A critically
important development in defending cases
under the False Claims Act, 31 U.S.C.
3729-33, as amended ("FCA"), has been
the evolution and recognition of the
so-called "government knowledge"
defense. The defense is based upon a
straightforward reading of the statutory
requisites specified by Congress in
defining an offense under the FCA.
"Since
the crux of an FCA violation is
intentionally deceiving the government,
no violation exists where the government
has not been deceived." United
States ex rel. Lamers v. City of Green
Bay, 998 F. Supp. 971, 987 (E.D.
Wis. 1998), aff'd, 168 F.3d
1013 (7th Cir. 1999). "If the
government knows and approves of the
particulars of a claim for payment
before that claim is presented, the
presenter cannot be said to have
knowingly present a fraudulent or false
claim. In such a case, the government's
knowledge effectively negates the fraud
or falsity required by the FCA."
United States ex rel. Durcholz v. FKW
Inc., 189 F.3d 542, 545 (7th Cir.
1999).
The
defense is not automatic, however. In
United States ex rel. Butler v.
Hughes Helicopters, 71 F.3d 321,
326-8 (9th Cir. 1995), the Ninth Circuit
explained one of the important
parameters limiting the reach of the
defense: the fact that "a defendant has
disclosed all the underlying facts to
the government may ... show
that the defendant had no intent to
deceive" (emphasis added). In
short, there are no guarantees. In that
case, the district court had found that
the
overwhelming evidence established a
pattern of cooperation between the
Army and [the contractor] during the
course of a complicated,
sophisticated and highly technical
military procurement program. The
evidence established that
information flowed freely between
[contractor] and the army . . . The
evidence established that all
information upon which Relator bases
his case was not only available to
the Army, but in the Army's
possession.
United States ex rel. Butler v. Hughes
Helicopter Co., CV 89-5760 SVW (Tx),
1993 U.S. Dist. LEXIS 17844 (C.D. Cal.
Aug. 25, 1993).
The
Butler court placed reliance on its
prior decision in Wang v. FMC Corp.,
975 F.2d 1412, 1421 (9th Cir. 1992),
where summary judgment for defendant was
granted because it had discussed with
the contracting agency mistakes and
limitations it had experienced. The
Lamers court reached the same
conclusion, holding that "the presence
of an open dialogue with government
officials about relevant factual
circumstances does mitigate ... the
degree to which false statements and
claims were knowingly' submitted."
Lamers, 998 F. Supp. at 988.
The
Butler court pointed to the
presence of continuing dialogue
as one key determinant for demonstrating
the existence of government knowledge:
Under
Hagood and Wang, if the district
court correctly found that the only
reasonable conclusion a jury could
draw from the evidence was that
[defendant] and the Army had so
completely cooperated and shared all
information during the testing that
[defendant] did not knowingly'
submit false claims, then we must
affirm the directed verdict."
71 F.3d
at 327.
A number
of other courts have recognized the
defense to a varying extent and under a
variety of conditions. See,
e.g., United States ex rel. Aakus v.
Dyncorp. Inc., 136 F.3d 676, 682
(10th Cir. 1998); United States ex
rel. Kreindler v. United Technologies
Corp., 985 F.2d 1148, 1157 (2d
Cir.), cert. denied, 508 U.S.
973 (1993); United States ex rel.
Durcholz, 997 F.Supp.1143, 1155
(S.D. Ind. 1998), aff'd, 189
F.3d 542 (7th Cir. 1999) ("Courts have
long recognized the significance of the
government's knowledge in FCA cases");
United States v. Frierson, No.
95 C 503, 1997 U.S. Dist. LEXIS 3368 at
*41-*45 (N.D. Ill. March 19, 1997);
United States ex rel., Milam v. Regents
of the University of California,
912 F. Supp.868, 888-89 (D. Md. 1995)
(recognizing that knowledge held by
government officials is highly relevant
to FCA determinations); X Corp. v.
Doe, 816 F. Supp. 1086, 1093-94 (E.D.
Va. 1993), aff'd, 1994 U.S.
App. LEXIS 3143 (4th Cir. Feb. 23, 1994)
(disclosure by contractor that "new"
equipment might contain re-manufactured
components "provide[d] persuasive
evidence that [contractor] did not
knowingly' make a misrepresentation");
United States ex rel. Herbert v.
National Academy of Sciences, No.
90-2568, 1992 U.S. Dist. LEXIS 14063 at
*19-*29 (D.D.C. Sept. 15, 1992),
aff'd, 974 F.2d 192 (D.C. Cir.
1992); Boisjoly v. Morton Thiokol,
Inc., 706 F. Supp. 795 (D. Utah
1988); United States v. Schmidt,
204 F. Supp. 540, 544 (E.D. Wis. 1962).
See also Neal J.
Wilson, The Government Knowledge
"Defense" to Civil False Claims Actions,
24 Pub. Cont. L. J. 43 (Fall 1994).
Some Recent Circuit Decisions of
Particular Interest
Fourth
Circuit Adopts the Defense
The
Fourth Circuit is the most recent to
formally recognize the government
knowledge defense.1 In
United States ex rel. Becker v.
Westinghouse Savannah River Co.,
305 F.3d 284 (4th Cir. 2002), defendant
had received explicit directions from
the Department of Energy ("DOE") to
switch to different "Budget and
Reporting" codes in a shared accounting
system. These codes were then utilized
to justify payment to the defendant.
Relator alleged that because it was
unclear whether Congress had ever
authorized the transfer of funding
between accounts, defendant had
submitted false records and improperly
retained government funds in violation
of the FCA. Relator further alleged
that defendant had acted in "deliberate
ignorance" or "reckless regard" (as
defined in 3729(b) of the FCA) by
relying upon the DOE directives.
Id. at 286-7.
The
district court granted summary judgment
for the defendant; the Circuit
affirmed. For the Circuit, even though
defendant may have "negligently
disregarded" whether Congress had
approved the funds transfer, "DOE had at
least as much knowledge as [defendant]
regarding Congressional authority for
the transfer and nonetheless
instructed [defendant] to change the
codes" (emphasis added).
Relying
upon Durcholz, the Circuit
found that defendant "properly relied on
DOE's knowledge of Congressional
authority." Equally important, the fact
that DOE had directed the defendant to
utilize those codes "negates any
knowledge that [defendant] had regarding
the truth or falsity of those
representations." Id. at
288-90.
The
Fifth Circuit Recognizes Restrained
Version of the Defense
The Fifth
Circuit recently affirmed its adherence
to the government knowledge defense,
albeit to a somewhat limited extent.
United States v. Southland
Management Corp., 288 F.3d 665 (5th
Cir. 2002); rehearing en banc
ordered 307 F.3d 352 (5th Cir.
2002). Whether the decision will become
the final position of the Circuit
remains unclear due to the court
granting defendants' en banc
petition.2
The case
grew out of a Department of Housing and
Urban Development ("HUD") program
designed to increase the supply of
low-income housing by making payments to
property owners. Under contracts, the
owners agreed to maintain their property
in a "decent, safe and sanitary"
condition" as a requirement for
payment. Payments were authorized on a
monthly basis by the owner submitting an
"Owner's Certification," certifying,
inter alia, that the subject
property is "decent, safe, and
sanitary." Id. at 669-71.
The
government alleged that defendants
improperly certified compliance.
Inspections by HUD established that the
property was not being maintained
appropriately. The Department of
Justice thereupon instituted suit
against the defendants. The government
further alleged that each monthly
voucher submitted by defendants violated
the FCA.
Defendants maintained that because HUD
was fully aware of the condition of the
rental property, and nonetheless
continued to make payments to the
defendants, the government knowledge
defense foreclosed liability under the
FCA, since the false certifications were
not material to securing payment. The
district court had granted summary
judgment for defendants on this and
other grounds. United States v.
Southland Management Corp., 95 F.
Supp. 2d 629, 635, n. 7 (S.D. Miss.
2000).
The
majority's stringent position
regarding the defense emerges with stark
clarity from the opinion: "we find it
difficult to comprehend how the
government's awareness that a claimant's
submission was false would in any way
affect the truth or falsity of the
claim." 288 F.3d at 680. The majority
apparently concluded that the defense
must be severely limited because it is
actually a variant of estoppel against
the government.
Moreover,
to invoke the defense in a case where
the government is working with a private
contractor to correct problems would
place the government "in an extremely
difficult position" should it later seek
recourse under the FCA. Id. at
683.
There are
several particularly critical
misconceptions manifested in the
majority's position. To begin with, the
government knowledge defense does not in
any way seek to convert false statements
into truthful ones.
Rather,
the defense is predicated upon one of
the preconditions for liability under
the FCA itself--there must be a
"knowing" submission of a false claim or
document.3 If the government
is aware of the true state of the facts,
it is asserted, the submission of the
claim cannot be false since it is not
representing facts to the government as
being true which the offeror knows to be
false but the government does not. In
short, the government is paying for and
accepting what it expected to receive. Boisjoly,
706 F. Supp. at 809.
The
majority's tactic of buttressing its
strained reading of the defense by
classifying the government knowledge
defense as one type of estoppel against
the government is unprecedented. This
tactic allows the majority to expend
several pages of analysis in
demonstrating the defense does not
satisfy the stringent criteria
necessary to assert estoppel against the
government. The majority is the only
court ever to have equated the
government knowledge defense with
estoppel against the government.
While
this tactic permits the majority to
joyfully strike down a number of straw
men, it contributes nothing to a serious
discussion of the issues raised in the
appeal. The dissent takes vigorous
issue on this point and fairly well
lacerates the majority's position. 288
F.3d at 699-701.
Next, the
majority argues that to allow the
government knowledge defense in the
Southland situation would be
fraught with difficulties. First, it
would place HUD (and presumably other
federal agencies) in a difficult
position because they could not accept
sub-standard performance in order to try
and negotiate improvement, and then turn
around and prosecute the contractors
under the FCA.
For the
majority, such an "election of remedies"
is not required by the housing statutes.
Second, the majority turns a very deaf
ear indeed to the argument raised by
defendants and the dissent that to
foreclose assertion of the government
knowledge defense in this type of
situation allows a form of entrapment to
ensue. Apparently, in the majority's
view, if defendants had not been making
a "good faith" effort to remedy the
property's deficiencies, an FCA
prosecution is just what they deserve.
Somewhat
surprisingly, the majority employs a "mens
rea" approach in discussing "knowledge"
requirement under 31 U.S.C. 3729(b),
even though that section is explicit in
stating "no proof of specific intent to
defraud is required." To begin with,
the majority correctly points out that
no place in the FCA itself is there any
recognition of the government knowledge
defense.
The
majority further correctly asserts that
even those other circuits which have
recognized the defense, have also
rejected the contention that it is an
absolute or automatic defense. See,
e.g., Kreindler, 985 F.2d at
1156-57; Hagood v. Sonoma County
Water Agency, 929 F.2d 1416, 1421
(9th Cir. 1991). Nonetheless, while the
majority concedes that the defense is
viable under certain circumstances, it
surprisingly holds that the defense is
"quite limited" in cases initiated by
the government, as contrasted with
qui tam complaints.
[I]n
the context of government-initiated
FCA actions, we would permit a
government knowledge defense'
primarily in the rare situation
where the falsity of a claim is
unclear and the evidence suggests
that the defendant actually
believed his claim was not false
because the government approved and
paid the claim with full knowledge
of the relevant facts.
288 F.3d
at 686. In short, the defense would be
applicable under this view in situations
precisely where it was unnecessary
because the contractor had not
submitted the claim with knowledge of
its falsity to begin with. Finally,
because defendants and the lower court
had based their invocation of the
defense on qui tam cases, and
Southland had been initiated by
the government, those authorities do not
foreclose the majority's refusal to
fully recognize the defense.
As a
result, it was error for the district
court to find (district court decision
at 641) that "there could be no
reasonable finding that defendants acted
knowingly." Consequently, there
remains a genuine issue of material fact
which forecloses summary judgment for
the defendants.
The
dissent's position on all this can be
concisely put. There is no basis
whatsoever for distinguishing between
government-initiated FCA actions and
those brought as qui tams.
Moreover, the majority's extremely
narrow definition of the defense is
without foundation. Clearly HUD was
fully apprized of the property's
condition; the fact that the defendants
may have known more than the government
about those conditions does not,
standing alone, foreclose application of
the government knowledge defense. 288
F.3d at 697-99.
The
Tenth Circuit Stresses the Importance of
"Dialogue" with the Government
A recent
decision by the Tenth Circuit, Shaw
v. AAA Engineering & Drafting, Inc.,
213 F.3d 519, 534 (10th Cir. 2000),
illustrates a fundamental point about
the government knowledge defense:
federal courts expect some substantial
indicators that the government
indubitably was aware of the activity
giving rise to the FCA complaint. The
stronger the evidence that the
government was aware of, and had
approved, the questioned activity, the
easier it is to establish a viable
government knowledge defense.
The Tenth
Circuit's decision of the defense is
sparse, but its position is explicit.
Placing reliance upon Hagood,
929 F.2d at 1420, the court defined the
defense in the following terms: "there
may [ ] be occasions when the
government's knowledge of or
cooperation with a [defendant's]
actions is so extensive that
the [defendant] could not as a matter of
law possess the requisite state of mind
to be liable under the FCA" (emphasis
supplied). 213 F.3d at 534.4
The question then becomes, how can a FCA
defendant demonstrate its "extensive"
"cooperation" with the government so as
to bring itself within the parameters of
the defense?
The
Circuit indicates some considerations in
its opinion, pointing to the Butler
decision. The FCA defendant must be
able to demonstrate that it had
discussions with government employees
regarding the matter at issue, and that
the government approved of what the
defendant was doing. Under this
approach, whatever is the focus of the
FCA allegations, must have been not only
discussed with the government, but also
full cooperation and disclosure of all
pertinent information must have
occurred.
The
defendant's claim on the government
knowledge defense is stronger apparently
if more than one discussion occurred;
preferably the defendant can document
that "an ongoing dialogue with the
government" occurred regarding the
alleged fraudulent conduct. Id.
at 534.
The
lessons of the Shaw opinion are
obvious. Any instances of purported
dialogue with the government, which a
FCA defendants wants to invoke as the
foundation of a government knowledge
defense, must be capable of
demonstration.
How
exactly the FCA defendant can
demonstrate that such a dialogue
occurred remains an open issue in each
case. However, the burden clearly lies
upon the shoulders of the FCA defendant
to lay the appropriate groundwork when
asserting the defense.
A second
important issue likewise was recently
addressed by the Tenth Circuit. Exactly
with whom in the government should the
requisite dialogue and disclosure
occur? In United States ex rel.
Stone v. Rockwell International Corp.,
282 F.3d 787, 811-12 (10th Cir.
2002), some light was cast on this
topic.
At issue
was a jury instruction given by the
district court which defendant Rockwell
argued was inappropriate because its
language ("government employees with
authority to act under the contract")
limited the pertinent category of
government employees to contracting
officers. Rockwell maintained that
mid-level and lower-level employees'
knowledge also was pertinent. The
Circuit rejected this attack on the jury
instruction, holding that nothing in the
instruction limited the pertinent
knowledge to that held
exclusively by contracting officers.
The
Rockwell holding is a reminder that
documenting full and complete disclosure
is one thing; but also critical is
whether the federal employee to whom the
alleged disclosures are made will be
seen by a district court as being of an
appropriate level of responsibility to
render the disclosure meaningful.
Acting Pursuant to Government
Direction is a Solid Indicator of the
Government's Knowledge
A related
defense to FCA actions is pertinent here
as well. It is well established that if
a defendant was following an instruction
from the government, its actions cannot
constitute the "knowing" submission of
false claims or false documents. For
example, in United States ex rel.
Minnesota Assoc. of Nurse Anesthetists
v. Allina Health System,
the district court ruled: "Even when
viewed in the light most favorable to
the Plaintiff, the record bears
substantial evidence that Defendants
billed in accordance with the advice
given them by the Government Agents."
No. 4-96-734 ADM/AJB, 1999 U.S. Dist.
LEXIS 23036 at *27-*28.5
Therefore, the district court held,
defendants could not "knowingly" have
submitted false claims. This defense
also was recognized in the Fourth
Circuit's decision in Becker,
discussed supra, where
defendant's compliance with agency
directive held to bar action under the
FCA.
Similarly, in Durcholz, 997 F.
Supp. at 1156-57, FCA liability could
not be established where "Navy officials
directly involved with the project" had
instructed defendants "to submit the
invoices without line items." The
Seventh Circuit on appeal concurred: "We
decline to hold [defendant] liable for
defrauding the government by following
the government's explicit direction."
United States ex rel. Durcholz v.
F.K.W., Inc., 189 F.3d 542, 545
(7th Cir. 1999). As the Circuit
recognized, to uphold a FCA action in
this situation would be to allege "that
the government was defrauded by the very
activities that its agents ordered."
Id.
Both
Allina and Durcholz placed
reliance upon Hindo v. University of
Health Science/The Chicago Medical
School, 65 F.3d 608 (7th Cir.
1995), cert. denied, 516 U.S.
1114 (1996). There, defendants were
alleged to have submitted fraudulent
billings to a Veterans Administration
Medical Center by seeking reimbursement
for salaries and benefits paid to
radiology residents at the Center. The
pertinent regulatory scheme required the
funding for each residency position be
approved by the VA prior to any claims
for reimbursement being submitted.
At trial,
it was established that the defendants
had been encouraged to submit their
claims for reimbursement prior to VA
funding because of representations by VA
officials that the funding might come
through even after the residents began
working at the Medical Center. The
Circuit affirmed the district court
decision that "there is no false claim
or fraud here." Id. at 613-14;
see also United States v. Fox Lake
Bank, 366 F.2d 962 (7th Cir. 1966)
(holding that the government was
estopped from bringing a FCA suit
against the defendant bank because the
government regulators had demanded that
the bank submit claims to the Federal
Housing Administration to ascertain
whether FHA insurance was collectible on
fraudulent home improvement loans so
that the regulators could assess the
exact financial condition of the bank).
If a FCA
defendant can demonstrate that it acted
in accordance with government
directions, then the government (or a
relator) can hardly argue that the
government was without knowledge of
defendant's activities. In this regard,
the two defenses compliment each other,
particularly in government contract FCA
cases.
Conclusion
While the
government knowledge defense is gaining
increased acceptance, several points
need to be kept in mind. First, it is
absolutely essential that a FCA
defendant be able to document its
disclosure of pertinent information to
the government and its cooperation with
government employees. The ideal device
for demonstrating both disclosure and
continuing cooperation is an established
dialogue between defendant and the
government.
Often,
the only evidence of such transactions
are found in testimony; ideally, written
documentation should be developed
especially in cases where there is
any deviation, even the slightest,
from government contract specifications
or instructions. See Bennett.
A second
issue to consider is that any
disclosures to and agreement with
government employees should involve an
employee with appropriate responsibility
regarding the matter or contract at
issue--not just any employee will
satisfy the requirement. Finally,
defense counsel should not hesitate to
assert the defense even in cases where
no ostensible violation of the FCA has
occurred.
Footnotes
1. The
Fourth Circuit previously had applied
the government knowledge defense, but
had not designated it as such. See,
e.g., United States ex rel.
Bennett v. Genetics & IVF Institute,
Inc., 1999 U.S. App. LEXIS 27911 at
*7-*9 (4th Cir. Oct. 28, 1999).
2. Fifth
Circuit Local Rule 41.3 states: "Unless
otherwise expressly provided, the
granting of a rehearing en banc vacates
the panel opinion and judgment of the
court and stays the mandate."
3. (b)
Knowing and knowingly defined.--For
purposes of this section, the terms
"knowing" and "knowingly" mean that a
person, with respect to information--
(1)
has actual knowledge of the
information;
(2)
acts in deliberate ignorance of the
truth or falsity of the information;
or
(3)
acts in reckless disregard of the
truth or falsity of the information,
and no proof of specific intent to
defraud is required.
4. In
government contracting FCA decisions, it
has long been recognized that if the
contracting agencies' expectations are
satisfied, there cannot be a basis for
alleging violations of the FCA.
See, e.g., United States ex rel.
Lidenthal v. General Dynamics Corp.,
61 F.3d 1402, 1411-12 (9th Cir. 1995),
cert. denied, 517 U.S. 1104
(1996); Bennett.
5.
Aff'd in part; rev'd in part, 276
F.3d 1032 (8th Cir. 2002); cert.
denied, 123 S. Ct. 345 (2002).
