PRIMARY SOURCE — captured 2026-06-03 via user paste from CaseMine (https://www.casemine.com/judgement/us/5914bbd5add7b04934798d4e). Caption: UNITED STATES OF AMERICA, ex rel. ROBERT COSTA and RONALD THORNBURG, and STATE OF CALIFORNIA, ex rel. ROBERT COSTA and RONALD THORNBURG, Plaintiffs, v. BAKER & TAYLOR, INC. d/b/a BAKER & TAYLOR BOOKS, and W.R. GRACE & CO.-CONNECTICUT, Defendants. Court: U.S. District Court, N.D. California. Judge: Vaughn R. Walker. Date: March 20, 1998. Docket: C-95-1825-VRW. Nature: ORDER on defendants' FRCP 12(b)(6)/(b)(1) motions to dismiss the third amended complaint. NOTE on names: CaseMine's body text reads "Richard Thornburg" once; the caption and all other sources (DOJ, the 2006 fee orders) confirm the relator is RONALD THORNBURG. "Richard" is a source typo. THIS IS A DIFFERENT OPINION FROM 955 F. Supp. 1188 (the 1997 seal-lift order already in the corpus). This 1998 MTD order is the one that recites the price-key MECHANISM in detail. === KEY MECHANISM PASSAGE (the "price key" / "Y Key" taxonomy) — verbatim === "Baker Taylor entered into contracts with various libraries and educational institutions in which Baker Taylor agreed to sell books at various discounts. The levels of discount were keyed to the discounts which prevail for certain kinds of books. In general, publishers sell distributors 'trade books' at a so-called 'deep discount' of 46 percent or more. Textbooks and other non-trade publications sell at 'short discounts' or no discount ('net')." "According to the third amended complaint, Baker Taylor deliberately overcharged 'for trade books that it believed its library and educational institution customers could be deceived into believing were non-trade publications and by otherwise manipulating discount levels in ways inconsistent with Baker Taylor's representations and contractual obligations.' ... Baker Taylor allegedly carried out this scheme by reprogramming its computers to deprive plaintiffs of discounts promised them in their contracts with Baker Taylor. Defendants purportedly did this by changing their system of 'price key' codes for three categories of trade books and manipulating the discounts associated with them." "Prior to 1980, all trade books were assigned to the 'T' Key. Thereafter, defendants began assigning certain trade books to the 'K', 'A' and 'R' Keys. They defined these keys as 'institutional trade books', 'hardcover university press books' and 'reinforced trade juvenile books' and gave these books only short discounts." "Baker Taylor also assigned books for which it received no discount from the publisher to the 'Y' Key. Defendants then allegedly instructed their employees to add improper hidden charges to these books when they were sold to the libraries and educational institutions. Retailers supposedly received their agreed upon contractual discounts. Plaintiffs claim this discrepancy violates their 'most favored customer' clause which provided that defendants would charge the libraries and educational institutions no more for a book than the lowest price other customers were charged." "Whenever a library or educational institution discovered instances in which it received a smaller discount than had been contracted for, defendants' employees allegedly represented that these were isolated mistakes. Then, defendants would adjust their computers to avoid overcharging the complaining library or educational institution in the future. In this way, defendants prevented plaintiffs from discovering the alleged fraud..." === THE PRICE-KEY TAXONOMY (summary) === - "T" Key = all trade books pre-1980 (deep discount, 46%+) — the honest baseline. - "K" Key = "institutional trade books" — trade books reclassified to SHORT discount. - "A" Key = "hardcover university press books" — trade books reclassified to SHORT discount. - "R" Key = "reinforced trade juvenile books" — trade books reclassified to SHORT discount. - "Y" Key = books on which B&T got NO publisher discount — B&T added IMPROPER HIDDEN CHARGES when reselling to libraries/schools (retailers still got full contractual discounts). === OTHER NET-NEW FACTS IN THIS ORDER === - EARLIER WHISTLEBLOWER — Joseph DeMarco: a "disgruntled former Baker Taylor employee" who in 1992 wrote W.R. Grace's general counsel alleging B&T "systematically bilked and defrauded its library customers out of millions of dollars as a result of its pricing practices." DeMarco also wrote B&T and the U.S. Attorney in Charlotte NC. (3d Am Compl Exhs H, I, J.) This pre-dates the Costa/Thornburg qui tam (1995) by three years. - CONSPIRACY / LATHAM & WATKINS: Grace + B&T jointly hired Latham & Watkins, which wrote the U.S. Attorney stating DeMarco's allegations were "groundless" (Exh K). Plaintiffs' counts III/IV allege Grace + B&T (separate entities after the March 1992 sale) conspired to mislead the government — via misleading their own law firm — into abandoning the 1992 inquiry. Court: pre-March-1992 conspiracy DISMISSED (a corporation can't conspire with its own division, Copperweld); post-March-1992 conspiracy SURVIVES the pleadings motion. Walker flagged that if the conspiracy claim survives summary judgment, Latham & Watkins (then still B&T's counsel) "would hardly seem in a position to continue its representation." - B&T's OWN ADMISSION: "Although Baker Taylor knew, and ultimately acknowledged that its pricing practices with respect to the 'K' Key were not valid, Baker Taylor conspired with W.R. Grace Co to mislead the government into abandoning a 1992 inquiry on the subject." (3d Am Compl ¶ 39.) - THORNBURG: worked at B&T 17 years; discharged 1989; admitted he knew of the fraud in 1989; DISMISSED as a plaintiff March 20, 1998 on FCA/CFCA statute-of-limitations grounds (filed >3 yrs after his own discovery). Case proceeds with Costa + the intervening governments. - "MOST FAVORED CUSTOMER" clause: libraries/schools to be charged no more than B&T's lowest price to any other customer; retailers got full discounts while institutions got the manipulated keys → the contractual breach hook. FedLink (federal library contract) confined to the "most favored customer" clause; the K-Key allegations were pled as applying to all contracts EXCEPT FedLink (¶21), with A/R-Key claims for FedLink allowed by amendment. - TIMELINE confirmations: W.R. Grace owned B&T 1970–1992; sold to the Carlyle Group March 1992; qui tam filed June 1, 1995; complaint unsealed/served Jan 31, 1997; 2d am. compl. Apr 30, 1997; 3d am. compl. Aug 22, 1997. === HOLDING (Section VI) === (1) SOL motion GRANTED IN PART — Thornburg dismissed. (2) Conspiracy (counts III/IV) — GRANTED for pre-March-1992 acts, DENIED for post-March-1992. (3) Motion to dismiss claims based on sales to library customers — DENIED. (4) MTD 3d am. compl. — GRANTED IN PART/DENIED IN PART; FedLink confined to "most favored customer" clause; leave to amend to add FedLink to "A"/"R" Key fraud by Apr 17, 1998. (5) Case management conference set Apr 17, 1998 (re: possible stay of all but the conspiracy claims). Full opinion text follows below as pasted. ================================================================================ UNITED STATES OF AMERICA, ex rel. ROBERT COSTA and RONALD THORNBURG and STATE OF CALIFORNIA, ex rel. ROBERT COSTA and RONALD THORNBURG, Plaintiffs, v. BAKER TAYLOR, INC d/b/a BAKER TAYLOR BOOKS and W.R. GRACE CO CONNECTICUT, Defendants. ORDER. VAUGHN WALKER, District Judge. Baker Taylor is a book wholesaler and distributor. W.R. Grace Co owned Baker Taylor from 1970 to 1992. Robert Costa, the former City Librarian of Richmond, Virginia, and Richard [sic: Ronald] Thornburg, a Virginia resident, brought this qui tam action against Baker Taylor and W.R. Grace Co to recoup monies purportedly obtained through a fraudulent billing scheme. Plaintiffs United States of America and State of California (all plaintiffs hereinafter referred to as "governments" or "plaintiffs") have intervened in this action and are now the real parties in interest. Baker Taylor entered into contracts with various libraries and educational institutions in which Baker Taylor agreed to sell books at various discounts. The levels of discount were keyed to the discounts which prevail for certain kinds of books. In general, publishers sell distributors "trade books" at a so-called "deep discount" of 46 percent or more. Textbooks and other non-trade publications sell at "short discounts" or no discount ("net"). According to the third amended complaint, Baker Taylor deliberately overcharged "for trade books that it believed its library and educational institution customers could be deceived into believing were non-trade publications and by otherwise manipulating discount levels in ways inconsistent with Baker Taylor's representations and contractual obligations." 3d Am Compl at 7. Baker Taylor allegedly carried out this scheme by reprogramming its computers to deprive plaintiffs of discounts promised them in their contracts with Baker Taylor. Defendants purportedly did this by changing their system of "price key" codes for three categories of trade books and manipulating the discounts associated with them. Prior to 1980, all trade books were assigned to the "T" Key. Thereafter, defendants began assigning certain trade books to the "K", "A" and "R" Keys. They defined these keys as "institutional trade books", "hardcover university press books" and "reinforced trade juvenile books" and gave these books only short discounts. Id at 8-12. Baker Taylor also assigned books for which it received no discount from the publisher to the "Y" Key. Defendants then allegedly instructed their employees to add improper hidden charges to these books when they were sold to the libraries and educational institutions. Retailers supposedly received their agreed upon contractual discounts. Plaintiffs claim this discrepancy violates their "most favored customer" clause which provided that defendants would charge the libraries and educational institutions no more for a book than the lowest price other customers were charged. Whenever a library or educational institution discovered instances in which it received a smaller discount than had been contracted for, defendants' employees allegedly represented that these were isolated mistakes. Then, defendants would adjust their computers to avoid overcharging the complaining library or educational institution in the future. In this way, defendants prevented plaintiffs from discovering the alleged fraud being perpetrated upon them. Id at 16-17. Thornburg worked for Baker Taylor for seventeen years. In 1989, Baker Taylor discharged him. In both the original and first-amended complaints at para 6, plaintiffs allege that during his employment Thornburg became "aware of Baker and Taylor's fraud." In March 1992, W.R. Grace Co sold Baker Taylor to the Carlyle Group. Id at 3. According to plaintiffs, W.R. Grace Co was notified of Baker Taylor's fraud and worked in concert with them to conceal it even after Baker Taylor was sold. Id at 19. [Sections I–V of the order — the FRCP 12(b)(6)/(b)(1) analysis (statute of limitations and Thornburg's dismissal; conspiracy counts III/IV and the DeMarco/Latham & Watkins facts; the federal-funds nexus under 31 USC 3729(c) and the Library Act; materiality; the invoice- disclosure/intent-to-deceive arguments; short-discount and FedLink "most favored customer" clause; unjust enrichment/payment-by-mistake and Contract Disputes Act jurisdiction) — see the "OTHER NET-NEW FACTS" and the verbatim conspiracy/DeMarco passages summarized above. Full reasoning preserved in the CaseMine source.] DeMarco/conspiracy core passage (verbatim): "The conspiracy allegations at bar center around conduct occurring in the wake of certain letters received from a disgruntled former Baker Taylor employee in 1992. The employee, Joseph DeMarco, wrote W.R. Grace Co's general counsel alleging that Baker Taylor had 'systematically bilked and defrauded its library customers out of millions of dollars as a result of its pricing practices.' 3d Am Compl, Exh H. DeMarco followed up with a letter to Baker Taylor and the United States Attorney in Charlotte, North Carolina. Id at Exhs I J. W.R. Grace and Baker Taylor jointly hired the Latham Watkins law firm which wrote a letter to the United States Attorney stating that an investigation had proved DeMarco's allegations groundless. Id at Exh K." ... "Although Baker Taylor knew, and ultimately acknowledged that its pricing practices with respect to the 'K' Key were not valid, Baker Taylor conspired with W.R. Grace Co to mislead the government into abandoning a 1992 inquiry on the subject." Plaintiffs FedLink passage (verbatim): "Plaintiffs argue that the FedLink contract was subject to the same misclassification scheme for 'A,' 'R' and 'Y' Key books. This claim is contradicted by the complaint itself. At para 21 the third-amended complaint says that the allegations of 'K' Key fraud apply to all contracts 'other than the United States Government FedLink contract.'" VI. ORDER: (1) SOL motion GRANTED IN PART/DENIED IN PART — Thornburg dismissed; (2) conspiracy counts III/IV GRANTED as to pre-March-1992 acts, DENIED as to acts thereafter; (3) motion to dismiss claims based on sales to library customers DENIED; (4) MTD 3d am. compl. GRANTED IN PART/DENIED IN PART — FedLink claims confined to the "most favored customer" clause, leave to amend to add FedLink to "A"/"R" Key fraud by Apr 17, 1998; (5) case management conference set Apr 17, 1998. IT IS SO ORDERED. U.S. v. BAKER TAYLOR, INC (N.D.Cal. 3-20-1998).