Seventh Circuit Affirms Dismissal Of An Opportunistic Relator’s False Claims Act Lawsuit That Alleged Violations Of The Trade Agreements Act
Each year, billions of dollars in damages are paid to the government as a result of False Claims Act (FCA) settlements and judgments. A significant percentage of those damages are paid out to whistleblowers – known as “relators” in FCA parlance – who are statutorily entitled to recover between 10 and 30 percent of the proceeds depending on the extent they contributed to the prosecution of the case. And where there is money to be had, there are opportunistic relators looking for an easy payday.
One such relator was Jeffrey Berkowitz, the president of Complete Packaging and Shipping Supplies, Inc., a company that does business with the government through a General Services Administration (GSA) Multiple Award Schedule contract. Berkowitz filed an FCA suit against nine of his competitors in the U.S. District Court for the Northern District of Illinois, alleging that they were violating the FCA by selling products through their respective GSA Schedule contracts that did not comply with the Trade Agreements Act (TAA). The defendants successfully moved to dismiss that case, but the relator filed an appeal with the U.S. Court of Appeals for the Seventh Circuit. This is a case we have been tracking for some time, having previously written about the District Court’s dismissal of the case here.
To recap, the defendants sold products to the government through the GSA Schedule program. Each of the defendants allegedly had a GSA Schedule contract that contained a “Trade Agreements Certificate” certifying that the products being sold were from TAA-compliant countries. The relator’s complaint alleged that the defendants – who were direct competitors of his company – were violating the FCA by selling products that did not comply with the TAA as part of a scheme to defraud the government. He claimed to be aware of this scheme based on country of origin information he obtained through the normal course of his business. The defendants moved to dismiss and the District Court dismissed the case with prejudice, holding that the relator’s Third Amended Complaint failed to allege enough details to support a claim for fraud.
On appeal, the relator argued that any invoices that the defendants submitted to the government that did not comply with the TAA constituted false statements under the FCA. The Seventh Circuit disagreed, finding that he was required to allege “specific facts demonstrating what occurred at the individualized transactional level for each defendant.” United States ex rel. Berkowitz v. Automation Aids, Inc., ___ F.3d ___, 2018 U.S. App. LEXIS 20694, at *11 (7th Cir. July 31, 2018). Otherwise, at best, his allegations could only amount to claims that the defendants made mistakes or were negligent, which is not sufficient to give rise to a claim of fraud under the FCA. The FCA is not intended as “a vehicle for punishing garden-variety breaches of contract or regulatory violations.” Id. at *13 (citations omitted).
In light of the lack of detail known to him, the relator requested that the Seventh Circuit apply a “relaxed” standard because, as a competitor to the defendants, he did not have direct access to the their records. Id. at *11-12. But, even applying a relaxed standard, the relator still failed to “inject ‘precision and some measure of substantiation’ into his allegations of fraud.” Id. at *12. The Court recognized that it is difficult for an outsider to accurately allege details regarding a competitor’s business practices, but that still does not excuse a failure to properly investigate and plead claims of fraud. As a result, the Seventh Circuit affirmed the dismissal of the complaint.
The Seventh Circuit’s decision in United States ex rel. Berkowitz v. Automation Aids, Inc. confirms that failing to comply with a statutory requirement, by itself, does not give rise to claims under the FCA. And the Court is not going to eliminate the basic pleading standards for fraud – even when the relator is an outsider who lacks insight into a company’s business practices and procedures.
 In the interest of full disclosure, Christopher Loveland represented three of the defendants in this case.