Opportunistic relators have made a cottage industry of filing claims under the False Claims Act (FCA) alleging that contractors are violating the Trade Agreements Act (TAA) by misrepresenting the country of origin of products being sold to the government. Many of these relators are not company insiders and, as a result, lack detailed information regarding the sales practices of their targets. Instead, these relators cobble together publicly available information and often base their claims of fraud on inferences and innuendo. Courts, however, have steadfastly required relators to allege their claims of fraud with particularity – i.e., pleading details regarding the who, what, when, where and how of the alleged fraudulent conduct. As a result, many unsupported FCA claims have been dismissed. The most recent example is the FCA lawsuit filed by Jeffrey Berkowitz against nine government contractors in the U.S. District Court for the Northern District of Illinois in U.S. ex rel. Berkowitz v. Automation Aids, et al., No. 13-C-08185.[1]

Mr. Berkowitz filed his initial complaint in 2013, alleging that nine government contractors made false statements regarding the country of origin of products they sold to the government through the U.S. General Services Administration’s (GSA) Multiple Award Schedule (MAS) program. Mr. Berkowitz lacked any inside information regarding the sales and practices of any of the defendants. Instead, he based his allegations on information he obtained in his role as the president of a competing government contractor. Specifically, Mr. Berkowitz alleged that he compared sales made by the defendants through the GSA Advantage! website to country of origin information he received for his company. The complaint attached lists of products that were sold to the government by each of the defendants from allegedly non-TAA compliant countries.

The complaint – which had been amended three times – was unsealed and served on the defendants in 2016. Shortly thereafter, motions to dismiss were filed by eight of the nine defendants. Seven of the nine defendants filed motions to dismiss on the ground that the complaint failed to plead fraud with the requisite particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, and one of the defendants moved to dismiss pursuant to the “first-to-file” bar.[2] Surprisingly, one of the defendants attempted to answer the complaint. In a stroke of luck for that defendant, the Court found that the answer did not comply with the Court’s Local Rules and directed that the defendant file another responsive pleading. Recognizing its tactical error in the face of the motions to dismiss filed by the other defendants, this defendant subsequently filed a motion to dismiss regarding the complaint’s failure to allege fraud with particularity.[3]

On March 16, 2017, the Court granted the motions to dismiss filed by eight of the defendants based on the complaint’s failure to plead fraud with particularity as required by Rule 9(b). United States ex rel. Berkowitz v. Automation Aids, No. 13-C-08185, 2017 U.S. Dist. LEXIS 38457 (N.D. Ill. March 16, 2017). The court dismissed the one motion to dismiss based on “first-to-file” grounds,[4] but subsequently granted leave for that defendant to file another motion to dismiss.

In dismissing the claims against eight of the defendants, the Court found that, at best, the relator alleged a breach of contract, not fraud. That is because, even accepting as true the allegation that defendants sold products from non-TAA compliant countries,

there are no particularized allegations on specifically who engaged in the fraud, and what they did to execute it. Most important of all, there are no specific allegations from which to reasonably infer that someone in each company knew that the company was selling noncompliant products to the government; that the same someone also knew that the Trade Agreements Act required that the products be made only in certain countries; and that the same someone knew that the submitted claims amounted to an implied certification that the goods were in compliance with all statutory and regulatory requirements, so the someone decided to omit the country of origin from the submitted claims.

The Court recognized that Mr. Berkowitz’s failure to allege fraud with particularity likely stemmed “from the fact that Berkowitz is not a whistleblower insider of any of these firms.”

In granting the motions to dismiss, the Court declined to permit Mr. Berkowitz another opportunity to amend his complaint. Although Mr. Berkowitz made a “vague suggestion that he has further information he could file,” he never identified what additional specificity he could allege to “cure” his complaint’s pleading deficiencies. That, coupled with the fact that Mr. Berkowitz had already amended his complaint three times, warranted dismissal of the complaint with prejudice.

On July 12, 2017, the Court granted the motion to dismiss filed by the remaining defendant and entered final judgement against Mr. Berkowitz. In that decision, the Court reiterated that it is not sufficient for a relator to simply list allegedly non-compliant sales to satisfy the heightened pleading standard required by Rule 9(b). Instead, “detail about the fraud scheme” must be pled.

The Court expounded on its prior holding, stating, among other things, that “if at least one person at [the defendant] did not simultaneously know about the company’s noncompliance with the TAA and that it was submitting claims in such a way to hide or omit that compliance, then no fraud scheme has been pled.” In other words, “piling inference upon inference is not permitted.”

The Berkowitz decision is only the most recent in a long string of cases where opportunistic relators cobbled together publicly-available information in an effort to satisfy the heightened pleading standard necessary to plead a viable claim under the FCA. The Court in Berkowitz makes clear that complaints based on speculation and inferences are not sufficient to satisfy Rule 9(b). The holding in the Berkowitz decision provides yet another valuable safeguard to protect contractors who may find themselves in the cross-hairs of an opportunistic relator lacking any inside information regarding the a company’s sales practices and procedures.