Don Ascolese v. Shoemaker Construction Co

55 F.4th 188

• Court: Court of Appeals for the Third Circuit
• Decided: November 30, 2022
• Docket: 21-2899
• Status: Published

Opinion

PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT __________

No. 21-2899 __________

UNITED STATES OF AMERICA ex rel. DON ASCOLESE

v.

SHOEMAKER CONSTRUCTION CO.; MCDONOUGH BOLYARD PECK INC.; SHOEMAKER SYNTERRA JV

Don Ascolese, Appellant __________

On Appeal from the United States District Court for the Eastern District of Pennsylvania (District Court No. 2:18-cv-01864) District Judge: Honorable Mitchell S. Goldberg __________

Argued on September 20, 2022

Before: AMBRO, RESTREPO, and FUENTES Circuit Judges (Filed: November 30, 2022)

David F. McComb [Argued] Zachary A. Silverstein Zarwin Baum DeVito Kaplan Schaer Toddy P.C. 2005 Market Street One Commerce Square, 16th Floor Suite 1300 Philadelphia, PA 19103 Counsel for Appellant

Eileen M. Ficaro [Argued] Kaufman Dolowich & Voluck, LLP 1600 John F. Kennedy Boulevard Four Penn Center Suite 1030 Philadelphia, PA 19103 Counsel for Appellee

__________

OPINION __________

RESTREPO, Circuit Judge. Appellant Don Ascolese, a compliance officer, challenges the District Court’s dismissal of his False Claims Act (“FCA”) retaliation claim against his former employer, Appellee McDonough Bolyard Peck (“MBP”), in connection with a qui tam action involving a federally funded public housing con- struction project for the Philadelphia Housing Authority (“PHA”). In 2009–2010, Congress amended the FCA to ex- pand the scope of protected conduct shielded from retaliation

2 and the type of notice an employer must have of the protected conduct. Here, the District Court denied Ascolese leave to file a Second Amended Complaint, applying both the old and new standards for retaliation under the FCA. This Court has not yet had the opportunity to address the statutory changes to the FCA retaliation standard. We take the occasion to do so now and adopt the new post-amendment standard. We will vacate and remand to the District Court for further proceedings.

I. BACKGROUND

This is a whistleblower case brought under the FCA. The relevant background has three parts: (1) the statutory back- ground, (2) the underlying alleged facts, and (3) the ensuing procedural history. We recount each part below.

A. Statutory Background

The FCA prohibits any person from, inter alia, knowingly presenting a “false or fraudulent claim for payment or ap- proval” to the United States government. 31 U.S.C. § 3729(a)(1)(A). It extends to all false claims resulting in the receipt of funds from the United States Treasury. See Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 185 (3d Cir. 2001). The government may bring a direct suit to recover dam- ages resulting from fraudulent claims or, “[a]lternatively, a pri- vate plaintiff [known as a relator] may bring a qui tam action on behalf of the government to recover losses incurred because of fraudulent claims,” in exchange for an award of up to thirty percent of the funds the government recovers. Id. at 181–82 (citing 31 U.S.C. §§ 3730(b)(1), (d)).

3 Employees seeking to report from within an organiza- tion might be reluctant to use these qui tam provisions for fear of employer backlash, thus the act also shields whistleblowers from retaliation “because of” conduct protected by the FCA. 31 U.S.C. § 3730(h)(1). Prior to 2009, protected activity in- cluded only “lawful acts done by the employee . . . in further- ance of an action under this section [i.e., a qui tam suit].” 31 U.S.C. § 3730(h) (2008). This was known as the “distinct pos- sibility” standard since it required plaintiffs to show that their employer had notice of the distinct possibility that the plaintiff was contemplating the filing of an FCA lawsuit. Hutchins, 253 F.3d at 179 (holding that “a retaliatory discharge cause of ac- tion under 31 U.S.C. § 3730(h) requires proof that the em- ployee engaged in ‘protected conduct’ and that the employer was on notice of the ‘distinct possibility’ of False Claims Act litigation and retaliated against the employee”).

In 2009, however, Congress expanded the universe of protected conduct to whistleblowers who lawfully try to stop one or more violations of the Act, without regard to whether their conduct advances a qui tam suit under the Act:

Any employee, contractor, or agent shall be en- titled to all relief necessary to make that em- ployee, contractor, or agent whole, if that em- ployee, contractor, or agent is discharged, de- moted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter.

4 31 U.S.C. § 3730 (emphasis added). Congress amended these whistleblower protections once again in 2010, now expressly protecting “lawful” acts “in furtherance of” either “an action” under the FCA or “other efforts to stop 1 or more violations of” the Act. 31 U.S.C. § 3730(h)(1); see, e.g., United States ex rel. Reed v. KeyPoint Gov’t Sols., 923 F.3d 729, 765 (10th Cir. 2019) (adopting these two amendments to the Act).

The legislative history confirms the change was made to “protect[] not only steps taken in furtherance of a potential or actual qui tam action, but also steps taken to remedy the mis- conduct . . . whether or not such steps are clearly in furtherance of a potential or actual qui tam action.” 155 Cong. Rec. E1295- 03, E1300 (June 3, 2009) (statement of Rep. Berman). In other words, to plead retaliation under the FCA, it is no longer solely required that an employer be on notice that a plaintiff is con- templating FCA litigation. See, e.g., Singletary v. Howard Univ., 939 F.3d 287, 296 (D.C. Cir. 2019) (explaining that the newly added language “is not tied to the prospect of a False Claims Act proceeding” and instead “focuses on the whistle- blower’s efforts to stop violations of the statute before they happen”) (internal quotations omitted).1 The events giving rise to this litigation took place against this statutory backdrop.

1 “To put it simply, the focus of the second prong is preventa- tive—stopping ‘violations’—while the first prong is reactive to an (alleged) actual violation of the statute.” Singletary, 939 F.3d at 296 (internal citations omitted)).

5 B. Factual Background

On July 1, 2014, the United States Department of Housing and Urban Development (“HUD”) awarded a $30 million grant to the PHA for the construction of public housing in North Philadelphia (the “Project”). The PHA designated Shoemaker Construction Co. and Shoemaker Synterra JV (together, “Shoemaker”),2 a joint venture, as construction managers for the Project. In the Spring of 2017, Shoemaker subcontracted Appellee MBP to handle quality control and ensure that the Project met all required construction standards.

Ascolese worked for MBP as the Quality Assurance/Qual- ity Control (“QA/QC”) Manager for the Project. In this role, he was tasked with detecting and reporting “deficiencies” such as issues with the Project’s “design plans, specifications and building codes.” App. 80. He was required to maintain an electronic “Project Deficiency List,” noting each time the con- tractors failed to follow design plans and specifications or building codes. In that capacity, Ascolese “outlined dozens of Project deficiencies” during his employment.

Ascolese alleges that he sent repeated emails to MBP and Shoemaker expressing concerns regarding compliance with the relevant contractual standards. For example, Ascolese alleges that “the concrete used in the foundational walls had not been allowed to fully cure before being backfilled. Nor was steel horizontal rebar used in the foundation walls, even though the building and design specifications required it as a fundamental safety measure.” App. 186. Ascolese “advised

2 Ascolese settled his claims against Shoemaker and dismissed it from the action; thus, Shoemaker is not a party to this appeal.

6 MBP and [Shoemaker management] that because of the dozens of project deficiencies on the [Deficiency List], it would be wrongful and fraudulent under those circumstances for [Shoe- maker] and MBP to be paid government funds and that certifi- cations of their contract compliance to obtain payments would necessarily be false and fraudulent.” App. 199–200.

When neither Shoemaker nor MBP acted in response to his internal complaints, Ascolese broke his chain of command and expressly informed PHA’s engineers, via email on Decem- ber 5, 2017, that Shoemaker’s concrete work was deficient. Ascolese informed PHA engineers via email that “we may have a problem with the foundation walls at [several of the Pro- ject buildings]” and that the concrete work did not meet the necessary requirements. App. 188.

After Ascolese sent these external emails, Shoemaker told him not to go into the field—where he normally reviewed the Project’s construction work and compliance issues—and instead should “just put [his] feet up on the desk and take it easy.” App. 188. Ascolese was further instructed to “keep his concerns to himself and not relay them to PHA.” App. 190. But Ascolese allegedly chose to not obey and “continued to question the safety of the project and note deficiencies,” in- cluding uploading over 1,600 photographs reflecting these de- ficiencies in the Project Submittal Exchange. App. 188–89. Shortly thereafter, on January 18, 2018, MBP informed Asco- lese that Shoemaker wanted him “off the job” and fired him. App. 199. Ascolese alleges that his termination constituted un- lawful retaliation for whistleblowing activities protected by the FCA.

7 C. Procedural History

Following his termination from MBP, Ascolese filed a qui tam action on behalf of the government under the FCA.3 Ascolese alleged that MBP and Shoemaker defrauded the gov- ernment by falsely certifying compliance with safety require- ments to get paid by the PHA. He further alleged that his em- ployer, MBP, illegally retaliated against him for trying to stop MBP and Shoemaker’s fraud, which is protected activity under § 3730(h) of the False Claims Act. After the government de- clined to intervene and Ascolese amended his complaint to, in- ter alia, withdraw certain claims generally applicable only to the government, MBP moved to dismiss the suit for failure to state a claim.

On April 19, 2021, the District Court granted MBP’s Motion to Dismiss on all counts without prejudice. At the Court’s invitation, Ascolese moved for leave to file a Second Amended Complaint. His proposed amendment contained several new allegations regarding MBP’s alleged notice of FCA-protected whistleblower conduct, including that Ascolese advised MBP that (1) “because of the dozens of project defi- ciencies . . . , it would be wrongful and fraudulent . . . for [Shoe- maker and MBP] to be paid government funds;” (2) “certifica- tions of [Shoemaker’s] contract compliance to obtain payments would necessarily be false and fraudulent;” and (3) he was con- cerned that Shoemaker was intentionally hiding deficiencies from the PHA. App. 199. Ascolese also clarified that when he made reports directly to the PHA, he was acting outside of his usual “reporting chain of command.” App. 199.

3 Because he filed a qui tam action, the record refers to Asco- lese as both a “plaintiff” and a “relator.”

8 On June 7, 2021, the District Court denied Ascolese’s motion for leave to file a Second Amended Complaint, con- cluding that amendment would be futile because Ascolese failed to show that MBP was on notice that he would file an FCA action or report fraud to the government, or that he acted to stop one or more of MBP’s alleged FCA violations. Asco- lese filed a motion for reconsideration, which the District Court denied on June 17, 2021.

Ascolese now appeals from the District Court’s order denying leave to file a Second Amended Complaint. His ap- peal presents two overarching questions. First, did the District Court exercise proper discretion in denying Ascolese’s motion for leave to file a Second Amended Complaint? Second, did the Court exercise proper discretion in not granting Ascolese’s motion for reconsideration of its order denying leave to file the proposed Second Amended Complaint?

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had federal question jurisdiction un- der 28 U.S.C. § 1331. We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1291, which provides for review of final decisions of the district courts.

We review a district court’s decision granting or deny- ing leave to amend a complaint for abuse of discretion. See Urrutia v. Harrisburg County Police Dept., 91 F.3d 451, 457 (3d Cir. 1996). However, we review this decision de novo when the amendment was denied for legal reasons, such as when the proposed amendment would fail to state a claim. Mullin v. Balicki, 875 F.3d 140, 150 (3d Cir. 2017). The Court reviews a denial of a motion for reconsideration under an

9 abuse-of-discretion standard. B.C. v. Att’y Gen. United States, 12 F.4th 306, 313 (3d Cir. 2021).

III. DISCUSSION

This Court has not yet had the opportunity to address the effect of the 2009–2010 Congressional amendments on the FCA retaliation standard. This has led to some confusion in the District Courts of the Third Circuit. Here, the District Court understandably misinterpreted Third Circuit precedent as holding that Ascolese is “require[d]” to show that MBP had notice either that he was contemplating FCA litigation or re- porting to the government that MBP had committed fraud. App. 35–36 (citing United States ex rel. Petras v. Simparel, Inc., 857 F.3d 497, 507 (3d Cir. 2017)). However, this pre- amendment “distinct possibility” standard is no longer the sole basis for liability.

The District Court correctly acknowledged that the new standard is whether Ascolese showed “(1) he engaged in pro- tected conduct (in furtherance of an [FCA] action . . . or other efforts to stop 1 or more violations of the [the FCA]) and (2) that he was discriminated against because of his protected con- duct.” App. 35. However, the District Court, necessarily af- fected by its belief that the pre-amendment standard was re- quired by the Third Circuit, ultimately concluded that Ascolese failed to show MBP was on notice that he was attempting to stop MBP from violating the FCA and not merely doing his job as a Quality Control/Quality Assurance Manager for the Pro- ject.

10 A. Retaliation Standard After the FCA Amend- ments

We take this occasion to formally adopt a reading of the anti-retaliation standard that takes into consideration the 2009– 2010 FCA amendments. See United States v. Adams, 252 F.3d 276, 286 (3d Cir. 2001) (observing that “[a]lthough a panel of this court is bound by, and lacks authority to overrule, a pub- lished decision of a prior panel, a panel may reevaluate a prec- edent in light of intervening authority and amendments to stat- utes or regulations”) (citation omitted). In this Court’s only post-amendment FCA retaliation case, Petras, we referenced the old “distinct possibility” of FCA litigation standard without considering the newly added “other efforts” to stop FCA vio- lations prong. 857 F.3d at 507. Since Petras stated that the whistleblower provision with the notice of an FCA claim ele- ment applies “only to actions in furtherance of a viable FCA case,” it implicitly suggested that the “distinct possibility” standard would continue to apply despite the FCA amend- ments. Id. at 507–08 (emphasis in original); see, e.g., Heckman v. UPMC Wellsboro, No. 4:20-CV-01680, 2021 WL 2826716, at *14 n.187 (M.D. Pa. July 7, 2021) (acknowledging limited nature of the Petras holding). We determine now that this is not the case.

The District Court understandably concluded that in Petras “[t]he Third Circuit [] held that the knowledge prong requires the employee to put his employer ‘on notice of the dis- tinct possibility of False Claims Act litigation.’” App. 35 (quoting Petras, 857 F.3d at 507). However, we conclude that neither our holding in Petras nor the plain text of the amended whistleblower provisions supports such a narrow view. Pet- ras’s reaffirmance of the “distinct possibility” standard was

11 limited to the FCA litigation prong of § 3730 since the retalia- tion claim was only asserted under that element of the whistle- blower provision. Briefing shows Petras never raised the “other efforts” prong on appeal. Significantly, the Petras Court never reached the retaliation issue since it found that the underlying FCA claim was not viable. Petras, 857 F.3d at 507 (“Even if Petras had sufficiently alleged [his employer had] no- tice [of his protected conduct]—an issue we do not address here. . . Petras’s reverse FCA action is not viable. Therefore, Petras’s retaliation claim fails as well.”).

Furthermore, the amendments to the anti-retaliation provision reflect a congressional intent to expand protection to “‘efforts to stop’ violations of the statute before they happen or recur.” Singletary, 939 F.3d at 296 (emphasis added). When “Congress expands the scope of activity protected by a statute, we cannot restrict ourselves to applying a narrower old stand- ard that the expansion . . . eschew[ed].” United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190, 201 (4th Cir. 2018). Ascolese is correct that the District Court’s continued reliance on the old standard vitiates the newly added category of protected activity—“other efforts to stop 1 or more viola- tions of this subchapter”—and renders Congress’s amendment null. Appellant Br. 10. Accordingly, we recognize that the 2009–2010 FCA amendments expanded the anti-retaliation standard to protect “lawful” acts “in furtherance of” either “an action” under the FCA or “other efforts to stop 1 or more vio- lations of” the Act. 31 U.S.C. § 3730(h)(1).

12 B. Applying the New Standard, Ascolese Suffi- ciently Pled Retaliation

As relevant here, the right question is whether Ascolese pled facts that plausibly showed MBP was on notice he tried to stop MBP’s alleged FCA violations. On appeal, Ascolese “submits that the FCA protects him because he went well be- yond the scope of his job responsibility as a QA/QC manager to stop fraudulent conduct at the Project.” Appellant Br. 3.

As a compliance employee, Ascolese must do more than his job responsibilities to trigger FCA protection, like “acting outside [his] normal job responsibilities [or] notifying a party outside the usual chain of command.” United States ex rel. Schweizer v. Oce N.V., 677 F.3d 1228, 1239 (D.C. Cir. 2012); Hutchins, 253 F.3d at 194 (holding an employee generally tasked with investigating regulatory deficiencies “must make it clear that his investigatory and reporting activities extend be- yond [his] assigned task in order to allege retaliatory discharge under § 3730(h)”); Reed, 923 F.3d at 767 (holding that to ade- quately pled notice, a compliance officer must show they were attempting to stop their employer from violating the FCA, and not just merely doing their job). This is a fact intensive inquiry.

When applying this prong, consistent with the 2009– 2010 amendments and Ascolese’s pleadings, the District Court should focus on whether Ascolese acted outside of his chain of command or his job duties. Here, the District Court relied on the Tenth Circuit’s decision in Reed, which involved a senior quality control analyst who brought an FCA action and retali- ation claim against her former employer. 923 F.3d at 729. It concluded that, like the relator in Reed, Ascolese “has failed to plead specific facts . . . that make clear that MBP was on notice

13 that he was attempting to stop MBP from violating the FCA and not merely doing his job as the Quality Control/Quality Assurance Manager for the Project.” App. 37.

Although Reed is instructive, it is distinct from this case. The relator in Reed did not plead facts regarding her specific job description nor define the scope of her duties such that the court could discern the contours of her chain of command or ordinary reporting structure related to fraud matters. Reed, 923 F.3d at 770. Without that information, the court could not say or reasonably infer that the relator broke her chain of command or ordinary communication protocol by speaking with individ- uals inside the company. Id. Accordingly, the Reed Court con- cluded that the relator did not sufficiently plead that she vio- lated her employer’s established communication protocol, broke her chain of command, or otherwise acted outside of the scope of her job duties. Id. at 771–72.

i. Ascolese sufficiently pled he engaged in pro- tected conduct

Here, Ascolese sufficiently pled that he engaged in pro- tected conduct when he went outside of his chain of command to report his concerns of fraudulent work to the PHA. He first outlined his usual job responsibilities, including “inspecting and verifying construction activities, noting . . . deficiencies, and various document and records keeping and reporting func- tions.” App. 182. He was “required . . . to maintain a Project Deficiency List” online through “a platform called the Project Submittal Exchange.” App. 185, 193.

Ascolese also established the contours of his chain of command—he raised Project issues and safety concerns with

14 his superiors at MBP, and reported MBP’s alleged fraudulent conduct to PHA, “HUD’s fiscal intermediary and a party out- side of [his] reporting chain of command.” App. 199. Under the contract with PHA, Shoemaker was supposed to inspect the work of its subcontractors, like MBP. Ascolese listed various MBP and Shoemaker supervisors that he reported to by name. Ascolese also pled that, in an effort to stop FCA violations, he “advised MBP and [Shoemaker] that because of the dozens of project deficiencies on the [deficiency list], it would be wrong- ful and fraudulent under those circumstances for [Shoemaker] and MBP to be paid government funds and that certifications of their contract compliance to obtain payments would neces- sarily be false and fraudulent.” App. 199–200.

In addition to these internal reports of fraud, Ascolese went outside of his chain of command and continued to docu- ment fraudulent project deficiencies despite being told not to do so. After he emailed PHA engineers and told them that there were problems with the foundational walls and the con- crete, Shoemaker instructed him to stay out of the field, where he normally reviewed the Project’s construction work and compliance issues, and instead should “just put [his] feet up on the desk and take it easy.” App. 188. But Ascolese alleges to have disobeyed this instruction and “continued to question the safety of the project and note deficiencies,” including upload- ing over 1,600 photographs reflecting these deficiencies in the Project Submittal Exchange. App. 188–89. He “repeatedly pressed the [P]roject to correct the deficiencies and reiterated that the deficiencies were a violation of the contract standards, fraudulent and creating potentially dangerous conditions” but “he was told to keep his concerns to himself and not relay them to PHA.” App. 190 (emphasis added); see, e.g., Schweizer, 677 F.3d at 1239 (holding relator made prima facie claim of

15 retaliation after pleading she “repeatedly disobeyed the orders of . . . her supervisor, to stop investigating” the alleged FCA fraud). Taking these facts as true and in the light most favora- ble to plaintiff, Ascolese sufficiently pled that he engaged in protected conduct.

ii. Ascolese sufficiently pled MBP was on notice of his protected conduct and retaliated against him because of it

Ascolese sufficiently alleged that MBP was on notice of his efforts to stop MBP and Shoemaker’s alleged FCA viola- tions and retaliated against him because of it. He alleged that “MBP was fully aware of [his] protected activity” because he “complained to MBP and [Shoemaker] management, as well as PHA management on numerous occasions in person and in writing about [Shoemaker’s] and MBP’s fraudulent conduct.” App. 200. Specifically, Ascolese directly advised MBP that receiving government funds for the Project was fraudulent un- der the circumstances since there were dozens of project defi- ciencies on his Deficiency List and, consequently, “certifica- tions of their contract compliance to obtain payments would necessarily be false and fraudulent.” App. 199–200.

MBP was aware that Ascolese made external reports to the PHA, which was “outside of [his] reporting chain of com- mand.” App. 199. After Ascolese circulated an email to sev- eral individuals, including PHA engineers, regarding project deficiencies that were allegedly fraudulent, Shoemaker took him out of the field and told him to “just put [his] feet up on the desk and take it easy.” App. 188. Ascolese’s employer then told him “to keep his concerns to himself and not relay them to PHA.” App. 190 (emphasis added). Ascolese

16 disobeyed these instructions and continued to make reports on the safety of the Project. A month and a half later, MBP fired him at Shoemaker’s request. We conclude that these facts give rise to a plausible inference that MBP was on notice of Asco- lese’s efforts to stop FCA violations in the Project and retali- ated by firing him.

We need not reach a decision on the motion for reconsid- eration as it is moot.

IV. CONCLUSION

For the foregoing reasons, we will vacate and remand to the District Court for further proceedings consistent with this opinion.