The U.S. Court of Appeals for the District of Columbia Circuit has reversed a decision that had dramatically expanded government contractors’ liability under the False Claims Act. The district court decision in the case, United States v. Science Applications International Corporation, had found the defendant liable for failing to disclose certain alleged organizational conflicts of interest and had assessed damages of more than six million dollars.

The Court of Appeals ruled that the district court erred in two key respects. First, the district court had allowed the jury to consider the “collective knowledge” of all employees in determining whether a contractor had the requisite scienter. Under that theory, a contractor could be deemed to have had actual knowledge of a false claim, even if no single employee knew the claim was false and even if the contractor took all reasonable precautions to prevent false claims from being made. The Court of Appeals held that by allowing liability for such innocent mistakes or even for mere negligence, the “collective knowledge” instruction violated the statutory scheme.

Second, the District Court had allowed the Government to recover as damages the full amount of payments it had made under the contract, without regard to the value that the Government had derived from the contractor’s performance. The Court of Appeals held that the Government could recover in damages only the amount it had paid over and above the value of the goods and services it received. Thus, on remand for a new trial, the defendant is free to show that the Government received the benefit of its bargain despite the alleged organizational conflicts of interest and therefore was not entitled to recover any damages at all.

The Court of Appeals rejected one of the defendant’s main arguments on appeal, however. Specifically, the defendant asserted that its failure to disclose the alleged organizational conflicts of interest could not give rise to liability under the False Claims Act because such disclosure was not an express condition for the Government’s payment. The Court of Appeals disagreed, holding that liability could attach even if disclosure was not an express condition of payment, so long as it was material to the Government’s decision to pay. Jenner & Block filed an amicus brief in this case in the U.S. Court of Appeals for the District of Columbia Circuit on behalf of the National Defense Industrial Association.