MacDowell v. A&T Marketing, Inc. et al

Filing 114

ORDER RE 94 MOTION TO DISMISS, 95 105 REQUESTS FOR JUDICIAL NOTICE, AND VACATING HEARING by Judge William Alsup. (whalc1, COURT STAFF) (Filed on 9/12/2019)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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For the Northern District of California

United States District Court

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UNITED STATES ex rel
MATTHEW MACDOWELL,
No. C 19-00173 WHA
Plaintiff,

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v.
ORDER RE MOTION TO DISMISS,
REQUESTS FOR JUDICIAL NOTICE,
AND VACATING HEARING

SYNNEX CORPORATION,
Defendant.
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INTRODUCTION

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In this False Claims Act action, defendant moves to dismiss qui tam relator’s third

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amended complaint. For the foregoing reasons, defendant’s motion is GRANTED.
STATEMENT

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Defendant Synnex Corporation sells office products to the federal government. Relator

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Matthew MacDowell is an individual suing on behalf of the United States. In 1980, defendant

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entered into a contract (Multiple Award Schedule 70) with the government for the sale of

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electric power supply products. The contract incorporates the Trade Agreements Act which

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necessitates end products sold to the United States Government be manufactured in certain

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countries. In 2006, Synnex entered into a contract with Huawei Technologies Co., Ltd., a

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Chinese technology corporation, to sell information technology infrastructure components in the

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United States. The complaint alleges that as a result of the agreement, Synnex imported
products from APC by Schneider Electric (formerly known as American Power Conversion

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Corporation). These products contained Huawei-manufactured parts. The complaint further

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alleges Synnex offered for sale and sold power-supply products to the government under MAS

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70 knowing that they contained parts from APC that were manufactured in TAA non-compliant

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countries (Compl. ¶¶ 1, 6, 9, 14, 43, 47, 67, 68).

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Relator filed the instant action in August 2012 in the United States District Court for the

amended complaint in January 2017, all under seal. During this time, various extensions of

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time allowed the United States to consider whether to intervene. A transfer sent the action to

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the United States District Court for the Northern District of California in January 2019. The

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government moved to unseal the complaint in February 2019, but declined to intervene. The

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For the Northern District of California

District of Columbia, followed by an amended complaint in February 2014 and a second

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United States District Court

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motion was granted. Relators then filed a public third amended complaint in April 2019,

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alleging violations of the False Claim Act. Defendant now moves to dismiss and relator

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opposes (Dkt. Nos. 1, 15, 44, 60, 69). Pursuant to our Local Civil Rule 7-1(b), this order finds

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relator’s motion suitable for submission without oral argument and hereby VACATES the

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September 26 hearing.

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ANALYSIS
To allege a False Claims Act claim for relief, there must be a “(1) a false statement or

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fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the

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government to pay out money or forfeit moneys due.” United States v. Safran Grp., S.A., No.

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15- CV-00746-LHK, 2017 WL 3670792, at *9 (N.D. Cal. Aug. 25, 2017). Furthermore,

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because the complaint alleges fraud, it is subject to a heightened pleading standard under FRCP

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9(b) which requires “a party [to] state with particularity the circumstances constituting fraud or

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mistake.”

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1.

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Defendant moves to dismiss all of relator’s claims on the grounds that the complaint is

PUBLIC DISCLOSURE RULE.

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based on two publicly disclosed federal lawsuits thereby triggering the public disclosure bar.

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Prior to 2010, the public disclosure bar applied if the following three requirements were met:

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(1) the disclosure at issue occurred through one of the channels specified in the statute; (2) the
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disclosure was ‘public’; and (3) the relator’s action is ‘based upon’ the allegations or

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transactions publicly disclosed.” 37 U.S.C. § 3730(e)(4)(A) (2006). Following a 2010

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amendment, the public disclosure bar requirements were changed so that “based upon” is

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defined as “substantially the same as,” and the “original source” exception was expanded.

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The first lawsuit was filed in the United States District Court, District of Massachusetts

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by qui tam relator Christopher Crennen in 2006 against various companies including Synnex.

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The 2006 complaint alleged defendants offered for sale computer and electronic products

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through the GSA from non-designated countries that did not comply with the TAA in violation

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of the False Claims Act. The allegations regarding Synnex specifically identified non-

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For the Northern District of California

United States District Court

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compliant printers and a computer. (Br. Ex. A, B).
The second lawsuit was filed in the United States District Court, District of Columbia by

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qui tam relator Brady Folliard in 2007 against a variety of companies including Synnex. The

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2007 complaint alleged Synnex sold Hewlett-Packard products that originated in China through

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the GSA’s MAS in violation of the TAA. Folliard then filed a second amended complaint in

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2008 alleging substantially the same claims. Folliard filed a third amended complaint in 2010

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alleging substantially the same claims but specifically identified that the contract in question

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was MAS 70. (Br. Ex. C, D, E).

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It is undisputed the first two elements of the public disclosure bar test are met. Civil

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hearings, including the pleadings and other materials filed in civil litigation remain one of the

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channels specified in the statute that may be subject to the public disclosure bar. Furthermore,

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the disclosures were public as the documents in the two lawsuits were publicly filed. The main

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point of contention between the parties is whether the relator’s action is based upon or

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substantially similar to the allegations or transactions publicly disclosed in the two lawsuits and

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whether the original source exception applies.

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A.

Substantially Similar.

Prior to the 2010 amendment, our court of appeals held that the term “based upon”

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meant “substantially similar to.” United States ex rel. Meyer v. Horizon Health Corp., 565 F.3d

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1195, 1199 (9th Cir.2009). Accordingly, the analysis of whether an action is based upon or
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substantially similar to the publicly disclosed material is the same.

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instant action alleges Synnex sold products to government under MAS 70 where parts of

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products were manufactured in China in violation of the TAA. The other two lawsuits similarly

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alleged Synnex sold or offered for sale products through GSA that were in violation of the

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TAA.

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The complaint in the

Relator distinguishes the complaint in the instant action from the earlier lawsuits,

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highlighting that the products at issue are different as well as the upstream manufacturers. In

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particular, relator contends his complaint is not substantially similar because it makes

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allegations regarding different parties and different products, specifically APC products and not
computer products or HP products as alleged in the other two lawsuits. United States ex rel.

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For the Northern District of California

United States District Court

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Mateski v. Raytheon Co., 816 F.3d 565, 579 (9th Cir. 2016). Nonetheless, unlike the publicly

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disclosed, generalized documents in Mateski (news media, congressional hearings, and GAO

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reports), the publicly disclosed documents here are civil complaints that allege the same type of

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violations to the same extent that the complaint in the instant action does. The primary party in

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all of the lawsuits—Synnex—is being accused of the same TAA violation in government

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contracts, for the same conduct of providing products with parts manufactured in non-

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designated countries. The other decisions cited by relator suffer a similar downfall in that the

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publicly disclosed materials either addressed different types of issues or added materially new

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information. Keeping in mind the purpose of the public disclosure bar is to ensure that whistle-

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blowers with valuable information bring suits while discouraging litigation where plaintiffs

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have no significant information to contribute, this order finds the instant action and the other

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two lawsuits are substantially similar.

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B.

Original Source Exception.

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If the public disclosure bar applies, an action shall be dismissed unless the person

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bringing the action is an original source of information. Prior to the 2010 amendment, an

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original source was one who has direct and independent knowledge of the information on which

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the allegations are based and has voluntarily provided the information to the government before

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filing an action. 37 U.S.C. § 3730(e)(4)(B) (2006). Following the 2010 amendment, an original
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source is one who either (1) prior to a public disclosure voluntarily disclosed to the government

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the information which allegations or transactions in a claim are based, or (2) who has

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knowledge that is independent of and materially adds to the publicly disclosed allegations or

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transactions, and who has voluntarily provided the information to the government before filing

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an action. 37 U.S.C. § 3730(e)(4)(B).

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With respect to the alleged conduct occurring before the 2010 amendment, relator offers

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proof that he, as an employee of a Synnex product reseller, knew that defendant had offered

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resellers substantial rebates and had discounted pricing on APC products and that it would

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affirmatively offer to swap out APC products when vendors had ordered similar products.
Relator has further offered proof stating that he spoke with a senior Synnex representative who

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For the Northern District of California

United States District Court

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told him products sold by Synnex were manufactured in China. Citing Prather v. AT&T, Inc.

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and United States ex rel. Calva v. Impac Secured Assets Corp., defendant contends relator

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merely took publicly available information and inferred a False Claims Act violation occurred.

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847 F.3d 1097, 1105 (9th Cir.); Case No. SSACV-16-1983-JVS, 2018 WL 6016152, at *2 (C.D.

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Cal. June 12, 2018). However, relator’s knowledge here comes from his experience observing

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defendant’s conduct in the course of his employment, not piecing solely public information

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together to conclude defendant violated the False Claims Act. He furthermore proceeded to

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report the alleged fraud to the government through the GSA’s online tip system.

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With respect to the alleged conduct occurring after the 2010 amendment, relator’s offer

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proof as well as the complaint’s allegations regarding the APC products are independent and

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material. These allegations go beyond merely adding detail as defendant contends, rather they

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suggest more serious conduct than what is contained in the complaints of the other two lawsuits,

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specifically that defendant sold products to the government containing parts from a TAA

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noncompliant country with significant security vulnerabilities. Accordingly, taking into

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account the offer proof and the pleadings, the record is sufficient for the original source

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exception to apply in regards to the alleged conduct that occurred before and after 2010.

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Defendant’s motion to dismiss on the grounds of the public disclosure bar is thus DENIED.

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2.

MATERIALITY.

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Defendant moves to dismiss all of relator’s claims on the grounds that TAA compliance

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is not material. Under United States v. Escobar, to allege a False Claims Act violation, a relator

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must plead materiality. 136 S. Ct. 1989 (2016). Mere statutory or contractual violations are not

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necessarily material. The third amended complaint here alleges that compliance with the TAA

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is a condition of payment and that by not complying, defendant has potentially exposed

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government computer systems to products that could open “backdoors” that could be accessed

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by China-based manufacturers. Defendant essentially contends TAA compliance in this

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instance is minor. Defendant relies on relator’s reasoning that because the products bore the
label of the country of manufacture, the government was aware the products it was purchasing

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United States District Court

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were TAA noncompliant and that furthermore, GSA has represented that it is willing to work

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with companies to address TAA compliance issues instead of explicitly refusing to pay them.

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Defendant further cites to Comstor in which the court found a lack of materiality where the

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government had declined to intervene after almost five years of investigation. United States v.

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Comstor Corp., 308 F. Supp. 3d 56, 87 (D.D.C. 2018).

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Although the fact that the government has declined to intervene in the seven years since

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relator instituted this action weighs toward finding a lack of materiality, it is not dispositive as

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there are other reasons why the government may decline to intervene. As pled, there is no

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indication the government has actual knowledge the alleged TAA violations occurred here and

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continues to pay defendant or that the government has regularly paid companies despite

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knowledge they were providing them with TAA noncompliant products. Furthermore, given

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the security concerns at stake as well as the fact compliance with the TAA was mentioned at

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various times throughout the MAS contract, relator at this early stage in the litigation, has

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adequately pled materiality. Accordingly, defendant’s motion to dismiss on the ground of

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materiality is DENIED.
SPECIFICITY OF PLEADING.

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3.

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The third amended complaint alleges defendant sells products through the GSA contract

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that are TAA noncompliant. From the face of the complaint, it is not clear how relator reached
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this conclusion. The complaint only makes conclusory allegations stating certain products and

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parts offered for sale by defendant were TAA noncompliant. Relator does not adequately plead

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with particularity how the products in the offer for sale lists correspond to those listed in the

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sales invoices.

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Relator relies on United States v. United Healthcare Ins. Co. to contend that the

(9th Cir. 2016). Contrary to relator, United Healthcare did not allow such broad inferences.

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Rather, our court of appeals found the adequately pled portions of that complaint were those

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that specifically alleged who, what, when, where, and how the misconduct occurred, detailing

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the exact parties and the exact actions they took in specific instances, allowing inferences only

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For the Northern District of California

complaint has provided enough detail for the connection to be inferred. 848 F.3d 1161, 1167

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United States District Court

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where there was sufficiently reliable indica. By contrast here, our complaint only pleads

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defendant offered TAA non-compliant products for sale and that the government purchased

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products from defendant between 2005 and 2016, not that defendant sold TAA noncompliant

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products to the government during this time. The remaining allegations are merely conclusory

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allegations that defendant or its employees were “aware of and participated in selling TAA non-

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compliant products to the government.” What is unclear from the complaint is which

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noncompliant products were sold to the government, when they were sold, who specifically sold

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them, and how they did so. Although it is not necessary to provide details on every aspect of

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the alleged scheme, it is necessary to plead causal links between the alleged TAA noncompliant

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products and those that they were ultimately sold to the government because they go to the root

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of the alleged misconduct. Accordingly, defendant’s motion to dismiss on the ground of

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pleading without the specificity required by Rule 9(b) is GRANTED.

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4.

REQUEST FOR JUDICIAL NOTICE.

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Courts may take judicial notice of facts that are not subject to reasonable dispute

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because they “can be accurately and readily determined from sources whose accuracy cannot

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reasonably be questioned.” FRE 201(b). “[M]atters of public record” are the appropriate

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subjects of judicial notice. Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001),

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overruled on other grounds by Galbraith v. Cty. of Santa Clara, 307 F.3d 1119, 1125–26 (9th

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Cir. 2002).

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This order accordingly GRANTS defendant’s unopposed request to judicially notice the

States District Court for the District of Massachusetts in the case United States ex. rel. Crennen

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v. Dell Marketing, L.P. et. al., 06-cv-10546-PBS; (2) a complaint and two amended complaints

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filed by a relator in the United States District Court for the District of Columbia case United

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States ex. re. Folliard v. Synnex, et. al., 07-cv-719-RCL; (3) a newsletter issued by the General

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Services Administration used by the court in Folliard; (4) a guide concerning an American

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Power Conversion Product InfraStruxure which is partially included in the third amended

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For the Northern District of California

following documents: (1) a complaint and amended complaint filed by a relator in the United

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United States District Court

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complaint; (5) a ruling by the United States Customs and Border Protection which is referred to

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in the third amended complaint.

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This order also GRANTS relator’s unopposed request to judicially notice the existence of

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the following documents: (1) various press releases from the DOJ related to cases regarding

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TAA violations; (2) the GSA Solicitation Document for General Purpose Commercial

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Information Technology Equipment, Software and Services; (3) Synnex’s MAS 70 contract,

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contract number GS-35F0143R; (4) Exhibit A of the Crennen complaint which allegedly lists

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products made in TAA-designated countries on the GSA Advantage! Website but are actually in

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non-designated countries; (5) Exhibit A of the amended Crennen complaint which allegedly

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lists products made in TAA-designated countries on the GSA Advantage! Website but are

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actually in non-designated countries; (6) Exhibit 2 of the Folliard second amended complaint

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which allegedly lists HP products on the GSA schedule that originated in China; (7) Exhibit 2a

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of the Folliard second amended complaint which allegedly lists HP products on the GSA

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schedule that were made Malaysia; (8) Exhibit 4 to the Folliard second amended complaint

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which allegedly lists products listed on the GSA schedule that originated in China.

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CONCLUSION

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To the extent stated above, defendant’s motion to dismiss all of relator’s claims is

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GRANTED. The September 26 hearing is VACATED. Relator may seek leave to amend the
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complaint and will have until OCTOBER 10 AT NOON, to file a motion, noticed on the normal

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35-day track for leave to file an amended complaint. The motion must include a proposed

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amended complaint and a redlined copy, and must clearly explain how the amendments to the

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complaint cure the deficiencies identified herein. Relator must plead his best case.

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IT IS SO ORDERED.

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WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

Dated: September 12, 2019.
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For the Northern District of California

United States District Court

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