Common Sense Prevails Once Again: District Court FCA Ruling Serves As Reminder That Whistleblowers Need to Prove Recklessness Too

While multi-million dollar False Claims Act (FCA) settlements paid by Government contractors get the lion’s share of the press, those with an attentive eye will have noticed a recent steady stream of more “contractor friendly” FCA decisions flying just under the national press’s radar. These cases, all arising in the context of the GSA Multiple Award Schedule program, serve as timely reminders that the FCA is not a blank check for opportunistic relators (plaintiffs/whistleblowers), and that relators must be in possession of facts actually supporting their allegations before walking into court.

The positive trend began with an FCA lawsuit filed by relator Christopher Crennen in 2006. Mr. Crennen filed the case in Massachusetts against dozens of GSA Schedule contractors alleging violations of the Trade Agreements Act (TAA). Specifically, Mr. Crennen alleged that the defendants sold products manufactured in non-compliant countries through their GSA Schedule contracts. Following motions to dismiss by all defendants, the federal district court in Boston held that “[a]rticulating a theory as to how a company could violate subsection (a)(1) [of the False Claims Act], without more, is insufficient to comply with the requirements of Rule 9(b).” United States ex rel. Crennen v. Dell Marketing, L.P., 711 F. Supp. 2d 157, 162 (D. Mass. 2010) (citations omitted; emphasis in original). The Court dismissed Mr. Crennen’s case with prejudice as to all defendants.

Shortly thereafter, in April 2007, another relator, Mr. Brady Folliard, filed a similar FCA suit in federal district court in Washington, DC. Mr. Folliard’s suit also named multiple GSA Schedule contractors as defendants, and also alleged violations of the TAA. Once again, each defendant moved to dismiss, and once again, the court granted the motions. (Well, the court granted most of the motions, but more on that below.) United States ex rel. Folliard v. Synnex Corp., 798 F. Supp. 2d 66 (D.D.C. 2011).

A third relator, Mr. Bryan Sandager, followed the Folliard case with yet another FCA action in July 2008, this time in federal district court in Minnesota. Like those before him, Mr. Sandager alleged that almost two dozen contractors misrepresented the country of origin of products listed for sale on the GSA Schedule website in violation of the TAA. Again, all of the defendants moved to dismiss, arguing that, among other things, the complaint failed to plead with particularity the “who, what, when, where, and how” of the alleged fraud as required by the federal rules. The Court agreed with the defendants, finding the failure “fatal” to Mr. Sandager’s claims, and dismissed the complaint with prejudice. United States ex rel. Sandager v. Dell Marketing, L.P., 872 F. Supp. 2d 801 (D. Minn. 2012).

Each of these cases stands for the common sense proposition that a plaintiff must be in possession of actual facts that support his or her lawsuit before invoking the False Claims Act. To put it simply: The FCA was not intended to permit fishing expeditions.

The most recent addition to this growing list of common sense FCA rulings is the final ruling in the Folliard matter referenced above. As noted, relator Brady Folliard had filed a complaint alleging TAA violations by multiple GSA Schedule Information Technology resellers. Following motions on a variety of bases, the court ultimately dismissed all but one of the defendants, and permitted Mr. Folliard to pursue limited discovery with respect to the remaining defendant.

After discovery was complete, the defendant filed a motion for summary judgment arguing that Mr. Folliard could not demonstrate two essential elements of an FCA claim: falsity or knowledge. To violate the False Claims Act, a contractor must (i) knowingly submit (ii) a claim (iii) to the United States (or other entity using US funds) that (iv) is false. The “knowledge” element may be demonstrated by showing that the defendant submitted the false claim (i) knowing that it was false, (ii) with reckless disregard as to whether it was false, or (iii) with deliberate ignorance as to whether it was false. The remaining defendant in the Folliard case argued that Mr. Folliard (the plaintiff/relator/whistleblower) had not demonstrated – and could not demonstrate – that the defendant acted with the requisite “scienter” (state of mind) even if defendant’s claims turned out to be false.

Following its consideration of the complaint, the pleadings, and the material produced during discovery, the court found that it could have granted summary judgment on the basis that the plaintiff had not proven the existence of a false claim. The court found an even stronger basis to grant summary judgment, however, with respect to the scienter (knowledge) element of the FCA. The court concluded that the plaintiff’s failure to provide evidence that the defendant “acted ‘knowingly’ is more glaring, and provides the strongest grounds” for granting summary judgment.

Unlike a motion to dismiss, which typically accepts the plaintiff’s allegations as true and asks whether plaintiff is entitled to relief based upon those alleged facts, a motion for summary judgment asks whether the plaintiff is entitled to judgment as a matter of law based upon undisputed material facts. Finding that Mr. Folliard’s evidence cannot support a finding that the defendant acted knowingly, the court granted summary judgment in the defendant’s favor. United States ex rel. Folliard v. Govplace, No. 07-cv-719-RCL, 2013 U.S. Dist. LEXIS 36576 (D.D.C. March 18, 2013).

The primary driver in the court’s decision (on the scienter issue at least) appears to have been the fact that the defendant, as an IT reseller, relied upon country of origin (COO) data received from its distributor. Like many resellers, the defendant in Folliard participated in the Ingram Micro GSA reseller program. Like other such programs, Ingram Micro’s program facilitates the transmission of COO data from manufacturers to the resellers in order to facilitate TAA compliance. The defendant argued that it reasonably relied on the data provided by Ingram Micro. Mr. Folliard, on the other hand, contended that the defendant was reckless to have relied on those data.

The Court found that the defendant’s reliance on the Ingram Micro data was reasonable, especially given that the defendant conducted due diligence regarding the Ingram Micro program before participating. In effect, the court held that a GSA Schedule reseller had no duty to “recheck” the COO data received from its distributors where it has no reason to doubt the validity of those data. Such an obligation “would undermine the beneficial effects of the partnership . . . .”

Interestingly, the Court also recognized the Government’s implicit approval of OEM/Distributor/Reseller structure that is so common among GSA Schedule IT contractors. From 2003 through 2009, the court noted, the GSA conducted annual Contractor Assistance Visits (IOA reviews) to evaluate defendant’s compliance with its GSA Schedule requirements, including the TAA. The fact that the IOA’s never criticized defendant’s reliance on its distributor’s COO data gave additional support to the court’s view that the defendant was not unreasonable in relying on those data.

This final Folliard decision reflects yet another common sense FCA ruling that should serve as a warning to would-be relators who seek to use the FCA as an unguided missile rather than the targeted anti-fraud weapon Congress intended. The case also serves as a useful reminder to GSA Schedule contractors of the importance of contract compliance, robust internal documentation, and full transparency when dealing with the Government. GSA Schedule contractors – like all Government contractors – live in the cross-hairs of Government auditors, investigators, and trigger happy relators. While qui tam law suits like Crennen, Sandager, and Folliard never can be prevented, the damage they cause can be minimized through compliance, vigilance, and a refusal to roll over simply because someone pulls the FCA trigger without even aiming.