, 313 F.3d 184, 192 (4th Cir. 2002)). The court is additionally required to “draw[] all reasonable . . . inferences from those facts in the plaintiff's favor.” Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).

         V. Discussion

         A. Persons under the False Claims Act

         The State Employees first argue that as employees of the state and state agencies, they are not “persons” under the False Claims Act, and that they are therefore not subject to liability under it. They contend that although they are named in the complaint individually, the specific allegations in the complaint refer to the state and the West Virginia Executive Office, “[i]n an attempt to circumvent its inability to sue the State of West Virginia pursuant to the FCA.” State Employees' Memo. in Supp. of Mot. to Dismiss at 6. Although they are named individually in the complaint, the State Employees further contend that as state officials, the allegations against them must be for individual or “unofficial” activity, and Citynet has not alleged that they have acted outside of their official duties. Id. at 7.

         In support of this argument, the State Employees cite to Will v. Michigan Department of State Police, 491 U.S. 58 (1989), for the proposition that state officials acting in their official capacities “are not ‘persons' for the purposes of law suits brought pursuant to federal statutes.” State Employees' Memo. in Supp. of Mot. to Dismiss at 7. They also cite to the Eighth Circuit case of United States ex rel. Gaudineer & Comito LLP v. Iowa, 269 F.3d 932 (8th Cir. 2001), where the court determined that a state employee, sued in his individual capacity, was not a person subject to suit under the FCA when the plaintiff failed to allege that the employee was not acting outside of their official duties. The State Employees contend that here, Citynet has similarly failed to allege that they acted outside of their official duties and that they are therefore not persons under the FCA. State Employees' Memo. in Supp. of Mot. to Dismiss at 8-9.

         In response, Citynet states that it has very explicitly sued the State Employees in their individual, not official, capacities because the State Employees “acted outside of their statutory authority when they engaged in the fraudulent activity set forth in the First Amended Complaint.” Citynet Resp. to State Employees' Mot. to Dismiss at 3. As a result, Citynet contends that it is suing the State Employees in only their individual capacities. Id. at 7.

         As Citynet noted in its response, its claims against the state employees are in their individual, not official capacity. Under the FCA, “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval . . . is liable to the United States Government.” 31 U.S.C. § 3729. In Vermont Agency of Natural Resources v. United States ex rel. Stevens, the Supreme Court determined that state and state agencies were not persons within the meaning of the FCA, and therefore were not subject to liability under it. 529 U.S. 765, 781 (2000). The Court did not address whether state employees, sued either in their individual or official capacity, are persons under the FCA.

         The Fourth Circuit has not addressed whether a state official sued in his individual capacity is a person subject to liability under the FCA. As the state employees note, in Gaudineer, the Eighth Circuit determined, in a 2-1 panel decision, that in order to state a claim against a state employee in his individual capacity, the alleged conduct of the defendant must be “outside of [his] official duties.” 269 F.3d at 937 (citing BlyMagee v. California, 236 F.3d 1014, 1016 (9th Cir. 2001)). According to the court, because the plaintiff did not allege “the extent and nature of [the state employee's] duties, the mere assertion that he issued standards that conflicted with state law does not allege actions outside his official duties.” Id. As a result, the plaintiff failed to state a FCA claim against the state employee.[1] Id.

         In dissent, Judge Gibson stated that he would hold “that state officials may be sued in their individual capacity under the False Claims Act.” Id. at 939. He made this determination based on the decision of the Supreme Court in Hafer v. Melo, where the Court ruled that “state officials, sued in their individual capacities, are ‘persons' within the meaning of § 1983.” Id. at 938 (quoting Hafer v. Melo, 502 U.S. 21, 31 (1991)). Judge Gibson found it persuasive that the Court “expressly rejected any distinction based on whether the actions at issue were within the scope of the official's authority, ” reasoning that to rule otherwise would “absolutely immunize state officials from personal liability for acts within their authority . . . . Yet our cases do not extend absolute immunity to all officers who engage in necessary official acts.” Id. (quoting Hafer 502 U.S. at 28). In light of the Court's decision in Hafer, Judge Gibson would similarly permit FCA claims against state officials in their individual capacity irrespective of whether those acts occurred within their official duties.

         The Ninth Circuit followed the approach of Judge Gibson's dissent in confronting the same issue. In Stoner v. Santa Clara County Office of Education, the Ninth Circuit reversed the decision of the district court, which found that plaintiff failed to state a FCA claim against state employee defendants sued in their official capacities because the plaintiff could not allege that their actions were outside of their official duties. 502 F.3d 1116, 1123 (9th Cir. 2007).[2] The court concluded that because the Supreme Court has defined “persons” to include “natural persons, ” state employees sued within their personal capacities were persons under the FCA. See id. at 1124 (citing Cook Cty. v. United States ex rel. Chandler, 538 U.S. 119, 125 (2003)). The plaintiff “need not allege that the individual defendants personally profited from such false submissions. Nothing in § 3729(a)(1) requires the person knowingly making a false submission to obtain a personal benefit from the wrongful act.” Id. The court stated that it disagreed with “Gaudineer to the extent the reasoning of [the case] cannot be reconciled with the plain language of the statute.” Id.

         The court finds the rationale of the Ninth Circuit and Judge Gibson in Gaudineer to be more persuasive. The text of the FCA contains no indication that a plaintiff must state more in pleading a FCA claim against a state official sued in his personal capacity. Guidance from the Supreme Court in the context of § 1983 claims similarly advises that state officials can be sued in their individual capacities for activities during the course of their official duties. Finally, requiring a state official to take action outside of his official capacity would “absolutely immune state officials from personal liability for acts within their authority and necessary to fulfilling government responsibilities, ” which is “contrary to the principles of the Supreme Court's well-established public employee immunity jurisprudence.” See Hafer, 502 U.S. at 28; see also Stoner, 502 F.3d at 1125 (citing Harlow v. Fitzgerald, 457 U.S. 800, 807 (1982)). Accordingly, the state employees sued in their individual capacities are persons under the FCA, and as such, are subject to liability under it. This determination does not affect the entitlement of the State Employees to qualified immunity, discussed below.

         B. Eleventh Amendment Immunity

         The State Employees next argue that the Eleventh Amendment bars the plaintiff's suit against them, insisting that although the State is not a named party in the complaint, the allegations refer directly to the State or an agency of the state. Memo. in Supp. of Mot. to Dismiss at 9. The State Employees argue that because the allegations in the complaint refer to official actions taken by them, or allegations against the State directly, sovereign immunity bars the FCA claims. Id. at 9. In response, Citynet contends that because it has decided to sue the state employees in their individual capacities and because it is not seeking damages or any relief from the State, the claims are not barred by the Eleventh Amendment. Citynet Resp. to State Employees' Mot. to Dismiss at 3-4.[3]

         The Eleventh Amendment “bars ‘citizens from bringing suits in federal court against their own states.'” Bragg v. W.Va. Coal Ass'n, 248 F.3d 275, 291 (4th Cir. 2001) (internal citations omitted). The Amendment further acts as a bar where the suit is against a state official but the State is the real party in interest. Id. Eleventh Amendment immunity is “an essential element of the constitutional design” inasmuch as it “accords the States the respect owed them as members of the federation” and “protects the States' ability to govern in accordance with the will of their citizens.” Id. (internal citations omitted). As noted by our court of appeals, Eleventh Amendment immunity is not absolute: “A State's immunity to suit in federal court is subject to well established and important exceptions.” Id. (citing S.C. State Ports Auth. v. Fed. Maritime Comm'n, 243 F.3d 165 (4th Cir. 2001)) (enumerating six exceptions to Eleventh Amendment immunity).

         “An individual capacity suit for damages against state officials alleged to have personally violated § 3729 does not implicate the principles of state sovereignty protected by Stevens and our Eleventh Amendment jurisprudence because such an action seeks damage from the individual defendants rather than the state treasury.” Stoner, 502 F.3d at 1125 (citing Alden v. Maine, 527 U.S. 757 (1999)).

         “Where a plaintiff seeks to hold individual employees personally liable for their knowing participation in the submission of false or fraudulent claims to the United States government, the state is not the real party in interest, and the Eleventh Amendment poses no barrier to such a suit.” Stoner, 502 F.3d at 1125 (citing Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 101 (1984) and Hafer, 502 U.S. at 30-31) (internal citations omitted). Accordingly, because here, plaintiff has sued the State Employees in their individual capacity and is not seeking damages from the state, the Eleventh Amendment does not bar its claims against them.

         C. Qualified Immunity

         The doctrine of qualified immunity protects government officials from actions for civil damages to the extent that the officials do not violate clearly established constitutional rights. See Harlow, 457 U.S. at 818. Because it is an immunity, and not merely a defense, it shields government officials from not only liability but also from the burdens of trial and preparing, and so it is to be addressed by the court at an early stage of the litigation. Hunter v. Bryant, 502 U.S. 224, 227 (1991); Mitchell v. Forsyth, 472 U.S. 511, 526 (1985). “[I]t is effectively lost if a case is erroneously permitted to go to trial.” Mitchell, 472 U.S. at 526.

         In general, government officials are entitled to qualified immunity from liability for discretionary actions unless a claim against an official satisfies a two-prong test: “(1) the allegations underlying the claim, if true, substantiate the violation of a federal statutory or constitutional right; and (2) this violation was of a clearly established right of which a reasonable person would have known.” Ridpath v. Bd. of Governors Marshall Univ., 447 F.3d 292, 306 (4th Cir. 2006) (internal citations and quotations omitted).

         As for the first prong, the court discusses below Citynet's FCA claims against the State Employees that survive the State Employees' Rule 12(b)(6) motion to dismiss. Consistent with that discussion, the court finds that Citynet has alleged that the State Employees violated the FCA to the extent detailed below. The first prong is thus satisfied.

         Conversely, the court finds that it cannot conclude whether Citynet's claims satisfy the second prong. As a consequence, despite the principles urging the court to make as early decision as feasible on the issue of qualified immunity, the determination of whether the State Employees are entitled to the defense must be deferred ...


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