IBM Whistleblower Suit Over $265M IRS Deal Revived

In a Tuesday decision, The D.C. Circuit revived several claims in a former IBM employee’s suit that alleged the tech giant unlawfully coerced the IRS into a $265 million software deal.

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A three-judge panel determined Paul Cimino sufficiently argued the Internal Revenue Service may have been fraudulently coerced by IBM into entering a $265 million software licensing contract renewal. It remanded those claims in his suit back to a D.C. federal court for future proceedings.

“We conclude that Cimino adequately pleaded but-for causation because he alleged facts that plausibly demonstrate the IRS would not have entered the agreement but for IBM’s fraudulent conduct,” U.S. Circuit Judge Neomi Rao said in the opinion.

Cimino brought a False Claims Act suit against IBM in 2013, arguing that the company tricked the IRS into a new agreement by way of a false audit. According to court documents, IBM presented that audit, conducted by Deloitte, showing the agency would owe IBM $91 million for its excessive use of software if it did not renew the contract, according to court documents.

A lower court dismissed those claims in October 2019, saying that even if the allegations were true, there was enough evidence that IBM did not cause the agency to enter the contract. Cimino appealed that decision to the D.C. Circuit.

In an amicus brief filed in March of last year, the government said the lower court wrongly dismissed the suit but decided not to weigh in on the merits of the case.

In its opinion, the D.C. Circuit said Cimino has yet to prove his claims that the false audit prepared by IBM was essential for the IRS to enter the software licensing contract, however he has sufficiently pleaded those arguments for the case to proceed. It also states that the lower court incorrectly dismissed his suit after rejecting all of Cimino’s claims.

“The district court’s dismissal boils down to a disbelief that the IRS would pay IBM millions of dollars after learning that it had been hoodwinked,” Judge Rao stated. “It is plausible that, had the IRS known IBM’s audit was false, it would not have renewed the agreement.”

The appeals court did side with the lower court in its dismissal of presentment claims that Cimino made because he didn’t specify how or when those false claims were made and who said them.

In her concurring opinion, Judge Rao said it remains unclear whether the False Claims Act allows fraudulent contract inducement claims to proceed in suits as separate causes of action. She also suggested it may present constitutional separation of powers issues worth exploring in future suitable cases.

“Fraudulent inducement under the FCA thus may reflect a judicial expansion of a statutory cause of action layered on top of congressional expansion of prosecution outside the executive branch,” she said.

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