False Claims Act: Device Maker Settles For $8 Million For Allegedly Selling Products Manufactured in Malaysia

 

An interesting False Claims Act issue cropped up in a recent $8 million settlement involving U.K.-based medical device manufacturer Smith & Nephew. The company allegedly violated the U.S. Federal Trade Agreement Act by selling orthopedic devices to the Department of Veteran’s Affairs that were manufactured in Malaysia, a country that has not executed a trade agreement with the U.S. This implicated the False Claims Act because Smith & Nephew allegedly certified that they were compliant with the Trade Agreement Act. The settlement is reportedly the first medical device “country of origin” case.

Trade Agreement Act and the False Claims Act

The U.S. Federal Trade Agreement Act (TAA) generally requires the United States to purchase only “U.S.-made or designated country end products.” The Act requires contractors to certify that each end product meets the applicable requirements. “End products” are defined as “those articles, materials and supplies to be acquired for public use.”

Several countries that are major suppliers of goods or services to the U.S. market, such as China, India, Malaysia, Thailand, and Taiwan, are not “designated countries” within the definition of the TAA. Therefore, items that are considered end products of those countries are not eligible for being placed on GSA schedules unless no U.S.-made or designated country end products are available.  

Qui tam whistleblowers and the United States have brought many successful False Claims Act lawsuits against federal contractors arising from violations the Trade Agreements Act. The FCA was enacted to provide the government with restitution for losses sustained as a result of fraud. It also authorizes whistleblowers (often former or sometimes current employees) to bring an action on behalf of the United States and share in the recovery.

Government contract competitors or former employees have brought qui tam actions alleging that the manufacturer knew or acted with reckless disregard that they were selling the government products that violated the TAA.

Smith & Nephew Case

In case at hand, the U.S. government declined to intervene in the case, which is a recurring trend we are noticing.  The whistleblower, Sam Cox, opted to litigate the case without the assistance of the government.

Cox was a former information technology manager of S&N who claimed that his former employer violated the TAA by selling the Department of Veterans Affairs orthopedic devices made in Malaysia. The TAA restricts sales to federal agencies to products only made in the U.S., or in countries which have standing trade agreements with the U.S., which Malaysia does not have.

“Today’s settlement sends a clear message to those medical device companies that routinely violate the Trade Agreements Act by misrepresenting the ‘country of origin’ of goods sold under contract to U.S. Government agencies,” stated H. Vincent McKnight, Jr., Co-Chair of Sanford Heisler’s whistleblower practice, which represented Cox. 

Other Developments under the Trade Agreements Act

On August 29, 2014, the U.S. Court of Appeals for the D.C. Circuit upheld the dismissal of a qui tam suit under the False Claims Act in United States ex rel. Folliard v. Government Acquisitions, Inc. The Circuit held that a contractor did not “knowingly” make a false claim regarding the country of origin of certain products when it reasonably relied upon the country of origin certifications provided by its distributor.

The whistleblower in this case alleged that government contractor, Govplace, violated the TAA by selling computer and IT products to the government that did not originate in the US or designated countries. These sales could be considered “false claims.”

Govplace acquires many of the products listed in its schedule contract from a distributor, Ingram Micro, which expressly certified that its products are TAA compliant. The relator in this case alleged that certain products acquired from Ingram Micro were actually manufactured in China, a non-designated country. The relator alleged that Govplace acted with reckless disregard in relying on Ingram Micro’s certifications.

The district court, equating reckless disregard to “an extreme version of ordinary negligence,” found that Govplace’s reliance on certifications from its distributors did not qualify, absent a showing that Govplace had reason to question those certifications. The National Law Review notes that the Circuit rejected two main pieces of evidence offered to demonstrate Govplace’s reliance was unreasonable: (1) an email from a manufacturer to Govplace concerning the possible foreign origin of a product, which was received only after the sale to the Government; and (2) a price list from an Ingram Micro competitor, allegedly demonstrating inconsistencies in the origin of the products at issue. The relator was unable to demonstrate Govplace had ever read this price list. 

“A contractor like Govplace is ordinarily entitled to rely on a supplier’s certification that the product meets TAA requirements,” the Court noted. Govplace participated in Ingram Micro’s “Pass Through Program,” through which Ingram Micro expressly certified compliance with the country of origin laws. Furthermore, the court found that the GSA “implicitly approved” of Govplace’s reliance on the Program’s certifications during Contractor Administrative Visits.

Arnold and Porter provided thoughtful commentary on the implications of this case as well:

“The D.C. Circuit’s decision represents an important step in limiting the sweeping approach that the government and relators often take to the concept of ‘reckless disregard.’ Nonetheless, reasonable reliance remains a fact-specific inquiry and contractors should apply appropriate diligence when vetting any supplier. As set forth in more detail in the underlying District Court decision, Govplace’s contract compliance team undertook significant due diligence regarding Ingram Micro’s methodology for assuring TAA compliance. Contractors who intend to rely on supplier certifications would be prudent to undertake similar diligence and to document the steps they have taken.”