The opinion of the court was delivered by: Leon Jordan United States District Judge
This civil action is before the court for consideration of two motions to dismiss. Defendants, Valley Milk Products, L.L.C. ("Valley Milk") and Donald C. Utz ("Utz") have filed a motion to dismiss [doc. 44]. Relator Kyle Fellhoelter ("Fellhoelter") has responded [doc. 82]. The United States has submitted a statement of interest in response to the motion to dismiss [doc. 84]. Valley Milk and Utz have filed a consolidated reply to the United States's statement of interest and Fellhoelter's response [doc. 90], and Fellhoelter has filed a sur-reply to Valley Milk's consolidated reply [doc. 96].
Defendant Maryland & Virginia Milk Producers Cooperative Association, Inc. ("Maryland & Virginia") has filed a "Renewed Motion to Dismiss" [doc. 47].*fn1 Fellhoelter has filed a response [doc. 71], and the United States has submitted a statement of interest in response [doc. 70]. Maryland & Virginia has filed a reply to the United States's statement of interest and Fellhoelter's response [doc. 80].
The court has decided that oral argument is unnecessary, and the motions are ripe for the court's consideration. For the reasons stated herein, both motions will be granted, and this case will be dismissed.
I. Background Procedural Factual
This case is brought under the False Claims Act, 31 U.S.C. §§ 3729, et seq. ("FCA"). The original complaint was filed July 8, 2005, and an amended complaint was filed, which is the complaint before the court [doc. 36]. The original and amended complaints included the U.S. Department of Agriculture ("USDA") as a defendant, with allegations by Fellhoelter as an individual plaintiff against the USDA, his employer, based on the Whistleblower Protection Act, 5 U.S.C. § 1221. Fellhoelter later voluntarily dismissed those claims [doc. 56]. Therefore, the case is now proceeding solely as a qui tam action.
Although the complaint was filed under seal as required by 31 U.S.C. § 3730(b)(2), Fellhoelter immediately served all the defendants with copies of the complaint. Section 3730(b)(2) requires that the complaint not be served on the defendants until ordered by the court. Nevertheless, the court sealed the matter and allowed the government time to decide whether or not it would intervene. The government chose not to intervene in this case [docs. 22, 30].
At the time of filing the original complaint, Fellhoelter was the Field Office Supervisor for the Knoxville office of the Milk Market Administrator for the USDA.*fn2 His duties included supervising a staff of auditors who conducted audits of milk processing plants in the Appalachian region.
The regulation and operation of the milk industry is extremely complex and the various details are beyond the scope of the issues before the court. For the purposes of the discussion herein, what is important is that the USDA has a regulatory scheme referred to as the "Appalachian Federal Order" that addresses shortages of Class 1 milk and payments to farmers who deliver Class 2, 3, or 4 milk that come from an industry funded program. According to the amended complaint, the USDA acts as an agent to "pass through" fund money from a paying processing plant to a receiving plant. All of the money in the program is money paid by the participating processing plants. The parties do not dispute that no government money is being distributed to the plants or deposited in the fund.
Fellhoelter alleges three fraudulent schemes that he contends Valley Milk and/ or Maryland & Virginia engaged in to violate the FCA. The first scheme involves Valley Milk. Fellhoelter avers that Valley Milk failed to pay farmers the "blend" or "uniform" price or a "minimum order value" in violation of 7 U.S.C. § 608c(5)(A). The amended complaint alleges:
Every plant that participates in the program pays at least the uniform price for milk it receives. If the plant produces Class 1 milk, which is fluid milk, the plant pays money into a fund that is managed by the USDA known as the "Settlement Fund."
Valley Milk received shipments of raw milk but paid $1.00-$1.50/hundredweight less than the blend price to which the farmers were entitled. Because Valley Milk paid lower than blend price, Valley Milk received approximately $500,000.00 to which the company was not entitled.
Valley then received a check out of the Settlement Fund for the difference between the classified price (reflecting what the milk was used for) and what they were supposed to pay (but did not pay) the farmer.
By this scheme, Valley improperly profited due to (a) receipt of payments from the Settlement Fund and (b) by getting raw milk from two suppliers at an illegally reduced price.
In the second scheme, Fellhoelter contends that Valley Milk acquired the right to become a "pool plant" under the Appalachian Order with qualifying milk that was allegedly supplied by two of its competitors. The complaint also alleges that Maryland & Virginia was given credit for supplying milk that was actually supplied by other milk cooperatives and by doing so received certain legal rights that should have been given to the other milk cooperatives. The amended complaint states:
. . . First, the Cooperative was allowed to divert some of its non-fluid milk to the more profitable Appalachian Order. Second, with these credits, the Cooperative was able to get its sister company, Valley Milk, recognized as having the right to become a supply plant to the Appalachian Order.
These credits gave Valley Milk and Maryland Virginia an unfair advantage over their competitors.
Furthermore, because Valley Milk was qualified as a supply plant under the Appalachian Order, the other farmers who supply milk under the Appalachian Order had the price they received for their milk reduced, because the other farmers' milk was "pooled" with Valley's milk, and Valley's milk was used in "lower value" (i.e. Class 2 and Class 4) products.
The third fraudulent scheme involves allegations that Valley Milk processed milk that did not meet standards for Grade "A" milk as enforced by the State of Virginia and was not fit for human consumption. The amended complaint alleges:
Because Valley Milk was not processing Grade A milk, under USDA regulations, the company was illegally participating in the program established by the AMA and FO-5 [Appalachian Order].
As a result of this misuse of the milk that Valley received, farmers belonging to the Maryland-Virginia Cooperative and Mr. Utz received in excess of Thirty Million Dollars ($30,000,000) in payments for Class 2 and Class 4 milk that they should not have received because the milk they received was not of the grade to receive those payments.
Also as a result of this fraud, milk that is not fit for human consumption was processed and shipped to manufacturers of milk-based products ...