United States ex rel. Berkowitz v. Automation Aids, Inc.

• Decision Date: 25 July 2018
• Docket Number: No. 17-2562,17-2562
• Citation: 896 F.3d 834
• Parties: UNITED STATES EX REL. Jeffrey BERKOWITZ, Plaintiff-Appellant, v. AUTOMATION AIDS, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

896 F.3d 834

UNITED STATES EX REL. Jeffrey BERKOWITZ, Plaintiff-Appellant,

v.AUTOMATION AIDS, INC., et al., Defendants-Appellees.

No. 17-2562

United States Court of Appeals, Seventh Circuit.

Argued February 14, 2018

Decided July 25, 2018

Daniel R. Hergott, Attorney, Linda Wyetzner, Attorney, Behn & Wyetzner, Chartered, Chicago, IL, H. Vincent McKnight, Jr., Attorney, Cleveland Lawrence, III, Attorney, John Wesley McKnight, Attorney, Sanford Heisler, LLP, Washington, DC, for Plaintiff-Appellant.

Adelicia R. Cliffe, Attorney, Brian Tully McLaughlin, Attorney, Crowell & Moring LLP, Washington, DC, Sabena Auyeung, Attorney, Stephen H. Pugh, Attorney, Pugh, Jones & Johnson P.C., Chicago, IL, Ming Yuan Zhou, Attorney, Crowell & Moring LLP, Los Angeles, CA, for Defendant-Appellee Automation Aids.

Kevin P. Shea, Attorney, Nixon Peabody LLP, Chicago, IL, for Defendant-Appellee A&E Office and Industrial Supply.

Christopher Michael Loveland, Attorney, Sheppard, Mullin, Richter & Hampton, LLP, Washington, DC, David Mitchell Poell, Attorney, Sheppard, Mullin, Richter & Hampton LLP, Chicago, IL, for Defendant-Appellee Support of Microcomputers Associated.

Christopher B. Mead, Attorney, London & Mead, Washington, DC, Steven M. Kowal, Attorney, K&L Gates LLP, Chicago, IL, for Defendant-Appellee Aprisa Technology LLC.

Richard C. Landon, Attorney, Gray Plant Mooty, Minneapolis, MN, for Defendant-Appellee United Office Solutions, Inc.

Brian Tully McLaughlin, Attorney, Crowell & Moring LLP, Washington, DC, Sabena Auyeung, Attorney, Stephen H. Pugh, Attorney, Pugh, Jones & Johnson P.C., Chicago, IL, for Defendant-Appellee Caprice Electronics, Inc.

David J. Chizewer, Attorney, Goldberg Kohn Ltd., Chicago, IL, for Amicus Curiae.

Before Easterbrook and Rovner, Circuit Judges, and Griesbach, District Judge.^*

Griesbach, District Judge.

Relator Jeffrey Berkowitz filed a qui tam complaint against nine separate defendants, alleging violations of the False Claims Act (FCA), 31 U.S.C. § 3730. The defendants moved to dismiss Berkowitz’ third amended complaint for failure to state a claim. The district court granted the defendants’ motions and dismissed the case. We affirm.

I. Background

Berkowitz is the president of Complete Packaging and Shipping Supplies, Inc., a company that holds a General Service Administration (GSA) multiple award schedule contract. Under the GSA schedule contract, Complete Packaging sells office supplies, packaging and shipping supplies, information technology products, and janitorial maintenance supplies to various government agencies and departments. The defendants—Automation Aids, Inc.; 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—also hold separate GSA schedule contracts and compete with Berkowitz’ company. Vendors with GSA schedule contracts are responsible for complying with the requirements of the Trade Agreements Act (TAA), 19 U.S.C. § 501 et seq. As relevant to this case, GSA requires that a vendor only offer and sell U.S.-made or other designated country end products to governmental agencies in accordance with the TAA. The Federal Acquisition Regulations (FAR) catalogues the designated countries for the purposes of the TAA and defines "designated country end product" as a product made in a designated country. FAR 52.225-5. It also requires that a vendor’s GSA agreement contain a "Trade Agreements Certificate," certifying that each end product sold through the GSA services contract is a U.S.-made or designated country end product and explicitly listing the other end products that are not U.S.-made or designated country end products. FAR 52.225-6.

Once a vendor enters into a GSA schedule contract with the government, the vendor uploads its price list to the GSA Advantage online portal, GSA’s online shopping and ordering system. From there, government employees may purchase millions of commercial products and services from the vendors.

According to Berkowitz, as early as 2005, he became aware that other vendors offered and sold products from non-designated countries, such as China or Thailand, to the government. He claims he came to this realization by comparing the sales other vendors made on the GSA Advantage online portal with certain product lists he obtained through the normal course of his business that identify the country of origin for various products. Berkowitz contends that while he carefully screens out the non-compliant products he places on the online portal, he realized many other vendors were not doing the same. As a result, he began compiling reports that compared non-TAA compliant products with sales made on GSA Advantage. He determined that the defendants sold end products that were from non-designated countries.

Berkowitz claims the defendants violated the FCA by making material false statements and presenting false claims to the United States. He alleges the defendants knowingly sold products from non-designated countries to the government even though they filed Trade Agreements Certificates, in accordance with FAR 52.225-6, affirming they would only sell products from designated countries. It therefore follows, Berkowitz contends, that any invoices the defendants submitted to the government for payment for products that did not comply with the TAA constitute material false statements as defined by the FCA. Berkowitz recognizes there are limited exceptions to GSA’s restriction on buying non-compliant products from vendors but asserts none of these exceptions apply to the defendants.

Berkowitz filed his complaint on November 14, 2013. On January 13, 2016, the government elected not to intervene in Berkowitz’ case. Berkowitz subsequently amended his complaint multiple times and filed a third amended complaint, the subject of the instant appeal, on April 4, 2016. He attached as exhibits to the complaint lists describing the number of alleged non-compliant products the defendants sold as well as GSA notices advising certain defendants to remove non-compliant products from their product catalogs maintained on the GSA Advantage online portal.

All defendants, excluding Aprisa, moved to dismiss the complaint for failure to state a claim under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. Aprisa filed a motion to dismiss under Rule 12(b)(1) asserting the district court lacked subject matter jurisdiction over Berkowitz’ claims against it. On March 16, 2017, the district court denied Aprisa’s 12(b)(1) motion but granted the other defendants’ Rule 12(b)(6) motions to dismiss and dismissed Berkowitz’ claims against them with prejudice. Aprisa then filed a motion to dismiss under Rule 12(b)(6). The district court granted the motion on July 12, 2017 and dismissed Berkowitz’ complaint with prejudice.

II. Analysis

We review the district court’s grant of a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedurede novo . Volling v. Kurtz Paramedic Servs., Inc. , 840 F.3d 378, 382 (7th Cir. 2016). In construing the complaint, we accept all of the well-pleaded facts as true and "draw all reasonable inferences in favor of the plaintiff." Kubiak v. City of Chicago , 810 F.3d 476, 480–81 (7th Cir. 2016). To survive a motion to dismiss, the complaint must contain sufficient factual information to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In other words, a claim has facial plausibility when "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

Because Berkowitz’ claims arise under the FCA, an anti-fraud statute, they are subject to the heightened pleading requirements of Rule 9(b). United States ex rel. Gross v. AIDS Research Alliance—Chicago , 415 F.3d 601, 604 (7th Cir. 2005). Under Rule 9(b), a plaintiff "alleging fraud or mistake ... must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). The plaintiff must describe the "who, what, when, where, and how" of the fraud—"the first paragraph of any newspaper story." United States ex rel. Lusby v. Rolls–Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). What constitutes "particularity," however, may depend on the facts of a given case. See Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreens Co. , 631 F.3d 436, 442 (7th Cir. 2011) (citations omitted). Plaintiffs must "use some ... means of injecting precision and some measure of substantiation into their allegations of fraud." United States ex rel. Presser v. Acacia Mental Health Clinic, LLC , 836 F.3d 770, 776 (7th Cir. 2016) (quoting 2 James Wm. Moore et al., MOORE’S FEDERAL PRACTICE § 9.03[1][b], at 9–22 (3d ed. 2015) ). The heightened pleading requirement in fraud cases "forces the plaintiff to conduct a careful pretrial investigation" to minimize the risk of damage associated with a baseless claim. Fidelity Nat’l Title Ins. Co. of N.Y. v. Intercounty Nat’l Title Ins. Co. , 412 F.3d 745, 748–49 (7th Cir. 2005).

The FCA allows private persons, or relators, to prosecute qui tam actions "against alleged fraudsters on behalf of the United States government." United States ex rel. Watson v. King–Vassel , 728 F.3d 707, 711 (7th Cir. 2013) ; 31 U.S.C. § 3730. If the government does not intervene in the action, as is the case here, the relator may proceed with the case on his own, though still on behalf of the government. 31 U.S.C. § 3730(c)(3). If the action is successful, the relator is eligible to receive a...