LawFlash

D.C. Circuit Supports Government Contractors’ Reliance on Supplier Certification of TAA Compliance in Qui Tam Suit

September 26, 2014

In a qui tam whistleblower suit under the False Claims Act, the D.C. Circuit affirmed a lower court finding that a federal contractor reasonably relied on certifications of Trade Agreements Act compliance from its distributor.

The U.S. government has increasingly sought recovery under the False Claims Act (FCA) for alleged violations of the Trade Agreements Act (TAA) and other domestic sourcing requirements in government contracts. In a recent decision, United States ex rel. Folliard v. Government Acquisitions, Inc. (Govplace),[1] the U.S. Court of Appeals for the District of Columbia Circuit provided contractors with additional support for defending such claims on the basis of supplier certifications of TAA compliance. In the Govplace decision, the D.C. Circuit affirmed the lower court’s decision that the contractor, Govplace, was appropriately entitled to rely on certifications regarding TAA compliance made by its distributor.

Background

Pursuant to the TAA, the government may acquire only “U.S.-made or designated country end products.” To be considered TAA compliant, the end product must be “wholly the growth, product or manufacture” of the United States or of a designated country or “substantially transformed in the U.S. or a designated country into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.” As a practical matter, virtually any manufactured good must be “substantially transformed” to be considered a U.S.-made or designated country product under the TAA. Determining whether a product has undergone a “substantial transformation” is highly fact-specific and often involves complex issues of interpretation and application that must be applied on a case-by-case basis. To that end, the government requires contractors to certify that each end product complies with the TAA’s requirements. If the contactor does not manufacture the item itself, it generally seeks a certification from the manufacturer or distributor that confirms that the product is TAA compliant.

Noncompliance with the certification requirements can potentially subject a prime contractor (and its supplier) to criminal liability, fines, or civil liability under the FCA to the extent that a person “knowingly” makes a false claim. The “knowledge” requirement of the FCA is satisfied when a person (1) has actual knowledge, (2) acts in deliberate ignorance, or (3) acts with reckless disregard.[2]

Govplace Decision

In Govplace, the appellant-relator argued that Govplace’s reliance on its supplier’s certifications was unreasonable because it had received information that called into question the initial certification’s accuracy, namely that Govplace received an email from the manufacturer of the items sold to the federal government that allegedly indicated that some of Govplace’s products were produced in China and that a competitor sent Govplace an unsolicited price list that contradicted the country-of-origin information received from Govplace’s distributor.[3] Ultimately, the D.C. Circuit agreed with the district court’s findings, holding that Govplace did not “knowingly” submit a false claim, referencing numerous specific facts establishing that Govplace did not act unreasonably. 

The court first noted that Govplace’s distributor expressly certified to resellers, including Govplace, that the country-of-origin information was accurate and that the products it distributed generally complied with the TAA.[4] The court also noted that the federal government implicitly approved of Govplace’s reliance on the distributor’s certification, as it had provided Govplace with “Administrative Report Cards” stating that Govplace complied with the TAA.[5] Govplace further informed the government that it had relied on the distributor’s certification of the country-of-origin information and, importantly, the court noted that any potential conflicting information was received after the alleged sales already occurred.[6] Moreover, the purported unsolicited conflicting country-of-origin information contained disclaimers regarding that information’s accuracy.[7] On these grounds, the court concluded that the district court did not err in holding that Govplace “reasonably relied” on its distributor’s county-of-origin certification. 

Implications

The Govplace decision lends additional support for federal contractors’ reasonable reliance on TAA certifications by third-party suppliers. Contractors nonetheless must remain diligent about their responsibility to provide accurate TAA certifications. The decision, which comes after years of costly litigation, is highly fact-specific and is not meant to alleviate contractors of their ultimate responsibility to ensure that their manufacturers and distributors provide accurate country-of-origin certifications. Contractors should ensure that their subcontractors expressly agree to keep their TAA and any other relevant certifications current during contract performance, particularly when multiple shipments are involved. In addition, contractors should be prepared to demonstrate that they have acted reasonably when relying on any certifications received, including by taking account of any known information that stands contrary to the certifications themselves. Indeed, this decision should not be viewed as fully insulating contractors that wholly rely on a supplier’s TAA certification in the face of facts or circumstances that raise reasonable questions regarding their accuracy.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the authors, Todd R. Steggerda (+1.202.739.5773; tsteggerda@morganlewis.com), Kelly S. Herman (+1.202.739.5540; kherman@morganlewis.com), Edwin O. Childs (+1.202.739.5625; echilds@morganlewis.com), and Stephen E. Ruscus (+1.202.739.5870; sruscus@morganlewis.com). 

If you would like more information about the areas of government contracts, international trade, or government enforcement, please contact any of the following Morgan Lewis lawyers:

Washington, D.C.
Brad Fagg                                         
Robert J. Bittman                                 
Margaret M. Gatti                                        
Kathleen McDermott                        
Matthew S. Miner                                
Stephen E. Ruscus                                  
Todd R. Steggerda                       
George J. Terwilliger                           
Donna Lee Yesner                                  
 
New York
Kelly A. Moore                                    
 
Philadelphia
Eric W. Sitarchuk                               


[1]. No. 13-7049, 2014 U.S. App. LEXIS 16691 (D.C. Cir. Aug. 29, 2014), available here.

[2]. See id. at *22–*23 (citing United States ex rel. K&R Ltd. P’ship v. Massachusetts Hous. Fin. Agency, 530 F.3d 980, 983 (D.C. Cir. 2008)). 

[3]. Id. at *24. 

[4]. Id. at *23.

[5]. Id.

[6]. Id. at *24. 

[7]. Id. at *26.