September 4, 2014

D.C. Circuit Decision Provides Protection to Federal Contractors Against FCA Liability

Arnold & Porter Advisory

Last week, the D.C. Circuit issued an important decision in a False Claims Act (FCA)1 matter that may provide federal contractors with protection against FCA liability when they reasonably rely upon the certifications of their suppliers. The FCA imposes liability only upon persons who "knowingly" make a false claim. In United States ex rel. Folliard v. Government Acquisitions, Inc.,2 the D.C. Circuit held that a contractor did not "knowingly" make a false claim regarding the country of origin of certain products when it reasonably relied upon the country of origin certifications provided by its distributor.

This case involved a GSA schedule contract, which is subject to the Trade Agreements Act’s (TAA) prohibition on sales of products that do not originate from "designated countries."3 In Government Acquisitions, Inc., the relator alleged that Govplace, which supplied IT equipment and services under a GSA schedule contract, sold to the federal government Hewlett-Packard (HP) products that originated from China, a non-designated country. Govplace purchased the HP products at issue through Ingram Micro, a Fortune 100 company described as the world's largest technology distributor. Through Ingram Micro's GSA Pass Through Program, Govplace obtained letters of supply from both Ingram Micro and HP authorizing Govplace to resell HP products to the federal government, as well as certifications from Ingram Micro that the products were TAA-compliant.

The district court granted summary judgment for Govplace, and the D.C. Circuit affirmed on appeal. In doing so, the D.C. Circuit's decision provided helpful guidance in at least three ways.

First, the D.C. Circuit's decision applies a high bar for scienter under the FCA. The FCA provides that a person acts "knowingly" by (1) having actual knowledge, or by acting in (2) deliberate ignorance or (3) reckless disregard of the truth or falsity of the information.4 The relator argued that Govplace acted with "reckless disregard" to the falsity of its sales because Govplace's reliance on Ingram Micro's certifications was not reasonable. The D.C. Circuit's decision reaffirms its longstanding guidance that "reckless disregard" under the FCA is "an extreme version of ordinary negligence."5

Second, the D.C. Circuit observed that "a contractor like Govplace is ordinarily entitled to rely on a supplier's certification that the product meets TAA requirements."6 In making this finding, the court noted that Ingram Micro, through its Pass Through Program, expressly certifies to resellers like Govplace that its country of origin information is accurate and that its products comply with the TAA.

Third, the court also noted that GSA had "implicitly approved" of Govplace's reliance on Ingram Micro's certifications because Govplace repeatedly informed GSA of its reliance on these certifications during several "Contractor Administrative Visits." GSA provided a clean slate on its "Administrative Report Cards," concluding that Govplace complied with the TAA.

The D.C. Circuit rebuffed the relator's contention that Govplace's reliance on Ingram Micro's certification was unreasonable because Govplace allegedly had received information undermining Ingram Micro's certification. The court refused to credit snippets of allegedly inconsistent evidence in the face of the express certifications from Ingram Micro.

The D.C. Circuit's decision represents an important step in limiting the sweeping approach that the government and relators often take to the concept of "reckless disregard." Nonetheless, reasonable reliance remains a fact-specific inquiry and contractors should apply appropriate diligence when vetting any supplier. As set forth in more detail in the underlying District Court decision,7 Govplace's contract compliance team undertook significant due diligence regarding Ingram Micro's methodology for assuring TAA compliance. Contractors who intend to rely on supplier certifications would be prudent to undertake similar diligence and to document the steps they have taken.

  1. 31 U.S.C. §§ 3729–3733.

  2. Case No. 13-7049 (slip op. Aug. 29, 2014).

  3. 19 U.S.C. §§ 2501–2581; FAR 52.225-5. Other federal government contracts are also subject to the TAA.

  4. 31 U.S.C. § 3729(b)(1)(A).

  5. Slip. op. at 18 (quoting United States v. Krizek, 111 F.3d 934, 942 (D.C. Cir. 1997)) (emphasis added).

  6. Id. at 19.

  7. United States ex rel. Folliard v. Govplace, 930 F. Supp.2d 123 (D.D.C. 2013).

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