The Perils of Bad Recordkeeping: A Lack of Country of Origin Documentation Results in Adverse Inference of Non-Compliance with the Trade Agreements Act
In a recent False Claims Act (“FCA”) case, United States ex rel. Louis Scutellaro v. Capitol Supply, Inc., the U.S. District Court for the District of Columbia held that the defendant’s failure to retain Country of Origin (“COO”) documentation for the products it sold to the government entitled the relator and the government to an adverse inference that the defendant did not comply with the Trade Agreements Act (“TAA”). This ruling highlights the consequences of poor document retention practices and could have far-reaching effects in FCA cases and beyond.
The defendant, Capitol, held various Federal Supply Schedule (“FSS”) contracts with the General Services Administration (“GSA”) through which it sold a variety of different products on the GSA Advantage! website. As is typical, Capitol’s FSS contracts required it to comply with the TAA, which meant it could only sell end products made in the United States or certain designated countries. The contracts also required Capitol to retain records regarding the COO for all of the products it sold to the government. Capitol had an automated system in place to track the COO data of its products, but, at some point before June or July 2009, the COO data existing at that time was overwritten as new data came in from different suppliers. Capitol eventually transitioned to a new tracking system and, by November 2010, it was retaining all historical COO data.
In the meantime, in June 2010, a relator filed a qui tam complaint alleging that Capitol was violating the FCA because it was selling products that did not comply with the TAA. The GSA Office of Inspector General (“OIG”) began an investigation into these allegations and in November 2010 and June 2011 served subpoenas on Capital requesting, among other things, COO information for certain products sold through the GSA schedule contracts. The government intervened in the case in October 2012.
Discovery in the case began in April 2014 but Capitol still had not produced any information in response to the subpoenas, which prompted the government to obtain an enforcement order and then move for sanctions in July 2014. Ultimately, in February 2015, Capitol stated that it did not have any information on the COO for products sold prior to June 2009; had incomplete COO information for products sold between July 2009 and November 2010; and only had complete COO information for products sold from December 2010 to the present.
After the Court rejected Capitol’s motion to dismiss the FCA claims, the parties engaged in additional discovery. In March 2016, the relator and government both filed motions for summary judgment, as well as motions asking the court to “exercise its inherent power to draw the adverse inference that, for all products for which COO is unknown because the defendant failed to retain that information, the COO is non-designated.” In response to the motions seeking an adverse inference, Capitol argued that this was a spoliation issue that should be analyzed under Federal Rule of Civil Procedure (“FRCP”) 37(e), which would require a showing that Capitol had an “intent to deprive” the relator and government of the information in the litigation. The court rejected this argument and found that FRCP 37(e) did not apply because there was no claim that the COO information was spoliated in the anticipation or conduct of litigation. Rather, the court reasoned, the failure to maintain records violated Capitol’s regulatory and contractual obligations to retain COO data. Accordingly, the court analyzed whether its inherent powers to manage and regulate its own affairs allowed it to draw the requested adverse inference.
The court, relying on a D.C. Circuit opinion involving Title VII discrimination claims — not contract claims — granted the motions for the following reasons:
Capitol did not overwrite the COO data unknowingly or accidentally; it was Capitol’s practice to overwrite COO data for many years despite its regulatory and contractual obligations to retain this information.
The government and the relator were within the “classes sought to be protected” by the regulations that are intended to allow the government to track COO data to ensure compliance with the TAA.
The spoliated COO information would “constitute direct proof or disproof of the falsity of claims made to the government.”
The court concluded that the relator and government were entitled to an adverse inference that the unavailable COO information would show that Capitol’s products came from non-designated countries — in other words, that Capitol had violated the TAA.
This ruling is a stark reminder to contractors of the importance of maintaining good records. The court’s finding rests on Capitol’s alleged failure to comply with a contractual requirement to retain COO data and could have far-reaching consequences beyond the FCA context. Contractors have any number of contractual requirements to retain documents, including the standard audit clause. The court’s reasoning here could be applied to other situations (including in disputes under the Contract Disputes Act) where a contractor has not kept required records of its compliance with a particular contractual obligation. And if a contractor cannot produce such documents, the Capitol decision could be invoked in support of an adverse inference that the contractor violated the obligation in question. This decision thus highlights that (1) good document control is critical; and (2) contractors need to be ever vigilant about the numerous regulatory and contractual requirements to retain documents.