United States District Court, D. Minnesota
United States of America, ex rel. Michael Cherwenka, Plaintiff,
Fastenal Company, Wells Technology, Inc., Cummins, Inc., ICS, Inc., and John Does 1-99, Defendants.
MEMORANDUM AND ORDER
A. Magnuson United States District Court Judge
matter is before the Court on Defendants' Motions to
Dismiss or for Judgment on the Pleadings. For the following
reasons, the Motions are granted.
lawsuit arises out of an allegedly fraudulent scheme between
industrial suppliers and their customers to procure
government contracts and benefits reserved for qualifying
Fastenal Company is an international distributor of
industrial supplies and parts, with $3.1 billion in annual
net sales in 2012. (Compl. (Docket No. 1) ¶ 17.)
Fastenal employs about 17, 000 people. (Id.)
Defendant Wells Technology, Inc., is an industrial
distributer that employs about 47 people and is a small
disadvantaged business certified by the Small Business
Administration (“SBA”). (Id.
¶¶ 18, 102 (citing 13 C.F.R. Pt. 124).) Wells
Technology also receives government benefits because its
owner is a member of the Red Lake Ojibwa Tribe. (Id.
¶ 18.) Relevant to this action, and seemingly at the
root of this lawsuit, Wells Technology operates a for-profit
Fastenal distribution channel. (Id.) Fastenal and
Wells Technology distribute supplies and parts to contractors
and industrial consumers, including Defendants Cummins, Inc.,
and ICS, Inc. Cummins develops, sells, and services diesel
engines and generation systems, and it has procured about
$368.4 million in government contracts since 2001.
(Id. ¶ 19.) ICS has executed about $100 million
in government contracts on various industrial construction
projects since 2001. (Id. ¶ 20.)
arranges for the performance of certain government contracts
as set-aside contracts, to be awarded “to socially and
economically disadvantaged small businesses.” 15 U.S.C.
§ 637(a)(1)(B). To bid on a set-aside contract, a
business must certify that it is a small business, typically
through registration in a federal database called the System
for Award Management (“SAM”). (Compl. ¶ 36.)
Certification as a small business is a material term for
these set-aside contracts. And in addition to small business
set-aside contracts, the federal government may also award
diversity credit on contracts performed by small businesses.
See 15 U.S.C. § 637(d)(4)(E). The Complaint
references numerous contracts and information about set-aside
contracts awarded to Defendants. (See, e.g., Compl.
¶¶ 90-91, 140-62.) While they dispute whether the
Complaint sufficiently specifies representative examples,
Defendants do not appear to dispute that at least some of
their business has benefited from the performance of
set-aside contracts or the award of some amount of diversity
credit on prime government contracts.
2005, Wells Technology became “an authorized
distribution channel for the Fastenal company, ” and
the SBA approved this business relationship through a
mentor/protégé agreement in 2006. (Id.
¶¶ 105, 107.) To obtain approval, a representative
of the SBA investigated the business relationship, because
the SBA cannot approve a mentor/protégé
relationship if it “determines that the agreement is
merely a vehicle to enable the mentor to receive 8(a)
contracts.” 13 C.F.R. § 124.520(e)(3). As part of
the investigation, the representative reviewed documents and
questioned Wells Technology regarding its Fastenal
distribution business. (Aff. of Wendy Knudson Ex. 7 (Docket
No. 84-7) (Wells Technology Presentation) at 39,
Wells Technology also advertises some of this information on
its website. (See, e.g., Compl. at 29 n.16.) The
SBA's investigation revealed that Wells Technology buys
and owns the parts it supplies, accepts purchase orders,
assumes risk of loss, collects payments, and pays sales
taxes. (Compl. ¶ 110; Wells Technology Presentation at
39, 41.) But Fastenal distributes the products, and Wells
Technology never takes physical possession of them.
Michael Cherwenka is a salesperson for another distributor of
industrial supplies that directly competes with Wells
Technology. (Compl. ¶¶ 5, 15.) He claims that Wells
Technology's Fastenal distribution business is a
“sham front” that has enabled Defendants to
procure set-aside contracts that Fastenal and Wells
Technology could not otherwise access, and that Cummins and
ICS knowingly use Wells Technology as a mechanism to obtain
diversity credit while accessing Fastenal's distribution
network. (Id. ¶¶ 3, 4.) Despite the
SBA's approval of this mentor/protégé
relationship, Cherwenka believes that Fastenal controls Wells
Technology's business so that the two companies are
affiliates. An affiliation exists if “one controls or
has the power to control the other.” 13 C.F.R. §
121.103(a)(1). And the SAM explicitly provides that a
business must add to its employee count the number of people
employed by its affiliates. (Compl. ¶ 69.) Because he
believes Wells Technology and Fastenal are affiliated,
Cherwenka argues that Wells Technology cannot represent
itself as a small business and that its decision to do so on
numerous bids for set-aside contracts, on its
mentor/protégé application, and on its annual
SAM updates is fraudulent.
support of its claims regarding affiliation, the Complaint
alleges that Wells Technology is an authorized Fastenal
reseller. (Id. ¶ 105.) It points out that
Fastenal's website advertises opportunities to obtain
diversity credit by using one of its resellers, like Wells
Technology. (Id. ¶¶ 155-57.) The Complaint
also alleges that Wells Technology's website contains
direct links to Fastenal's website and advertises
Fastenal employees as points of contact for its distribution
business. (Id. ¶¶ 112, 114.) And the
website outlines numerous statistics on employees, office
locations, and business revenue for Wells Technology and
Fastenal. (Id. ¶¶ 84-91, 118-20, 173-77.)
Complaint also references two conversations that Cherwenka
had with representatives of Cummins and ICS regarding their
small business set-aside contracts. The Cummins
representative allegedly told Cherwenka that Cummins
“use[s] Wells Technology through Fastenal to satisfy
their diversity requirements” on certain set-aside
contracts. (Id. ¶ 170.) The ICS representative
allegedly told Cherwenka about the benefits of working with
Fastenal and that those benefits “would make it almost
impossible for [ICS] to change vendors.” (Id.
believes that the government was harmed by this scheme
because set-aside contracts normally reserved for small
businesses ultimately went to Fastenal instead of to
legitimate small businesses, which “sabotaged”
the growth of small businesses and offends the purpose of the
SBA. (Id. ¶ 182.) The three-count Complaint
claims that Defendants violated the False Claims Act
(“FCA”), 31 U.S.C. § 3729 et seq., by
receiving payments or benefits from the United States for
false or fraudulent claims (Count I), making false statements
to the United States on those allegedly false claims (Count
II), and conspiring to commit violations of the FCA (Count
III). (Compl. ¶¶ 193-207.) The Government declined
to intervene. (Docket No. 32.) Defendants now move to dismiss
the Complaint or move for judgment on the pleadings.
Standard of Review
evaluating a motion to dismiss under Rule 12(b)(6), the Court
assumes the allegations in the Complaint to be true and
construes all reasonable inferences from those facts in the
light most favorable to the non-moving party. Morton v.
Becker, 793 F.2d 185, 187 (8th Cir. 1986). But the Court
need not accept as true wholly conclusory allegations,
Hanten v. Sch. Dist. of Riverview Gardens, 183 F.3d
799, 805 (8th Cir. 1999), or legal conclusions that the
plaintiff draws from the facts pled. Westcott, 901
F.2d at 1488. The Court also reviews a Rule 12(c) motion to
dismiss “under the standard that governs 12(b)(6)
motions.” Westcott v. City of Omaha, 901 F.2d
1486, 1488 (8th Cir. 1990).
complaint must contain “enough facts to state a claim
to relief that is plausible on its face” to survive a
motion to dismiss. Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007). Although a complaint need not contain
“detailed factual allegations, ” it must contain
facts with enough specificity “to raise a right to
relief above the speculative level.” Id. at
555. “Threadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, ” will
not pass muster under Twombly. Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (citing
Twombly, 550 U.S. at 555). This standard
“calls for enough fact[s] to raise a reasonable
expectation that discovery will reveal evidence of [the
claim].” Twombly, 550 U.S. at 556.
complaint that alleges “violations of the FCA must
[also] comply with Rule 9(b), ” which requires stating
with particularity “the circumstances constituting
fraud.” United States ex rel. Joshi v. St.
Luke's Hosp., Inc., 441 F.3d 552, 556 (8th Cir.
2006); see Fed.R.Civ.P. 9(b).
Rule 9(b) requires identification of “the ‘who,
what, where, when, and how' of the alleged fraud.”
Joshi, 441 F.3d at 556 (quoting United States ex
rel. Costner v. URS Consultants, Inc., 317 F.3d 883, 888
(8th Cir. 2003)). But a relator who alleges a
“systematic practice or scheme of submitting fraudulent
claims” may satisfy the Rule 9(b) requirement by
“alleging particular details of a scheme to submit
false claims paired with reliable indicia that lead to a
strong inference that claims were actually submitted.”
United States ex rel. Thayer v. Planned Parenthood of the
Heartland, 765 F.3d 914, 917 (8th Cir. 2014) (quotation
omitted). “[T]he relator must provide sufficient
details ‘to enable the defendant to respond
specifically and quickly to the potentially damaging
allegations.'” Id. at 919 (quoting
Costner, 317 F.3d at 888). Defendants argue that the
Complaint fails to satisfy the particularity requirement
under Rule 9(b). Cherwenka contends that the Complaint
sufficiently alleges a systematic practice or scheme of
submitting fraudulent claims under Thayer.
Complaint asserts fraudulent inducement of government
contracts. “Fraudulent inducement requires a plaintiff
to show: (1) the defendant made a ‘false record or
statement'; (2) the defendant knew the statement was
false; (3) the statement was material; and (4) the defendant
made a ‘claim' for the government to pay money or
forfeit money due.” United States ex rel. Miller v.
Weston Educ., Inc., 840 F.3d 494, 500 (8th Cir. 2016).
“FCA liability attaches to ‘each claim submitted
to the government under a contract so long as the original
contract was obtained through false statements or fraudulent
conduct.'” Id. at 499 (quoting In re
Baycol Prods. Litig. (Baycol I), 732 F.3d 869, 876 (8th
claims of fraudulent inducement of government contracts, to
sufficiently allege a “reliable indicia that lead[s] to
a strong inference that claims were actually submitted,
” Thayer, 765 F.3d at 917 (quotation omitted),
Cherwenka need not plead the details of Defendants'
accounting practices. “[C]laims for payment
subsequently submitted under a contract initially induced by
fraud do not have to be false or fraudulent in and of
themselves.” Baycol I, 732 F.3d at 876. But
Cherwenka must nevertheless provide representative examples
of fraudulently induced government contracts.
respect to Fastenal, Wells Technology, and Cummins, Cherwenka
has provided such examples. The Complaint alleges specific
contracts awarded to Cummins that involved Wells Technology
and Fastenal. (Compl. ¶¶ 164, 170.) It also alleges
numerous other contracts awarded to Wells Technology that
relied on its Fastenal distribution business. (Id.
¶¶ 133-34, 142-48, 149-53.) These representative
examples all occurred during the life of the
mentor/protégé relationship. Fastenal, Wells
Technology, and Cummins do not ...