United States ex rel. Zhi Guo v. Nat'l Endowment for Democracy

UNITED STATES OF AMERICA ex rel. ZHI GUO, et al., Plaintiff-Relators, v. NATIONAL ENDOWMENT FOR DEMOCRACY, et al., Defendants.

No. 1:18-cv-02986 (TNM)

United States District Court, District of Columbia

February 18, 2022

MEMORANDUM OPINION

TREVOR N. McFADDEN, U.S.D.J.

Zhi Guo and Pengcheng Si (collectively, Relators) move for default judgment in this qui tam action against Defendants Princeton China Initiative (PCI), Independent Chinese PEN Center (ICPC), Laogai Research Foundation (LRF), and Yu Zhang.^[1] Defendants have not appeared or participated in this suit. After reviewing Relator's filings, the Court finds that they have shown liability for most claims and have met their burden on damages for some claims. The Court will thus grant in part and deny in part their motions for default judgment.

I.

In 1998, Congress began directing the State Department to set aside funding for “nongovernmental organizations” devoted to “fostering democracy in China.” Compl. ¶ 21, ECF No. 1. Congress has annually funded this China Democracy Program (CDP), allocating $215 million in 2018. See Id. ¶ 23. According to the Complaint, this money passes through the National Endowment for Democracy (NED), a nonprofit corporation chartered by Congress to encourage democracy abroad. See Id. ¶ 17; 22 U.S.C. § 4411. NED “exercise[s] substantial day-to-day control” over CDP funds and passes those funds onto entities who apply for them. Id. ¶ 74. Entities apply through a “formal NED-administered process.” Id. ¶ 27. To receive funds organizations must agree to special conditions and certify that they meet certain qualifications. See Id. ¶ 27-30.

Defendants here apply for and receive those funds. PCI, ICPC, and LRF are U.S.-based nonprofits connected to a community of Chinese political dissidents. See Id. ¶¶ 14, 15 19. Both ICPC and PCI have “entered into multiple contracts” with the Government for CDP funds. Id. ¶¶ 14-15. LRF “was formerly funded” through CDP. Id. ¶ 19. Defendant Zhang is an officer of ICPC who “resides in Sweden.” Id. ¶ 16.

Relators are “Chinese political dissidents and writers residing in the United States.” Id. ¶ 13. At times, Guo and Si have worked for or been linked to Defendants. From 2003-2007, Guo helped ICPC to formulate its bylaws and other policies. Aff. of Zhi Guo ¶ 5, ECF No. 27-3 (Guo Aff.). He never asserts that the organization employed him or paid him for those services. ICPC ultimately expelled him in 2007 after he questioned ICPC's spending and accounting practices surrounding the use of CDP funds. See Compl. ¶ 96. After Guo's termination, Zhang and other ICPC personnel wrote online posts on ICPC-related forums attacking him. See Id. ¶ 100.

Si began working for PCI and ICPC in 2008. See Decl. of Pengcheng Si ¶¶ 3, 12, ECF No. 27-4 (Si Aff.). For ICPC, he performed administrative and IT-related duties, and for PCI, he was a “cashier and administrative assistant.” Id. ¶ 13. Like Guo, Si discovered irregularities in ICPC's accounting of CDP funds, which he raised with ICPC's board. See Compl. ¶ 102. He also asked ICPC to change its financial practices. See Id. ¶ 103. ICPC refused. See Id. Si observed similar behavior at PCI and told NED officials that ICPC and PCI were “defrauding” the Government. Id. ¶ 112. Both organizations eventually fired Si-ICPC in March 2016 and PCI in October 2017. See Id. ¶¶ 107, 112. Si alleges that PCI fired him because LRF merged with PCI and wanted to retaliate against him for his earlier qui tam lawsuit against LRF. See Id. ¶ 115; see also Pengcheng Si v. Laogai Research Found., 71 F.Supp.3d 73, 78 (D.D.C. 2014) (accusing LRF of misusing federal grant funds). Si also alleges that ICPC and PCI still owe him money for his work. See Compl. ¶¶ 118-19.

Relators filed this lawsuit in December 2018. They assert five claims under the False Claims Act (FCA), which allows a private plaintiff to act as a qui tam relator on behalf of the Government to recover damages and civil penalties. See Id. ¶¶ 121-161; see also United States ex rel. Bid Solve, Inc. v. CWS Marketing Grp., Inc., No. 19-cv-1861 (TNM), 2021 WL 4819899, at *2 (D.D.C. Oct. 15, 2021). With their FCA claims, Relators bring other federal and state law claims. Guo accuses ICPC and Zhang of defamation. See Compl. ¶¶ 162-166. Si accuses ICPC, PCI, and LRF of violating the Fair Labor Standards Act (FLSA); LRF of tortiously interfering with an economic relationship; and ICPC and PCI of breaching the implied covenant of good faith and fair dealing. See Id. ¶¶ 167-185. Because Relators sued under the FCA, the Court sealed their Complaint while the United States considered whether to intervene. See 31 U.S.C. § 3730(b)(2).

The United States ultimately declined to intervene, leaving Relators to proceed alone. See Notice of Election to Decline Intervention, ECF No. 12. No Defendants have appeared or participated. The Clerk of Court thus entered default against each Defendant. See ECF No. 24 (ICPC and Zhang); ECF No. 25 (LRF); ECF No. 26 (PCI). In two motions, Relators now move for default judgment. See Pls.' Mot. for Default J. on Causes of Action 1, 2, 3, 4, and 5, ECF No. 27 (Pls.' FCA Mot.); Pls.' Mot. for Default J. on Causes of Action 6, 7, 8, and 9, ECF No. 28 (Pls.' Tort Mot.). As part of its consideration, the Court asked Relators for more information. See Order, ECF No. 29. Relators have provided that information. See Response to Order to Show Cause, ECF No. 30 (Show Cause Response). Their motions are now ripe for disposition.^[2]

II.

Federal Rule of Civil Procedure 55 establishes a two-step process for default judgments. This process applies even in qui tam False Claims Act cases. See, e.g., U.S. ex rel. Landis v. Tailwind Sports Corp., 324 F.Supp.3d 67, 71 (D.D.C. 2018). First, the Clerk of Court enters a default on the docket if the “party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend.” Fed.R.Civ.P. 55(a). Then the plaintiff moves for a default judgment under Rule 55(b).

Entry of a default judgment, however, “is not automatic.” Mwani v. bin Laden, 417 F.3d 1, 6 (D.C. Cir. 2005). First, the plaintiffs prove proper service of any defendants. See Salmeron v. District of Columbia, 113 F.Supp.3d 263, 269-70 (D.D.C. 2015). The Court then must “conduct an inquiry into both liability and damages.” Bozzuto Contractors, Inc. v. Evans, No. 19-cv-3292 (TNM), 2021 WL 1564437, at *2 (D.D.C. Apr. 21, 2021) (cleaned up). On liability, the defaulting defendant admits every well-pled allegation in the complaint. See id.

Once liability is established, “the Court must make an independent evaluation of the damages to be awarded.” Landis, 324 F.Supp.3d at 71 (cleaned up). Plaintiffs must prove the amount sought “to a reasonable certainty.” Bozzuto, 2021 WL 1564437, at *3 (cleaned up).

Courts may rely on “detailed affidavits or documentary evidence” to determine the appropriate sum. Boland v. Providence Const. Corp., 304 F.R.D. 31, 36 (D.D.C. 2014).

III.

Before liability, the Court analyzes service of process on Defendant Zhang. Through proper service, plaintiffs provide legal notice to defendants. See Portillo v. Smith Commons DC, LLC, No. 20-cv-49 (RC), 2021 WL 3287741, at *2 (D.D.C. Aug. 2, 2021). Thus, when a plaintiff has not properly served a defendant, courts cannot issue default judgment. See Gates v. Syrian Arab Repub., 646 F.Supp.2d 79, 84 (D.D.C. 2009). The plaintiff has the burden to show that service was proper. See Salmeron, 113 F.Supp.3d at 267.

Federal Rule of Civil Procedure 4(e) says that to serve a U.S.-based person, a plaintiff may deliver the service documents to the person; leave them at the person's “dwelling or usual place of abode with someone of suitable age and discretion who resides there”; serve the person's agent who may receive service of process; or follow the law for service “in the state where the district court is located or where service is made.” Fed.R.Civ.P. 4(e).

Relators argue that they properly served Zhang under Federal Rule 4(e) when they delivered service documents to ICPC's address in Manassas, Virginia. See Return of Service/Aff., ECF No. 17; Return of Service/Aff., ECF No. 18. Relators say that Zhang “resided” at that address. See Show Cause Response at 5.^[3] But their Complaint says that Zhang “resides in Sweden.” Compl. ¶ 16. So service did not happen at Zhang's “dwelling or usual place of abode.” Fed.R.Civ.P. 4(e)(2)(B). And although Relators have shown that Emily Wu-to whom they delivered the papers-is the registered agent for ICPC, see Pls.' FCA Mot., Ex. 4, ECF No. 27-6, their documents do not establish that she is Zhang's “agent authorized by appointment or by law, ” Fed.R.Civ.P. 4(e)(2)(C). Relators likewise do not allege that they personally delivered the documents to Zhang. See Id. 4(e)(2)(A).

With those service methods under Rule 4(e) foreclosed, Relators can rely only on state law “in the state where the district court is located or where service is made.” Id. 4(e)(1). Neither law helps here. Virginia does not allow service at an individual's place of business. See Va. Code Ann. § 8.01-296 (2021).^[4] The District allows such service only “[i]f the court determines that, after diligent effort a party has been unable to accomplish service by” other methods, all of which recite verbatim the methods in Federal Rule 4(e)(2). D.C. Super. Ct. Civ. R. 4(e)(3). As discussed, Relators' efforts under those methods failed as to Zhang. And in any event, D.C. law requires plaintiffs seeking to serve a place of employment to first “file a motion with an affidavit specifying” their “diligent efforts to serve by” the approved methods. Id. § 4(e)(3)(C). Relators have filed no such affidavit. Thus, the state laws at issue do not save Relators under ...