On December 3, 2010, in United States v. Science Applications International Corp., No. 09-5385, the D.C. Circuit vacated a judgment of False Claims Act (FCA) liability and remanded the case for a new trial based on errors committed by the district court in jury instructions that permitted scienter to be established through collective knowledge of corporate employees and based on a jury instruction that improperly relieved the Government from establishing its burden of proof on damages. Id. at 33 & 39. The court also discussed the contours of the implied certification theory of falsity under the FCA. Id. at 18.
Science Applications International Corporation (SAIC) contracted with the Nuclear Regulatory Commission (NRC) to provide “technical assistance and expert analysis” in support of potential rulemaking by the NRC. Id. at 3. The United States later brought suit, alleging that the contracts between SAIC and the NRC and certain federal regulations required SAIC to disclose conflicts of interest, and that SAIC had failed to do so. The United States contended that SAIC’s alleged failure to do so amounted to violations of the FCA and breach of contract. The case was tried to a jury, and the jury returned a verdict in favor of the Government for “the full amount of payments made by the government for the claims the jury concluded were knowingly false.” Id. at 9. SAIC moved for judgment as a matter of law or a new trial, both of which the district court denied.
On appeal, the D.C. Circuit first considered the scope of the implied certification theory. Implied certification permits a plaintiff to establish the FCA’s requirement of “falsity” when a claim for payment “rests on a false representation of compliance with an applicable federal statute, federal regulation, or contractual term” and the “certification was a prerequisite to the government action sought.” Id. at 13 (citation and quotation marks omitted). The court rejected SAIC’s position that the implied certification theory requires an “express condition precedent to payment” in the relevant statute, regulation or contract. Instead, the court provided the following formulation:
[W]e hold that to establish the existence of a “false or fraudulent” claim on the basis of implied certification of a contractual condition, the FCA plaintiff—here the government—must show that the contractor withheld information about its noncompliance with material contractual requirements. The existence of express contractual language specifically linking compliance to eligibility for payment may well constitute dispositive evidence of materiality, but it is not, as SAIC argues, a necessary condition. The plaintiff may establish materiality in other ways, such as through testimony demonstrating that both parties to the contract understood that payment was conditional on compliance with the requirement at issue.
Id.at 18. The court noted the risk of an excessively broad interpretation of the implied certification doctrine and suggested this could be “addressed through strict enforcement of the [FCA]’s materiality and scienter requirements.” Id. at 21. The D.C. Circuit declined to vacate the judgment on grounds concerning the implied certification theory.
The court did hold, however, that the district court’s instruction permitting the jury to find scienter established based on the collective knowledge doctrine was in error and required that the judgment be vacated. The collective knowledge doctrine “allows ‘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.’” Id. at 29 (citation omitted). The D.C. Circuit concluded, “We nonetheless believe that under the FCA, ‘collective knowledge’ 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.” Id. at 28.
The D.C. Circuit also vacated the judgment on the ground that the district court’s jury instruction on damages was in error. The Government essentially sought to “adopt an irrebuttable presumption . . . that treats services involving expert advice and analysis affected by potential organizational conflicts as categorically worthless.” Id. at 39. The D.C. Circuit held that in a case in which a “defendant agreed to provide goods or services to the government,” the “benefit of the bargain measure” is the proper test to calculate damages. Id.at 36. “[T]he government will sometimes be able to recover the full value of payments made to the defendant, but only where the government proves that it received no value from the product delivered,” id. at 37, and the defendant must be entitled to offer countervailing evidence of the value provided to the government, id. at 39.
The court’s decision is available by clicking here.