We previously wrote about the adverse inference permitted by the court in United States ex rel. Scutellaro v. Capitol Supply, 2017 WL 1422364 (D.D.C. Apr. 19, 2017). That inference allowed the whistleblower and the government to prove the falsity element of their claims against a supplier of office products to various federal agencies based on the defendant’s blatant failure to have maintained required documentation concerning its products’ country of origin (“COO”).
This blog post covers the court’s analysis of the materiality requirement under the False Claims Act, basically whether the violations alleged were significant enough and sufficiently related to the government’s determination whether it would pay on particular claims or purchases.
Materiality Under Escobar
Basically, “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” Id. at *7, citing the Supreme Court’s 2016 opinion in United Health Services v. United States ex rel. Escobar. In the Capitol Supply case, the court reviewed defendant’s contention that the government both regularly paid the allegedly tainted claims and signaled no change in position on account of the wrongdoing. As the court explained:
[F]or more than a decade, the GSA gave the defendant mixed signals. On the one hand, the GSA’s regional office gave the defendant not just “satisfactory” or “very good,” but “exceptional” ratings on its report cards…. Ms. Springer, the assigned IOA out of the Atlanta Regional Office who conducted the defendant’s [Contractor Assistance Visits] CAVs, never once marked the defendant down for TAA non-compliance despite the defendant’s complete lack of retention of historical COO information until at least June 2009, testifying that she ‘didn’t see anything wrong with their process or their understanding of the Trade Agreements Act.’ … Moreover, during the pendency of this seven-year litigation, the defendant received two additional GSA contracts and seven renewals of prior contracts.”
2017 WL 1422364 at *21.
The court denied both defendant’s and the relator/government motions for summary judgment, ruling that there were disputed facts and inferences that could be drawn from the evidence. Basically, the court held that the mixed signals discussed above defeated a ruling on summary judgment for either side.
Should One Side Have Won on Summary Judgment?
The court’s decision to deny summary judgment to defendant was clearly appropriate. There were obvious violations both in terms of non-compliant products and grossly insufficient and non-compliant record-keeping. Barring some prior specific determination by the relevant agency about the particular conduct at issue, based on full and complete information about the challenged conduct, it should be an extremely high burden for a defendant to prevail on summary judgment regarding materiality, basically a ruling that defendant’s violative conduct simply didn’t matter. It is also helpful for whistleblowers that the court did not accept the defendant’s evidence of ongoing and additional contracts as being sufficient, on its own, to defeat a showing of materiality.
It seems to be a closer question whether the evidence introduced by Relator and the government was sufficient to support summary judgment in their favor. The court’s citation of facts that ostensibly could allow a jury to reach a conclusion of non-materiality is a bit weak, because there is only vague indication of whether the “signals” of a lack of concern were sent by people with a full understanding of the totality and egregiousness of the facts. Indeed, the primary evidence cited of “mixed signals” had earlier been described by the court as report cards issued by one GSA employee based on Contractor Assistance Visits in which “the defendant controlled the scope of the CAVs by selecting three small samples of data.” U.S. ex rel. Scutellaro v. Capitol Supply, Inc., 2017 WL 1422364, at *4.
Similarly for the contract renewals, it is hard to see that the government’s ongoing relationship with a contractor signals acquiescence in the contractor’s misconduct absent a clear demonstration that those ongoing or new contracts were awarded in the face of full and accurate information about the alleged violations.
Impact of Executive Order and Related Promulgations Concerning Enforcement of Buy American Laws
It will be interesting to see if the President’s Executive Order about Buy American requirements and the related memorandum that came out of the Office of Management and Budget and the Secretary of Commerce, right at the end of June, will have any impact on future evaluations of materiality. The memo focused on enforcing the Buy American laws and cutting back on waivers. Assuming federal agencies actually comply–and there are some fairly strict reporting obligations to suggest that will happen–the impact of those efforts might provide evidence of materiality and will possibly prompt agencies themselves to define their regulations in this area as material.
Finally, if an employee or competitor realizes that a company has discovered that it is out of compliance with Buy American laws, self-reporting is likely required. A knowing failure to self-report can itself constitute a False Claims Act violation, and such claims will likely bypass the materiality determinations altogether.