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United States ex rel. Berkowitz v. Automation Aids

United States District Court, N.D. Illinois, Eastern Division

March 16, 2017

United States of America ex rel. Jeffrey Berkowitz, and Jeffrey Berkowitz individually, Plaintiffs,
v.
Automation Aids; A&E Office and Industrial Supply; Support of Microcomputers Associated; Aprisa Technology LLC; Supply Saver Corporation; United Office Solutions, Inc.; Vee Model Management Consulting; Caprice Electronics, Inc.; and Computech Data Systems, Defendants.

          MEMORANDUM OPINION AND ORDER

          HONORABLE EDMOND E. CHANG UNITED STATES DISTRICT JUDGE.

         This is a qui tam action brought by relator Jeffrey Berkowitz on behalf of the United States government. Berkowitz is president of a company that sells office supplies to government agencies. R. 22, Third Am. Compl. ¶¶ 10, 21.[1] Defendants are competing vendors in Berkowitz's industry. Id. ¶¶ 9, 22-30. Through Berkowitz's regular business dealings, he allegedly discovered that Defendants were violating the False Claims Act, 31 U.S.C. §§ 3729-33, et seq., by making false statements about some of the products they were selling to the General Services Administration (“GSA”). Id. ¶¶ 1, 10, 14. Berkowitz says Defendants certified that their products complied with all relevant federal vendor regulations, even though some of the listed products violated what are known as “country of origin” restrictions. Id. ¶¶ 2, 7-9, 14. Berkowitz thus brought suit as a relator under the False Claims Act against the Defendants, demanding treble damages and forfeitures.[2] Id. ¶¶ 154-171. The Defendants now move to dismiss Berkowitz's claims. All Defendants (except Aprisa) move to dismiss for failure to state a claim, Fed.R.Civ.P. 12(b)(6) and 9(b), arguing, among other things, that Berkowitz has failed to plead fraud with enough particularity.[3] Aprisa also moves to dismiss, but solely under Federal Rule of Civil Procedure 12(b)(1) and solely on the ground that there is no subject matter jurisdiction for the claims against it. See R. 132, Aprisa Mot. to Dismiss. For the reasons discussed below, all Defendants' motions to dismiss are granted, except Aprisa's Rule 12(b)(1) motion, which is denied.

         I. Background

         For purposes of this motion, the Court accepts as true the allegations in the Third Amended Complaint. Erickson v. Pardus, 551 U.S. 89, 94 (2007). Defendants are vendors that sell products to the United States government's General Services Administration. Third Am. Compl. ¶ 2. To sell to the GSA, a vendor must be awarded a GSA Federal Supply Schedule contract under a specific “Schedule”: Schedule 70, for instance, deals with information technology equipment; Schedule 51 deals with hardware supplies; and so on. Id. ¶¶ 4-5, 39-40.

         All vendors pursuing GSA Schedule contracts need to comply with the Trade Agreements Act of 1979, 19 U.S.C. § 2501 et seq., which, according to the GSA's online guidance on the Act, allows “only U.S. made or designated country end products” to be “offered and sold under Schedule contracts.” Third Am. Compl. ¶ 7 (citing guidelines page on General Services Administration website).[4] The list of allowed countries is determined by “numerous multilateral and bilateral international trade agreements and other trade initiatives.” Id.

         The interplay between these “numerous … agreements” and “initiatives” is labyrinthine, [5] but ultimately: to determine which countries are acceptable (“designated, ” to use procurement parlance) for the purposes of GSA Schedule contracts, one looks at whether a country has an official trade agreement for that type of product with the United States under the World Trade Organization's Government Procurement Agreement. Third Am. Compl. ¶¶ 42-49. So for the types of products at issue here, Great Britain (to pick an example) is in, whereas China and Thailand are out. Id. ¶¶ 46, 49. The Federal Acquisition Regulations (known in the industry as “FAR”), which the General Services Administration is bound by, make things easier by specifically identifying the “designated” countries, and by defining “designated country end product” as a product made in one of the listed designated countries. FAR 52.225-5(a).

         Relator Jeffrey Berkowitz is President of Complete Packing and Shipping Supplies, Inc. in Freeport, New York, which sells office supplies and other things to federal government agencies. Third Am. Compl. ¶¶ 21, 96. More specifically, Berkowitz's company sells office supplies, packaging and shipping supplies, information technology products, and janitorial maintenance supplies to the General Services Administration. Id. ¶¶ 96-97.

         Around 2005, Berkowitz allegedly became aware that various vendors were selling items to the General Services Administration that were not from the United States or from “designated” countries. Third Am. Compl. ¶¶ 10, 98. He determined this by comparing product lists that he received in the course of his business (the lists reflected the products' country of origin) with data on products being sold to the government by other vendors. Id. ¶ 99. While he made sure that his business “carefully screened” out non-compliant products, he found that some of his competitors were allegedly not doing the same. Id. ¶¶ 99-100. Berkowitz recorded these comparisons in reports, merging country-of-origin data with vendor sales data. Id. ¶ 101. He acknowledges that there are some narrow exceptions to the GSA's bar on buying products from countries not on the list, but argues that none of those exceptions applies to Defendants. Id. ¶¶ 8, 78-95.[6]

         Berkowitz claims that Defendants have violated the False Claims Act, 31 U.S.C. §§ 3729 et seq., by “making material false statements and presenting false claims to the United States.” Third. Am. Compl. ¶¶ 12, 14. More specifically, he contends that he “discovered that Defendants certified these products [from undesignated countries] as having been manufactured in designated countries.” Id. ¶ 11. He arrives at that allegation through a chain of inferences, starting with the fact that each contract between the government and a vendor should incorporate a Trade Agreements Certificate. Id. ¶¶ 52-55. On that certificate, either the vendor affirms that all of the listed products meet the United States or designated-country manufacturing requirement, or the vendor provides, in a separate subsection, a list of products that do not meet the requirement. Id. ¶ 54.

         Berkowitz argues that the Defendants must not have identified non-compliant products' true origins on the relevant certificate before selling those goods to the government, because if Defendants had done so, then according to the Federal Acquisition Regulations, either the entire offer would have to have been rejected by the government or the offer would have been subjected to an analysis by the government under one of the narrow “open market” exceptions. Third. Am. Compl. ¶¶ 71-74. Berkowitz argues that because neither of these things ostensibly happened, the Defendants must not have been truthful in their representations to the General Services Administration, and are thus liable under the False Claims Act. Id. ¶ 72.

         Berkowitz lists each alleged non-compliant product category sold by Defendants in a series of exhibits. See Third Am. Compl., Exhs. E, I-K, M-X. The summed-up values are presented in the body of the Complaint. Automation Aids allegedly sold 19, 697 non-compliant products worth $1, 015, 448 from April 2010 to June 2013 and an additional $60, 214 worth up to February 19, 2014. Id. ¶ 106. A&E allegedly sold 16, 751 non-compliant products worth $590, 645 from April 2010 to June 2013 and an additional $1, 378, 808 worth up to September 30, 2015. Id. ¶ 112. Support of Microcomputers Associated allegedly sold 15, 525 non-compliant products worth $1, 333, 343 from April 2010 to June 2013 and an additional $2, 754, 099 worth up to October 6, 2015. Id. ¶ 116. Aprisa allegedly sold 18, 431 non-compliant products worth $537, 622 from April 2010 to June 2013 and an undisclosed additional amount between August 23, 2007 and December 30, 2014. Id. ¶ 120. Supply Saver allegedly sold 5, 087 non-compliant products worth $922, 843 from April 2010 to June 2013 and an additional $6, 620, 911 worth between January 5, 2010 and March 31, 2015. Id. ¶ 124. United Office Solutions allegedly sold 12, 216 non-compliant products worth $597, 971 from April 2010 to June 2013. Id. ¶ 127. Vee Model Management Consulting allegedly sold 1, 743 non-compliant products worth $381, 935 from April 2010 to June 2013 and an additional $1, 672, 513 worth up to April 1, 2015. Id. ¶ 130. Caprice Electronics, Inc. allegedly sold 39, 621 non-compliant products worth $687, 047 from April 2010 to June 2013 and an additional $1, 364, 189 worth between January 1, 2014 and December 31, 2015. Id. ¶ 133. Computech allegedly sold 7, 987 non-compliant products worth $603, 668 from July 1, 2013 to October 29, 2014 and an additional $747, 428 worth since January 1, 2009. Id. ¶ 137.

         Berkowitz asserts that he meets the conditions to be an “original source” under 31 U.S.C. § 3730(e)(4), as he has independent knowledge of Defendants' violations that did not come from any previous public disclosure. Third Am. Compl. ¶¶ 16-17. Defendants now move to dismiss Berkowitz's suit for, among other things, failure to state a claim. The exception is Aprisa, which moves only on the ground that there is no subject matter jurisdiction over the claims against it.

         II. Standard of Review

         All Defendants except Aprisa bring their motions under Federal Rule of Civil Procedure 12(b)(6). A Rule 12(b)(6) motion tests the sufficiency of the complaint, Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). When reviewing a motion to dismiss under either rule, the Court accepts as true all factual allegations in the complaint and draws all reasonable inferences in the plaintiff's favor. Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618 (7th Cir. 2007).

         Under Federal Rule of Civil Procedure 8(a)(2), any complaint must “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration in original) (internal quotation marks and citation omitted). These allegations “must be enough to raise a right to relief above the speculative level, ” id., and must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face, '” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). The allegations entitled to the assumption of truth are those that are factual, rather than mere legal conclusions. Iqbal, 556 U.S. at 678-79.

         Ordinarily, under Federal Rule of Civil Procedure 8(a)(2), a complaint generally need only include “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). But claims alleging fraud must also satisfy the heightened pleading requirement of Federal Rule of Civil Procedure Rule 9(b), requiring that, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b) (emphasis added). So Rule 9(b) requires complainants to go further than the usual claim: fraud claims should “state the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.” Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992) (internal quotation marks omitted). In other words, fraud claims “must describe the who, what, when, where, and how of the fraud.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011) (internal quotation marks and citation omitted).

         Defendant Aprisa brings a 12(b)(1) motion. A Rule 12(b)(1) motion tests whether the Court has subject-matter jurisdiction, Hallinan, 570 F.3d at 820; Long v. Shorebank Dev. Corp., 182 F.3d 548, 554 (7th Cir. 1999). The plaintiff bears the burden of establishing subject matter jurisdiction. Ctr. for Dermatology & Skin Cancer, Ltd. v. Burwell, 770 F.3d 586, 588-89 (7th Cir. 2014). “When ruling on a motion to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), the district court must accept as true all well-pleaded factual allegations, and draw reasonable inferences in favor of the plaintiff.” Ezekiel v. Michel, 66 F.3d 894, 897 (7th Cir. 1995). “[A] factual challenge lies where the complaint is formally sufficient but the contention is that there is in fact no subject matter jurisdiction. … [W]hen considering a motion that launches a factual attack against jurisdiction, the district court may properly look beyond the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists.” Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 444 (7th Cir. 2009) (internal quotation marks omitted).

         III. Analysis

         A. Rule 9(b)

         Berkowitz brings four False Claims Act counts against the Defendants, contending that they made material false statements when certifying various goods to sell to the General Services Administration. Third Am. Compl. ¶¶ 154-171. As relevant to Berkowitz's counts, the False Claims Act, 31 U.S.C. §§ 3729 et seq., holds liable anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. §§ 3729(a)(1)(A)-(B). To account for various amendments to the False Claims Act, Berkowitz brings four counts altogether: (i) “knowingly submitt[ing], and caus[ing] to be submitted, false or fraudulent claims for payment and reimbursement” before May 20, 2009, Third Am. Compl. ¶¶ 154-157; (ii) “knowingly submitt[ing], and caus[ing] to be submitted, false or fraudulent claims for payment and reimbursement” after May 20, 2009, Third Am. Compl. ¶¶ 158-161; (iii) “knowingly ma[king], us[ing], or caus[ing] to be made or used, material false statements to obtain Federal Government payment for false or fraudulent claims” before June 7, 2008, Third Am. Compl. ¶¶ 162-166;[7] and (iv) “knowingly ma[king], us[ing], or caus[ing] to be made or used, material false statements to obtain Federal Government payment for false or fraudulent claims” after June 7, 2008, Third Am. Compl. ¶¶ 167-171.[8] For purposes of the Act, a “claim” is “any request or demand … for money” that “is presented to an officer, employee, or agent of the United States.” 31 U.S.C. § 3729 (b)(2)(A). Berkowitz alleges (and for now there is no dispute) that when the Defendants requested to be paid by the government for products tendered, they made claims covered by the Act. Third Am. Compl. ¶ 38.

         The question is whether Berkowitz's allegations of fraud are specific enough to satisfy Federal Rule of Civil Procedure 9(b). The Seventh Circuit has consistently described what a plaintiff needs to do in order to satisfy Rule 9(b). Generally speaking, a suit alleging fraud should give “the who, what, when, where, and how: the first paragraph of any newspaper story.” E.g., DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). Writing that first newspaper paragraph entails giving “the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.” United States ex rel. Grenadyor v. Ukrainian Vill. Pharmacy, Inc., 772 F.3d 1102, 1106 (7th Cir. 2014) (internal quotation marks omitted); see also United States ex rel. Hanna v. City of Chicago, 834 F.3d 775, 778- 79 (7th Cir. 2016) (citing the same standards from DiLeo and Grenadyor); United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009); United States ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 377-378 (7th Cir. 2003) (demanding evidence of specific statements rather than blanket allegations); United States ex rel. Grant v. Thorek Hosp. & Med. Ctr., 2007 WL 2484333, at *2 (N.D.Ill. Aug. 29, 2007); United States ex rel. Swift v. DeliverCareRx, Inc., 2015 WL 10521636, at *4 (N.D.Ill. Oct. 26, 2015); United States ex rel. Bragg v. SCR Med. Transp., Inc., 2012 WL 2072860, at *1 (N.D.Ill. June 8, 2012); United States ex rel. Ceas v. Chrysler Grp. LLC, 78 F.Supp.3d 869, 883 (N.D.Ill. 2015). The reason that Rule 9(b) requires more than the usual case is that “a public accusation of fraud can do great damage to a firm before the firm is exonerated in litigation (should the accusation prove baseless).” United States ex rel. Bogina v. Medline Indus., 809 F.3d 365, 370 (7th Cir. 2016).

         In line with the specificity requirement, conclusory allegations in relator cases are not enough; particular details of a fraud scheme must be pled. United States ex rel. Gross v. AIDS Research All.-Chicago, 415 F.3d 601, 605 (7th Cir. 2005); United States ex rel. Dolan v. Long Grove Manor, Inc., 2014 WL 3583980, at *6 (N.D.Ill. July 18, 2014) (the complaint “is peppered with allegations that clinical and patient records and data were ‘manipulated, ' ‘fabricated, ' or ‘falsified, ' but nowhere does relator tell us what any particular record contained”). A fraudulent claim should not be pled from a broad aerial view, but instead must allege that a defendant made a false claim “at an individualized transaction level.” United States ex rel. Wildhirt v. AARS Forever, Inc., 2011 WL 1303390, at *5 (N.D.Ill. Apr. 6, 2011) (citing United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 741-42 (7th Cir. 2007), overruled on other grounds by Glaser v. Wound Care Consultants, Inc., 570 F.3d 907 (7th Cir. 2009)). And voluminous exhibits by themselves do not automatically satisfy Rule 9(b) and will not otherwise save a complaint that never arrives at ...


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