Take Heed of Trade Agreements Act

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Contractors that must comply with the government’s domestic preference laws should take note of United States ex rel. Folliard v. Comstor Corp. — a recent decision dismissing a country-of-origin fraud lawsuit initiated by serial relator Brady Folliard.

In Comstor, the relator alleged that two contractors violated the False Claims Act by selling end products on the General Services Administration Federal Supply Schedule that failed to comply with the Trade Agreements Act, as incorporated into the contract through Federal Acquisition Regulation 52.225-5 and -6.

Under the rules, a contractor subject to the Trade Agreements Act must deliver U.S.-made end products manufactured or “substantially transformed” in the United States, or “designated country end products” that are “wholly manufacture[d]” or “substantially transformed” in certain foreign countries with which the U.S. has negotiated a trade agreement.

The court found that the relator had failed to adequately plead that the alleged non-compliance was “material” — a necessary element of a False Claims Act case that requires a showing that an alleged non-compliance had an effect on the government’s payment decisions. The relator argued that the bare language of the statutes, regulations and contract provisions at issue demonstrated that the non-compliance was material.

The court, relying on the Supreme Court’s landmark decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, rejected this legalistic argument and found that the relator had “not alleged sufficient facts to show that any sales of non-TAA compliant products by the defendants were material to the government’s decision to pay” for those products.

This is a significant victory for contractors subject to domestic preference requirements because it demonstrates that the “materiality” analysis under the False Claims Act requires a consideration of whether the government in fact has treated these provisions as material, and not just whether there has been a technical violation.

The materiality analysis requires actual facts showing that the alleged non-compliance would have affected the decision to pay.

Comstor is one of the first federal court decisions to discuss how the Supreme Court’s Escobar decision impacts claims of fraud relating to domestic preference rules. It held that the relator’s simplistic view did not satisfy the False Claims Act’s materiality threshold for two critical reasons.

First, the court held that the mere presence of FAR 52.225-5 and -6 in the defendants’ contracts did not demonstrate materiality. The court’s conclusion here is consistent with Escobar’s instruction that “statutory, regulatory and contractual requirements are not automatically material, even if they are labeled conditions of payment.”

"Contractors should also work to reduce the chance that the government will intervene."

Second, the court found that GSA’s expressed willingness in a 2006 newsletter to work with vendors in order to address compliance issues instead of outright rejecting claims showed that the organization “may continue to make payments even when TAA violations are known,” and therefore further supported the notion that an alleged non-compliance may not be material to a condition of payment.

The court also acknowledged that the “requirement of demonstrating materiality would seem especially crucial here where the government declined to intervene after almost five years of investigation.”

In summary, Comstor confirms that alleging a mere technical violation of the Trade Agreements Act will not satisfy the materiality requirement under the False Claims Act. Rather, the unique factual circumstances of each case must be considered, including whether the government has expressed a willingness to work with contractors to resolve compliance issues instead of simply rejecting claims.

There are key takeaways for contractors.

Consider a proactive approach. Comstor reveals that an agency’s willingness to work with a contractor to resolve a compliance problem after a claim for payment is submitted may help demonstrate that the non-compliance was not material. With that in mind, contractors who discover a potential Trade Agreements Act issue — or any domestic preference issue for that matter — may want to consider raising the matter promptly with the agency and documenting how the parties are working together to resolve it. A proactive approach may pay dividends down the road, even if mandatory disclosure is not required.

Contractors should also work to reduce the chance that the government will intervene. Comstor demonstrates why it is important to encourage the government not to intervene in a qui tam matter.

The government’s decision not to intervene may affect the way the court views the relator’s case.

Companies should also be on the lookout for enhanced enforcement and scrutiny of domestic preferences and its impact on the materiality analysis going forward. Since the time period at issue in the Comstor case, there have been significant developments regarding domestic preference laws, including recent bipartisan congressional action related to strengthening “Buy American” laws like the Buy American Act and the Berry Amendment. As a result, executive agencies and the Department of Justice may be more likely to take an aggressive stance when faced with a potential non-compliance related to domestic preferences, which could affect the determination of materiality in future cases.

Topics: Government Contracting Insights, Defense Contracting, Defense Department