The Government Knowledge Defense in False Claims Act Cases

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 mayshow 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.


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.


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).


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