Recently, the United States District Court for the District of Columbia dismissed a qui tam action involving allegations of fraud in connection with country of origin requirements imposed by the Trade Agreements Act (“TAA”). United States ex rel. Folliard v. Comstor Corp., __ F. Supp. 3d __, 2018 WL 1567620 (D.D.C. 2018).
Comstor involved a False Claims Act (“FCA”) action filed by a serial whistleblower who alleged two contractors violated the FCA by selling non-TAA compliant products on their General Services Administration (“GSA”) Federal Supply Schedule (“FSS”) contracts to federal government customers. Depending on the dollar value of the acquisition, most procurements are subject to either the Buy American Act (“BAA”) or TAA. Currently (2018), the BAA applies to supply procurements valued at or below $180,000. Accordingly, the TAA currently applies to such procurements valued in excess of $180,000. GSA has determined the TAA applies to FSS contracts.
Under the Federal Acquisition Regulation (“FAR”), to comply with the TAA, a contractor must certify it will deliver products that are manufactured or substantially transformed either in the United States or in certain “designated” foreign countries which have negotiated a trade agreement with the United States. Notably, countries such as China, India, Russia, Indonesia, and Malaysia are not designated countries.
In dismissing the case, the Comstor court found the relator failed to adequately plead that the alleged TAA noncompliance was “material.” Among others, materiality is a necessary element in every FCA case and requires a showing that the alleged noncompliance had an effect on the government’s payment decisions. Here, the relator argued that the plain language of the applicable statutes, regulations, and contract provisions demonstrated that the noncompliance was material. Based on the Supreme Court’s decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the court rejected this argument and found the relator failed to allege “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.
In addition to dismissing the entire case for lack of materiality, the court also found the relator failed to properly allege “falsity” with respect to “open market” sales. Open market items are products sold to government customers that are not listed on a contractor’s FSS. The relator alleged the defendants sold government customers non-TAA compliant open market items. The court disagreed and held the FAR does not require TAA compliance for open market items.
The Comstor decision is a significant victory for contractors subject to TAA (and presumably BAA) requirements. It reinforces that simply alleging a technical violation of a statute, regulation, or contract term is insufficient. Rather, under the FCA, a materiality analysis requires consideration of whether the government in fact treats these provisions as material. In making its decision, the court relied, in part, on a 2006 GSA Newsletter stating that GSA “may continue to make payments even when TAA violations are known.” This, according to the court, supported the position that alleged TAA noncompliance may not be material to the government’s decision to pay. The court also noted that the requirement to demonstrate materiality seemed especially important here because the government declined to intervene after nearly five years of investigation.
Notwithstanding the Comstor decision, contractors should not scrap their country of origin compliance programs. Other courts could disagree with the Comstor court or limit Comstor to GSA FSS cases, refusing to apply the decision to other agencies that have not expressed a willingness to work with contractors in instances of TAA noncompliance. Moreover, Comstor makes clear that materiality will be analyzed case-by-case on the applicable facts. Thus, contractors should not assume there is no risk for failing to comply with domestic preference requirements. Finally, given the current Administration’s focus on domestic preference policies, government regulators and enforcers are unlikely to simply walk away quietly and abandon BAA and TAA compliance.