Cafasso Court Rulings Re Qui Tam Action

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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) ) ) Plaintiff-Relator, ) ) vs. ) ) ) General Dynamics C4 Systems, Inc., ) ) Defendant. _________________________________ ) ) ) ) General Dynamics C4 Systems, Inc., ) ) Counterclaimant, ) ) vs. ) ) Mary A. Cafasso, ) ) Counterdefendant. ) United States ex rel. Mary A. Cafasso,

No. CV 06-1381 PHX NVW ORDER

Before the Court are Relator’s Motion for Summary Judgment on Defendant’s

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Counterclaims (doc. #275) and GDC4S’s Motion for Partial Summary Judgment on: (1)

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Count II of Relator’s Substitute Amended Complaint (Retaliation) and (2) Count I of

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GDC4S’s Counterclaim (Breach of Contract) (doc. #272).

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I.

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Legal Standard for Summary Judgment The court should grant summary judgment if the evidence shows there is no

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genuine issue as to any material fact and the moving party is entitled to judgment as a

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matter of law. Fed. R. Civ. P. 56(c). The moving party must produce evidence and

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persuade the court there is no genuine issue of material fact. Nissan Fire & Marine Ins.

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Co., Ltd. v. Fritz Cos., Inc., 210 F.3d 1099, 1102 (9th Cir. 2000). To defeat a motion for

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summary judgment, the nonmoving party must show there are genuine issues of material

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fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). A material fact is one

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that might affect the outcome of the suit under the governing law. Id. at 248. A factual

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issue is genuine “if the evidence is such that a reasonable jury could return a verdict for

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the nonmoving party.” Id. When the moving party has carried its burden under Rule

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56(c), the nonmoving party must produce evidence to support its claim or defense by

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more than simply showing “there is some metaphysical doubt as to the material facts.”

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Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Where the

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record, taken as a whole, could not lead a rational trier of fact to find for the nonmoving

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party, there is no genuine issue of material fact for trial. Id.

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In this context, the court presumes the nonmoving party’s evidence is true and

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draws all inferences from the evidence in the light most favorable to the nonmoving party.

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Eisenberg v. Insurance Co. of North America, 815 F.2d 1285, 1289 (9th Cir. 1987). If the

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nonmoving party produces direct evidence of a genuine issue of fact, the court does not

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weigh such evidence against the moving party’s conflicting evidence, but rather submits

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the issue to the trier of fact for resolution. Id. “[T]he court should give credence to the

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evidence favoring the nonmovant as well as that ‘evidence supporting the moving party

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that is uncontradicted and unimpeached, at least to the extent that that evidence comes

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from disinterested witnesses.’” Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S.

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133, 151 (2000).

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Therefore, the narrative that follows states the disputed facts in favor of Relator Mary A. Cafasso.

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II.

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Background

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A.

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In September 2001, General Dynamics Corporation hired Cafasso when it acquired

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the assets of the Motorola, Inc., business unit in which Cafasso worked. In 2003, General

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Dynamics Corporation merged the former-Motorola unit with another subsidiary

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corporation, which was based in Tauton, Massachusetts. The resulting merged

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corporation was named General Dynamics C4 Systems, Inc. (“GDC4S”) and based in

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Scottsdale, Arizona. Before the 2003 merger, Mark Fried served as the President of the

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former-Motorola unit in Arizona and Christopher Marzilli served as the Vice President of

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Commercial Hardware Systems for the Massachusetts unit. After the merger, Fried was

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appointed President of GDC4S, and Marzilli was appointed the Senior Vice President and

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Deputy General Manager of GDC4S. Marzilli spent the majority of his time at the

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Massachusetts location and had primary responsibility for managing the operations at that

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location.

Factual History

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Cafasso was employed as the Chief Scientist/Technologist and reported to

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GDC4S’s Vice President and Chief Technology Officer, Erling Rasmussen. Cafasso’s

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responsibilities included coordinating GDC4S’s intellectual property portfolio and

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ensuring GDC4S’s compliance with its Government contracts. She was responsible for

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seeing that GDC4S met its obligations to protect the United States Government’s interest

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in intellectual property developed pursuant to Government contracts. She also chaired all

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meetings of the Technology Transfer Review Board (“TTRB”), which reviewed proposed

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transfers of intellectual property to and from GDC4S, and assisted in functions of the

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TTRB.

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As early as February 2002, GDC4S had a policy that in determining whether

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resources should be invested in pursuing a patent application, its business decision-

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makers should consider, among other factors, whether an invention had only Government

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application and the Government already had unlimited rights in the invention. If the only

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customer who could use the invention was the Government, and the Government already

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held unlimited rights to use the invention, then a patent may not provide any value to

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GDC4S and may not warrant substantial allocation of resources. Moreover, many of

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GDC4S’s inventions cannot be disclosed as the patent process would require because they

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involve United States classified information or technical information that international

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traffic in arms regulation and federal law prohibits placing into the public domain.

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In February 2004, Cafasso received a voice mail from a senior engineer that led

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her to believe GDC4S planned to delay, within contractual limits, giving notice to the

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Government of GDC4S’s intention to abandon patent prosecution on inventions in which

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the Government had intellectual property rights. The delay would increase the risk that

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the Government would miss its opportunity to pursue the patent process and likely would

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enable GDC4S to retain the inventions as trade secrets. Cafasso believed GDC4S was

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defrauding the Government by failing to protect the Government’s interest in inventions

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developed under Government contracts. She further believed GDC4S’s actions were in

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violation of federal regulations governing its contracts and of GDC4S’s TTRB policy.

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She believed GDC4S took these actions under the direction of John Jones, an intellectual

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property attorney in GDC4S’s Law Department. Cafasso reported her concerns to

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Rasmussen, who does not recall relaying them to anyone else, but testified it was possible

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he conveyed them to the Law Department. Rasmussen did not talk to Marzilli about

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Cafasso’s concerns.

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On October 27, 2004, then-Internal Compliance Manager Tim Pawlak sent an

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email to Rasmussen, Cafasso, and another CTO employee requesting input on possible

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audit topics for 2005. On November 2, 2004, Cafasso responded to the email and

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requested an audit of the Law Department based on: “Legal agreements NOT being

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compliant with the approved Transfer of Technology Review Board (TTRB). Business

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policies not being followed OM 1.5.” Cafasso’s email identified four of six adverse

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effects of the subject of her audit request: “failure to safeguard company assets,”

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“financial loss and exposure,” “erroneous record keeping,” and “failure to adhere to

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organizational policies, plans, and procedures.” She did not identify “failure to adhere to

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government regulations” or “negative publicity.” Cafasso did not copy anyone on her

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email to Pawlak.

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On November 11, 2004, Cafasso met with Pawlak to discuss her audit request.

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Cafasso told Pawlak she believed Jones and the Law Department were not complying

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with GDC4S’s intellectual property policy and federal regulations. She did not tell

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Pawlak the Law Department was engaging in fraud or use the word “fraud” in her

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discussion with Pawlak although at some point she used the word “fraud” in oral

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communications with Rasmussen. Also in November 2004, Cafasso exchanged emails with Devon Engel, Jones’s

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supervisor in the Law Department, with a copy to Rasmussen. In these emails Cafasso

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told Engel she believed Jones was violating company policy and intended to continue to

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violate company policy. She did not refer to “fraud” or submission of false claims or

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statements to the Government. Engel responded that the TTRB policy was created by

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Motorola, a predominantly commercial company, and GDC4S may deviate from the

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policy in some circumstances for strategic business purposes and/or because of federal

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laws and regulations.

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In Engel’s opinion, the roles of the Law Department and the CTO were not clearly

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defined and led to conflict between Jones and Cafasso. Both Engel and Jones found

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Cafasso to be difficult to work with.

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In January 2005, Cafasso was notified her audit request did not receive a high

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enough ranking based on identified factors to be included in the internal controls 2005

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audits. In email communications with Pawlak, Cafasso referred to her request as “the

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TTRB process audit of legal contracts” and said “this issue requires attention to enforce

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company policy.” Pawlak referred to it as “the TTRB issue” and described the end result

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of such an audit as “compliance to policies.” He offered to conduct a less formal review

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after receiving more information from Cafasso. She provided Pawlak a copy of her

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November 2004 email exchange with Engel. The last correspondence Pawlak received

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from Cafasso regarding her audit request was in early January 2005. In October 2005,

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Pawlak sent Cafasso an email asking for her suggestions for possible audits in 2006, but

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received no response from Cafasso.

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By mid-2005, Fried expressed his intent to retire at the year’s end, and Marzilli

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began preparing to assume the presidency of GDC4S. As President, Marzilli intended to

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address integration issues that had not been resolved since the 2003 merger of the two

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previously distinct businesses. In Marzilli’s opinion, one of the inconsistencies between

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the two businesses was the centralization of certain functions in the Chief Technology

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Office (“CTO”) for Arizona operations that were decentralized for the Massachusetts

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operations. By mid-November 2005, Marzilli decided to establish a new organizational

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structure to reduce redundancies and inconsistencies and effect cost savings. The new

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organizational structure eliminated a number of central departments in Massachusetts and

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Arizona, including the CTO in Arizona. At the time Marzilli decided to eliminate the

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CTO, he had no knowledge Cafasso ever had requested an audit of the Law Department,

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complained about the Law Department, expressed concern about suspected fraud to

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Rasmussen, or raised internal complaints about any issue at any time.

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Following Marzilli’s decision to reorganize, functions of the CTO were assigned to

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other parts of GDC4S. All functions of managing GDC4S’s intellectual property were

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assigned to the Law Department. Technology planning and other centralized engineering

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functions were assigned to the Engineering Leadership Team. The reorganization

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resulted in the resignations or retirements of several executives such as the Vice President

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of Information Technology; the Vice President of Communications, Customer and

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Community Services; the Vice President of Programs and Integration; the Director of

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Strategic Planning; and Chief Technology Officer Rasmussen.

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In November 2005, Cafasso talked to Rasmussen again about her concerns about

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Jones and the Law Department. Later in November 2005, Rasmussen resigned and

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retired, which left Cafasso and an administrative assistant as the CTO’s only remaining

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employees. The administrative assistant was transferred to another department. In

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December 2005, Cafasso was told the Chief Technology Officer position would be

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eliminated.

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On January 11, 2006, Cafasso met with Marzilli, who directed Cafasso to speak

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with the Vice President of Strategic Initiatives about a possible position for her. Cafasso

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did not use the word “fraud” when she talked to Marzilli about issues she felt needed

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attention, including policy compliance and the CTO’s roles and responsibilities. She did

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not inform Marzilli she was contemplating filing a False Claims Act qui tam action.

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On February 9, 2006, in response to an email from Cafasso, Marzilli emailed her

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that with “the disestablishment of the office of the CTO,” he was taking the opportunity

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to unify the policies and procedures of the two previously distinct businesses merged in

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2003. Cafasso responded on February 9, 2006, that she had expected to be involved and

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have input into decisions regarding functions of the CTO office. She expressed particular

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concern about “compliance issues regarding IP management which we have had issues

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with in the past.” By February 13, 2006, Cafasso had been told CTO functions would be

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covered by other departments.

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On March 2, 2006, Cafasso was notified her position would be eliminated and

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given sixty days notice to find another position within General Dynamics Corporation or

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be discharged. Cafasso was advised her CTO-related job duties had been assigned to

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others. Cafasso applied for approximately twenty-five positions within General

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Dynamics Corporation, but was not offered any of those positions.

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In or about the first week of March 2006, Cafasso contacted Mark Vrla, a partner

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with a law firm serving as outside counsel for GDC4S for intellectual property matters.

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Cafasso asked Vrla to provide information about certain patent applications the firm

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tracked and/or prosecuted for GDC4S. She also asked Vrla for legal advice regarding

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GDC4S’s obligations under certain Government contracts. Vrla subsequently responded

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to Cafasso’s requests.

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On April 3, 2006, Bernadette Phillips-Garcia, GDC4S’s Senior Human Resources

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Manager, informed Cafasso she would be discharged in thirty days if she did not find a

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new job. On April 13, 2006, Phillips-Garcia sent Cafasso an email providing job-seeking

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advice, offering further job-seeking assistance, and reminding her she was expected to

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spend the sixty days focusing on her job search because all of her work already had been

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transitioned to others.

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On April 2006, Cafasso had two telephone conversations with Ken Spitza, a

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procurement fraud adviser for the United States Army and told him she was concerned

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GDC4S might destroy documents to prevent detection of what Cafasso perceived to be a

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scheme to defraud the Government. Spitza thought Cafasso was the custodian of the

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records she wanted the Government to examine and told her the Government had the right

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to look at documents evidencing, or that could lead to evidence of, fraud or contractual

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violation. Spitza and Cafasso did not discuss specifically what Cafasso could or could

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not copy. Spitza never received any documents directly from Cafasso.

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On May 1, 2006, Phillips-Garcia met with Cafasso to inform her it appeared she

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was not going to be successful in her internal job search and she would be discharged

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from GDC4S on Friday, May 5, 2006. Phillips-Garcia informed Cafasso her exit meeting

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was scheduled for 9:30 a.m. on May 5, 2006, gave Cafasso the standard exit materials to

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review, and told her the exit documents must be signed before or during her exit interview

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on May 5, 2006. The exit documents included confirmation the departing employee had

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returned all General Dynamics Corporation property and secured all classified material

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and a reminder the employee had a non-disclosure obligation and obligation to return any

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documents, computer files, “and the like” that contain or embody proprietary information

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before departing. The exit documents also included a document requiring the departing

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employee to reaffirm his obligations regarding safeguarding of classified information and

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that he had returned all classified information in his custody. During the May 1, 2006

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meeting, Phillips-Garcia also gave Cafasso a severance agreement reflecting General

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Dynamics Corporation’s standard severance package for job elimination.

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On May 4, 2006, Jones learned Cafasso had requested and obtained copies of two

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GDC4S confidential documents from Bob Wigington, the Intellectual Property Manager

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in the Law Department. On May 5 and 6, 2006, a GDC4S Information Security Engineer

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performed a forensic analysis of Cafasso’s computer to determine whether the computer

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had been used to copy, transfer, or otherwise misappropriate GDC4S confidential

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information. The forensic examination determined that between April 29, 2006, and May 4,

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2006, Cafasso downloaded onto her computer more than ten gigabytes of GDC4S’s

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confidential, proprietary, and trade secret information and that removable data storage

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devices were connected to her computer at various times during that period. Although the

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forensic examination could not determine that files were actually copied to the removable

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data storage devices, Cafasso subsequently produced to GDC4S twenty-one CDs of

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documents and data she had copied from GDC4S’s files. The examination also

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determined that between April 18, 2006, and April 29, 2006, she downloaded from the

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GDC4S computer network 26,690 emails and attachments (approximately 4.4 gigabytes)

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she had sent or received from 2001 through 2006. In addition to some personal files and

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large media files she had stored on her GDC4S computer, the files Cafasso copied

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include:

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–approximately 31,762 files organized into approximately 1,862 separate folders from the years 1996 to 2006;

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–email and other communications between GDC4S attorneys and its employees;

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–trade secrets appearing to belong to GDC4S, GDC4S affiliates, General

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–GDC4S’s internal research and development information;

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–Sensitive But Unclassified Government Information controlled by the

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International Traffic in Arms Regulations; and –at least one patent application that in 1998 the United States Patent Office placed under a secrecy order to protect national security. Cafasso admitted she obtained and downloaded electronic copies of documents

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and data related to technology development in general and those within folders containing

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at least one file that appeared to be related to technology development without reviewing

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individual files to determine whether they could be relevant to her concerns about fraud

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or noncompliance with company policies or federal regulations. She testified she

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removed copies of these files because she was concerned that documents would be

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destroyed because two databases would no longer be used after certain CTO functions

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were transferred to the Law Department.

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Cafasso did not attend the scheduled May 5, 2006 exit meeting with Phillips-

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Garcia or call to cancel it. On Monday, May 8, 2006, Phillips-Garcia called Cafasso and

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sent a letter to Cafasso via hand-courier notifying her to meet with Phillips-Garcia at

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10:00 a.m. on May 9, 2006, for her exit interview. She also reminded Cafasso she was

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obligated to return GDC4S’s property and proprietary information in her possession.

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Cafasso did not appear for her exit interview on May 9, 2006.

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After Cafasso did not appear for an exit interview on May 9, 2006, Phillips-Garcia

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sent a second letter to Cafasso’s home via Federal Express, explaining her legal and

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contractual obligations to return GDC4S’s property and proprietary information. On May

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11, 2006, GDC4S’s then-Senior Employment and Labor Counsel Rebecca Collins sent

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Cafasso an email stating GDC4S had become aware that in her last days of employment

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Cafasso had requested proprietary and sensitive data that she had no legitimate business

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reason to seek and she apparently had downloaded a significant amount of GDC4S’s

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proprietary information onto removable storage devices during her last days at work.

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Collins’ email stated Cafasso had until the close of business that day to return all

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proprietary data in her possession and/or provide GDC4S with written assurances she did

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not have any such data in her possession. Cafasso returned her ID badge, keys, remote

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access card, and cell phone by May 11, 2006, but did not return the computer files she

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had copied and removed.

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On May 18, 2006, Wigington told Jones that Cafasso had asked him how GDC4S

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billed on Government contracts. The conversation caused Jones to speculate, for the first

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time, that Cafasso may have been collecting documents and copying files for a qui tam

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action.

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B.

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When Cafasso was hired in September 2001, she signed an Employee

Cafasso’s Confidentiality Agreement

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Confidentiality and Assignment of Inventions Agreement (“Agreement”). Section 2 of

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the Agreement is titled Nondisclosure of Confidential Information and includes the

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following:

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I recognize that GD is engaged in a continuous program of research and development regarding all aspects of its business, technical and otherwise, and that as a GD employee I will have access to Confidential Information that has value to GD in part because it is confidential. During the time of my employment by GD, I will not disclose or use any Confidential Information except to the extent I am required to disclose or use such Confidential Information in the performance for [sic] my assigned duties for GD; and I will use my best efforts to safeguard the Confidential Information and protect it against disclosure, misuse, espionage, loss and theft.

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After the termination of my employment with GD, I will not use any Confidential Information or disclose any Confidential Information to any person or entity who is not specifically authorized by GD to receive it.

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...all confidential information and trade secrets (whether or not specifically labeled or identified as “confidential”), in any form or medium, that is disclosed to, or developed or learned by me and that relates to the business, products, services, research or development of GD or its suppliers, distributors or customers and which has not become publicly known.

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“Confidential Information” includes, among other things, internal business information,

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intellectual property of GD, and:

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identities of, negotiations with, individual requirements of, specific contractual arrangements with, and information about, GD’s suppliers, distributors, customers, investors, partners and/or other business associates, as well as their confidential information.

5 Section 5 of the Agreement is titled “Ownership and Return of Materials” and 6 consists of the following paragraph: 7 8 9 10 11 12 13 14

All documents, manuals, lab notebooks, memoranda, letters, customer and supplier lists, computer programs and data, equipment, and other physical property, including any copies, which GD makes available to me, which I produce in connection with my services for GD, or which otherwise belong to GD, whether or not such materials contain Confidential Information, shall remain the sole property of GD. I will not remove any such materials from GD’s premises without the prior written consent of a corporate officer of GD. Upon the termination of my employment with GD, or at any time requested, I shall promptly deliver to GD all such materials and copies thereof in my possession and control. If GD requests, I shall provide written confirmation that I have returned all such materials. (Emphasis added.)

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Section 6 of the Agreement is titled “Noncompliance” and includes the following:

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I acknowledge that my compliance with this Agreement is necessary to protect GD’s goodwill and Confidential Information, that my failure to comply with this Agreement will irreparably harm the business of GD, and that monetary damages would not provide an adequate remedy to GD in the event of such non-compliance. Therefore, GD shall be entitled to obtain an injunction and other equitable relief in any court of competent jurisdiction . . . against acts of noncompliance by me of this Agreement, without the posting of bond or other security, in addition to whatever other remedies it may have. . . . In the event that GD is forced to and successfully does enforce this Agreement against me in any court, I will reimburse and indemnify GD for the actual costs incurred by GD in enforcing this Agreement, including but not limited to attorneys’ fees.

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Section 8 of the Agreement provides: 23 24 25

This Agreement does not constitute an employment agreement and I understand that I remain an employee at will. This means that I may resign at any time and GD may terminate my employment at any time, with or without cause and with or without notice.

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C.

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On May 15, 2006, GDC4S filed a Complaint in the Arizona Superior Court for

Procedural History

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Maricopa County against Cafasso for breach of contract, misappropriation of trade

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secrets, and conversion. On May 26, 2006, Cafasso filed in the United States District

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Court this qui tam action for herself and on behalf of the United States against GDC4S

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and General Dynamics Corporation. On January 10, 2007, Cafasso served the

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Defendants. On January 30, 2007, GDC4S answered and pled six counterclaims: (1)

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breach of contract, (2) misappropriation of trade secrets, (3) conversion, (4) breach of

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fiduciary duty, (5) common law fraud/fraudulent misrepresentation, and (6) computer

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fraud and abuse. (Doc. #37.) On July 5, 2007, the United States notified the Court of its

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decision not to intervene in this action.

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Cafasso’s Substitute Amended Complaint includes Count I (False Claims Act

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Violations) and Count II (Retaliation). (Doc. #92.) GDC4S was granted judgment on the

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pleadings on Count I for failure to state a claim upon which relief can be granted. (Doc.

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#219.) Cafasso now moves for summary judgment on GDC4S’s counterclaims, and

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GDC4S moves for partial summary judgment on its breach of contract counterclaim and

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Cafasso’s retaliation claim. (Doc. ##272, 275.) GDC4S seeks injunctive relief enjoining

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and restraining Cafasso from disclosing or using any of the information she had access to

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or copied while employed by GDC4S and directing her to execute her exit paperwork and

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return everything she took from GDC4S (other than employee benefit documents,

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discharge/severance documents, and payroll documents). GDC4S also seeks

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reimbursement of its legal expenses incurred in connection with its state court claims and

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its federal court counterclaims pursuant to section 6 of the Agreement.

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III.

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Count II of Relator’s Substitute Amended Complaint (Retaliation) A.

The False Claims Act (“FCA”) 1.

Liability Under the FCA

The FCA imposes liability on any person who: - 13 -

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(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;

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(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;

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(3) conspires to defraud the Government by getting a false or fraudulent claim allowed or paid; (4) has possession, custody, or control of property or money used, or to be used, by the Government and, intending to defraud the Government or willfully to conceal the property, delivers, or causes to be delivered, less property than the amount for which the person receives a certificate or receipt;

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...

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(7) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government . . . .

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31 U.S.C. § 3729(a). Subsection (a)(1) “attaches liability, not to underlying fraudulent

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activity, but to the ‘claim for payment.’ What constitutes the FCA offense is the knowing

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presentation of a claim that is either fraudulent or simply false.” U.S. ex rel. Hopper v.

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Anton, 91 F.3d 1261, 1266 (9th Cir. 1996).

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Subsection (a)(7) does not require presentation of a false claim, but instead

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“requires that a defendant make or use a false record or statement in order to conceal,

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avoid or decrease an obligation to pay the government.” U.S. v. Bourseau, 531 F.3d

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1159, 1169 (9th Cir. 2008). Subsection (a)(7), known as “the reverse false claims

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provision,” applies only where the United States “was owed a specific, legal obligation at

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the time that the alleged false record or statement was made, used, or caused to be made

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or used”:

27

The obligation cannot be merely a potential liability: instead, in order to be subject to the penalties of the False Claims Act, a defendant must have had a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness. . . . The deliberate use of the certain, indicative, past tense suggests that Congress intended the reverse false claims provision to apply only to existing legal duties to pay or deliver property.

28

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24 25 26

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1 2

Filed 05/21/09 Page 15 of 25

Id. “Violations of laws, rules, or regulations alone do not create a cause of action

3

under the FCA. It is the false certification of compliance which creates liability when

4

certification is a prerequisite to obtaining a government benefit. . . . Mere regulatory

5

violations do not give rise to a viable FCA action.” Hopper, 91 F.3d at 1266-67.

6 7 8 9 10 11 12

2.

FCA Protection from Retaliation

The FCA protects employees from retaliation by their employers for lawful acts done in furtherance of an FCA action: Any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee or others in furtherance of an action under this section, including investigation for, initiation of, testimony for, or assistance in an action filed or to be filed under this section, shall be entitled to all relief necessary to make the employee whole.

13

31 U.S.C. § 3730(h) (emphasis added). To prove a § 3730(h) claim, a plaintiff must

14

prove three elements: (1) the employee was engaging in conduct protected by the FCA,

15

(2) the employer knew the employee was engaging in protected conduct, and (3) the

16

employer discriminated against the employee because of his or her protected conduct.

17

U.S. ex rel. Hopper v. Anton, 91 F.3d 1261, 1269 (9th Cir. 1996). Though Hopper’s

18

summary of the statute did not mention it because it was not in play in that case, the

19

statute plainly protects only “lawful acts done by the employee.”

20

Although § 3730(h) does not require specific awareness of the FCA, the subsection

21

protects only employees “investigating matters which are calculated, or reasonably could

22

lead, to a viable FCA action.” Id. “[A]n employee engages in protected activity where

23

(1) the employee in good faith believes, and (2) a reasonable employee in the same or

24

similar circumstances might believe, that the employer is possibly committing fraud

25

against the government.” Moore v. Cal. Inst. of Tech. Jet Propulsion Lab., 275 F.3d 838,

26

845 (9th Cir. 2002). See also U.S. ex rel. Yesudian v. Howard University, 153 F.3d 731,

27

740-41 (D.C. Cir. 1998) (FCA-protected activity includes investigating matters that

28

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1

reasonably could lead to a viable FCA case, but does not require specific awareness of the

2

FCA).

3

“[A] retaliation claim can be maintained even if no FCA action is ultimately

4

successful or even filed.” United States ex rel. Ramseyer v. Century Healthcare Corp.,

5

90 F.3d 1514, 1522 (10th Cir. 1996). But “the activity prompting plaintiff’s discharge

6

must have been taken ‘in furtherance of’ an FCA enforcement action.” Id. And the

7

defendants must have had notice the plaintiff was acting “in furtherance of” an FCA

8

enforcement action in order for their actions to constitute retaliation. Id. Where a

9

plaintiff merely advised her superiors of noncompliance and warned of consequences for

10

noncompliance, and her monitoring and reporting activities were required to fulfill her

11

job duties, defendants did not have notice the plaintiff was furthering or intended to

12

further an FCA action. Id. at 1523; see Yesudian, 153 F.3d at 740 (to be covered by the

13

FCA, the plaintiff’s investigation must include false or fraudulent claims, something more

14

than his employer’s noncompliance with state or federal regulations).

15

Just as there is no requirement a plaintiff know his investigation could lead to an

16

FCA action, there is no requirement the plaintiff inform his employer he is contemplating

17

an FCA action to be protected from retaliation. Yesudian, 153 F.3d at 742. Nor must the

18

employer know, or be advised, the false or fraudulent claims the plaintiff is investigating

19

would violate the FCA. Id. What the employer must know, however, is the plaintiff is

20

engaged in investigations that reasonably could lead to an action under the FCA. Id.

21

“[U]nless the employer is aware that the employee is investigating fraud, the employer

22

could not possess the retaliatory intent necessary to establish a violation of § 3730(h).”

23

Hopper, 91 F.3d at 1269.

24

Although courts may infer causation based on the proximity between the protected

25

action and the allegedly retaliatory employment decision, such an inference cannot be

26

made where nine months or more lapsed between the two events. Manatt v. Bank of

27

America, 339 F.3d 792, 802 (9th Cir. 2003). “Although lack of temporal proximity may

28

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1

make it more difficult to show causation, circumstantial evidence of a pattern of

2

antagonism following the protected conduct can also give rise to the inference.” Porter v.

3

Cal. Dep’t of Corrections, 419 F.3d 885, 895 (9th Cir. 2005) (internal quotation marks and

4

citation omitted).

5

B.

A Reasonable Jury Could Not Find GDC4S Liable for Retaliation Under § 3730(h).

6 Cafasso contends GDC4S terminated her employment in retaliation for 7 investigating and reporting internally GDC4S was failing to comply with the company 8 policy and federal regulations that protect the Government’s interest in GDC4S 9 inventions. For her § 3730(h) claim to succeed at trial, Cafasso must prove: (1) she was 10 engaging in conduct protected by the FCA, (2) GDC4S knew she was engaging in 11 protected conduct, and (3) GDC4S terminated her employment because of her protected 12 conduct. 13 1. 14

The FCA Does Not Protect Cafasso’s Investigating and Reporting.

15

There is evidence Cafasso believed GDC4S, under Jones’s direction, was

16

intentionally failing to notify the Government of its intent to abandon patent prosecution

17

for certain inventions in which the Government had intellectual property rights until a

18

time that would disadvantage the Government and benefit GDC4S. Cafasso reasoned

19

GDC4S would benefit by retaining certain inventions developed under Government

20

contracts as trade secrets and underbidding competitors for projects requiring application

21

of those trade secrets or perhaps by charging the Government for research and

22

development costs that would not actually be incurred on subsequent projects using those

23

trade secrets. She suggests the Government would not know that subsequent projects

24

applied inventions developed under previous Government contracts because GDC4S did

25

not properly disclose some inventions to the Government.

26 27 28

This, and perhaps other business strategies, appeared to conflict with the TTRB policy adopted under Motorola ownership and perhaps violate federal acquisition - 17 -

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1

regulations or contract provisions. It may have seemed unfair or even fraudulent. But

2

Cafasso does not allege she investigated and reported—or even suspected—GDC4S had

3

submitted a false claim, statement, or bill to the Government or had created a false record

4

or statement to conceal, avoid or decrease an obligation to pay or transmit money or

5

property to the Government.

6

At the most, Cafasso could have suspected GDC4S, by omission, avoided

7

transferring intellectual property rights to the Government. But even if § 3729(a)(7) did

8

not require that GDC4S affirmatively create a false record, the business strategy Cafasso

9

challenged applied only to inventions having only a Government application and for

10

which the Government already held unlimited intellectual property rights. For those

11

inventions GDC4S could not have had an obligation to transfer additional intellectual

12

property rights.

13

“Violations of laws, rules, or regulations alone do not create a cause of action

14

under the FCA.” Hopper, 91 F.3d at 1266. Cafasso’s acts could not reasonably have led

15

to an FCA claim. See id. at 1269 (“Her investigatory activity did not have any nexus to

16

the FCA.”) Even assuming Cafasso in good faith did believe GDC4S was committing

17

fraud subject to the FCA, a reasonable employee in the same or similar circumstances

18

could not have. See Moore, 275 F.3d at 845. Therefore, Cafasso’s investigating and

19

reporting do not constitute acts “in furtherance of an action” under the FCA.1 2.

20

Even If the FCA Protected Cafasso’s Conduct, GDC4S Did Not Know of Her Protected Conduct.

21 Even if Cafasso’s investigating and reporting did constitute acts “in furtherance of 22 an action” under the FCA, Cafasso did not report she suspected fraud or that GDC4S had 23 submitted false claims or created false records or statements. She requested an audit of 24 25 1

27

This conclusion means the FCA claims, which have been dismissed with prejudice for failure to state a claim upon which relief can be granted, also are wanting under a summary judgment standard.

28

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26

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1

the Law Department for failing to comply with the TTRB. She informed the Law

2

Department she believed it was violating company policy. She complained to her

3

supervisor, but he did not give notice to anyone else that she suspected GDC4S of fraud,

4

submitting false claims, or creating false records. Cafasso’s job included ensuring

5

GDC4S’s compliance with its Government contracts, and she repeatedly voiced concerns

6

about compliance. None of her actions could have notified GDC4S she was acting in

7

furtherance of an FCA action.

8

3.

9 10

Even If the FCA Protected Cafasso’s Conduct and GDC4S Knew of Her Protected Conduct, GDC4S Did Not Terminate Cafasso’s Employment Because She Engaged in Protected Conduct.

It is undisputed Marzilli alone made the decision to eliminate the CTO, which

11

included Cafasso’s position, and when Marzilli decided to eliminate the CTO, he did not

12

know of Cafasso’s concerns about compliance with the TTRB policy or federal

13

regulations. He did not know she had requested an audit of the Law Department. There

14

is no evidence—or evidence from which it may be inferred—he was persuaded by the

15

Law Department, or anyone else, to eliminate the CTO.

16

Instead, the undisputed evidence is General Dynamics Corporation acquired a

17

business unit in 2001 and merged it with another subsidiary in 2003. Until late 2005, the

18

two units functioned substantially under separate leadership. When Marzilli took control

19

of the Arizona unit, he chose to structure it consistently with the Massachusetts unit

20

already under his control. The Massachusetts unit did not have a CTO. Cafasso may not

21

have fully understood Marzilli intended to eliminate the entire CTO when he eliminated

22

the Chief Technology Officer position in November 2005, but it is not reasonable to

23

conclude Marzilli intended to retain a one-person CTO employing only Cafasso.

24

No later than January 2006, however, Cafasso knew that the entire CTO would be

25

eliminated, including her position as Chief Scientist/Technologist. In May 2006, the final

26

determination that Cafasso would be discharged was made because she had not found

27

another position in the company within sixty days—not the decision to eliminate

28

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1

Cafasso’s position as Cafasso suggests. Further, no evidence supports finding GDC4S

2

interfered with Cafasso finding another position within the company as retaliation for

3

Cafasso’s reporting.

4

Thus, a reasonable jury could not conclude that in January 2006, when Cafasso

5

first told Marzilli about the issues she felt needed attention, Marzilli eliminated the CTO

6

and Cafasso’s position in retaliation for reporting her concerns.

7

4.

8 9

Cafasso’s Other Theories of Retaliation

Cafasso contends GDC4S’s motion does not challenge her theories of retaliation based on GDC4S’s actions against her after terminating her employment and even if

10

GDC4S prevails on its motion she will be able to present her other theories of retaliation

11

to a jury. (Doc. #282 at 13 & n.1.) However, Cafasso’s Substitute Amended Complaint

12

does not allege any facts to support a claim for retaliation after termination. In fact, it

13

barely mentions Cafasso’s termination as an act of retaliation. GDC4S’s motion for

14

summary judgment on Cafasso’s retaliation claim is not limited to specific theories of

15

liability or types of retaliation although it properly focuses on the only basis Cafasso

16

touched upon for her retaliation claim. Moreover, as found below, the FCA does not

17

protect Cafasso’s copying and removing of GDC4S files, and GDC4S’s state court action

18

and Counterclaim in this action therefore cannot be retaliation for FCA-protected activity.

19

Therefore, GDC4S will be granted summary judgment on Count II (Retaliation) of

20

Relator’s Substitute Amended Complaint. Cafasso may not further litigate Count II under

21

new theories of retaliation.

22

IV.

GDC4S’s Counterclaim

23

A.

24

“[W]hen one person agrees to perform in a certain manner upon adequate

Legal Standard for Breach of Contract

25

consideration and fails to keep the agreement, he is liable to the performing party for any

26

damages sustained as a result of his failure to perform.” Graham v. Asbury, 540 P.2d

27

656, 657 (Ariz. 1975). To establish its counterclaim for breach of contract, GDC4S bears

28

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1

the burden of proving: (1) the existence of a valid contract; (2) its breach; and (3)

2

resulting damages. Id.

3

B.

GDC4S’s Claim for Breach of Contract

4

The existence of a contract and its breach are not disputed. It is undisputed

5

Cafasso executed an Agreement in which she promised not to disclose any Confidential

6

Information to any person or entity not specifically authorized by GDC4S to receive it

7

and she disclosed Confidential Information, as defined by the Agreement,2 to her

8

attorneys in violation of Section 2 of the Agreement. It also is undisputed Cafasso

9

violated Section 5 of the Agreement both by removing copies of GDC4S documents and

10

files from GDC4S’s premises and by failing to deliver all GDC4S materials and copies in

11

her possession to GDC4S promptly upon her termination.

12

Cafasso contends GDC4S has not incurred, disclosed, or proven damages. Section

13 6 of the Agreement, however, provides that Cafasso acknowledged her failure to comply 14 with the Agreement “will irreparably harm the business” of GDC4S and entitle GDC4S to 15 injunctive and other equitable relief. Section 6 further provides that in the event GDC4S 16 successfully enforces the Agreement against Cafasso, she will reimburse and indemnify 17 GDC4S for the actual costs incurred by GDC4S in enforcing the Agreement, including but 18 not limited to attorneys’ fees. Cafasso deprived GDC4S of its right under the Agreement 19 to keep its confidential information confidential, and GDC4S has spent three years 20 litigating to protect that right and is entitled to an injunction. Although its legal expenses 21 are not yet quantified, there is no question GDC4S has been damaged. Nor is there any 22 unfair surprise to Cafasso. 23 24 2

27

Although Cafasso now contends that GDC4S has not met its burden of proving that any of the wrongfully copied files contained trade secret or privileged documents, she admitted in her state court answer that she downloaded “more than ten gigabytes of the Company’s confidential, proprietary, and trade secret information” and copied that data onto removable storage devices.

28

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1

Filed 05/21/09 Page 22 of 25

In defense to GDC4S’s breach of contract claim, Cafasso contends the FCA

2 protects her conduct violating the Agreement because “[p]ublic policy grants Relator a 3 privilege in gathering copies of documents as part of an investigation under the FCA and 4 gives Relator immunity from civil liability based on claims against her for so doing.” She 5 contends conferring with a government investigator constitutes “cooperating with the 6 government,” and by doing so before she made copies of GDC4S’s files, removed them, 7 and refused to return them, her actions became a privileged investigation of a potential 8 FCA qui tam action. But Spitza did not ask or authorize Cafasso to do anything in 9 violation of her Agreement (or the law). That he did not affirmatively instruct Cafasso not 10 to copy and remove files does not transform her actions into “cooperation with the 11 government.” Moreover, Cafasso never gave Spitza the files she copied. None of the 12 authority on which Cafasso relies supports her position. See Forro Precision, Inc. v. IBM 13 Corp., 673 F.2d 1045, 1051, 1053-54 (9th Cir. 1982) (IBM assisted the San Jose Police 14 Department, with the involvement and consent of the Santa Clara County District 15 Attorney, in executing a search warrant by examining the seized material to ensure it 16 matched that described in the warrant); Caesar Elecs. Inc. v. Andrews, 905 F.2d 287, 288, 17 289 (9th Cir. 1990) (manufacturer complied with instructions of U.S. Customs 18 investigating illegal transaction and obtained letters from the U.S. Departments of Justice 19 and Commerce confirming it was acting with the knowledge and consent of those 20 departments and would not be subject to any liability for possible violations of American 21 export laws as the result of its cooperation in the investigation); U.S. ex rel. Grandeau v. 22 Cancer Treatment Centers of America, 350 F. Supp. 2d 765, 770 (N.D. Ill. 2004) (FCA 23 did not immunize relator’s secret delivery of confidential documents to the government in 24 compliance with a subpoena not addressed personally to relator). 25

Public policy does not immunize Cafasso. Cafasso confuses protecting

26 whistleblowers from retaliation for lawfully reporting fraud with immunizing 27 whistleblowers for wrongful acts made in the course of looking for evidence of fraud. The 28

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1 limitation of statutory protection for retaliation to “lawful acts done by the employee” 2 weighs against any inference of a broad privilege for Cafasso to breach her contract with 3 GDC4S. Statutory incentives encouraging investigation of possible fraud under the FCA 4 do not establish a public policy in favor of violating an employer’s contractual 5 confidentiality and nondisclosure rights by wholesale copying of files admittedly 6 containing confidential, proprietary, and trade secret information. Although the 7 Agreement might be unenforceable if the interest in its enforcement is outweighed in the 8 circumstances by a substantial public interest, e.g., the public interest in filing an FCA qui 9 tam action, that would be harmed by enforcement of the Agreement, such an interest is not 10 harmed by enforcement of the Agreement in these circumstances. See U.S. ex rel. Green 11 v. Northrop Corp., 59 F.3d 953, 962-63 (9th Cir. 1995). In fact, Cafasso filed a FCA qui 12 tam action before she or her attorneys reviewed the files she copied and removed from 13 GDC4S’s premises. 14

Further, there is no evidence Cafasso needed to remove copies of the files to avoid

15 destruction of evidence in support of her FCA claim. Although Cafasso told Spitza she 16 feared document destruction, she testified her concern was that two databases were to be 17 transferred from the CTO to the Law Department and the Law Department may not 18 continue to use those databases. She said she was not concerned the documents would be 19 destroyed, just the databases. Moreover, Cafasso’s copying and removing was not limited 20 to files in the two databases or to files within the time period during which the alleged 21 fraud occurred. 22

Finally, Cafasso’s characterization of O’Day v. McDonnell Douglas Helicopter

23 Co., 79 F.3d 756 (9th Cir. 1996), as permitting “an employee to surreptitiously gather 24 documents related to an employer’s unlawful conduct” is incorrect. In O’Day, the Ninth 25 Circuit applied the Title VII balancing test for determining whether an employee’s conduct 26 constitutes “protected activity” to a retaliation claim under the Age Discrimination in 27 28

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Case 2:06-cv-01381-NVW Document 352

Filed 05/21/09 Page 24 of 25

1 Employment Act. Id. at 763. The balance tipped in favor of the employer’s interest in 2 maintaining a harmonious and efficient operation. Id. The court explained: 3 4 5 6

In balancing an employer’s interest in maintaining a “harmonious and efficient” workplace with the protections of the anti-discrimination laws, we are loathe to provide employees an incentive to rifle through confidential files looking for evidence that might come in handy in later litigation. The opposition clause protects reasonable attempts to contest an employer’s discriminatory practices; it is not an insurance policy, a license to flaunt company rules or an invitation to dishonest behavior.

7 O’Day v. McDonnell Douglas Helicopter Co., 79 F.3d 756, 762-64 & n.6 (9th Cir. 1996). 8

Thus, the FCA does not immunize Cafasso for her breach of Sections 2 and 5 of the

9 Agreement. Summary judgment on Count I (Breach of Contract) of GDC4S’s 10 Counterclaim will therefore be granted in favor of GDC4S. 11

C.

GDC4S’s Other Claims

12

In addition to Count I for breach of contract, GDC4S’s Counterclaim includes the

13 following five counts: (2) misappropriation of trade secrets, (3) conversion, (4) breach of 14 fiduciary duty, (5) common law fraud/fraudulent misrepresentation, and (6) computer 15 fraud and abuse. In its Motion for Partial Summary Judgment, GDC4S states if it obtains 16 summary judgment on Count I of its Counterclaim, it will agree to dismiss its remaining 17 counterclaims. Because the Court will grant GDC4S summary judgment on Count I of its 18 Counterclaim, the remaining counts will be treated as voluntarily dismissed, and Cafasso’s 19 motion for summary judgment on the remaining counterclaims will be denied as moot. 20 V.

Conclusion

21

GDC4S is entitled to summary judgment on Cafasso’s retaliation claim. Although

22 Cafasso may have believed she was investigating what she suspected to be fraud, no 23 reasonable employee could have believed what she suspected reasonably could have led to 24 an action under the FCA. Further, GDC4S did not know she was engaging in conduct 25 protected by the FCA, and GDC4S terminated her employment as a result of a strategic 26 business decision, not in retaliation for FCA-protected activity. 27 28

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1

Filed 05/21/09 Page 25 of 25

GDC4S also is entitled to summary judgment on its breach of contract

2 counterclaim. Cafasso agreed not to disclose GDC4S’s confidential information without 3 authorization, not to remove any copies of GDC4S’s documents and data from GDC4S’s 4 premises, and to promptly deliver to GDC4S all such material and copies in her possession 5 and control upon termination or at any time requested. She violated each of those 6 agreements causing irreparable harm to GDC4S, and the FCA does not immunize her. 7

IT IS THEREFORE ORDERED that Relator’s Motion for Summary Judgment on

8 Defendant’s Counterclaims (doc. #275) is denied. 9

IT IS FURTHER ORDERED that GDC4S’s Motion for Partial Summary Judgment

10 on: (1) Count II of Relator’s Substitute Amended Complaint (Retaliation) and (2) Count I 11 of GDC4S’s Counterclaim (Breach of Contract) (doc. #272) is granted. 12

IT IS FURTHER ORDERED that Counts II through VI of GDC4S’s Counterclaim

13 are dismissed without prejudice on motion of GDC4S, but without leave to refile them in 14 this or any other action. 15

DATED this 21st day of May, 2009.

16 17 18 19 20 21 22 23 24 25 26 27 28

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Filed 07/01/09 Page 1 of 4

1 2 3 4 5 6

IN THE UNITED STATES DISTRICT COURT

7

FOR THE DISTRICT OF ARIZONA

8 9 10 11 12 13 14 15 16 17 18 19 20 21

) ) ) Plaintiff-Relator, ) ) vs. ) ) ) General Dynamics C4 Systems, Inc., ) ) Defendant. ) _________________________________ ) ) ) ) General Dynamics C4 Systems, Inc., ) ) Counterclaimant, ) ) vs. ) ) Mary A. Cafasso, ) ) Counterdefendant. ) ) United States ex rel. Mary A. Cafasso,

No. CV 06-01381 PHX NVW JUDGMENT and PERMANENT INJUNCTION

22

By order of August 11, 2008, the Court granted Defendant General Dynamics C4

23

System, Inc.’s (“GDC4S”) Motion for Judgment on the Pleadings on Count I of the

24

Substitute Amended Complaint. (Doc. # 219.) By order of May 21, 2009, the Court granted

25

Defendant and Counterclaimant GDC4S’s Motion for Partial Summary Judgment on: (1)

26

Count II of Relator’s Substitute Amended Complaint (Retaliation) and (2) injunctive relief

27

on Count I of GDC4S’s Counterclaim (Breach of Contract). Having prevailed for injunctive

28

relief on Count I of GDC4S’s Counterclaim (Breach of Contract), GDC4S voluntarily

Case 2:06-cv-01381-NVW Document 377

Filed 07/01/09 Page 2 of 4

1

dismissed the remaining Counts II through VI of its Counterclaim. GDC4S also withdrew

2

its claim for damages on Count I of its Counterclaim (Breach of Contract). The only matter

3

remaining for determination is GDC4S’s Motion for Attorneys’ Fees (doc. # 363), which is

4

set for hearing on August 18, 2009, and the pendency of which does not preclude entry of

5

final judgment on the substantive claims, all of which have been adjudicated or withdrawn.

6

Fed. R. Civ. P. 54(d)(2). The Court finds it appropriate to enter final and appealable

7

judgment on all substantive claims at this time.

8

IT IS THEREFORE ORDERED, ADJUDGED, AND DECREED that Defendant

9

General Dynamics C4 Systems, Inc., have judgment against Plaintiff United States of

10

America and Relator Mary A. Cafasso on their Substitute Amended Complaint and that

11

Plaintiff United States of America and Relator Mary A. Cafasso take nothing.

12

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Counts II through

13

VI of Counterclaimant General Dynamics C4 Systems, Inc.’s Counterclaim are voluntarily

14

dismissed without prejudice, but without leave to refile them in this or any other action.

15 16 17 18 19 20 21 22 23 24 25

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED as follows: 1.

Plaintiff/Counterdefendant Mary A. Cafasso (“Plaintiff”) and all of her

lawyers, agents, servants, employees, successors and assigns shall return to General Dynamics C4 Systems, Inc. (“GDC4S”) any and all documents and copies of documents (including electronic documents, data and information where converted to hard copies, but not including any of her attorneys’ work product or their attorney-client communications) that Plaintiff took from GDC4S during her employment, provided that, where Cafasso’s attorneys have written on GDC4S documents or attached them to attorney-client communications or attorney work product, such writings or attachments may be deleted/unattached before the documents are returned to GDC4S, but this paragraph does not apply to the following:

26 27 28 -1-

Case 2:06-cv-01381-NVW Document 377

1 2 3

a.

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Employee benefit documents, discharge/severance documents, payroll

and tax documents, and personal (non-business-related) documents and things where, in each category, such documents pertain directly to her; and

4 5

Filed 07/01/09 Page 3 of 4

b.

Any documents that have been filed as exhibits in connection with any

motions or pleadings in this matter, to the extent that Plaintiff or her attorneys require access to such documents for purposes of any further trial or appellate court proceedings. If any such documents were filed under seal, they shall remain under seal until all trial and appellate proceedings in this matter are exhausted – at which point they shall be returned to GDC4S, upon GDC4S’s motion. Until that time, the documents described in this sub-paragraph shall remain subject to the restrictions imposed by the July 26, 2006 Order of the Arizona Superior Court in Case No. 06-007147, as adopted by this Court pursuant to the April 26, 2007 Order on Procedural Matters (doc. # 79). To the extent not filed as exhibits with the Court, the original and all copies of any GDC4S documents that Plaintiff introduced or used as exhibits at any depositions in this matter shall be returned to GDC4S’s attorneys by September 8, 2009, as described below. 2.

By September 8, 2009, Plaintiff and her attorneys shall comply with this Order

by doing the following: a.

obtaining the return of all documents and copies identified in Paragraph

1 above that Plaintiff or her attorneys have shared with or published to any other persons or entities (other than a Court or a branch of the U.S. Government); b.

delivering all hard-copy documents and copies identified in Paragraphs

1 and 2a above (except as otherwise noted in Paragraphs 1a or 1b) to GDC4S’s attorneys,

23 Mark G. Kisicki, Lawrence Allen Katz and Peter S. Kozinets, Steptoe & Johnson LLP, 201 24 East Washington Street, Suite 1600, Phoenix, Arizona 85004-2382; 25 c.

destroying and/or permanently deleting from any electronic media

26 within their possession, custody or control any originals, images or copies of such data and 27 documents; and 28 -2-

Case 2:06-cv-01381-NVW Document 377

1 2 3 4 5 6 7 8 9 10 11 12 13

d.

Filed 07/01/09 Page 4 of 4

certifying in a writing, signed by both Plaintiff and her attorneys, that

they have performed all the obligations set forth in Paragraphs 1 and 2 above. 3.

Plaintiff and her lawyers are also restrained and enjoined from referring to or

divulging any of the documents and data referred to in Paragraph 1 and 2 above to any third party (other than a Court or a branch of the U.S. Government), for any purpose unrelated to the litigation of this case and any appeals therefrom. 4.

For seven years from the conclusion of this litigation, all documents returned

to GDC4S or its counsel shall be maintained and available to be accessed by Plaintiff’s counsel pursuant to normal discovery procedures or court order prior to which GDC4S has been given the opportunity to challenge the request for access. The Clerk shall terminate this case, without prejudice to adjudication of the pending motion for attorneys’ fees. Dated: July 1, 2009.

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Case 2:06-cv-01381-NVW Document 419

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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United States of America ex rel. Mary A.) ) Cafasso, ) ) Plaintiff, ) ) vs. ) ) General Dynamics C4 Systems, Inc., ) ) Defendant. _________________________________ ) ) ) General Dynamics C4 Systems, Inc., ) ) Counterclaimant, ) ) vs. ) ) Mary A. Cafasso, ) ) Counterdefendant. )

No. CV06-1381-PHX-NVW FINDINGS OF FACT AND CONCLUSIONS OF LAW and ORDER [Not for Publication]

Before the Court is General Dynamics C4 Systems, Inc.’s (“GDC4S”) Motion for

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Award of Attorneys’ Fees [doc. # 363] and Motion for Leave to File Supplemental Bill of

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Costs re State Court [doc. # 385]. GDC4S brought suit against its former employee Mary

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Cafasso in state court alleging breach of contract and numerous other claims for her

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taking of tens of thousands of business records. Shortly thereafter, Cafasso brought suit

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in this Court seeking relief against GDC4S under the False Claims Act, 31 U.S.C. § 3730.

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Cafasso’s complaint included two claims under the statute, first, a qui tam claim that

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GDC4S made false claims, and second, a retaliation claim that GDC4S had fired Cafasso

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in response to protected activities. The state court claims were voluntarily dismissed and

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reasserted as counterclaims in the federal case. A stipulation of the parties provided that

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the state court orders would remain in effect unless modified by this Court and without

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waiver of any party’s substantive rights. In effect, the dual litigation was replaced by

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single litigation in this Court. Judgment was entered in favor of GDC4S on the breach of

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contract action, the qui tam action, and the retaliation action, and permanent injunctive

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relief was entered on GDC4S’s contract action requiring Cafasso to return GDC4S’s

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business records.

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GDC4S now moves for an award of attorneys’ fees under Arizona contract law and the Court’s statutory and inherent sanctioning powers. GDC4S requests

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$1,593,095.75 as sanctions against Cafasso and her lawyers: $91,930.50 for misuse of

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the federal action in state court; $1,143,004.25 for prosecution of the qui tam claim; and

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$358,161.00 for prosecution of the retaliation claim. GDC4S also moves for an award of

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attorneys’ fees against Cafasso under A.R.S. § 12-341.01(A) in the total amount of

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$575,415.00, which includes $91,930.50 of the sanctions request. GDC4S also seeks to

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file a supplemental bill of costs relating to costs incurred in the state court action.

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FINDINGS OF FACT

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Previous orders have outlined the facts underlying the merits of this case, and it is

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unnecessary to retread that ground as a whole. [Doc. ## 219, 352.] GDC4S has prevailed

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in every aspect: It defeated Cafasso’s qui tam claim by obtaining judgment on the

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pleadings, it defeated her retaliation claim at the summary judgment stage, and it won its

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state-law contract action against her on summary judgment as well. (GDC4S voluntarily

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dismissed several other counterclaims because success in the contract action provided the

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essential injunctive relief sought.)

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I.

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The State Court Proceedings and the Ex Parte Federal Court Orders GDC4S brought suit against Cafasso in Maricopa County Superior Court on May

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15, 2006. On May 24, 2006, the state court issued a temporary restraining order after

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notice to Cafasso requiring her to return nearly eleven gigabytes of documents she had -2-

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removed from the GDC4S offices without permission, while she was still on payroll but

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after her work duties were ended and before her computer access was terminated.

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Two days later, Cafasso filed this qui tam action in this Court. Her local Phoenix

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counsel, Thomas M. Rogers, telephoned and asked to come to chambers to present papers

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that he had filed in a sealed action. His inquiry did not request a hearing or indicate that

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ex parte relief would be requested. The undersigned judge allowed him to come to

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chambers. After exchange of pleasantries, Mr. Rogers presented and requested entry of

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two ex parte orders, one sealing the case and one permitting Cafasso to inform the state

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court ex parte of the pendency of the federal action.

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At that point, this Court committed an error of judgment in not recognizing the

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unannounced request for the second ex parte order as requiring presentation on the

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record. Mr. Rogers and the undersigned judge have differing recollections of the

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conversation that ensued. The Complaint itself referenced the state court litigation and

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restraining order as concerning an attempt to get Cafasso’s computer, not documents of

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GDC4S that Cafasso allegedly misappropriated. The undersigned judge recalls inquiring

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about the referenced state court litigation and receiving a general response but no

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disclosure of an existing state court order to return misappropriated documents. Nor was

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there any disclosure of an intent to use this Court’s ex parte order allowing ex parte

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disclosure of this proceeding to the state court as a basis to seek lifting of a state court

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order without notice to GDC4S. Mr. Rogers now states that he and unlisted co-counsel,

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Richard J. Harris and Michael Bothwell of Atlanta, Georgia, planned and rehearsed a full

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presentation of the relevant facts and procedural history of the state court proceeding if

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this Court were to inquire about it. Mr. Rogers remembers informing this Court of the

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state court temporary restraining order. This Court entered both requested ex parte

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orders.

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Nearly four weeks later, armed with this Court’s order allowing Cafasso to inform

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the state court ex parte of the federal action and with the participation of an Assistant

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United States Attorney, Mr. Rogers presented an ex parte request to the state court to lift -3-

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the May 24, 2006 temporary restraining order requiring Cafasso to return the nearly

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eleven gigabytes of documents taken from GDC4S. The motion was heard by a judge pro

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tempore in the absence of the assigned Superior Court Judge. Compliance with the

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temporary restraining order would not have prejudiced the United States’ investigation if

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there were some underlying False Claims Act claim; indeed, the United States could get

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all GDC4S’s documents directly without divulging the sealed action under 31 U.S.C.

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§ 3733. The judge pro tem was persuaded to lift the restraining order by the unsupported

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contention that the investigation itself, not just the filing of the federal action, must be

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kept secret under federal law. The judge pro tem explicitly stated his belief that he was

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lifting the restraining order because it was required by federal law and at the request of

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this Court. Mr. Rogers denies that he made either assertion to the judge pro tem, but the

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record shows that he did not disabuse the judge of those mistakes when the judge

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expressed them, even after the judge asked counsel to correct him as appropriate. Indeed,

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counsel built on those mistakes and persuaded the judge pro tem to stay the entire state

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court proceeding. The Arizona Court of Appeals later granted special action relief against

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these orders as unauthorized by law.

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The False Claims Act required Cafasso to give the Government “substantially all

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material evidence and information [she] possesse[d].” 31 U.S.C. § 3730(b)(2). She was

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not required to show the Government evidence that she did not possess, or to possess

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evidence unlawfully. Cafasso did not show a lawful basis for removing or retaining those

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documents. In addition, the False Claims Act only protects the confidentiality of the

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federal court proceedings themselves. It does not directly enable or require courts to

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protect the secrecy of the Government’s or a relator’s investigation at the price of

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violating other substantive and procedural laws.

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Upon later learning of these events, this Court vacated its ex parte orders as improvidently entered. [Doc. # 19.]

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II.

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The Federal Complaint Cafasso’s initial complaint was six pages long. [Doc. # 1.] It accused GDC4S of

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making false claims, but it identified none of the specific false claims or intellectual

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property at issue. The Complaint contained only conclusory assertions of liability. Six

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months later, Cafasso filed a lengthier Amended Complaint which was stricken for

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invading Defendant’s attorney–client privilege. [Doc. # 87.] A modified version of the

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Amended Complaint was filed in August 2007 without immediate challenge. [Doc.

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# 92.]1 This complaint included more bulk but identified no specific false claims. Weeks

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and months after filing the initial complaint, Cafasso herself stated in state court filings

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that she needed to retain the documents so that her lawyers could perform their Rule 11

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inquiry and determine whether she had viable claims against GDC4S.

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III.

Qui Tam Discovery and Briefing

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Discovery proceeded in this forum. At a September 28, 2007 Scheduling

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Conference, GDC4S expressed frustration with Cafasso’s tactics. In particular, GDC4S

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objected to Cafasso’s demand that GDC4S identify privileged documents in Cafasso’s

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possession before she identify those that supported her claim. Such a process would have

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placed an enormous and unnecessary burden on GDC4S because Cafasso had taken

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nearly eleven gigabytes of documents, numbering in the thousands. The Court ordered

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that GDC4S was “entitled to be given usable, practical disclosure whether under Rule

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26(a) or under a crafted order from the Court as to what it is you are relying on for your

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case against them.” [Doc. # 104 at 16.] It was not enough to say that all eleven gigabytes

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of documents were relevant to Cafasso’s claims; Cafasso was still obligated to inform

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GDC4S of those documents supporting her claims.

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In November 2007, Cafasso gave “categorical discovery responses listing many thousands of documents as the supposed bases for each claim—exactly the kind of

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During this time, proceedings were stayed for several months while the Government considered whether to intervene. [Doc. # 42.] -5-

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evasion and attempt to shift her own work to the opposing party that the court warned in

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September 2007 was improper.” [Doc. # 219 at 14.] A discovery dispute then arose

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regarding the scope and time limits of discovery, and the dispute was adjudicated in

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January 2008. At the discovery dispute hearing, the Court reiterated its earlier directions

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concerning the burden of discovery and granted Cafasso’s counsel additional time to

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comply. GDC4S’s Rule 37 motion for attorney’s fees relating to this dispute was denied.

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After the hearing, Cafasso propounded discovery into 110 inventions that were not

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mentioned in the Substitute Amended Complaint. The Court granted GDC4S’s motion

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for a protective order against the new lines of inquiry. No sanctions were sought or

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awarded at this stage.

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Cafasso’s evasiveness continued on June 2, 2008, when she responded to an

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interrogatory asking her to “[i]dentify each specific provision of 31 U.S.C. § 3729(a)(1)-

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(7) of the False Claims Act (“FCA”) that you allege in paragraph 173 of the Substitute

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Amended Complaint (“SAC”) that Defendant ‘knowingly violated’ . . . .” [Doc. # 184-2,

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exh. 2, at 2-4.] In response, Cafasso stated that she “has not made a claim as described in

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this Interrogatory, nor does the law require that she claim such to have been the case.”

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By any fair reading, Cafasso’s statement abandoned any qui tam allegations.2 The answer

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prompted GDC4S’s motion for judgment on the pleadings as to the qui tam action.

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In her briefing on the motion for judgment on the pleadings, Cafasso’s attorneys argued that she could state a claim under the False Claims Act without pleading that a “claim” was submitted to the Government. Whatever the merits of that theory under the law applicable at the time, it in no way justified her refusal of discovery. The interrogatory sought the basis for claims under the statute, not “claims” submitted to the Government, as Cafasso now reconceives it. In her briefing on this motion for attorney fees, Cafasso more candidly states that by refusing this discovery on the eve of her deposition of GDC4S, she thought she could invoke GDC4S’s duty to confer before seeking discovery relief, postponing her production until after the deposition. [Doc. # 392 at 5-6.] Rather than demand a better answer, GDC4S took her answer at face value, as it was entitled to do. -6-

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Responding to this motion, Cafasso lodged a response that was 57 pages long,

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exceeding the page limit by 40 pages. The exhibits to the response also included 775

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pages of single-spaced argument and supplemental charts. The Court disallowed the

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filing. On its own, the Court granted Cafasso a two-week extension to file a proper

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response and warned that her approach was improper. [Doc. # 202.] Nonetheless,

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Cafasso filed a 17-page response that included 549 single-spaced pages of mostly

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supplemental charts. She also lodged a 733-page Proposed Second Amended Complaint.

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GDC4S’s motion for judgment on the pleadings was granted [doc. # 219], and leave to amend again was denied. The substitute amended complaint of record appeared

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to allege that GDC4S had breached certain contractual or regulatory obligations to the

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Government, but it did not allege any “presentment of [a] false claim itself, or the

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submission of a false statement or omission to get a false claim paid” on the part of

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GDC4S. [Id.] Vague attacks on regular billing under GDC4S’s contract did not avail

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Cafasso. The contract covered many technologies not at issue, and the Complaint did not

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explain how any such billing was relevant to charges of fraud or falsification. Similarly,

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nothing in the complaint supported other allegations of nondisclosure on GDC4S’s part.

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Denying further leave to amend, the Court noted that the proposed substitute amended

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complaint violated this Court’s order to “comply with the rules of pleading.” [Id. at 2;

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doc. # 208 at 2.] It also violated the protective order already entered by attempting to

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expand the scope of the case beyond the thirty-seven previously identified inventions.

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[Doc. # 172.]

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Subsequently, both parties moved for summary judgment on the remaining

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claims: Cafasso’s retaliation claim against GDC4S, and GDC4S’s counterclaims against

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Cafasso. GDC4S prevailed on both motions. [Doc. # 352.] Facts revealed during

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discovery showed Cafasso’s retaliation claim to be without merit. She could offer no

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valid defense to the contract action.

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CONCLUSIONS OF LAW

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GDC4S divides its fee request into three primary areas: the breach of contract

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claim (counterclaim in this federal action and principal claim in the state court

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proceedings), the retaliation claim, and the qui tam action. For reasons explained below,

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partial fees will be awarded against Cafasso on the contract claim for taking GDC4S

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documents.

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I.

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The Breach of Contract Claim GDC4S will be awarded partial fees for its state court litigation and federal

counterclaims under A.R.S. § 12-341.01(A). A stipulation of the parties preserves the

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state court rights of the parties in this forum that fairly includes the general right to seek

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attorneys’ fees at the conclusion of the case as a matter of Arizona contract law. [Doc. #

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75.] For choice of law purposes, Arizona’s fee shifting statute forms part of the

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substantive contract rights of the parties. See In re Larry’s Apartment, L.L.C., 249 F.3d

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832, 836 (9th Cir. 2001); Building Innovation Indus., LLC v. Onken, 473 F. Supp. 2d 978,

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986 (D. Ariz. 2007).

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A.R.S. § 12-341.01(A) provides, “In any contested action arising out of a contract,

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express or implied, the court may award the successful party reasonable attorney fees.”

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To determine whether to award fees, the Court considers the factors governing awards

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under the statute, including the merits of Cafasso’s defense, GDC4S’s success in

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obtaining the relief sought, the avoidable expense incurred, the possibility that the award

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will cause “extreme hardship,” any chilling effect the award might have on other parties

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with tenable claims or defenses, and the novelty of the legal questions presented. See

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Associated Indem. Corp. v. Warner, 143 Ariz. 567, 570, 694 P.2d 1181, 1184 (1995).

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A.

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Cafasso’s defense to the contract claim had no merit. Cafasso never disputed she

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took GDC4S’s confidential and proprietary business documents in violation of the plain

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terms of her employment contract with GDC4S. She raised only the defense that she was

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privileged to take those documents to obtain evidence for her qui tam action. It is not

The Merits of Cafasso’s Defense

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necessary to adjudicate here whether such a privilege ever exists in any circumstances.

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Cafasso had no such privilege in this case. In removing the documents, she was not

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cooperating in a Government investigation, nor was she reporting fraud, nor was she

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preserving evidence. Moreover, Cafasso’s contact with Army Fraud Advisor Spitza in

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April 2006 does not excuse her conduct. Spitza asked to see any documentation of fraud

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that Cafasso possessed. He did not require or ask Cafasso to download or otherwise

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obtain GDC4S’s technology information wholesale.

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This is not a case where an employee came into the possession of specific

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documents that exposed wrongdoing at her company. Cafasso obtained these documents

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indiscriminately, whether or not they pertained to the specific claims she sought to bring.

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So doing, she deprived GDC4S of vital business benefits provided by its employment

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agreement. That agreement was designed to prevent GDC4S’s proprietary information

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from falling into the wrong hands. It prevented the competition from availing itself of

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GDC4S’s investment in its own technology. It also protected the secrecy of new

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technologies that play a part in the nation’s military and domestic security operations.

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Cafasso wilfully compromised these interests for no legitimate litigation purpose, only the

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speculative pursuit of self-help discovery.

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B.

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Summary judgment was entered in favor of GDC4S on the breach of contract

GDC4S’s Success in Obtaining Relief

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counterclaim. The other counterclaims relating to the same set of facts were voluntarily

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dismissed, as GDC4S obtained the full injunctive relief it sought. [Doc. ## 352, 377.]

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On its counterclaims, GDC4S prevailed in every meaningful way.

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C.

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Cafasso’s weak defense of the state court claims and federal counterclaims caused

Avoidable Expense

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much expense that could have been avoided. On June 21, 2006, almost a month after

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filing her federal complaint, she argued that she needed to retain the documents at issue

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“for her legal counsel to perform their due diligence obligations pursuant to Rule 11,

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Ariz. R. Civ. P., to determine whether she has provable claims against [GDC4C].” [Doc. -9-

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# 227, tab 2:1.] She reiterated this statement as late as August of that year. [Id. at tab

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1:10.] Contrary to her assertions to the state courts in 2006, Cafasso now contends that

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she had sufficient Rule 11 basis for her False Claims Act claims even without review of

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the documents and based on what she heard and believed while at GDC4S. For purposes

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of this motion, the Court will take Cafasso’s new contention as correct. Even so, the

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taking and retention of the documents in violation of contract served no legitimate

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purpose.

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The Government had access to all GDC4S’s documents, even without legal

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process. It could have sought those documents directly without informing GDC4S of the

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pendency of Cafasso’s False Claims Act claims, thus observing the letter of the sealing

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terms of the Act. See 31 U.S.C. § 3733. Once the Government elected not to intervene,

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Cafasso could have served the complaint and had discovery. There was no colorable

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basis to think GDC4S was destroying documents, nor was it even suggested that

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documents were altered or falsified in the first place. If there were any basis to fear loss of

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documents, Cafasso could have applied to this Court for appropriate relief, including

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early protective orders.

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In short, every principle of substantive and procedural law cut against Cafasso’s

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self-help discovery tactic. Moreover, there was no legitimate reason for refusing

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compliance with the state court restraining order to surrender documents to GDC4S.

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Shortly after getting that order lifted ex parte, Cafasso herself breached the seal on the

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pendency of her False Claims Act action and GDC4S found out about it. She could have

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gotten any appropriate discovery with judicial enforcement of the rules designed to

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protect both parties.

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Cafasso now contends that she should not be assessed attorney fees on this failing

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battle that never had any legitimate practical purpose precisely because she would have

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“settled” this part of the case if she had been asked. But she was asked—in a lawsuit,

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which she fought with dogged determination to the end. This contention does not defend

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To be sure, Cafasso’s misappropriation of records and persistent battle to retain

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them had advantages to her, but not legitimate ones. It freed her of the inconvenience of

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doing discovery through the ordained process, and it deprived GDC4S of the protections

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of judicial mediation over what evidence and documents must be produced. It exposed

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GDC4S to the danger from having its sensitive documents beyond its physical control, at

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risk of further compromise from lack of care or misconduct by Cafasso herself or her

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attorneys. GDC4S had reason to fear for Cafasso’s integrity and no obligation to trust

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that of her attorneys, whom they did not know. GDC4S was exposed to the security

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limitations of her attorneys’ law offices, which surely were different from the security

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systems GDC4S designed for its business and technology data. These circumstances put

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GDC4S at the utmost duty to reclaim its documents. This exponential increase in

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GDC4S’s cost and risk of this litigation gave Cafasso a leverage not grounded in the

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merits of any claim.

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D.

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Cafasso’s sworn statement indicates that she has remained unemployed for over

Possibility of Extreme Hardship

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three years while devoting over 5,000 hours to this litigation, her house has limited equity

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remaining, and her living expenses are barely being met while her savings are “nearly

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depleted.” Cafasso claims to have lost $500,000 in income over a period of three years,

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which suggests substantial past income and present earning power. She provides no

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specific information concerning her assets or sources of income, her household budget, or

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additional liabilities, but GDC4S does not dispute her general assertions of likely

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hardship. This limited evidence indicates the possibility that a fee award of $575,415.00

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would cause Cafasso extreme hardship.

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In a typical commercial litigation case, it may be appropriate to give greater weight

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to that fact. Where a whistle blower, consumer, or other individual pursues a contract

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action against a large company in good faith and with substantial basis throughout, the

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relative resources of the parties may often weigh against a fee award to the large

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company. But this is not the ordinary commercial case. Here the breach of a generally - 11 -

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valid contract was plain and wilful, and great substantive harm and litigation cost was

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thrust upon the employer. The justification offered for the breach of contract, if it might

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suffice in narrow circumstances, fell far short of the wholesale misappropriation of

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records in this case. The unfair expense of having to defeat Cafasso’s breach of contract

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is not excused by its own magnitude. It would be a poor exercise of discretion to allow

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that reckless, unnecessary, and burdensome breach to trump the other factors strongly

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favoring an award of fees “to mitigate the burden of the expense of litigation to establish

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a just claim.” A.R.S. § 12-341.01(B).

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Therefore, although fees will be awarded under A.R.S. § 12-341.01(A), the

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amount of the award will reflect a reduction based on the possibility of extreme hardship

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the full amount requested could impose on Cafasso.

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E.

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Cafasso contends that a fee award will deter parties from raising novel defenses

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and will deter future qui tam plaintiffs from bringing suit. These arguments rely upon

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flawed reasoning. As explained in the following section, Cafasso’s defense was not so

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much novel as unsupported. Breaching the terms of her employment agreement was not

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necessary to bring the qui tam or retaliation actions. The contract fees at stake are not

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attributable to GDC4S’s successful defense of the qui tam and retaliation actions, but

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rather to the prosecution of a well-founded contract claim independent of those actions.

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Cf. Moses v. Phelps Dodge Corp., 826 F. Supp. 1234, 1237 (D. Ariz. 1993) (disfavoring

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fee awards relating to the defense of statutory actions that vindicate Congressional intent).

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Cafasso’s claims under the False Claims Act and GDC4S’s breach of contract claims and

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counterclaims do not have a reciprocal relationship. The award poses no threat to False

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Claims Act plaintiffs who perform a reasonable inquiry into the facts and law underlying

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their claim and avail themselves of the discovery under the law.

Chilling Effects

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F.

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Any novelty to Cafasso’s defense and her related qui tam theory does not militate

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against fees. Cafasso’s defense to her breach of contract was not grounded in the line of

Novelty of the Issues

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authority protecting whistle blowers who lawfully report fraud or cooperate in ongoing

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Government investigations. [Doc. # 352 at 22.] The lack of directly applicable precedent

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for her sweeping proposition signals her defense’s weakness more than its novelty. In re

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Estate of Parker, 217 Ariz. 563, 569, 177 P.3d 305, 311 (Ct. App. 2008) (absence of

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applicable precedent does not preclude award of fees where “the result was compelled by

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the plain language of the statute”).

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G.

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The award of fees encompasses the other counterclaims for misappropriation of

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Interwoven Counterclaims

trade secrets, breach of fiduciary duty, common law fraud, conversion, and computer

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fraud and abuse. Although the bulk of the fees are attributable to the contract claim, the

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other counterclaims are sufficiently interwoven with the contract claim to fall within the

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ambit of the award. Campbell v. Westdahl, 148 Ariz. 432, 441, 751 P.2d 288, 297 (Ct.

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App. 1985). They arise out of the same set of facts—Cafasso’s removal of nearly eleven

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gigabytes of documents from GDC4S’s offices—and they all involve a common legal

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question: whether Cafasso’s contractual relationship with GDC4S, including her

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contractual duty of secrecy, prohibited her from removing the documents. Modular

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Mining Sys., Inc. v. Jigsaw Techs., Inc., No. 2 CA-CV-2008-0118, 2009 WL 1162893, at

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*6 (Ariz. App., April 30, 2009); see also, e.g., A.R.S. § 44-401(1)-(2) (defining

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misappropriation of trade secrets with reference to duties of secrecy); Restatement

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(Second) of Agency § 395, 396 cmt. h (1959) (defining fiduciary duty with reference to

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confidentiality agreements). However, the Court’s discretionary reduction in the fee

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award effectively limits the award to an amount incurred directly on the breach of

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contract claim.

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Cafasso’s contract with GDC4S was not an implied agreement or one that merely

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mirrored her preexisting legal obligations, but a “special contractual relationship” that

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created specific boundaries in Cafasso’s employment relationship. Thus, the

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counterclaims would not have arisen in the same manner had the contract not existed.

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Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519, 523-24, 747 P.2d 1218, 1222-

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23 (1987).

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H.

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The Court has reviewed the fee statements submitted by GDC4S. There is no

Fee Statements

5

merit to Cafasso’s contention that the statements contain many billing entries that cannot

6

be the subject of any fee award, either because the billing entries are too vague or because

7

GDC4S has sometimes engaged in “block billing” of unrelated tasks. The context of the

8

objected-to entries makes their meaning clear, and tasks are grouped into appropriate

9

categories of activity.

10

I.

11

Under A.R.S. § 12-341.01(A), the Court has discretion to determine the amount of

Amount of Fees and the Fee Litigation

12

attorneys’ fees to be awarded. The award of attorneys’ fees “need not equal or relate to

13

the attorney fees actually paid or contracted, but the award may not exceed the amount

14

paid or agreed to be paid.” A.R.S. § 12-341.01(B).

15

The following factors strongly weigh in favor of an award of attorneys’ fees: the

16

merits of Cafasso’s defense, the avoidable expense incurred, the novelty of the legal

17

questions presented, and any chilling effect the award might have on other parties with

18

tenable claims or defenses. The possibility that an award in the amount of $575,415.00

19

will cause extreme hardship on Cafasso weighs against an award of that amount, but is

20

barely supported with Cafasso’s general assertions and no specific information regarding

21

her financial condition.

22

Therefore, attorneys’ fees will be awarded under A.R.S. § 12-341.01(A) in the

23

amount of $300,000.00. In exercising its discretion in setting the amount of the award,

24

the Court also exercises its discretion to decline to impose an additional award of

25

attorneys’ fees incurred in preparing the fee application. This is a major discretionary

26

reduction in the award that otherwise would be warranted.

27 28 - 14 -

Case 2:06-cv-01381-NVW Document 419

1

J.

Filed 11/04/09 Page 15 of 20

Sanctions as an Alternative Basis for Fees Related to the Contract Claim

2 No fee award will be made on the alternative basis of sanctions against Cafasso’s 3 attorneys under 28 U.S.C. § 1927 or against Cafasso or her attorneys as a matter of 4 inherent powers. At the outset, fees cannot be assessed based on Mr. Rogers’ ex parte 5 obtaining of the May 26, 2006 order allowing him to inform the state court ex parte of 6 this proceeding. This Court’s error in judgment in hearing Mr. Rogers’ request off the 7 record deprives him of the proof of whether he did or did not discharge his ethical duty to 8 inform the Court of all material facts and circumstances in the ex parte proceeding, even 9 though he is also at fault for not informing the Court of his purpose to ask for ex parte 10 orders when he asked to come to chambers. Rules of the Supreme Court of Arizona, Rule 11 42, ER 3.3 (d) (“In an ex parte proceeding, a lawyer shall inform the tribunal of all 12 material facts known to the lawyer which will enable the tribunal to make an informed 13 decision, whether or not the facts are adverse.”) The Court’s error is greater, and 14 sometimes judicial error has irremediable consequences. 15 More generally, sanctions relating to the state proceedings are beyond this Court’s 16 power. Neither § 1927 nor inherent judicial powers enable this tribunal to remedy any 17 such abuses; these powers are limited “to attorney’s actions which multiply the 18 proceedings in the case before the court.” In re Case, 937 F.2d 1014, 1022-24 (5th Cir. 19 1991); accord GriD Sys. Corp. v. John Fluke Mfg. Co., Inc., 41 F.3d 1318, 1319 (9th Cir. 20 1994) (following the holding of Case). Obviously a court may sanction abuses of process 21 beyond the courtroom, but only to the extent those abuses implicate the court’s 22 administration of its own rules or orders. Chambers v. NASCO, Inc., 501 U.S. 32, 55 & 23 n.17, 57-58 (1991); CJC Holdings, Inc. v. Wright & Lato, Inc., 989 F.2d 791, 794 (5th 24 Cir. 1993); see also LaPrade v. Kidder Peabody & Co., 146 F.3d 899, 904-05 (D.C. Cir. 25 1998). This is not a case where the state proceedings interfered in this way. None of 26 GDC4S’s cited cases affirms, condones, or even discusses the use of a federal fee 27 sanction to redress abusive litigation conduct in non-federal proceedings. See, e.g., In re 28 - 15 -

Case 2:06-cv-01381-NVW Document 419

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1

DeVille, 361 F.3d 539, 545-46, 550-51 (9th Cir. 2004); Fink v. Gomez, 239 F.3d 989,

2

993-94 (9th Cir. 2001); Bader v. Itel Corp. (In re Itel Sec. Litig.), 791 F.2d 672 (9th Cir.

3

1986); Schepers v. Babson-Smith, 2008 WL 246086, at *5-7 (N.D. Iowa Jan. 28, 2008).3

4

GDC4S contends that the parties’ procedural stipulation enables this Court to

5

sanction conduct that occurred in the state proceedings. This is not so. The scope of the

6

Court’s sanctioning powers is akin to subject matter jurisdiction, Morris ex rel. Rector v.

7

Peterson, 871 F.2d 948 (10th Cir. 1989), and like subject matter jurisdiction, it cannot be

8

enlarged by consent or waiver of the parties. The purpose and effect of the stipulation

9

was to achieve judicial economy by combining two related proceedings. It accelerated

10

the federal case according to what had been accomplished in the state court, and the

11

parties brought with them whatever substantive rights they could still assert in this

12

tribunal. Those rights included the fee-shifting provisions of Arizona contract law, which

13

are an incident of substantive contract rights. Building Innovation Indus., LLC v. Onken,

14

473 F. Supp. 2d 978, 986 (D. Ariz. 2007). They did not include a procedural right, which

15

never existed, to have a federal district judge regulate abusive litigation conduct that

16

occurred in the state forum. Even where separate state court proceedings are used to

17

obstruct a federal action, the federal court’s sanctioning powers do not stretch so far. See

18

Case, 937 F.2d at 1022 (reversing bankruptcy court’s award of § 1927 and inherent

19

powers sanctions for state court tactics designed to harass federal court creditor and delay

20

federal proceedings).

21

For the same reasons, no attorney sanctions will be awarded for Cafasso’s alleged

22

evasion of service of process. Even if the Court had the power to award those sanctions,

23

the record contains no indication that Cafasso’s attorneys participated in or encouraged

24 25 26 27 28

3

The state and the federal actions in this case are separate. The state action was voluntarily dismissed, and the parties stipulated to the adoption of the state court’s orders by this Court, while reserving all the rights they retained in the state proceeding. A nonremoved state court proceeding is an “entirely separate action” even when a parallel claim is made in federal court. Case, 937 F.2d at 1023. - 16 -

Case 2:06-cv-01381-NVW Document 419

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1

evasive conduct on her part. Any difficulty in obtaining personal service on Cafasso

2

herself is primarily explained by her need to travel out of state from May 24, 2006, until

3

June 18, 2006, to attend to her ill mother. She was served five days after she returned.

4

II.

The Retaliation Claim No fees will be awarded as sanctions relating to Cafasso’s retaliation claim. The

5 6

Court is not persuaded that Cafasso’s attorneys unreasonably multiplied the retaliation

7

proceedings in violation of 28 U.S.C. § 1927, or that Cafasso committed some serious

8

wrongdoing that requires use of the Court’s inherent sanctioning power because the

9

statutes or rules come up short. Chambers, 501 U.S. at 50. Summary judgment on the

10

retaliation claim was granted in favor of GDC4S. The retaliation claim’s lack of merit is

11

not, by itself, grounds for § 1927 sanctions. Knorr Brake Co. v. Harbil, Inc., 738 F.2d

12

223, 226 (7th Cir. 1984).

13

GDC4S argues that Cafasso’s retaliation suit was not brought in good faith

14

because in the days before leaving the company, she complained that her termination was

15

in retaliation for reporting an instance of workplace violence. This complaint is not

16

inconsistent with the allegations relating to retaliation. As the False Claims Act itself

17

recognizes in its sealing provisions, plaintiffs may have good reasons not to alert their

18

employers of an intent to bring suit under the Act. Nor does the time passing between her

19

ethics complaints and her termination show bad faith in pursing the claim; it simply

20

increases the difficulty of showing a causal connection between the two.

21

III.

The Qui Tam Action4

22 23 24 25 26 27 28

4

GDC4S originally sought fees relating to the qui tam claim under the False Claims Act itself, 31 U.S.C. § 3730(d)(4). [Doc. # 227 at 16.] Although GDC4S’s most recent motion for attorney’s fees renewed the original motion with that request for relief, the new motion excludes the False Claims Act as a basis for fees. Therefore, no fee request will be adjudicated under the Act. However, § 3730(d)(4) does not preclude sanctions by way of the Court’s inherent powers or 28 U.S.C. § 1927. Pfingston v. Ronan Eng’g, 284 F.3d 999, 1006 n.5 (9th Cir. 2002). - 17 -

Case 2:06-cv-01381-NVW Document 419

Filed 11/04/09 Page 18 of 20

1

Finally, no fees will be awarded as sanction against Cafasso’s attorneys under 28

2

U.S.C. § 1927 for multiplication of the qui tam proceedings. In general, § 1927 is not a

3

vehicle for awarding “a generic, all-encompassing, massive, post-trial retribution, with no

4

indication whatsoever of reasonableness.” In re Yagman, 796 F.2d 1165, 1185 (9th Cir.

5

1986). Yet that is the type of award GDC4S seeks: all the attorney fees that it expended

6

to litigate the qui tam action. Other, more specific principles support this denial of

7

sanctions. First, the filing of a complaint cannot be the basis for sanctions under 28

8

U.S.C. § 1927. Moore v. Keegan Mgmt. Co. (In re Keegan Mgmt. Co., Sec. Litig.), 78

9

F.3d 431, 435 (9th Cir. 1996). To predicate a fee award on the pursuit of the qui tam

10 11

action as a whole would contravene this basic principle. Second, it is necessary to deny fees because some such fees were already sought

12

and denied before judgment, and others were not sought at all. In general, district courts

13

are expected to sanction wrongful conduct as it occurs. Yagman, 796 F.2d at 1183. The

14

Court will not revisit its previous denials of fees relating to purported discovery abuses.

15

Although post-judgment sanctions may be warranted where the depth and the cumulative

16

effect of the bad faith were not clear to the Court at the time of the offending conduct, see

17

Yagman, 796 F.2d at 1183; Salstrom v. Citicorp Credit Servs., Inc., 74 F.3d 183, 185 (9th

18

Cir. 1996), the Court does not come to a different conclusion.5

19

Third, GDC4S contends that the Court already has characterized certain acts of

20

Cafasso’s attorneys as taken in bad faith, namely, the filing of egregiously over-length

21

papers and attempted expansion of discovery that contravened both the rules and prior

22

orders of the Court. However, these characterizations were not made with reference to

23

sanctioning standards, but with reference to the standards of briefing, discovery, and

24

amendment of pleadings. The Court limited discovery and rejected the proposed over-

25

length filings. The nature of counsel’s bad faith at that time went to the merits of those

26 5

27 28

The Court declined to entertain a motion for sanctions at the time the qui tam action was adjudicated to avoid likely duplication of effort. [Doc. # 237.] The Court treats the instant motion as though it had been brought at that time. - 18 -

Case 2:06-cv-01381-NVW Document 419

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1

tactics—that is, whether expanded discovery or amendment should be allowed—and not

2

to the vexatious or multiplicitous abuse of the litigation process. To the extent that

3

Cafasso’s counsel persisted in an ill-considered strategy near the conclusion of the qui

4

tam action, that strategy engendered its own penalty: denial of leave to amend the

5

insufficient complaint again. The Court’s prior findings of bad faith do not, therefore,

6

require the imposition of sanctions now.

7

Fourth, GDC4S’s fee motion fails because it does not set apart the additional

8

expenses attributable to specific instances of wrongful behavior. Yagman, 796 F.2d at

9

1183. It is not enough to say that a particular stage of the briefing was time consuming.

10

The burden is on GDC4S to show the extent to which any sanctionable actions augmented

11

its expense beyond what it should have been required to spend in the course of good faith

12

litigation. New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298, 1306 (9th Cir. 1989).

13

The fee motion and exhibits submitted with it present no such differentiation.

14

Other conduct relating to the qui tam case will not be the subject of sanctions,

15

including Cafasso’s June 2, 2008 response to the interrogatory and her counsel’s

16

appearance by telephone for settlement meetings. Cafasso’s response to the interrogatory

17

confirmed her attorneys’ defiant attitude toward discovery duties, but it did not multiply

18

the proceedings. To the contrary, it hastened their conclusion. GDC4S held Cafasso to

19

her answer, rather than demanding a different answer, and obtained judgment on the

20

pleadings just weeks later.

21

IV.

22

State Court Costs GDC4S seeks leave to file a supplemental bill of costs relating to taxable costs

23

incurred in the state court action. [Doc. ## 385, 386.] Under LR 54.1(e)(9), a prevailing

24

party may be entitled to costs of “fees paid to the Clerk of the State Court prior to

25

removal.” LR 54.1(e)(10) provides for taxation of “[o]ther items . . . with prior Court

26

approval.” GDC4S’s state court action was not removed. Rather, the parties stipulated to

27

its dismissal in state court and it was refiled in federal court with a further stipulation that

28

all prior rulings of that court would be adopted by this one. Nonetheless, taxation of state - 19 -

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1

court costs in this instance falls within the spirit of LR 54.1(e)(1)-(9) and within the letter

2

of LR 54.1(e)(10). To deny taxable costs from the state court proceeding would defeat

3

the purpose of the stipulation bringing the state court claims into this case without

4

prejudice to the rights of either party. GDC4S will therefore be granted leave to file its

5

supplemental bill of costs. Cafasso may raise objections to particular costs once the bill is

6

filed.

7 8

ORDER IT IS THEREFORE ORDERED that Defendant GDC4S’s Motion for Award of

9

Attorneys’ Fees [Doc. # 363] is granted in part and denied in part. The motion for award

10

of fees against Relator’s counsel under 28 U.S.C. § 1927 and the court’s inherent power is

11

denied. The motion for award of fees against Relator Mary A. Cafasso under A.R.S.

12

§ 12-341-01(A) is granted in the amount of $300,000.00.

13

IT IS FURTHER ORDERED that Defendant GDC4S’s Motion for Leave to File a

14

Supplemental Bill of Costs re State Court [doc. # 385] is granted. The Clerk is directed to

15

file Defendant GDC4S’s Lodged [Proposed] Supplemental Bill of Costs [doc. # 386].

16

IT IS FURTHER ORDERED that the Clerk enter judgment in favor of General

17

Dynamics C4 Systems, Inc., against Mary A. Cafasso in the amount of $300,000.00 for

18

attorney fees pursuant to A.R.S.§ 12-341.01(A).

19

DATED this 3rd day of November, 2009.

20 21 22 23 24 25 26 27 28 - 20 -