In a December 3, 2010 decision in United States v. Science Applications International Corporation, Case No. 04-CV-01543 (D.C. Circuit Dec. 3, 2010), the D.C. Circuit affirmed a trial court’s holding that the implied certification theory of liability does not require the offending false certification to relate to an express condition for payment, holding that a violation of the False Claims Act exists when a false certification is material to the government’s decision to pay a claim. In addition, the D.C. Circuit rejected the lower court’s instructions on the “collective knowledge” standard for scienter and its instructions on damages, vacated the lower court’s judgment as to liability and damages, and remanded for a new trial.

Beginning in 1992, Science Applications International Corporation (“SAIC”) contracted with the Nuclear Regulatory Commission (“NRC”) to provide technical assistance and analysis in connection with the NRC’s rulemaking regarding the release of recycled radioactively contaminated materials. A follow-on contract was executed in 1999. Under these contracts, SAIC agreed not to enter into other contractual arrangements with entities that could potentially give rise to conflicts of interest with respect to SAIC’s work for the NRC. SAIC also agreed to obtain prior written approval from the NRC if SAIC had reason to believe there may be a conflict of interest and agreed to disclose any such conflicts that might arise during the term of the contracts. NRC regulations specified circumstances that qualified as conflicts of interest. Pursuant to its contract with the NRC, SAIC certified that the award of the contract did not result in a conflict of interest. During the term of the contract the parties agreed to several modifications. SAIC also certified that the modifications did not result in conflicts of interest. However, nothing in the contract made SAIC’s certification as to the lack of conflicts of interest an express condition for payment. Likewise, nothing in the vouchers submitted by SAIC for payment made SAIC’s certifications an express condition for payment.

In October 1999, a member of the public alleged that SAIC had a conflict of interest between its for-profit work for other clients and its work with the NRC. The NRC investigated and concluded that SAIC’s work for two companies, British Nuclear Fuels, Ltd. and Bechtel Jacobs Company, gave rise to a potential conflict of interest. The NRC and SAIC agreed to stop work and entered into a settlement terminating the contract.

The United States brought suit against SAIC, alleging, among other things, that SAIC violated the False Claims Act by knowingly submitting false claims for payment under 31 U.S.C. § 3729(a)(1) and knowingly made false statements to get false or fraudulent claims paid or approved under 31 U.S.C. § 3729(a)(2). On summary judgment, the district court recognized that the claims submitted by SAIC for payment contained no express false statements. However, the district court held that the government could still proceed under the theory of implied false certification. The district court rejected SAIC’s argument that such a theory requires proof that compliance with the certification at issue is an express condition for payment. After trial, a jury found SAIC liable under both 3729(a)(1) and (a)(2) and the district court, after trebling the jury’s finding of approximately $2 million in damages and adding civil penalties and other damages, entered judgment in an amount of nearly $6.5 million.

SAIC moved for judgment as a matter of law or in the alternative for a new trial, raising four arguments: (1) the government could not prevail under an implied certification theory because there was no evidence that payment was expressly conditioned on compliance with the conflict of interest obligations; (2) SAIC did not knowingly violate the False Claims Act because it believed it had no conflicts of interest when it submitted claims for payment (3) various jury instructions were erroneous, including the instruction that the jury could make finding of facts as to SAIC’s knowledge of the alleged false claims based on the “collective knowledge” of its employees; and (4) the government failed to prove any damages or, in the alternative, that the damages instruction was erroneous and prejudicial. The district court rejected all four arguments.

On appeal, the D.C. Circuit applied the language of the False Claims Act in effect at the time of the trial. The D.C. Circuit rejected both SAIC’s argument that false claims liability under the implied certification theory may apply only if the certification in question was an express condition for payment and the government’s argument that violations of express representations in a contract are, in and of themselves, sufficient to establish liability under the implied certification theory. Instead, the D.C. Circuit adopted the 10th Circuit’s standard for the implied certification theory of liability, holding that this theory requires a showing that “the contractor withheld information about its noncompliance with material contractual requirements.” The Court of Appeals stated that a plaintiff may establish the element of materiality of noncompliance with contractual requirements to the government’s decision to pay in various ways, including demonstrating “express contractual language specifically linking compliance to eligibility for payment”.

With respect to the role of scienter in the implied certification theory of liability, the D.C. Circuit held that scienter is established when the plaintiff demonstrates both that the contractor violated a contractual obligation and that compliance with that obligation was material to the decision to pay on the contractor’s claim. Referring to the testimony of SAIC witnesses, the court held that the record was capable of supporting a jury finding that SAIC knew it had violated the applicable conflict of interest provisions and regulations and that compliance with such provisions and regulations was material to the NRC’s decision to pay SAIC’s claims for payment.

Addressing the district court’s jury instructions on the standard of scienter, the D.C. Circuit rejected the application of the “collective knowledge” standard of scienter under the False Claims Act, noting that no Circuit has applied such a standard and that its adoption could lead to liability for honest mistakes. While the D.C. Circuit agreed with the government that the record could support a jury finding of the requisite scienter regardless of the district court’s “collective knowledge” instruction, the D.C. Circuit refused to find the error harmless, noting that the instruction could have led the jury to believe that the standard of scienter was lower for corporate defendants than for individual defendants. The court, therefore, vacated the judgment with respect to the causes of action under the False Claims Act.

On the matter of damages, the D.C. Circuit rejected SAIC’s argument that the government could prove no damages because it received the full value of the services provided by SAIC under the contract. The court noted that the government contracted for technical advice and assistance and freedom from conflict of interest. Thus, the technical proficiency of SAIC’s advice and assistance did not preclude a finding of damages based on conflicts of interest. The court, however, held that the district court’s instructions on damages were flawed in that they limited the jury’s calculation of damages to the amounts actually paid to SAIC under the contract. Noting that in cases where the value of the goods or services at issue is impossible to determine, the court found that the standard of damages under the False Claims Act requires to the jury to determine damages based on the “amount actually paid minus the value of the goods or services the government received or used.” The court held that the district court’s instructions had required the jury to find that services provided to the government by SAIC had no value regardless of any contrary evidence that the services provided by SAIC had some value despite conflicts of interest.