Federal Courts Begin To Lose Patience With Opportunistic Relators

Guest Bloggers: Christopher Loveland and Jonathan Aronie, Sheppard Mullin Richter & Hampton LLP

Since 2005, anyone with even a passing familiarity with GSA’s Multiple Award Schedules Program knows that compliance with the Trade Agreements Act is a key enforcement area of the Office of Inspector General, the Department of Justice, and whistleblowers. It was in 2005 (continuing into 2006), as many of you will recall, that several office products companies settled False Claims Act (“FCA”) cases with the Department of Justice. The cases were brought by a whistleblower (known as a “relator” in FCA parlance) alleging that the companies had sold non-TAA products to the government through their Schedule contracts. These cases, which collectively settled in the neighborhood of $27 million, made the TAA a household word – at least among those households holding GSA schedules.

The 2005 settlements had a significant impact on Schedule contractors and on the Schedules Program generally. Following the settlements, the GSA Office of Inspector General issued some 200 subpoenas to Schedule vendors as part of a targeted enforcement effort. GSA contracting officers began incorporating notices of the importance of TAA compliance in solicitation packages, on the GSA web site, and in training materials. And, important for our purposes here, prospective relators were awakened by the scent of blood in the water, and the profit that that blood could bring.

The sharks began circling Schedule contractors almost immediately. One of the first relators to test the FCA waters with a TAA case was Mr. Christopher Crennen, who filed a case in Massachusetts on March 28, 2006 against dozens of contractors. Mr. Crennen was a lawyer by trade from Colorado who reviewed the country of origin labels on the backs of computers and computer accessories in several government offices in Denver, and in his local retail electronics store. He then took the list of products made overseas and compared it to the products listed by Schedule vendors on the GSA Advantage! website. When he found a match, he concluded he had identified a False Claims Act violation. Based upon this “investigation,” Mr. Crennen filed a qui tam action alleging that the defendants had misrepresented and falsely certified that their products complied with the TAA.

Given the scope of Mr. Crennen’s “investigation” and his lack of any inside information, there obviously were a number of problems with his allegations, including his failure to identify even one actual false claim for payment that allegedly was submitted to the government. It thus should have come as no surprise when, shortly after the complaint was ordered served on September 18, 2009, each of the defendants filed a motion to dismiss arguing that Mr. Crennen’s amended complaint failed to include enough particularity regarding the details of the alleged fraud as required by Rule 9(b) of the Federal Rules of Civil Procedure.

The Court agreed with the defendants, finding that “[a]rticulating a theory as to how a company could violate subsection (a)(1), without more, is insufficient to comply with the requirements of Rule 9(b).” The Court dismissed Mr. Crennen’s case with prejudice on futility grounds because, “after three years and a government investigation, he still cannot allege that any specific claim was planned or submitted for a product listed on the GSA Advantage! website with a false country of origin.”

Shortly after Mr. Crennen gave it his best shot, Mr. Brady Folliard threw his hat into the ring, filing suit in Washington, DC on April 20, 2007 against a number of Schedule vendors, including several of those previously sued by Mr. Crennen. Mr. Folliard was no stranger to the lure of the False Claims Act, having filed at least five other qui tam actions, all of which ultimately were dismissed. Like Mr. Crennen, Mr. Folliard was not a whistleblower in the traditional sense. He did not work for any of the defendants or have any insider information. Instead, he based his claims entirely on purported “industry knowledge” and publicly available information.

Not long after the case was unsealed on June 22, 2010 (remember, FCA cases initially are filed under seal), each of the defendants moved to dismiss because Mr. Folliard’s second amended complaint did not satisfy the particularity pleading requirements of Rule 9(b). Six of the defendants who were parties to the Crennen case also argued that the Court lacked jurisdiction pursuant to what is called the “first-to-file” bar because Mr. Folliard’s complaint alleged the same material elements of fraud as Mr. Crennen, and the claims did not give rise to a separate and distinct recovery by the Government. The Court agreed that it did not have jurisdiction over those defendants who were parties to the Crennen case because “[a]llowing the complaint to go forward would not reduce fraud or return money to the federal fisc, and it would set a precedent that encourages opportunistic relators.”

Interestingly, while the Court granted the motions to dismiss on first-to-file grounds, it denied the motions based on Rule 9(b). That resulted in the case proceeding against two of the defendants. In its Order, however, the Court invited the two remaining defendants to file a motion for “summary judgment following on the heels of the complaint if . . . [their] records discredit the complaint’s particularized allegations.” Both defendants filed a motion for summary judgment at the outset of discovery, arguing that their records discredited Mr. Folliard’s allegations. The Court recently granted these motions in part and dismissed two of the relator’s four claims. The Court further ordered that Mr. Folliard file an amended opposition to each of the defendants’ summary judgment motions regarding the remaining two claims. Once briefing is complete, the Court will decide summary judgment.

Mr. Bryan Sandager was the most recent relator to jump on the qui tam bandwagon. He filed an FCA action in Minnesota on July 31, 2008, alleging that almost two dozen contractors misrepresented the country of origin of products listed for sale on the GSA Advantage! website in violation of the TAA. Like Mr. Crennen and Mr. Folliard, Mr. Sandager did not have any inside information regarding any of the defendants. In fact, he readily conceded in his Amended Complaint that “[t]he details of each Defendant’s sales to the Government … are peculiarly within each Defendant’s private knowledge and are not known to Relator.” Instead, he based his allegations entirely on publicly available information gleaned “through his long-held position in the industry.” Mr. Sandager had worked as a corporate compliance officer since 1999 at one of the defendants’ competitors.

Given the lack of details alleged by Mr. Sandager, all of the defendants moved to dismiss in January 2012, arguing that the amended complaint failed to plead with particularity the “who, what, when, where, and how” of alleged fraud as required by Rule 9(b). Many of the defendants also moved to dismiss pursuant to the first-to-file bar because Mr. Sandager’s allegations were based on the same underlying allegedly fraudulent conduct as several earlier-filed qui tam actions that were pending when Sandager filed his action, including Crennen and Folliard.

The Court agreed with the defendants. Not only was the action jurisdictionally barred against many of the defendants under the first-to-file bar, the Court also found that Mr. Sandager’s failure to allege with particularity the existence of even one false claim was “fatal to his claims.” The Court dismissed the action with prejudice because it did not believe that Mr. Sandager could resolve the “fundamental flaws” in his amended complaint by re-pleading.

The rulings in Crennen, Folliard, and Sandager demonstrate that at least some courts are unwilling to grant opportunistic relators a “free pass.” Claims need to be both properly plead and jurisdictionally sound to get to the discovery stage of a case. It simply is not enough for a relator to allege a theory or methodology as to how a company could have violated the FCA. Instead, compliance with Rule 9(b) mandates that specific details be alleged by a relator showing the “who, what, when, where, and how” of the alleged fraud. Were courts to hold otherwise, it would open the floodgates of baseless lawsuits by opportunistic relators and cause companies to needlessly incur significant resources fending off countless discovery fishing expeditions.

While the outcomes in these cases are encouraging and show a positive trend of Courts standing up against baseless and harassing litigation, they also serve to provide valuable reminders to contractors. TAA compliance remains a high profile issue and should not be an afterthought. Products offered for sale to the government on a GSA Schedule must be from trade-compliant countries. Contractors should take steps to make sure that their contracting personnel are well trained and have in place procedures to confirm compliance with the TAA. A strong and effective compliance program is a good defense to claims of a “knowing” violation of the FCA. Moreover, it is important to maintain documentation showing that products sold to the government are TAA-compliant. Contractors need to take the necessary steps not only to guard against whistleblower actions by employees, but also, as demonstrated in the Folliard and Sandager cases, potential actions by competitors.

No contractor expects to be sued under the FCA. But if it happens, having in place effective safeguards will prove invaluable to a contractor’s defense, saving both time and money.[1]

[1] In the interest of full disclosure, the authors of this article represented several of the defendants in each of the Crennen, Folliard and Sandager cases.

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