USCA4 Appeal: 21-1290 Doc: 30 Filed: 07/21/2022 Pg: 1 of 25
PUBLISHED
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
No. 21-1290
UNITED STATES OF AMERICA EX REL. HAILE KIROS NICHOLSON,
Plaintiff - Appellant,
v.
MEDCOM CAROLINAS, INC.; JEFF TURPIN,
Defendants - Appellees,
and
JOHN DOES 1-50,
Defendants.
Appeal from the United States District Court for the Middle District of North Carolina at Greensboro. William L. Osteen, Jr., U.S. District Judge. (1:17-cv-00034-WO-LPA)
Argued: March 10, 2022 Decided: July 21, 2022
Before WYNN, HARRIS, and RICHARDSON, Circuit Judges.
Affirmed as modified by published opinion. Judge Richardson wrote the opinion, in which Judge Wynn and Judge Harris joined.
ARGUED: Volney LaRon Brand, BRAND LAW, PLLC, Dallas, Texas, for Appellant. Jeffrey Ryan Whitley, FOX ROTHSCHILD LLP, Raleigh, North Carolina, for Appellees. USCA4 Appeal: 21-1290 Doc: 30 Filed: 07/21/2022 Pg: 2 of 25
ON BRIEF: Stephen W. Petersen, FOX ROTHSCHILD LLP, Raleigh, North Carolina, for Appellees.
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RICHARDSON, Circuit Judge:
While working for a company that makes skin grafts, Haile Kiros Nicholson caught
wind of a kickback scheme operating in a Veterans Administration hospital. In broad
strokes, the scheme involved the sale of skin grafts to the VA by commission-based
salespeople who were paid based on how much they sold. If true, that would likely violate
the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, which would then make each
commission-induced sale a violation of the False Claims Act, 31 U.S.C. § 3729 et seq. So
Nicholson brought this qui tam suit as a False Claims Act relator on behalf of the United
States government and an analogous state-law claim under North Carolina law.
After the United States declined to intervene in the suit, Nicholson prosecuted it.
Because he used conclusory language in his original Complaint, the district court dismissed
the Complaint with prejudice for failure to state a fraud claim with particularity under
Federal Rule of Civil Procedure 9(b). When Nicholson moved to amend his Complaint
after judgment, the district court denied leave to amend, in part based on a finding of bad
faith.
We agree with the district court’s dismissal of the original Complaint for a lack of
particularity. Given that it is largely made up of conclusory allegations, the original
Complaint may even have failed Rule 8’s lower standard of plausibility. We also find that
the district court did not abuse its discretion in denying leave to amend for bad faith. So
we affirm the district court’s dismissal (with one minor modification, clarifying that a state-
law claim was dismissed without prejudice).
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I. Background
From what we can tell, the basic shape of Nicholson’s alleged kickback scheme is
simple enough. Integra made skin grafts, and they used another company, MedCom
Carolinas, Inc. (“MedCom Inc.”), to sell those skins grafts. MedCom Inc. is run by its
owner, Jeff Turpin. According to Nicholson, Turpin, and MedCom Inc. used independent
contractors to promote the Integra skin grafts and paid them by commission based on their
sales numbers. And paying commissions for referring the skin grafts to the VA would
violate the federal Anti-Kickback statute.
From there, the details get hazy fast. While litigating this case in the district court,
Nicholson offered two Complaints—his original Complaint and an Amended Complaint.
Because we need not reach the Amended Complaint, we focus on the original Complaint,
but include the allegations in the Amended Complaint to add some clarity to a confusing
set of allegations.
A. The Original Complaint
Nicholson filed his original Complaint under seal in 2017. It included five counts:
Counts I, II, and III were claims under three provisions of the False Claims Act, 31 U.S.C.
§§ 3729(a)(1)(A), (B) & (C); Count IV was a private cause of action under the Anti-
Kickback Statute, 42 U.S.C. § 1320a-7b; and Count V was under the North Carolina False
Claims Act, N.C. Gen. Stat. § 1-607.
In paragraph 16 of the Complaint, Nicholson describes the illegal scheme that
formed the basis of all his claims. Because much of the difficulty here comes from trying
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to make heads or tails of what is being alleged in that paragraph, we include it here
verbatim:
Relator’s employer Integra utilized 1099 nonemployee reps to generate referrals for Medicare/Medicaid and other federal healthcare program patients in violation of the anti-kickback statute. Specifically, these representatives were paid by Jeff Turpin who owns MedCom LLC in whole or in part for furnishing items covered by federal healthcare programs and received commissions based on the same including PriMatrix and Integra Dermal Replacement Therapy. Relator learned of this scheme based upon his employment with Integra whereby these representatives engaged in national competitions with the full-time employees. Relator spoke with treating physicians, reimbursement personnel, and also received compensation for these 1099 nonemployee’s role in generating these sales. For example, on or about Nov 2016, Patient T. W. received an Integra Dermal Replacement Therapy graft furnished by Relator’s 1099 counterpart/sales representative Holloway whereby VA care benefits paid for this graft utilized by Dr. Phillips in excess of $3,000.00.
J.A. 15.
Some of the story comes through clearly enough: Nonemployee representatives—
in other words, independent contractors 1—were paid, at least in part by commission, to
furnish skin-graft products to federal healthcare programs like VA hospitals. That is the
basic kickback scheme. Representatives were paid commission to sell Integra skin grafts
to VA doctors. Nicholson learned about this scheme through his work at Integra and by
speaking to doctors and “reimbursement personnel.” Nicholson offers a sketch of one such
sale, from a salesperson called Holloway to a Dr. Phillips at a VA hospital, around
November 2016, for at least $3,000.
1 By “1099 nonemployee reps,” the Complaint is likely referring to the IRS form 1099-NEC, which is used to report income as an independent contractor. That form can be contrasted with the W2, which is the form used to report income as an employee. So we understand the reference to 1099 reps and the like to be lingo referring to workers who were independent contractors and not employees.
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Though the outline is clear, there is considerable ambiguity and confusion about
the specifics. How Nicholson knows all this is obscure. “National competitions” are
mentioned—and competition does at least suggest promotion, incentives, and
inducements—but those competitions are not described in any detail at all. Nicholson says
he “received compensation for these 1099 nonemployee’s role in generating sales,” but it
is not clear whether that means Nicholson himself made some of these sales and got
commissions or whether he was the person at Integra receiving the sales proceeds from the
government, perhaps working in the billing department. As to the example involving
Holloway, many important details are missing: No first names were used; no location was
given (which VA hospital, where in the country?); the payment amount is vague,
somewhere on the border between guess and estimate; and he does not link that sale to the
general kickback scheme, except by a dangling introductory phrase “For example.”
The district court focused largely on two further reasons for confusion. First, there
is a confusion about how many MedComs there are. You may have missed it at first pass,
but there is a discrepancy between the MedCom in the case caption and the MedCom
described in paragraph 16 of the Original Complaint. The caption names “MedCom
Carolinas, Inc.” (that is who we have been calling “MedCom Inc.”) as a defendant, but
paragraph 16 describes actions performed by MedCom LLC. In its opinion dismissing the
Original Complaint, the district court refused to assume that MedCom LLC and MedCom
Inc. were one and the same. The court pointed out that, even after having this confusion
raised in Defendants’ briefing, Nicholson continued to refer to nonparty MedCom LLC in
later briefing. And the Complaint talks about “Defendant companies’ payments,” which
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might suggest MedCom Inc. and MedCom LLC; or MedCom Inc. and Integra; or MedCom
Inc., MedCom LLC, and Integra. 2
The second cloud of confusion covered who the 1099 representatives worked for:
MedCom Inc., MedCom LLC, or Integra. Paragraph 16’s first sentence says, “Integra
utilized 1099 nonemployee reps,” suggesting Integra paid them. But the next sentence
says, “these representatives were paid by Jeff Turpin who owns MedCom LLC.” That
phrase links back to the first sentence, suggesting that maybe Integra did not pay for them
after all and one of the MedComs did. Maybe it was some combination of the three.
Nicholson then says that the reps were paid by Jeff Turpin but also that they “received
commissions.” Who paid those commissions is unclear. Integra, either of the MedComs,
or Turpin himself could have done so. And it is precisely this commission—not ordinary
pay—that forms the basis for these claims.
To put it mildly, paragraph 16 lacks clarity. After paragraph 16, the Complaint
claims that this scheme led to thousands of false claims, that they necessarily caused
violations of the Anti-Kickback Statute, and that those violations were routine.
After reviewing the Complaint, the United States declined to intervene, and the
Complaint was unsealed and served on MedCom Inc. and Turpin. MedCom Inc. and
2 In truth, it is hard to make much of the phrase “defendant companies’,” J.A. 15, because there is only one company named as a defendant. So no matter what additional companies are included in that phrase, they are not truly defendant companies.
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Turpin moved to dismiss the Complaint, and that motion was granted two years later. The
district court dismissed the Complaint with prejudice and entered judgment. 3
B. The Amended Complaint
Nicholson then moved to amend or alter the judgment under Rule 59(e) and for
permission to file an amendment under Rule 15(a)(2), attaching a proposed Amended
Complaint to the motion.
The Amended Complaint adds more detail about the scheme, but the same basic
shape appears. First and most importantly, MedCom LLC disappears, leaving only
MedCom Inc. Next, the changes clarify who the representatives work for. Instead of only
Integra “utilizing” the independent contractors, “Integra and MedCom both utilized” them.
J.A. 146. But “to be clear, the 1099 employees were employees of MedCom not Integra.”
J.A. 146 n.1. (The distinction between “utilizing” the reps and claiming them as employees
is not explained.) Nicholson also added more detail about how he learned all this. He
described further knowledge based on “easy access” to purchasing information, access to
things like pricing schedules, patient information, and doctor information. J.A. 149. He
claimed that he learned more about the commission scheme from speaking to Jeff Turpin
and his representatives. In those conversations, Turpin’s representatives apparently told
Nicholson that Turpin was MedCom Inc.’s sole owner and did all the hiring and firing.
3 There is a slight ambiguity about the resolution of the state-law claim in the district court’s order granting the motion to dismiss. On one page, the district court “decline[d] to exercise supplemental jurisdiction” over the state-law claim, but then on the next page, the court dismissed the whole case with prejudice, suggesting that even the state-law claim was dismissed with prejudice. J.A. 118–19. 8 USCA4 Appeal: 21-1290 Doc: 30 Filed: 07/21/2022 Pg: 9 of 25
Turpin also told Nicholson that he paid the representatives “on a strictly commission basis”
based on “the volume of reimbursements for these products they sold.” J.A. 147–48.
Nicholson also adds more information about Holloway—now Robert Holloway—
and from Holloway, more information about the scheme. Holloway worked in Durham,
NC and had inside knowledge of the scheme. According to what Holloway allegedly told
Nicholson, the way the scheme worked was that MedCom Inc. sales reps would sell skin
grafts to government programs (like VA hospitals) and submit claims for payment to the
hospitals who would then pay out to Integra. From there, Integra would send 25% of the
net sales money back to MedCom Inc. as a commission, and MedCom Inc. would pay 40%
of its share to the representative (like Holloway).
Nicholson also fleshed out the story surrounding Holloway’s November 2016
payment. The sale was to the VA hospital in Durham, NC; that hospital took claims from
salespeople at the time of the procedure at a preset price; and Holloway sold a graft to Dr.
Phillips for use on Patient T.W. and submitted the claim for a payment of at least $3,000
to the hospital, which was paid to Integra. There is no mention in the Amended Complaint
of whether the 75/25, 60/40 split was followed in the November 2016 sale.
Much of the rest of the Amended Complaint remained the same: Nicholson
included the same five Counts and asked for the same relief.
In March 2021, the district court denied both the motion to amend and the motion
to alter the judgment, citing as its reasons, first, bad faith, and second, that the Amended
Complaint would have been futile for similarly failing to state a claim with particularity.
Nicholson timely appealed, and we have jurisdiction. 28 U.S.C. § 1291.
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II. Discussion
On appeal, Nicholson challenges the dismissal of his Original Complaint, the district
court’s decision to dismiss the Complaint with prejudice, the denial of leave to amend for
bad faith, and the denial of leave to amend for futility. Because we find that the district
court was right to dismiss the Original Complaint, that the court did not abuse its discretion
in dismissing the Complaint with prejudice, and that the court did not abuse its discretion
in denying leave to amend for bad faith, we need not discuss the sufficiency of the
allegations in the Amended Complaint. 4
A. Dismissal of the Original Complaint
1. Failure to State a Claim with Particularity
We review a district court’s dismissal of a complaint for failure to state a claim de
novo. United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190, 195 (4th Cir. 2018).
Nicholson brings three claims under the False Claims Act: a “presentment claim” under
4 Nicholson’s appeal focuses on the three False Claims Act claims and does not discuss Count IV, the standalone Anti-Kickback Statute violation. While the Fourth Circuit has not yet addressed the issue, other courts agree that there is no private cause of action under the Anti-Kickback Statute. See United States ex rel. Barrett v. Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 28, 37 (D.D.C. 2003) (citing W. Allis Mem’l Hosp., Inc. v. Bowen, 852 F.2d 251, 255 (7th Cir. 1988)); Rzayeva v. United States, 492 F. Supp. 2d 60, 78 (D. Conn. 2007); Donovan v. Rothman, 106 F. Supp. 2d 513, 516 (S.D.N.Y. 2000). But either way, Nicholson waived this argument by conceding it before the district court.
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31 U.S.C. § 3729(a)(1)(A), 5 a false-record-or-false-statement claim under
§ 3729(a)(1)(B), 6 and a conspiracy claim under § 3729(a)(1)(C). 7
Roughly speaking, a presentment claim alleges that a defendant knowingly
submitted a false claim to the government themselves. A false-record-or-statement claim
alleges that a defendant knowingly made a false statement or produced a false record
material to a false claim that was submitted to the government by someone else. And a
conspiracy claim covers knowing agreements to do either. Both a presentment claim and
a false-record-or-statement claim under the False Claims Act require four elements: (1) “a
false statement or fraudulent course of conduct; (2) made or carried out with the requisite
scienter; (3) that was material; and (4) that caused the government to pay out money or to
forfeit moneys due.” Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788
(4th Cir. 1999). For the conspiracy claim, the plaintiff must show that the defendants
“agreed that [a] false record or statement would have a material effect on the Government’s
decision to pay [a] false or fraudulent claim.” Allison Engine Co. v. United States ex rel.
Sanders, 553 U.S. 662, 673 (2008). Nicholson brings all three claims against Turpin and
MedCom Inc.
5 “[A]ny person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval . . . is liable . . . .” § 3729(a)(1)(A). 6 “[A]ny person who . . . knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . is liable . . . .” § 3729(a)(1)(B). 7 “[A]ny person who . . . conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G) . . . is liable . . . .” § 3729(a)(1)(C).
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Nicholson’s theory about what makes the alleged claims here false or fraudulent is
that they violated the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b. A violation of that
statute “automatically constitutes a false claim under the False Claims Act.” United States
ex rel. Lutz v. Mallory, 988 F.3d 730, 741 (4th Cir. 2021) (citing United States ex rel. Lutz
v. United States, 853 F.3d 131, 135 (4th Cir. 2017)); accord 42 U.S.C. § 1320a-7b(g) (“[A]
violation of this section constitutes a false or fraudulent claim for purposes of subchapter
III of chapter 37 of title 31.”). Under the Anti-Kickback Statute, it is illegal for any person
to knowingly solicit or receive “remuneration” in return for referring any “good, facility,
service, or item” to someone that will be paid for, at least in part, by a Federal health care
program. 42 U.S.C. § 1320a-7b(b)(1)(B).
The Anti-Kickback Statute seems broad enough to criminalize sales by all medical-
device salespeople—e.g., those who get paid to sell anything at all to hospitals who take
Medicare—but it does not quite go that far. The statute includes an exception for “any
amount paid by an employer to an employee [within] a bona fide employment
relationship.” § 1320a-7b(b)(3)(B). Also, given the statute’s ominous breadth, the
Department of Health & Human Services was given the ability to modify exceptions to the
rule and to create further exceptions to the rule. Medicare and Medicaid Patient and
Program Protection Act of 1987, Pub. L. No. 100-93, sec. 14, 101 Stat. 680, 697. The Code
of Federal Regulations includes a long list of agency-created exceptions to this rule, and
one of those is for personal services and management contracts and outcomes-based
payment arrangements. 42 C.F.R. § 1001.952(d). That is how the regulations describe the
bona-fide-employee safe harbor. But that exemption only applies to sales employees that
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meet certain criteria, one of which is that the payment of the employee’s salary “is not
determined in a manner that takes into account the volume or value of any referrals.”
§ 1001.952(d)(1)(iv) (emphasis added). In other words, commissions earned by an
independent contractor based on volume or value are illegal “remuneration” under the
statute and therefore fraudulent claims to boot. See Mallory, 988 F.3d at 738.
In sum then, it would violate the Anti-Kickback Statute, and therefore violate the
False Claims Act, to pay a medical-device salesperson by commission per sale or based on
the value of sales and get paid back in federal healthcare money; any such sale under that
scheme would be a false claim. That is the gist of what Nicholson is trying to allege here.
Now to the pleading standards. Normally when considering Rule 12(b)(6) motions
to dismiss, we look to our familiar plausibility standard, see Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009), but because False Claims Act claims are fraud claims, a higher standard
applies: Fraud-based claims must be pleaded with particularity, Grant, 912 F.3d at 196;
see Fed. R. Civ. P. 9(b). Because all False Claims Act claims must be linked in some way
to presenting a claim for payment to the government this particularity requirement applies
to that presentment element. Grant, 912 F.3d at 197. There are two ways to show
presentment with particularity: either by alleging a representative example describing “the
time, place, and contents of the false representations, as well as the identity of the person
making the misrepresentation and what he obtained thereby”; or by alleging a “pattern of
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conduct that would necessarily have led to submission of false claims.” Id. (cleaned up). 8
When the claim hinges on an underlying kickback violation, the kickback scheme must be
pleaded with particularity as well. See Nathan, 707 F.3d at 458 (“[O]ur pleading
requirements do not permit a relator to bring an action without pleading facts that support
all the elements of a claim.”); see also United States ex rel. Strubbe v. Crawford Cnty.
Mem’l Hosp., 915 F.3d 1158, 1166 (8th Cir. 2019).
This particularity requirement is often called the fraud’s “who, what, when, where,
and how.” See Wilson, 525 F.3d at 379 (quoting United States ex rel. Willard v. Humana
Health Plan of Tex. Inc., 336 F.3d 375, 384 (5th Cir. 2003)). We require that detail to
prevent frivolous suits, stop fraud actions where everything is learned after discovery (i.e.,
fishing expeditions), and to protect defendants’ reputations. Id.; United States ex rel.
Ahumada v. NISH, 756 F.3d 268, 280–81 (4th Cir. 2014). While we require significant
detail, “[a] court should hesitate to dismiss a complaint under Rule 9(b) if the court is
satisfied (1) that the defendant has been made aware of the particular circumstances for
which she will have to prepare a defense at trial, and (2) that plaintiff has substantial
prediscovery evidence of those facts.” Harrison, 176 F.3d at 784, 789.
8 The district court noted some confusion among district courts in our Circuit on whether a representative example must be pleaded with particularity to make out a False Claims Act claim under Rule 9(b). Grant tells us that there are two ways to show presentment with particularity, and only one requires a representative example. 912 F.3d at 197. The second option requires only that “a plaintiff can allege a pattern of conduct that would necessarily have led to submission of false claims to the government for payment,” even where we do not have particularized detail about any one such claim. Id. (cleaned up). So while there may have been confusion, there was and is no open question on this issue in the Fourth Circuit.
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Nicholson’s Original Complaint simply does not meet the high standards of
particularity required by Rule 9(b)—and may not even meet Rule 8’s lower plausibility
standards—so the district court was right to dismiss the Complaint. Much of what is said
in the Original Complaint is classic conclusory language. To say that “representatives were
paid by Jeff Turpin . . . for furnishing items covered by federal healthcare programs and
received commissions based on the same” is in essence just a restatement of the legal
standards we outlined above, plus the owner’s name. Adding the name of the products
helps, but more than that is required to satisfy Rule 9(b). Unlike the Amended Complaint
which gave some detail about the payment breakdown—75/25 split between the companies
and then a 60/40 split of MedCom Inc.’s share between it and its representative—this first
Complaint includes no information about how the payments were split up or how
representatives were paid. It also provides no detail about the actual inducement of sales,
whether and how representatives were supposed to push the product. All this amounts to
not much more than saying that they were using commissioned salespeople to submit false
claims, a legal conclusion.
Nicholson does offer some support for how he knew about the scheme: “based upon
his employment with Integra whereby these representatives engaged in national
competitions with the full-time employees,” by talking to treating physicians and
reimbursement personnel, and by “receiv[ing] compensation for these 1099 nonemployee’s
role in generating these sales.” But none of that pushes this Complaint much further along.
Claiming to know something based on working in an undisclosed role at the relevant
company, based on discussions with unnamed people, and based on participation in
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vaguely described events cannot make a series of conclusory legal statements into a
particularized allegation.
Now to the offered representative claim—the Holloway example—which is only
slightly less nebulous than the general allegations. Nicholson claims in one sentence that
“Patient T. W. received an Integra Dermal Replacement Therapy graft furnished by
Relator’s 1099 counterpart/sales representative Holloway whereby VA care benefits paid
for this graft utilized by Dr. Phillips in excess of $3,000.00.” J.A. 15. So much detail is
missing from this allegation that it sounds like a neighbor’s conversation only half
overheard through the walls. The patient is unknown, the first names of the other two
participants are unknown, who submitted the claim is unknown, who was paid the $3,000
is unknown, whether it was $3,000 or much more than $3,000 is unknown, what VA
hospital in what state is unknown (how many Dr. Phillips are there in the country?), and so
on. The unknowns swamp the knowns. And while there is discussion of some payment,
there is no discussion of the most important detail: a submitted false claim. This story
simply does not give us any confidence that Nicholson “has substantial prediscovery
evidence of [these] facts.” Harrison, 176 F.3d at 784.
Nicholson argues that the district court erred by suggesting that the representatives
worked for Integra and not MedCom Inc. and by making too much of the confusion
between MedCom Inc. and MedCom LLC. But confusion about which corporate entity
was involved matters when pleading particularity is required. And even disregarding
Nicholson’s conflation, we find that there was not enough offered in the Original
Complaint to make out a claim with the particularity required by Rule 9(b).
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In these Rule 9(b) cases, the particularity standard is steep. For future relators, it
may be wise to err on the side of saying too much to avoid a kick from Rule 12(b)(6). The
Original Complaint here needed more to scale that wall. The district court was right to
dismiss the Original Complaint for a lack of particularity.
2. With-Prejudice Dismissal
Next, the district court did not abuse its discretion by dismissing the Original
Complaint with prejudice. In the Fourth Circuit, district courts are not required to give
plaintiffs one without-prejudice ruling on the merits before dismissing with prejudice. See
Adbul-Mumit v. Alexandria Hyundai, LLC, 896 F.3d 278, 292 (4th Cir. 2018). In this
Circuit, plaintiffs do not get a dry run as a matter of right. District courts have inherent
power to manage their dockets with an eye toward speedy and efficient resolutions, Dietz
v. Bouldin, 579 U.S. 40, 47 (2016), and part of that power is the use of with-prejudice
dismissals. So we review decisions about the nature of a dismissal—even a very first
dismissal—for an abuse of discretion. Adbul-Mumit, 896 F.3d at 292. And we see no
reason to question the district court’s discretionary decision here to dismiss the plainly
insufficient federal causes of action with prejudice.
The district court also dismissed a fifth and final claim, this one under the North
Carolina False Claims Act. Because the state-law claim was the only thing left after the
dismissal of all the federal-law claims, the district court had the discretion to decline to
exercise supplemental jurisdiction over that claim. See Carlsbad Tech., Inc. v. HIF Bio,
Inc., 556 U.S. 635, 639 (2009) (citing 28 U.S.C. § 1367(c)). But the court’s order might
be read to dismiss that claim with prejudice along with the federal claims. See J.A. 119
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(dismissing the whole case with prejudice). Because the district court declined to even
take jurisdiction over the state-law claim, it could not have and did not adjudicate the merits
of the claim, so that dismissal should have been without prejudice. See Farlow v. Wachovia
Bank of N.C., N.A., 259 F.3d 309, 316–17 (4th Cir. 2001). So we affirm the dismissal of
the state-law claim, but we modify the order to clarify that Count V was dismissed without
prejudice.
3. Denial of Leave to Amend
Nicholson next argues that even if the False Claims Act counts were properly
dismissed with prejudice, the district court should have at least granted his post-judgment
motion for leave to amend to fix the Original Complaint’s deficiencies. But denials of
leave to amend are also reviewed for an abuse of discretion, Laber v. Harvey, 438 F.3d
404, 428 (4th Cir. 2006), and again, we find that the district court did not abuse its
discretion.
Under the Federal Rules, a court “should freely give leave” to amend “when justice
so requires.” Fed. R. Civ. P. 15(a)(2). In putting that rule into effect, we have often
described our Fourth Circuit policy as one to “liberally allow amendment.” See, e.g.,
Galustian v. Peter, 591 F.3d 724, 729 (4th Cir. 2010). And our policy furthers a wider
federal policy of—when possible—resolving cases on the merits, instead of on
technicalities. Mayfield v. Nat’l Ass’n for Stock Car Auto Racing, 674 F.3d 369, 379 (4th
Cir. 2012); see Foman v. Davis, 371 U.S. 178, 182 (1962). While we generally encourage
amendment, there are, of course, circumstances that justify denying a plaintiff the
opportunity to try again. We have laid out three such justifications for denying leave to
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amend: prejudice to the opposing party, bad faith, or where the amendment would be futile.
Laber, 438 F.3d at 426 (citing Johnson v. Oroweat Foods Co., 785 F.2d 503, 509 (4th Cir.
1986)). Delay alone is not enough to deny leave to amend, though it is often evidence that
goes to prove bad faith and prejudice. See Johnson, 785 F.2d at 509–10.
At first glance, there seems a tension in this doctrine. Abuse-of-discretion review
suggests district courts have free range, but a liberal policy of amendment and a narrow list
of permissible reasons to deny amendment looks like a short leash. But the tension is
fleeting. An abuse of discretion is where the judge has acted in an arbitrary or irrational
manner, where he has completely failed to consider the right factors, or where he relied on
faulty legal or factual premises. United States v. Welsh, 879 F.3d 530, 536 (4th Cir. 2018).
At bottom, it is a standard of deference, where the trial judge “will not be reversed simply
because an appellate court disagrees.” Henry J. Friendly, Indiscretion About Discretion,
31 Emory L.J. 747, 754 (1982); see also Evans v. Eaton Corp. Long Term Disability Plan,
514 F.3d 315, 322 (4th Cir. 2008) (“At its immovable core, the abuse of discretion standard
requires a reviewing court to show enough deference to a primary decision-maker’s
judgment that the court does not reverse merely because it would have come to a different
result in the first instance.”). So in this context, it would be an abuse of discretion for the
district court to fail to identify which of the three permissible reasons to deny amendment
it relied on or to fail to give any reasons at all—unless, of course, its reasons “are apparent,”
see Matrix Cap. Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 194 (4th Cir. 2009)—
but within those three categories, a judge only abuses his discretion when he steps outside
the bounds of reasonable disagreement, see Evans, 514 F.3d at 322. Put simply, an abuse
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of discretion is when the district judge is “fundamentally wrong.” Bluestein v. Cent. Wis.
Anesthesiology, S.C., 769 F.3d 944, 957 (7th Cir. 2014).
One last point on the standard: The same legal standards apply to both pre- and
post-judgment motions to amend. Laber, 438 F.3d at 427. Either before or after a judgment
is entered, a district court should deny amendment only where there is prejudice, bad faith,
or futility. But while the legal standard is the same, courts will reasonably deny a higher
number (perhaps a much higher number) of post-judgment motions to amend like the one
here. As we have said, delay may not be enough by itself to deny leave to amend, but
prejudice will naturally be much easier to show and bad faith will seem more plausible the
more time has passed between a first attempt and a proposed amendment. Id. 9
The district court denied amendment because of a finding of bad faith. A few words
on bad faith. We cannot provide a comprehensive definition of a term like bad faith; in
truth, it is a difficult term to define without retreating to circular reasoning or just listing
examples. See Constance A. Anastopoulo, Bad Faith: Building a House of Straw, Sticks,
or Bricks, 42 U. Mem. L. Rev. 687, 696 (2012) (explaining how, in the insurance context,
courts often describe “bad faith” as the opposite of “good faith”); Kenneth S. Abraham &
Daniel Schwarcz, Insurance Law & Regulation 91–92 (6th ed. 2015) (“It is extremely
difficult to specify the kind of behavior that triggers the bad faith cause of action. . . . [I]t
may be that each case requires a judgment in context.”). As the Restatement (Second) of
9 Beyond that practical difference, we note there is also a procedural difference between the pre- and post-judgment motion to amend: “[T]he district court may not grant the post-judgment motion unless the judgment is vacated pursuant to Rule 59(e) or . . . 60(b).” Laber, 438 F.3d at 427. 20 USCA4 Appeal: 21-1290 Doc: 30 Filed: 07/21/2022 Pg: 21 of 25
Contracts says, “a complete catalogue of types of bad faith is impossible.” § 205 cmt. d
(Am. Law Inst. 1981); but see Liquid Dynamics Corp. v. Vaughan Co., 449 F.3d 1209,
1225 (Fed. Cir. 2006) (offering a nine-factor test to determine whether a patent infringer
was operating in bad faith).
Black’s Law Dictionary defines “bad faith” as “[d]ishonesty of belief or purpose.”
Bad Faith, Black’s Law Dictionary (8th ed. 2004). To act with a dishonesty of purpose is
to act for the wrong reasons. It may be outright lying, deceiving, playing unjustifiable
hardball, slacking off, intentionally causing confusion, or stubbornly refusing to follow
rules—you can imagine cases where a party just wants to cause chaos—or it might be
something as mundane as noticing someone’s mistake and saying nothing about it. See
Restatement (Third) of Restitution and Unjust Enrichment § 52 cmt. c & illus. 3 (Am. Law
Inst. 2011). In the contract context, courts have found bad faith for “evasion of the spirit
of the bargain, lack of diligence . . . , willful rendering of imperfect performance, abuse of
a power . . . , and interference . . . or failure to cooperate.” Restatement (Second) of
Contracts § 205 cmt. d. We could go on, but this sketch of the contours of this many-
faceted concept suffices here.
And remember, we review the district court’s finding for abuse of discretion. So
we must determine whether the district court’s decision that the amending party acted in
bad faith is outside the realm of reasonable disagreement.
Now to these facts. The district court offered several reasons for the bad-faith
finding, and we do not find that there was an abuse of discretion, especially when viewing
its reasons together.
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First, the district court suggested that Nicholson withheld facts and evidence that he
knew before filing the original Complaint, without satisfactory explanation. The district
court’s opinion rightly notes that parties have a duty to introduce important evidence on
which they intend to rely as soon as reasonably possible in the litigation. And when a party
withholds evidence for an extended period, it is not unreasonable for a district court to
presume bad faith, at least where no satisfactory explanation is given for the delay. See
First Nat’l Bank of Louisville v. Master Auto Serv. Corp., 693 F.2d 308, 314 (4th Cir.
1982); see also 6 Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal
Practice and Procedure § 1488 (West 3d ed. 2022). And here, Nicholson waited years to
amend the original Complaint with additional facts. The district court here found that the
facts were withheld—i.e., the facts were known at the time of the filing of the Complaint—
and that no satisfactory explanation was provided. Counsel for Nicholson admitted in oral
argument before this Court that almost all the details added to the Amended Complaint
were known to Nicholson when the original Complaint was filed. Oral Arg. 9:01. Holding
back important details without justification may not always be evidence of bad faith, but
that move is especially dodgy in a case like this where Rule 9(b) requires particularity, in
part, to put defendants on notice of exactly what it is they are being accused of. See
Harrison, 176 F.3d at 784. While that is not undeniable evidence of skulduggery, neither
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can we say that the district court was unreasonable to cite this holding back of important
facts as evidence of bad faith. 10
Next, even though the district court had held there was no private cause of action
under the Anti-Kickback Statute, and even though Nicholson conceded there was no
private cause of action under the Anti-Kickback statute, Nicholson still insisted on
including a standalone Anti-Kickback Statute claim as Count IV of his proposed Amended
Complaint. The district found this to be more evidence of bad faith: “[P]ursuing claims
with the knowledge they are not supported by law—cannot be classified as good faith
conduct.” J.A. 221 (cleaned up). Maybe this inclusion was a mistake by Nicholson’s
counsel—perhaps a mistaken copy/paste which many of us can relate to or perhaps an
innocent confusion about the law 11—but at least on the record as we see it, this is a question
10 Because the district court denied Nicholson leave to amend for both bad faith and futility, Nicholson was in a tough spot on appeal, having to argue both that the Amended Complaint had changed enough to be sufficiently particular and also, to rebut the claim of bad-faith withholding of evidence, that the only new facts added to the Amended Complaint were “immaterial”—which all but concedes the first issue of whether the Amended Complaint fixes the particularity problem. But we do not agree that the facts added to the new Complaint were immaterial. They were not just adding first names or saying it was the Durham VA. Nicholson added details of conversations with the two main characters in the story, Turpin and Holloway; he added more detail about his knowledge of Integra and the companies’ relationships; and he added a detailed percentage-by- percentage breakdown of how the payment was split between the companies and their employees. While the Amended Complaint likely did not do enough to scale the wall of Rule 9(b), we cannot agree that all the facts added were immaterial. 11 Nicholson argues in his briefing to this Court that the Anti-Kickback claim in Count IV was included in the Amended Complaint “out of an abundance of caution,” just in case the new Complaint was resealed, and the United States Government revisited its decision to intervene in the qui tam suit. Br. of Appellant 31.
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on which reasonable people might disagree. So the district court justifiably pointed to this
as more evidence of bad faith.
The district court also suggested that Nicholson “change[ed] substantive facts from
one filing to the next” to avoid dismissal. J.A. 220–21. And “misleading and inconsistent
assertions” sometimes reveal bad faith. Adbul-Mumit, 896 F.3d at 293 n.7. It is unclear
whether the two complaints here are truly inconsistent. As we discussed above, there is at
least some ambiguity in the Original Complaint about who the 1099 representatives worked
for and where all their payment came from. Paragraph 16 of the Original Complaint is,
frankly, confusing. We might tease out a reading that aligns with the Amended Complaint.
But that reading is surely not required. And however generous we might be, the briefs and
opinions below suggest that Defendants and the district court were both confused on this
point. So at best for Nicholson, the statements were merely misleading instead of both
misleading and inconsistent, which is not exactly a neon sign of good-faith lawyering. 12
Taking all the court’s arguments together, the district court’s bad-faith finding was
within the bounds of reasonable disagreement, and we find no abuse of discretion. Because
we find that the district court did not abuse its discretion in finding bad faith, we can affirm
12 The court noted briefly that Nicholson breached local rules about appropriate citations, and that this supported a finding of bad faith. At first blush, that comment seems to cut against our policy that—at least when it comes to leave to amend—minor technicalities should not stand in the way of reaching the merits. See Mayfield, 674 F.3d at 379. But the rule that was violated here was a rule against paraphrasing facts from the Complaint without citing to them. That error is particularly suspect in a Rule 9(b) case that requires particularity. Especially when added to the concerns about withholding of evidence and shifting allegations, the court’s concern with Nicholson’s refusal to cite his factual allegations was not an abuse of discretion.
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the district court on that ground, and we need not discuss the possibility that the Amended
Complaint would have been futile.
* * *
Nicholson failed to make his allegations in the Original Complaint with the
particularity Rule 9(b) requires, so the district court was right to dismiss the Original
Complaint. From there, the district court had discretion both to dismiss the federal claims
with prejudice and to deny Nicholson leave to amend for bad faith. We see no abuses of
that discretion on this record. But because the district court did not take jurisdiction over
the state-law claim, we modify the decision to clarify that the state-law claim should be
dismissed without prejudice. So the district court is
AFFIRMED AS MODIFIED.