D.C. Circuit Rejects the Government’s Sweeping “Collective Knowledge” and Damages Theories Under the False Claims Act

December 6, 2010

On December 3, 2010, a panel of the United States Court of Appeals for the D.C. Circuit vacated a False Claims Act ("FCA") judgment against Science Applications International Corporation ("SAIC") and rejected the government’s expansive "collective knowledge" and damages theories under that punitive statute.  The D.C. Circuit’s decision in this closely watched case represents a sharp rebuke of several of the government’s most aggressive theories under the FCA.   

The case arose out of two contracts under which SAIC agreed to provide technical assistance and expert analysis to the Nuclear Regulatory Commission ("NRC") in connection with a potential NRC rulemaking on the recycling and release of radioactive materials.  The NRC terminated its contract with SAIC in 1999 based on SAIC’s alleged noncompliance with contractual conflict-of-interest requirements.  Five years later, the government brought an FCA action contending that SAIC’s alleged noncompliance rendered its facially accurate claims for payment impliedly false.  The government ultimately obtained a $6.5 million judgment under the FCA.

On appeal, the D.C. Circuit vacated the judgment against SAIC and remanded for a new trial.  In so doing, the D.C. Circuit rejected the district court’s "collective knowledge" instruction, which permitted the jury to find that SAIC acted with scienter even if no particular employee knew the company’s claims were false.  The court held that the so-called "collective knowledge" theory is legally deficient because it permits "a plaintiff to prove scienter by piecing together scraps of ‘innocent’ knowledge held by various corporate officials, even if those officials never had contact with each other or knew what others were doing in connection with a claim seeking government funds."  The theory, the court continued, "provides an inappropriate basis for proof of scienter because it effectively imposes liability, complete with treble damages and substantial civil penalties, for a type of loose constructive knowledge that is inconsistent with the Act’s language, structure, and purpose." 

The court also agreed with several of SAIC’s other arguments, thereby raising the threshold for FCA plaintiffs–including qui tam relators–to succeed in future litigation.  First, the D.C. Circuit rejected the government’s sweeping damages theory as "flawed" and instead adopted the benefit-of-the-bargain standard proposed by SAIC.  At the government’s urging, the district court had instructed the jury that it was barred from considering the value of the services that SAIC actually provided.  That instruction "compelled the jury to assess as damages the actual amount of payments the government made to SAIC."  The D.C. Circuit held that the government’s "automatic equation" of its payments with its damages was "mistaken" because it "essentially required the jury to assume that SAIC’s service had no value even in the face of possible evidence to the contrary."  The court concluded that the "proper measure of damages" was a "benefit-of-the-bargain framework" that requires the government to prove "that the performance [it] received was worth less than what it believed it had purchased."

Second, the court rejected the government’s theory that false statements constitute separate violations of the FCA even if they were not used to get a false claim paid.  That theory, the court explained, "rest[ed] on a misunderstanding of the FCA’s structure" because knowingly false statements are "separately actionable under FCA section 3729(a)(2) . . . only if" they are used to get a false claim paid.[1]

Finally, although the court adopted the implied certification theory of FCA liability, it recognized the danger that this far-reaching theory could pose.  "As SAIC compellingly point[ed] out," the court wrote, "without clear limits and careful application, the implied certification theory is prone to abuse by the government and qui tam relators who, seeking to take advantage of the FCA’s generous remedial scheme, may attempt to turn the violation of minor contractual provisions into an FCA action."  To address "this very real concern," the court emphasized the need for "strict enforcement of the Act’s materiality and scienter requirements." 

Theodore B. Olson, Matthew D. McGill, Amir C. Tayrani, Ryan J. Watson, and Joshua B. Carpenter of Gibson Dunn briefed the case on behalf of SAIC.  Theodore B. Olson argued the case in the D.C. Circuit in September 2010.

 [1]  The court referred to former section 3729(a)(2) based on the government’s concession that the amendments in the Fraud Enforcement and Recovery Act of 2009 had "no bearing on the outcome of this case."

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