Earlier this year, the D.C. District Court denied cross-motions for summary judgment in a False Claims Act (“FCA”) case alleging that defendant Capitol Supply sold document shredders manufactured in China through the General Services Administration (“GSA”) website, in violation of the Trade Agreements Act (“TAA”). United States ex rel. Scutellaro v. Capitol Supply, 2017 WL 1422364 (D.D.C. Apr. 19, 2017).
We will discuss two significant aspects of the court’s opinion: materiality, and the availability of adverse inferences against a company that fails to maintain required records. This post will address the adverse inferences, and a subsequent post will discuss materiality.
Factual Background of the Capitol Supply Lawsuit
The defendant entered into a Multiple Award Schedule contract with GSA in January 2003. The contract allows the defendant to advertise and sell office supplies to various federal agencies through the GSA Advantage! website. Various provisions of the Federal Acquisition Regulation (“FAR”) were incorporated, requiring that all vendors selling products to federal agencies retain records regarding the country-of-origin (“COO”) of their products. Defendant Capitol Supply certified that each “end product” it listed and sold was TAA compliant. Id. at *2.
In fact, defendant had an automated system in place to identify and track the COO for its merchandise, but for a period of time it utilized a system that overwrote the COO data as new data came in from different suppliers.
After various efforts to forestall discovery, defendant admitted that it did not have any information on the COO for products sold prior to June 2009, had incomplete COO information for products sold between July 2009 and November 2010, and only had complete COO information for products sold after December 2010. The unavailability of that information potentially presented a critical obstacle in the FCA case, because there was no direct way to prove that many of the defendant’s products were non-compliant.
Impact of Defendant’s Failure to Retain Records Showing Country of Origin
The relator and government, which had intervened in part of the case, filed motions requesting an “adverse inference” ruling – to wit, that the court “exercise its inherent power to draw the adverse inference that, for all products for which COO is unknown because the defendant failed to retain that information, the COO is non-designated.”
The court readily concluded that the failure to maintain records violated Capitol’s regulatory and contractual obligations to retain COO data and proceeded to analyze whether the requested adverse inference ruling was appropriate.
Key factors in the court’s analysis were:
- the overwriting of the data was not accidental or unknowing, but was a company practice notwithstanding the regulatory and contractual requirements to retain the information;
- the government was within the class of persons sought to be protected by the tracking and retention regulations; and
- the missing information was critical to a determination of the COO violations alleged in the case.
Based on its analysis of its inherent powers and the circumstances at hand, the court concluded that the relator and government were entitled to an adverse inference that the unavailable COO information would show that Capitol’s products came from non-designated countries. Essentially, the adverse inference demonstrated the falsity element of the FCA claims.
Implications for Whistleblower Litigation
A company’s willful failure to comply with the Buy American laws and the Buy American terms in their contracts or subcontracts with U.S. government agencies presents a viable False Claims Act case. The adverse inference permitted by the Capitol Supply court is a powerful tool against a company that might believe it can blow past a government investigation or litigation simply by claiming that the government cannot prove all the claims, and the company did not retain all of the relevant documentation.
This ruling could have consequences beyond the GSA supply or Buy American context. Contractors have any number of contractual requirements to retain documents, including standard audit clauses. If a contractor cannot produce such documents, the Capitol Supply decision could be invoked in support of an adverse inference that the contractor violated the obligation in question. That could be a huge step towards success in FCA cases challenging various types of regulatory violations where there are corresponding record-retention requirements.