Courts Continue to Construe “Worthless Services” Theory Narrowly (if at all)

By on March 10, 2015
Posted In Uncategorized

Last August, the Seventh Circuit decided U.S. ex rel. Absher v. Momence Meadows Nursing Center, Inc., 764 F.3d 699 (7th Cir. 2014), a decision that cast significant doubt on the “worthless services” theory of False Claims Act (FCA) liability.  The Absher court declined to address the validity of the “worthless services” theory as a general matter, instead concluding that even if it were to recognize the theory, no reasonable jury could have found FCA liability based on “worthless services” because the relator failed to establish that the services in question had no value.  In vacating the jury verdict for the plaintiff-relators, the court, citing prior case law, held that to establish a worthless services claim, “the performance of the service [must be] so deficient that for all practical purposes it is the equivalent of no performance at all . . . . It is not enough . . .  that the defendant provided services that are worth some amount less than the services paid for . . . [s]ervices that are ‘worth less’ are not ‘worthless.’”  The Seventh Circuit subsequently declined to reconsider its ruling.  Commentators predicted that that Absher would limit the reach of the worthless services theory of FCA liability going forward.

On February 26, a district court in the Seventh Circuit confirmed that prediction.  In U.S. ex rel. McGee v. IBM Corp. et al., No. 11-C-3482, 2015 WL 877458 (N.D. Ill. Feb. 26, 2015), the court dismissed a worthless services claim against Johnson Controls Inc. (JCI), where the relator asserted that equipment JCI installed on certain “mobile platforms” (interoperable voice, data and video systems for municipal emergency vehicles) were “non-functional” and “unreliable.” The Court concluded that “by alleging that some of the equipment was unreliable, McGee concede[d] that JCI provided something of value, even if unreliable.”  In addition, the Court concluded that JCI’s work on a separate phase of the project did not implicate the worthless services theory, where JCI was unable to fix equipment that the relator himself deemed “unfixable.”  However, the Court concluded that JCI’s inability to “maintain” other equipment did implicate the worthless services theory where the relator alleged that JCI had eliminated any value realized by the successful installation of previously installed mobile platforms.

The McGee decision’s analysis is straightforward:  If a defendant’s government-reimbursable work has conferred any value, the worthless services claim fails.  If a defendant’s work has added no value, then a court may allow the claim to proceed, though again, the viability of the worthless services theory of FCA liability is still an open question in many Circuits, including the Seventh Circuit.

This rubric gives defendants a roadmap to successfully defeating worthless services claims as early as the pleading stage.  Defendants can seek dismissal of FCA complaints by pointing to plaintiffs’ allegations demonstrating that some, even marginal, value was provided to a project subject to government reimbursement, or in the health care context, a patient whose treatment by the defendant was subject to government reimbursement.

We will continue to follow courts’ evaluation of “worthless services” claims going forward.