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July 2011

"Do You Know Where That's Been?" If You're Selling to the Federal Government, You Better

Termination for default, costs to repair and replace, diminution of value, treble damages, suspension or debarment from federal government contracts that have generated more than $25 Million in revenue since 2003 ---- these are the consequences that The Home Depot, Inc. ("Home Depot") faces in a federal qui tam or "whistleblower" case pending in the Federal District Court for the Central District of California.  In the suit that was filed in 2008 but only recently unsealed, two former Actus Lend Lease employees (including a former Vice President of Construction) accused Home Depot of violating the Buy American Act and the False Claims Act by providing non-U.S.-made products to Actus Lend Lease, LLC ("Actus") on numerous privatized military housing projects, which Actus had with the Department of Defense and by selling similarly non-Buy-American-Act-compliant products through its General Services Administration (GSA) Schedule Contract to numerous federal agencies.

The recently unsealed documents reveal that, in April 2011, Home Depot's motion to dismiss the lawsuit was denied.  The documents also indicate that the case will go to trial early next year.

Actus Lend Lease, a global developer and design/builder had federal government contracts to construct and operate on-base housing for active-duty military personnel under the Military Housing Privatization Initiative (MHPI).  Actus had MHPI contracts for projects in Hawaii, New Mexico, Arizona, California, Colorado, Kentucky, New York, North Carolina, South Carolina and Texas, which the plaintiffs claimed incorporated Home Depot supplied products that were made in China.  In addition to the violations of the Buy American Act, Actus and Home Depot were accused of False Claims Act violations by submitting pay requests that certified that they had complied with the Buy American Act.

The Buy American Act, 41 U.S.C. §10a, et seq., (the "BAA") and the Trade Agreements Act, 19 U.S.C. §2501, et seq., which modified the BAA, apply to federal government contracts and projects funded under the American Recovery and Reinvestment Act and requires that all goods for public use (articles, materials, or supplies) must be produced in the U.S., or a "designated country" and manufactured items must be manufactured in the U.S. from U.S. materials.  There are exceptions to the BAA, and companies can seek exemptions from its requirements.

The federal government recovered nearly $22 billion under the False Claims Act between 1987 and 2008.  But even without the False Claims Act penalties, violating the BAA can be extremely costly and result in the damages for breach, including the cost to remove or replace the non-compliant goods, termination for default, suspension, and debarment.  Over the past several years, several companies have publicly paid multi-million dollar settlements to resolve allegations of BAA violations.

Home Depot's situation reflects the importance of all parties in the federal government contracting chain knowing the source of the products and materials that they intend to sell to the federal government.  Actus "flowed down" the BAA requirements to its subcontractor Home Depot and Home Depot gave Actus an indemnity for claims arising from its products and performance.

Commercial Litigation

Cecily J. McLeod

Commercial Litigation