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IBM Must Face Suit Saying It Tricked IRS Into Software Deal (1)

July 6, 2021, 3:32 PMUpdated: July 7, 2021, 1:10 PM

A False Claims Act whistleblower will have another chance to allege IBM worked with Deloitte LLP to fraudulently induce the Internal Revenue Service into signing a $265 million software contract, the D.C. Circuit said.

A district court erred by concluding that Paul Cimino, a former IBM sales representative, didn’t adequately allege that IBM created a false audit in an attempt to coerce the IRS into paying for unwanted software, the U.S. Court of Appeals for the D.C. Circuit said Tuesday.

Cimino adequately pleaded but-for causation by alleging facts plausibly demonstrating that the IRS wouldn’t have entered the agreement but for IBM’s fraudulent conduct, the court said.

Whether Cimino can prove the allegations remains to be seen, the court said.

The court, however, affirmed that Cimino didn’t adequately allege that IBM presented false claims to the IRS for services not provided.

Judge Neomi Rao wrote the court’s opinion. Chief Judge Sri Srinivasan and Judge Douglas H. Ginsburg joined in the decision.

Rao also wrote a concurring opinion to question whether the FCA creates a cause of action for fraudulent inducement.

The plain meaning of the FCA, recent U.S. Supreme Court decisions, and the lack of clarity in precedents are all reasons to reconsider, in an appropriate case, if fraudulent inducement is a separate cause of action, Rao said.

The decision reaffirms the longstanding view that the FCA applies to a fraudulently induced contract, said Claire M. Sylvia, who represents whistleblowers with Phillips & Cohen LLP in San Francisco.

“What is surprising and a bit mystifying is the concurring opinion that raises old and discredited arguments about the constitutionality of the qui tam provisions of the FCA,” she said.

“The opinion cites a 1989 opinion of DOJ’s Office of Legal Counsel that the Office later disavowed. And two decades ago, the Supreme Court relied on the history of qui tam actions, which existed at the formation of the United States, to hold that private qui tam relators had standing under the Constitution to sue in the name of the government,” she said.

Michael E. Shaheen, who represents FCA defendants with Crowell & Moring LLP in Washington, said the court applied the right causation standard, but was also right to question the legitimacy of a cause of action for fraudulent inducement.

An FCA suit can result in “draconian consequences,” such as treble damages and penalties exceeding $20,000 per claim, he said.

“Reading into the statute a cause of action that is not there is extremely problematic, and the courts should revisit the existence of a fraudulent inducement claim until/unless Congress decides to write it into the statute,” he said.

Cimino alleged that IBM, with Deloitte’s assistance, fabricated audit findings concerning the agency’s software usage, and then presented those false findings to the agency to coerce the agency into agreeing to the contract.

Cimino said the IRS agreed to the deal under the threat of a $91 million license charge penalty.

The U.S. District Court for the District of Columbia rejected the suit in a September 2019 ruling.

Hogan Lovells US LLP represented IBM. Goldstein & Russell PC represented Cimino.

The case is United States ex rel. Cimino v. Int’l Bus. Mach. Corp, D.C. Cir., No. 19-7139, 7/6/21.

(Updates story published July 6 with comments on ruling from False Claims Act attorneys in paragraphs nine through 14.)

To contact the reporter on this story: Daniel Seiden in Washington at dseiden@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Patrick L. Gregory at pgregory@bloomberglaw.com