I would not even try to filter a flat file. I am not surprised it does not work. A flat file must be read sequentially. The filter option is offered, but on the basis that the user understands that a flat file cannot be "selected" from since it can only be read sequentially. So while DocuWare is allowing you to create a filter on the file, the error message is correct. If you want to filter this data you need to import the file in to a database table where a query can be filtered.
I guess the problem is that DocuWare is allowing a filter to be created against a flat file but given that it not possible it is assumed that it will not be attempted.
Edit:
And the flat file should be the file that is read from. It should be the "iterated" file. Meaning you should read the file line-by-line and select the appropriate record from DocuWare - which can be filtered. If your iterated source is DocuWare, then for every record selected from the DocuWare file cabinet, you will read every record from the flat file until a match is found for every record from the DocuWare table.
Phil Robson
Senior Director Support Americas