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By Sarah Walton 

On August 10, 2015, the Fourth Circuit issued a published opinion in the civil case of Smith v. Clark. The Fourth Circuit held that the plaintiff stated a claim under the False Claims Act and affirmed the district court’s holding in part, reversed in part, and remanded for further proceedings.

Smith Alleged Violations of the False Claims Act and the District Court Dismissed the Complaint

From 2012-2013, plaintiff Brian K. Smith (“Smith”) worked on several construction projects on Washington D.C. landmarks, including the Smithsonian and the City Market on O Street. Because these were sizable projects, the Davis-Bacon Act (“DB Act”) applied to Smith’s work. Under the DB Act, contractors and subcontractors cannot pay workers less than the prevailing wage in that geographic area. The Secretary of Labor sets the prevailing wage in accordance with the type of task that an employee performs. In the event of a dispute concerning the classification of a task, the Department of Labor will determine the appropriate pay grade.

Smith alleged that his work was misclassified and, as a result, he received less pay than the DB Act required. Smith made an oral complaint with the Department of Labor about the discrepancy. Smith further alleged that the Department of Labor investigated and concluded that Smith was paid less than the DB Act’s minimum requirements. After the investigation, Smith was reassigned to a project in which he received lower wages.

Smith then filed a complaint in the District Court for the District of Maryland, alleging, in pertinent part, violations of the False Claims Act (“FCA”). Smith complained that defendants Shirley Construction Company and Clark Construction Group (collectively, “Defendants”) reported false information when they failed to categorize his work properly and subsequently retaliated against him when he reported the infractions. Under Section 3730(b)(2) of the FCA, a plaintiff must file the complaint under seal. Smith’s attorney filed the complaint under seal, but over the next few days, disclosed to the Defendants that a complaint had been filed against them. When the government became aware of the allegations, it moved to partially lift the seal. The government investigated the allegations and decided not to intervene. The Defendants then filed a Motion to Dismiss under Fed. R. Civ. P. 12(b)(1) and 12(b)(6). The district court dismissed the complaint with prejudice. The district court dismissed the complaint for three reasons: (1) Smith’s violation of the FCA’s seal requirements, (2) jurisdictional deficiencies, and (3) Fed. R. Civ. P. 9(b) pleading deficiencies.

The District Court Erred in Dismissing Smith’s Claims on Procedural Grounds

A violation of the FCA’s seal requirements warrants dismissal when the violation “incurably frustrates” the statutory purpose. The Fourth Circuit determined that the FCA’s seal requirement had the following purposes: “(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene.” The Fourth Circuit held that violation of the seal requirement did not incurably frustrate the FCA’s statutory purpose, reasoning that the government properly investigated the allegations and that the Defendants did not suffer any harm because Smith’s attorney made the disclosures to counsel, rather than to the public.

The Fourth Circuit also determined that the District Court erred in reasoning that even if violating the seal requirements did not warrant dismissal, Smith could not proceed because of (1) jurisdictional deficiencies and (2) his failure to meet the pleading requirements under Fed. R. Civ. P. 9(b).

On the jurisdictional deficiencies issue, the district court invoked the “primary jurisdiction doctrine.” This doctrine allows courts to refer matters to an agency when the agency may have more expertise to make a determination. Thus, because the Secretary of Labor was authorized to determine whether Smith’s work was misclassified, the district court referred the matter to the Department of Labor. However, after the district court made the referral, it dismissed Smith’s claims with prejudice. The Fourth Circuit held that the district court should have stayed or dismissed the action without prejudice, pending the agency determination.

Regarding the Fed. R. Civ. P. 9(b) requirements, Smith’s attorney made an oral motion to amend the complaint in response to the district court’s concerns about Smith’s inability to meet the pleading requirements. The district court denied the motion. The Fourth Circuit affirmed the denial of the motion to amend, reasoning that Smith had met all of the pleading requirements in accordance with Fed. R. Civ. P. 9(b), which negated any need to amend the complaint.

The Fourth Circuit Reverses the District Court’s Dismissal of the Retaliation Claim 

In order to state a claim for retaliation, the plaintiff must show that he (1) engaged in a protected activity, (2) the employer knew about the activity, and (3) the employer took an adverse action against him as a result of the activity. While the district court held that Smith could not show that his employer knew about the activity, the Fourth Circuit reasoned that because Smith made a complaint to the Department of Labor, this satisfied the knowledge prong. As a result, the Fourth Circuit held that the district court erred when it dismissed Smith’s retaliation claim.

The Fourth Circuit Affirms in Part, Reverses in Part, and Remands for Further Proceedings

The Fourth Circuit affirmed the district court’s denial of Smith’s motion to amend and reversed the district court’s holding on the remaining claims on appeal. The court remanded the case to the district court for further proceedings.

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