For today’s post — which is part one of a series — readers can pick their own title:
Business owners can level the playing field with a qui tam action
or, if you prefer a more scholarly title:
Use of the qui tam Provisions of the federal False Claims Act by market-participants to correct anti-competitive behavior in marketplace
In this short series, we will take a look at a new trend in qui tam litigation under the federal False Claims Act — use of the FCA as a tool by business-owners to correct anti-competitive behavior in the market.
As regular readers know, the true power of the federal FCA (and similar state statutes) lies in the qui tam provisions. The requirements of those provisions — which allow any person with first-hand non-public information to bring a claim — have most frequently been met by current and/or former employees of fraud-feasors. Without question it is difficult for an individual to acquire this level of knowledge without being an insider.
But if current or former employees of a company committing fraud make up the biggest category of whistle-blowers, I would be willing to bet that small business owners who bring claims against their competitors are the second most successful group of qui tam relators. This is moreover a trend that seems to be on the increase. The ways in which a business-owner can obtain the first-hand knowledge of his competitors are many and varied, but they generally involve either (1) a relator who bids on a contract, loses, and then observes the winning company’s performance and has industry knowledge sufficient to know that that winning company never intended to perform in the first place or (2) a relator whose business is invited to join a kickback scheme or conspiracy and refuses to participate in said scheme.
In the first part of this series, we will take a look at one excellent example of the first type of business to business FCA case: United States ex rel. Douglas Knisely v. Iron Mountain Inc. et al. This case also has an added bonus for the student of FCA jurisprudence, in that it highlights a few facts that draw the line between a false claim to the government and a meaningless error on the part of a government contractor.
Earlier this summer, two of the largest document-shredding companies in America, Iron Mountain Corporation and Shred-It USA paid a total of $1.1 million to settle a lawsuit alleging that they submitted false claims to the government when they failed to shred sensitive documents as required by their contracts with the United States. The case was initiated by a gentleman named Douglas Knisley, the owner and operator of Knisely Security LLC, a small, family-owned document destruction business based in Lock Haven, Pennsylvania.
Mr. Knisely had bid on contracts to perform document destruction work for the federal government numerous times. Each time, he lost out to one of three competitors — Iron Mountain, Shred-It, or Cintas. He knew, from his bids on the contracts, what was required by the government. Each time, the government solicitation unambiguously required that document-shredding vendors use shredders producing residue particles not exceeding 1/32 inch in width (with a 1/64-inch tolerance) by 1/2 inch in length.
It seems that that is a rather stringent standard in the world of document destruction. Indeed, to meet that kind of standard, a company would need to purchase special equipment; moreover, because the shredding service was required to be mobile (as most services today are mounted onto a flat-bed truck) a company would have to purchase an entirely different truck to be able to perform these services.
So, Knisley was armed with detailed knowledge about the shredders normally used by such companies, the cost of such equipment, and so forth. And he knew the exacting standards required by the federal contracts which he didn’t get. He also knew, based on observing the trucks and the equipment the “big three” were using, that they weren’t living up to their end of the bargain.
Knisely also spoke to employees operating trucks for all three companies. While “talking shop” so to speak, employees of two of the three defendants admitted that their trucks did not possess equipment that could shred documents to that exacting specification. Then he went searching for a lawyer, eventually hiring world-class FCA lawyers Mark Raspanti and Michael Morse.
Knisley filed his false claims act case in 2010 alleging that the big three (again, that is Iron Mountain, Shred-It, and Cintas) failed to shred sensitive documents of numerous federal government agencies as per the contractual requirements. Specifically, each one of the big three used shredders that produced residue particles exceeding 1/32 inch in width (with a 1/64-inch tolerance) by 1/2 inch in length.
And here is where the added bonus comes in — the extra factual nuance that really, in my humble opinion, nudges the facts of this case across the — sometimes vague — line between a false claims act violation and a mere breach of contract. That is to say, the extra factual nuance that demonstrates clearly that these defendants knew that what they were doing was false, and they went ahead and did it anyway.
Mr. Knisely knew, based on his considerable experience in the industry, that documents shredded to the ultra-tiny specifications of the feds are unusable by the recycling industry. Therefore, by not using the shredders mandated by the government solicitation — and thus by not producing the tiny, tiny cuts required by the feds — the companies were able to re-sell the improperly shredded government documents to paper recyclers and create an additional stream of revenue.
Stay tuned for Part II of our series, which looks at business owners who refuse to participate in kickback schemes…