Common Sense Prevails: “Tougher” To Satisfy Rule 9(b) Standard in “Implied Certification” FCA Case Arising from GSA Schedule Contractors’ Alleged TAA Non-Compliance
A U.S. District Court recently dismissed a False Claims Act (FCA) qui tam action alleging that numerous GSA Schedule contractors violated their obligations under the Trade Agreements Act (TAA), resulting in the submission of false claims under the “implied certification” theory of FCA liability. As discussed further below, the court’s decision — United States ex rel. Berkowitz v. Automation Aids, No. 13-C-08185, 2017 WL 1036575 (N.D. Ill. Mar. 12, 2016) — is important for at least two reasons:
The court found that “often” it is “tougher” to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) when FCA allegations are based on an implied certification theory.
The court held that, when dealing with conduct arising from a “sprawling federal procurement statutory and regulatory framework” (like the TAA), general allegations of non-compliance may support a breach-of-contract claim, but are insufficient in an FCA case. Rather, “specific allegations” about the fraudulent scheme are needed.
This decision comes at a particularly opportune time for contractors, given the likelihood of increased TAA and Buy American Act (BAA) enforcement during the Trump Administration and the corresponding potential uptick in whistleblower FCA activity involving these country-of-origin issues.
The Berkowitz case involves the complex area of TAA compliance. The TAA, as implemented in the FAR, generally waives the domestic sourcing requirements prescribed by the BAA when a procurement is valued in excess of certain specified dollar thresholds. When it applies, the TAA requires that government contractors deliver “U.S.-made end products” (i.e., end products “manufactured” or “substantially transformed” in the U.S.) or “designated country end products” (e.g., end products “wholly manufacture[d]” or “substantially transformed” in certain foreign countries with which the United States has negotiated a trade agreement).
The relator here, Berkowitz, is a competitor of the companies he sued and is not a “whistleblowing insider,” as the court put it. As a consequence, he lacked first-hand knowledge of the defendant contractors’ practices regarding TAA compliance and so he instead based his allegation of fraud on a comparison of “product lists that he received in the course of his business (the lists reflected the products’ country of origin) with data on products being sold to the government by other vendors.” Relying on this comparison, Berkowitz asserted that the defendants had sold non-compliant items to the Government while, with each invoice they submitted, “impliedly certifying” that they were in compliance with the TAA. According to Berkowitz, this rendered each invoice a false claim within the meaning of the FCA. Once Berkowitz’s complaint was unsealed, the majority of the defendant contractors moved to dismiss, arguing that the complaint failed to satisfy Rule 9(b)’s heightened pleading requirements for fraud claims.
It Is “Tougher” to Satisfy Rule 9(b) When Relying on the Implied Certification Theory
In ruling on the defendants’ motions, the District Court noted the well-established principles that, under Rule 9(b): (1) a plaintiff “must describe the who, what, when, where, and how of the fraud;” and (2) a failure to meet these requirements can result in dismissal with prejudice. These general principles, of course, are not new. But what is new is the District Court’s discussion of the interplay between the Rule 9(b) requirements and the showing of “materiality” that must be made under the U.S. Supreme Court’s United Health Services, Inc. v. United States ex rel. Escobar decision.
The District Court noted that, in Escobar, the Supreme Court held that if “a claimant seeks payment for a specified good or service and fails to disclose that the good or service violates a ‘material’ statutory, regulatory, or contract-based requirement, then it is possible to establish False Claims Act liability on an implied certification theory.” But the District Court went on to explain that “simply alleging” a fraud based on an implied certification theory will not satisfy the Rule 9(b) pleading requirements. In fact, the District Court opined that “it is safe to say that satisfying Rule 9(b) often will be tougher to do in implied certification cases than in cases with an outright affirmative misrepresentation. Tougher not because the implied certification theory of liability is disfavored as a matter of law in any way, but only because Rule 9(b) is . . . sensitive to the factual context of each case.” (Emphases added).
Fraud Will Not Be Inferred From General Allegations of Non-Compliance with a Complex Statutory and Regulatory Procurement Regime
The District Court took issue with Berkowitz’s attempt to “infer” an FCA violation that (a) allegedly arose from a complex statutory and regulatory procurement framework, and (b) was based on general facts that merely tended to support a “simple mistake” or a potential breach of contract (e.g., the mere sale of TAA non-compliant end products).
The court noted that the “closest that Berkowitz comes to nudging the [FCA] claim away from a breach of contract to a fraud is when he alleges that two of the Defendants received notices from GSA about noncompliance with the Trade Agreements Act.” However, the District Court explained that these “notices were based on reviews of catalogs, not submitted claims, so once again Berkowitz asks too much of the allegations to reasonably infer fraud, rather than a breach of contract or a simple mistake.” (Emphases added). And, in fact, one of the defendant contractors took action after receiving this notification from GSA – an employee emailed another to remove the product from the FSS. The District Court acknowledged that this “exemplifies why, in the context of the sprawling federal procurement statutory and regulatory framework, inferring fraud from those few general notices is not reasonable.” (Emphases added).
The District Court’s Berkowitz decision should prove to be useful for contractors defending against FCA complaints arising from alleged TAA and BAA non-compliances, as well as other alleged statutory and regulatory violations. In fact, combining this decision with the D.C. Circuit’s 2014 decision in United States ex rel. Folliard v. Government Acquisitions, Inc. – finding that GSA FSS contractors, in general, can rely on letters of supply and manufacturer-certified information from suppliers to defeat an FCA allegation – should provide a real boost to potential contractor defenses. Of course, an ounce of prevention is always worth a pound of cure, so contractors should continue to ensure that they have the necessary processes and procedures in place to avoid a TAA or BAA compliance failure in the first place.