A recent district court opinion affirming a jury decision that held Science Applications International Corporation (“SAIC”) liable for failing to disclose organizational conflicts of interest (“OCI”) that impacted its contracts with the Nuclear Regulatory Commission (“NRC”) raises two important issues for government contractors.

First, the decision reflects a contractor’s potential exposure to a False Claims Act (“FCA”) violation for failing to disclose the existence of an OCI pursuant to contract requirements. The district court found that SAIC’s failure to disclose information about OCIs impacting contract performance when submitting requests for payment constituted false claims.

Second, the decision reinforces the need for contractors to maintain current and complete information on company business interests. Applicable federal regulations provide that an OCI may arise where the contract’s requirements conflict with a contractor’s business interests, affecting the ability of the contractor to perform the contract requirements impartially. The district court found in part that SAIC had failed to track its business interests sufficiently to prevent the occurrence of an OCI.

The court’s opinion highlights a contractor’s need to be aware of potential OCIs that may impact performance of a particular contract. The opinion also underscores that a contractor must know the extent that its business interests impact the contract and provide relevant information to the contracting officer as part of the OCI mitigation process.

The Federal Acquisition Regulation provides that an OCI exists when, because of activities or relationships with other persons or organizations, a person or organization is unable or potentially unable to render impartial assistance or advice to the government. FAR § 2.101. The FAR requires contracting officers to identify and evaluate potential OCIs as early in the acquisition process as possible. FAR § 9.504. Among the OCIs identified by the FAR is an impaired objectivity OCI, which arises when a contractor’s judgment and objectivity in performing a contract’s requirements may be impaired due to the substance of the contractor’s performance potentially affecting the contractor’s other interests. FAR § 9.505. In discussing the steps a contracting officer should follow in determining the existence of an impaired objectivity OCI, the Government Accountability Office has directed the contracting officer to consider the contractor’s financial or business interests relevant to the contract. Alion Science & Technology Corp., B-297022.3, 2006 CPD ¶ 2.

In United States v. Science Applications International Corp., No. 04-1543 (D.D.C. Sept. 14, 2009), the district court found that a jury acted reasonably in finding that the contractor was liable for violating the FCA and its contracts with the NRC by failing to disclose to the government contracting officer the existence of OCIs. The United States sued SAIC for breaching its no-OCI obligation under its NRC contracts by engaging in relationships with organizations that created an appearance of bias in the technical assistance and support provided to the NRC.

The government also alleged that the contractor’s no-OCI certification and requests for payment under the contracts violated the FCA. The jury found that SAIC had violated the FCA by knowingly presenting false claims for payment or approval by the government and making, using or causing to be made false records or statements for approval of payments based upon the failure to provide information regarding potential OCIs affecting the contracts.

The district court affirmed the application of the FCA to a contractor’s failure to provide information on potential OCIs pursuant to a contract clause. The two NRC contracts incorporated regulations that require the contractor to warrant that it had no OCI that, in part, would diminish its capacity to give impartial, technically sound, objective assistance and advice or would result in a biased work product. The regulations further required the contractor to disclose any OCIs discovered after entering the contract.

In its opinion, the district court rejected a number of challenges to the government’s application of the FCA, including an implied certification theory to support false claims for payment. The implied certification theory provides that where the government pays funds to a party, and would not have paid those funds had it known of a violation of a law or regulation, the claim submitted for those funds contained an implied certification of compliance with law and regulation. SAIC argued that the theory did not apply because the government had failed to prove that payment was expressly conditioned upon the OCI certifications. The court disagreed, holding that there was no requirement of express certification to find a false claim, only that certification with the OCI requirement was so important to the contract that the government would not have paid the claim if it were aware of a violation of law or regulation. The court found sufficient evidence existed to support the jury’s finding that SAIC’s OCI representations were critical to the government’s decision to pay.

As part of its opinion, the district court focused on the issue of whether SAIC had acted with reckless disregard or deliberate ignorance with respect to the existence of OCIs under the contract. SAIC argued that it had made a diligent inquiry to ensure its compliance with OCI requirements, and pointed to its “comprehensive OCI compliance system.” The district court rejected the argument, finding that the evidence showed that SAIC’s OCI compliance system was inadequate “by failing to incorporate some of SAIC’s business relationships, by containing incomplete descriptions of SAIC’s work, and by failing to associate relevant key words with certain descriptions.” The court found that this failure to maintain complete information on SAIC’s business interests supported the finding that the company was liable under the FCA.

The opinion is important for contractors as it reflects the government’s willingness to extend the reach of the FCA to contractual requirements involving OCIs. Identifying an OCI often involves a subjective analysis of varying interests and relationships held by the contractor and their impact upon the performance of contract requirements. This assessment becomes more difficult as the scope and variety of those interests and relationships grow, particularly for larger contractors that hold different business units or contracts within a single business unit.

Although contractual certifications require a contractor to make a good faith representation regarding the substance of the certification, this case demonstrates the government’s decision to reject a contractor’s representations and apply the penalties of the FCA. The decision heightens the need for contractors to ensure that they have conducted an effective OCI assessment as part of contract performance.

The court’s decision in SAIC also shows that it is critical that contractors maintain current and complete information on business or financial relationships that are relevant to contract performance. The simplest approach to fulfill this obligation is to create an internal database or repository of all business or financial interests on a company-wide basis, including all affiliated entities and subsidiaries. Such interests include the company’s products or services, the company’s contracts to provide the products or services, and the identities of the company’s customers and competitors. The contractor should ensure that the database is updated periodically to reflect any changes to its interests. The contractor can use this database to compare the requirements of a specific contract against its current financial interests to determine whether performance of the contract requirement would create an OCI. Identifying an OCI would allow the contractor to work with the contracting officer to mitigate the OCI.

While creation and maintenance of a financial interests database may seem an onerous task, this database is an essential component of an effective OCI mitigation strategy and important evidence of a contractor’s compliance with OCI requirements. The court’s decision reinforces the importance of a financial interest database and the potential penalty faced by a contractor that fails to maintain current and complete information on its financial interests.