DC Circuit grants new trial to SAIC in mixed ruling

by Ben Vernia | December 9th, 2010

On December 3, the D.C. Circuit Court of Appeals granted government contractor SAIC a new trial, reversing a $6.5 million judgment against the company.

The case arose from SAIC’s contracts with the Nuclear Regulatory Commission to provide expert assistance with the NRC’s rulemaking regarding the release of radioactive materials. Under the agreements, SAIC was required to certify that it was free of conflicts of interest (i.e., performing work for NRC-regulated entities).

After it was disclosed by a hearing attendee that the company performed work for nuclear contractors, the government sued under the False Claims Act, alleging that the company, in failing to disclose its work as a subcontractor at a Department of Energy facility, and an executive’s service on the board of a trade group, rendered its claims for payment false. The company submitted those claims on preprinted forms provided by the NRC which made no reference to the contract’s conflict term.

The Court of Appeals first upheld the District Court’s endorsement of the implied certification of compliance theory of liability under the FCA, rejecting SAIC’s argument that a case could be proven “only where a statute, regulation, or contractual provision makes compliance with a requirement an express condition precedent to payment.” The court reasoned that the company’s proposed standard would create a “counterintuitive gap in the FCA”:

For example, under SAIC’s theory, no FCA liability would attach where a government contractor (1) knows that it violated a contractual requirement, (2) recognizes that compliance with that requirement is material to the government’s decision to pay (even though the contract nowhere formally identifies the condition as a payment prerequisite), and (3) submits claims for payment that omit any mention of the requirement while knowing that were the violation disclosed, no payment would be forthcoming. Under this scenario, the contractor would escape FCA liability because the absence of an express condition precedent to payment would prevent the fact-finder from judging the company’s claim to be false despite the contractor’s knowledge that its ability to receive payments from the government depended on withholding information about its non-compliance with a key contractual provision.

Instead, the court held that to prove FCA liability under an implied certification theory, the plaintiff “must show that the contractor withheld information about its noncompliance with material contractual requirements.”
The Court then observed that record evidence supported the existence of both materiality and scienter in SAIC’s conduct.
The Court of Appeals then granted SAIC two tactical victories:

  • Scienter – the Court found that a jury instruction on collective corporate knowledge was both erroneous and prejudicial. After noting that in other contexts, it had expressed skepticism over aggregating the knowledge of individual employees to establish corporate knowledge, the Court 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.

    The Court found this conclusion supported by the definition of knowledge under the FCA to include deliberative ignorance and reckless disregard. These standards, and not collective knowledge, the court reasoned, were the means Congress chose to assess corporations’ scienter in submitting false claims.

  • Damages – The Court also agreed with the company that the trial judge erred in instructing the jury that it should disregard the value of services SAIC provided in calculating damages. The court stated that the measurement of the government’s damages is determined by the benefit of the bargain:

    Under this benefit-of-the-bargain framework, the 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.

    Although identifying the value of services allegedly tainted by conflicts of interest may be difficult, the court wrote, it was the government’s burden to prove its damages, and that is saw “no basis for adopting an irrebuttable presumption-essentially what the government seeks-that treats services involving expert advice and analysis affected by potential organizational conflicts as categorically worthless.”

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