Most government contractors are familiar with the requirement in federal government contracts that products and construction materials supplied to the Government must comply with the Buy American Act (“BAA”) or, if applicable, the Trade Agreements Act (“TAA”). Failure to comply with these domestic preference requirements can subject government contractors to severe penalties ranging from directions from the Government to replace the non-compliant items at no additional cost to termination for default to allegations of violations of the False Claims Act (“FCA”). Indeed, a number of FCA actions have been brought successfully against government contractors who allegedly supplied items that did not comply with their contracts’ domestic preference requirements.
Recently, however, a decision by the United States District Court for the District of Columbia raised the issue of whether a failure to comply with a contract’s domestic preference requirements is material for purposes of the FCA. United States ex rel. Folliard v. Comstor Corp., No. 11-731 (BAH), 2018 WL 1567620 (D.D.C. Mar. 31, 2018). Under the Supreme Court’s decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), alleged failure to comply with contract requirements must be material to the Government’s payment decision in order to violate FCA. It is not enough to establish that the contractor did not comply with a contract provision.
In the Comstor case, the qui tam relator alleged that the defendants submitted false claims and false statements to the Government under two GSA Federal Supply Schedule contracts. The contracts required that the products sold under the contracts be U.S.-made or designated country end products and contained a continuing requirement for the contractor to certify that the products sold complied with this requirement. The relator alleged that the defendants knowingly sold products that were not TAA compliant. According to the relator, the defendants violated the FCA by, among other things, knowingly billing for the non-compliant products.
The defendants moved to dismiss the relator’s claims on the grounds that the relator failed to sufficiently plead that the alleged TAA non-compliance was material to the Government’s decision to pay for the products, and the court granted the motion. The court held that the relator did not sufficiently plead that the alleged violations of the TAA were material to the Government’s decision to pay. In his Amended Complaint, the relator alleged that the defendants did not comply with the TAA’s regulatory requirements but made no factual allegations that the Government took any action against the defendants when the alleged TAA violations came to light such as cancelling the contracts or even sending notices of TAA non-compliance. Indeed, GSA expressed its willingness to work with the defendants to address the TAA compliance issues. As there were no factual allegations that the defendants’ compliance with the TAA was material to the Government’s decision to pay, the court granted the defendants’ motion to dismiss the case.
While the court’s decision was favorable for the defendants, government contractors should keep in mind that this decision does not hold that failure to comply with the BAA or TAA would never be a material or a violation of the FCA. Rather, the relator in the Comstor case failed to properly allege a violation. A different result certainly could happen in other FCA cases alleging violations of domestic preference requirements. In light of the Government’s move toward greater BAA enforcement through the Buy American and Hire American Executive Order (Executive Order 13788) and other government initiatives, government contractors need to remain vigilant in their efforts to ensure that their products comply with any contractual domestic preference requirements.