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United States ex rel. Knisely v. Cintas Corporation, Inc.

United States District Court, Eastern District of Pennsylvania

March 14, 2014

UNITED STATES OF AMERICA ex rel. DOUGLAS KNISELY, et. al.
v.
CINTAS CORPORATION, INC.

MEMORANDUM

STEWART DALZELL. J.

Relator Douglas Knisely ("Knisely") brings this action under the False Claims Act (hereinafter "FCA"), 31 U.S.C. § 3729 et seq., alleging that Cintas Corporation, Inc. ("Cintas") submitted false claims to the United States for payment for shredding services that failed to comply with size specifications in Cintas's Government contracts. Knisely also alleges that Cintas violated the Lanham Act, 15 U.S.C. § 1125(a), by misrepresenting its compliance with government shredding contracts in to win other shredding business. Before us are Cintas's motion to dismiss, Knisely's opposition thereto, Cintas's reply and Knisely's surreply. For the reasons detailed below, we will grant Cintas's motion in part and deny it in part.

I. Background

A. The Parties

Knisely owns and operates Knisely Security LLC which through a subsidiary provides shredding services in central Pennsylvania. First Amended Complaint ("FAC") at ¶¶17-19. Cintas is a publicly-traded $4 billion (revenue) company that offers nationwide shredding services through one of its four subsidiaries. Id ¶¶42, 44, 45, 48. Knisely Security and Cintas are direct competitors in central Pennsylvania. Id ¶ 250. In 2010, relator Knisely brought this qui tam action under seal, pursuant to the False Claims Act, against Shred-It USA, Inc., Iron Mountain, Inc., and Cintas, alleging that each defendant knowingly submitted false claims for payment for shredding services that failed to comply with the size specifications mandated in their contracts with the Government. Id ¶¶1-5. The False Claims Act encourages those with knowledge of fraud against the Government to bring an action as individuals and on behalf of the Government in exchange for a share of any recovery — including civil penalties for each false claim and up to three times the Government's damages. FAC ¶¶13-15.

On March 12, 2012, the Government notified the Court of its decision not to intervene. We subsequently unsealed the First Amended Complaint on November 27, 2012. On December 21, 2012, Iron Mountain reached a settlement with Knisely and the United States and we therefore dismissed it from the case. On April 11, 2013, Shred-It also settled with Knisely and the United States and we subsequently dismissed it as well.[1] On August 14, 2013 we ordered Knisely to serve the unsealed amended complaint on Cintas.

We have federal question jurisdiction pursuant to 28 U.S.C. § 1331 and 31 U.S.C. § 3732(a) as Knisely brings his claims pursuant to the False Claims Act.

B. Relator's Allegations

1. False Claims Act Violations

In his complaint Knisely alleges that Cintas has been providing document shredding services under a General Services Administration ("GSA") schedule to government agencies since at least 2004. FAC ¶¶ 71, 82, 160. [2] Federal agencies may use a vendor once the GSA accepts that vendor's offer in response to a GSA solicitation. Id ¶¶ 77, 81. A vendor who chooses to submit an offer in response to a GSA solicitation agrees to the terms and conditions of the contract identified in the solicitation. Id. ¶ 78.

The GSA requirements for shredding and other so-called Destruction Services cover less than three pages of the 165-page document known as a Multiple Award Schedule ("MAS" or "schedule") that solicits vendors for all manner of goods and services. Id ¶ 84, see also FAC, Ex. A at 22. Destruction services include:

[O]n-site and off-site services of classified and unclassified paper documents, materials and magnetic media. The methods for destruction services may be obtained through these destruction options: shredding (e.g., paper documents, folders, newspapers, catalog, magazines) disintegration (e.g., microfilm, microfiche, ID cards, VHS tapes, audio cassettes, CD ROM, floppy disks, computer tapes and computer hard drives) and incineration (e.g., paper documents, maps, files, envelopes, manuals, newspapers, catalogs, magazines, blue prints).

FAC Ex. A at 22-23.

The purpose of this segment of the MAS is "to provide Federal agencies with a customized plan for destroying government documents that is unique and cost effective to their needs." Id at 23. The contract provides that "[t]hese services may be used on a nonmandatory basis" by government agencies and "may be performed at the contractor's facilities or the ordering agency's facilities." Id Federal law obliges each federal agency "to establish and maintain" its own program to manage and dispose of agency records. FAC ¶ 54 (citing 44 U.S.C. § 3102). The National Archives and Records Administration ("NARA") oversees each agency's document and record disposition programs while the GSA is responsible for overseeing economy and efficiency in records management. Id ¶ 57.

The GSA schedule states in relevant part,

The following methods for [Destruction Services] may be obtained through these material destruction options[:]
A) SHREDDING: Include both on-site and off-site for shredding services, which is designed to handle a variety of classified and unclassified materials. Shredders shall be designed to produce residue particle size not exceeding 1/32 inch in width with a 1/64-inch tolerance by 1/2 inch in length. There is no need to separate paper grades or remove staples, clips or other bindings.

FAC Ex. A at 23 (emphasis supplied). [3]

Vendors must also certify destruction with a signed certificate showing the date of destruction and the material destroyed that must be signed by "the individuals designated to destroy and witness the destruction." Id at 24. "Destruction officials shall be required to know, through their personal knowledge, that such material was destroyed" and, "[i]f required, the contractor must destroy Government material in accordance with record disposition schedules established by the agency." Id

Knisely's qui tam claim hinges on his assertion that the Government "clearly and unambiguously requires that document shredding services provided to United States government agencies through [the] GSA Schedule [] must use shredders designed to produce residue particles" no larger than the size described above. FAC ¶ 87. He alleges that the import of this size constraint arises from the difference between on-site mobile shredders and off-site equipment. Id ¶ 100. Federal agency customers typically deposit documents for shredding into locked consoles throughout their offices, which the shredding vendor empties into an on-site mobile truck or carries off-site to do the shredding. Id ¶¶ 98, 99. About 95% of mobile shredder trucks use a method called "pierce and tear" that shreds more quickly and cheaply than off-site shredders but they cannot achieve the small size shreds described above. Id ¶¶ 101, 102. Knisely contends that the pierce-and-tear method "frequently leaves large sections of documents, and in some cases entire documents, intact and easily readable." Id If 103.

Based on his more than thirty years' experience in the business, Knisely alleges that the smallest shred size a mobile shredding truck can produce is 3/8 inch, and very few such trucks are in operation. Id If 104. Shredded paper is generally sold for recycling but he asserts that the residue particle size described in the GSA schedule is too small for that use. Id ¶ 105-107. Cintas sells its customers' shredded documents to Georgia-Pacific Corporation to be recycled as toilet tissue. Id ¶ 174.

Knisely alleges that Cintas claims its document-destruction business handles confidential information and helps businesses mitigate risk, but that Cintas has repeatedly failed to shred government documents in conformity with the GSA schedule. Id ¶¶165-167. On October 13, 2009, a Cintas representative, Jim Duchess, allegedly stated that Cintas's standard shred size is approximately 5/8 inches wide by 2 Vi inches long and, two days later, he is said to have stated that Cintas does not have the equipment needed to meet the shredding sizes specified in the GSA schedule. Id ¶¶170, 171. Knisely contends that Cintas has therefore acknowledged that "it does not operate shredding equipment that can satisfy the shred size specifications mandated by" the GSA schedule. Id ¶ 175.

Knisely alleges that Cintas has been awarded many federal agency shredding contracts, including:

Agency

Date

Place

Department of Veteran Affairs

3/10/2009

California

Social Security Administration

12/31/2008

Kansas

Department of Homeland Security --Bureau of Citizenship & Immigration

10/1/2008

Missouri

Department of Justice

8/28/2008

District of Columbia

Department of Veteran Affairs

10/31/2007

Florida

Department of Justice

9/4/2007

District of Columbia

Department of Health and Human Services

7/18/2007

Ohio

Department of Transportation

3/22/2007

District of Columbia

General Services Administration

11/30/2006

District of Columbia

Social Security Administration

6/30/2006

Kansas

Department of Health and Human Services -- NIH

9/28/2005

Maryland

Id ¶ 176.

Knisely cites only one specific shred residue size for one agency among these Cintas clients — that is, the Social Security Administration — which adopted a maximum ...


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