Courts Strike Down False Claims Act Complaints

By Justin M. Ganderson, Peter Hutt II and Evan R. Sherwood

Photo: iStock

Over the summer, the United States Court of Appeals for the Seventh Circuit — in United States ex rel. Berkowitz v. Automation Aids, Inc., 896 F.3d 834 — unanimously affirmed a trial court’s decision to dismiss a False Claims Act complaint regarding alleged Trade Agreements Act non-compliances because the relator failed to plead fraud with “particularity” under Rule 9(b). In doing so, the Seventh Circuit provided additional guidance about various topics, including the Rule 9(b) standard for implied certifications and the power of the materiality defense.

In Berkowitz, the relator claimed that the defendants sold non-Trade Agreements Act-compliant end products through the GSA Advantage website, and that the defendants impliedly certified compliance upon submitting invoices to the government. The relator formulated his allegations “by comparing the sales other vendors made on the GSA Advantage online portal with certain product lists he obtained through the normal course of his business that identify the country of origin for various products.”

The Seventh Circuit explained that to plead fraud with “particularity” under Rule 9(b), the relator “must describe the ‘who, what, when, where and how’ of the fraud.”

Importantly, the Seventh Circuit also cited the U.S. Supreme Court’s landmark decision in Universal Health Servs., Inc. v. United States ex rel. Escobar for the proposition that any “concerns about fair notice and open-ended liability in [False Claims Act] cases based on an implied false certification theory should be ‘effectively addressed through strict enforcement of the Act’s materiality and scienter requirements.’”

The Seventh Circuit thus recognized the critical and enhanced role that Rule 9(b) plays in safeguarding defendants from generalized and flimsy claims based on a theory of implied certification. This view is consistent with the lower court’s observation that “satisfying Rule 9(b) often will be tougher to do in implied certification cases than in cases with an outright affirmative misrepresentation ... [because] usually it will be easier to set forth the specific details of a fraud scheme that is premised on affirmative lies than it is to sufficiently allege the specifics of a scheme based on material omissions.”

The relator generally alleged that the defendants sold non-compliant end products to the government based on a review of sales reports and product information, and alleged False Claims Act liability based on a theory of implied false certification. The court determined that these factual allegations did not satisfy the particularity requirement under Rule 9(b) because they did not demonstrate what occurred at the individualized transactional level for each defendant.

“The fact that the defendants may have sold non-compliant products during a certain time period in violation of the TAA does not equate to the defendants making a knowingly false statement in order to receive money from the government. … At most, [the relator’s] allegations amount to claims that the defendants made mistakes or were negligent” with respect to compliance, the court ruled. In other words, not every alleged non-compliance is fraud.

The relator also failed to allege that the defendants acted with reckless disregard. Although some defendants received a notice of non-compliance from the General Services Administration, the court was quick to point out that the relator could not demonstrate that “the defendants who received the notices subsequently submitted claims for payment for these [non-compliant] products anyway or that any of the defendants received non-compliant warnings regarding actual product sales.”

The Seventh Circuit acknowledged that it is difficult for a relator to allege with accuracy what occurs inside a competitor’s operations, but explained that this difficulty did not relieve the relator of his obligation to adequately plead all of the elements of a claim or to fully investigate his claim before filing a complaint. In other words, there is no relaxation of Rule 9(b) for outside whistleblowers.

Finally, the Seventh Circuit commented about the post-Escobar materiality defense: “It also seems worth noting that the fact that the government has allegedly paid millions of dollars for the non-compliant products suggests that [the relator] cannot satisfy the materiality prong of the implied certification theory.”

This demonstrates again the power of the post-Escobar materiality defense. Favorable facts regarding government payment after knowledge of alleged violations may very well sway a court’s view of a relator’s allegations and the case generally, and ultimately could lead to a dismissal.

This defense can be a critical tool for contractors looking to dismantle claims based on alleged Buy American Act or Trade Agreements Act non-compliances. Accordingly, contractors should consider keeping the government informed about potential sourcing issues and concerns because an open dialogue may help support a materiality defense down the road — and generally may foster a better relationship with the government customer.

The Seventh Circuit’s decision continues a recent trend of courts striking down claims based on alleged Trade Agreements Act violations, and hopefully will deter relators and the Department of Justice from pursuing speculative claims based on complex regulatory schemes. 

Peter B. Hutt II is a partner, Justin Ganderson is special counsel and Evan R. Sherwood is an associate at Covington & Burling LLP.

Topics: Defense Contracting, Government Contracting Insights, Government Policy

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