Appeal from the United States District Court for the District of Columbia (No. 1:04-cv-01543)
The opinion of the court was delivered by: Tatel, Circuit Judge:
Argued September 21, 2010
Before: SENTELLE, Chief Judge, TATEL and GRIFFITH, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
In this case a jury found, among other things, that appellant, a major government contractor, violated the False Claims Act (FCA), 31 U.S.C. § 3729, by seeking payments at the same time it knew it was violating contractual provisions governing potential conflicts of interest. On appeal, the contractor principally argues that no liability may attach for its claims for payment because its contract nowhere designated compliance with these conflict of interest requirements as express conditions of payment. As we explain in this opinion, however, requests for payment can be "false or fraudulent" under the FCA when submitted by a contractor that has violated contractual requirements material to the government's decision to pay regardless of whether the contract expressly designates those requirements as conditions of payment. We nonetheless vacate the judgment as to FCA liability and remand for a new trial because the district court's "collective knowledge" instruction conflicted with the FCA's scienter standard, the proper application of which is critical to ensuring that FCA liability attaches only for false or fraudulent claims and not for accidental or even negligent breaches of contract.
The Nuclear Regulatory Commission (NRC) is an independent federal agency that regulates the civilian use of nuclear materials. Pursuant to its general authority, the NRC oversees the release into interstate commerce of commercially valuable recycled radioactively contaminated materials from nuclear facilities. Companies wishing to release such materials must obtain an NRC license and comply with license restrictions. Beginning in the mid-1980s, however, the NRC sought to establish standards for unrestricted release by setting contamination levels that were below "regulatory concern." Am. Compl. ¶ 11. After the NRC's initial efforts encountered Congressional and public opposition, the agency commenced new studies aimed at developing scientific criteria that could inform a future rulemaking to set uniform national standards on the recycling and release of radioactive materials.
Appellant Science Applications International Corporation (SAIC), a scientific, engineering, and technology applications company, entered into a contract with the NRC in 1992 to provide technical assistance and expert analysis to support the agency's potential rulemaking. SAIC performed multiple tasks under the contract, delivering several reports, including both a literature review and a regulatory options paper that the NRC published in 1999. In the options paper, SAIC calculated radiological dose assessment estimates for materials recycled and released from nuclear facilities. In 1999, SAIC and the NRC executed a follow-on contract to allow the company to continue its work in support of the agency's rulemaking.
The 1992 and 1999 contracts included several provisions designed to identify and prevent potential conflicts of interest. Because the two contracts are substantially identical for all purposes relevant to this litigation, we shall refer only to the 1992 contract. SAIC's contract imposed limitations on the company's ability to "work for others" during the contract term. Specifically, SAIC agreed to "forego entering into consulting or other contractual arrangements with any firm or organization, the result of which may give rise to a conflict of interest with respect to the work being performed under [the] contract." If SAIC had "reason to believe with respect to itself or any employee that any proposed consultant or other contractual arrangement with any firm or organization may involve a potential conflict of interest," the contract obliged SAIC to obtain the NRC's prior written approval. The contract also included disclosure obligations that required SAIC to "warrant to the best of its knowledge and belief" that it had no "organizational conflicts of interest" and would make "an immediate and full disclosure in writing" if it discovered such conflicts after the contract award. In the event SAIC disclosed a conflict, the contract required it to provide a mitigation strategy, but the NRC retained the right to terminate the contract if doing so was "in the best interest of the government." The contract defined organizational conflicts of interest by reference to NRC regulations, which in turn defined an organizational conflict of interest as follows:
a relationship . whereby a contractor or prospective contractor has present or planned interests related to the work to be performed under an NRC contract which: (1) May diminish its capacity to give impartial, technically sound, objective assistance and advice or may otherwise result in a biased work product, or (2) may result in its being given an unfair advantage.
41 C.F.R § 20-1.5402(a) (1979).
In addition, the contract required SAIC to make several "representations" and "certifications." SAIC certified that its contract award resulted in none of the "situations or relationships" outlined in 41 C.F.R. § 20-1.5403(b) (1979).
That regulation, now codified at 48 C.F.R. § 2009.570-3(b), lists the following situations or relationships that give rise to conflicts:
(i) Where the . . . contractor provides advice and recommendation to the NRC in a technical area in which it is also providing consulting assistance in the same area to any organization regulated by the NRC.
(ii) Where the . . . contractor provides advice to the NRC on the same or similar matter on which it is also providing assistance to any organization regulated by the NRC.
(iv) Where the award of a contract would otherwise result in placing the . . . contractor in a conflicting role in which its judgment may be biased in relation to its work for the NRC, or would result in an unfair competitive advantage . . .
The contract also provided that "[t]he nondisclosure or misrepresentation of any relevant interest may . . . result in the disqualification of the [contractor] for awards[,] or if nondisclosure or misrepresentation is discovered after the award, the resulting contract may be terminated."
During the term of the 1992 contract, SAIC and the NRC agreed to several modifications, and each time the company certified that the modification involved none of the above situations or relationships. SAIC repeated this certification in the 1999 contract. Critical to the issue before us, the pre- printed payment vouchers that the NRC required SAIC to submit for work performed under the contracts contained no express certifications, nor did anything in either contract expressly condition payment on such a certification.
At an open NRC meeting in October 1999, a member of the public charged that SAIC was involved in projects with for-profit companies that potentially created prohibited organizational conflicts of interest with respect to SAIC's NRC work. Responding to this allegation, the NRC asked SAIC to provide information about the company's other work in the area of nuclear recycling. Based on SAIC's disclosure of its existing contracts with two companies--British Nuclear Fuels, Ltd. ("British Nuclear") and the Bechtel Jacobs Company ("Bechtel Jacobs")--the NRC determined that SAIC had, without proper disclosure, placed itself in potentially conflicting roles. The NRC informed SAIC of this determination and ordered the company to stop working on the 1999 contract. The parties subsequently entered into a no- cost settlement terminating that contract.
The United States brought suit against SAIC, raising two claims under the False Claims Act. First, the government charged SAIC with knowingly submitting false or fraudulent claims for payment in violation of 31 U.S.C. § 3729(a)(1) by continuing to submit payment invoices after the conflicting relationships arose. Second, the government alleged that SAIC knowingly made false statements to get false or fraudulent claims paid or approved in violation of 31 U.S.C. § 3729(a)(2) when the company certified to the NRC not only that it had no organizational conflict of interest relationships, but also that it would immediately inform the NRC if such relationships developed. The government also brought a claim for breach of the 1992 contract.
The government's FCA causes of action focused on SAIC's business relationships with contractors participating in a project to decommission and decontaminate buildings at a Department of Energy (DOE) site in Oak Ridge, Tennessee. DOE contracted with British Nuclear in 1997 to work on this project, and British Nuclear then engaged SAIC to serve as a subcontractor. Although work performed at DOE's facilities was subject only to DOE oversight, the government argued that SAIC's relationship with British Nuclear created a potential conflict because the project involved the recycling and release of radioactive materials that would become subject to NRC regulation after leaving the DOE facility and entering into interstate commerce. In addition, one of British Nuclear's other subcontractors on the project, its wholly- owned subsidiary Manufacturing Science Corporation (MSC), was licensed under NRC standards by the state of Tennessee. In 1999, SAIC also performed consulting work for Bechtel Jacobs, another contractor DOE employed on the Oak Ridge project. SAIC helped Bechtel Jacobs with a dose assessment and performed a cost-benefit analysis regarding the recycling of radioactively contaminated materials from the site. The government contended that SAIC's work for Bechtel Jacobs closely overlapped with the company's work for the NRC, as illustrated most starkly by the allegation that a company employee copied material from a report prepared for the NRC and pasted it into one for Bechtel Jacobs.
Beyond SAIC's work relating to DOE's Oak Ridge decommissioning and decontamination project, the government alleged that SAIC possessed other undisclosed potential conflicts. For example, the government pointed out that SAIC Vice President Gerald Motl participated in the company's work for the NRC while at the same time serving as an officer and board member of the Association of Radioactive Metal Recyclers (ARMR), a trade association that advocated for national regulatory standards governing the reuse and recycling of radioactive materials.
SAIC moved for summary judgment on the government's FCA and breach of contract claims, which the district court denied. In doing so, the district court rejected SAIC's argument that the government failed to present evidence that the company's submissions for payment qualified as false claims under the FCA. See United States v. Science Applications Int'l Corp. ("Science Applications I"), 555 F. Supp. 2d 40, 49-51 (D.D.C. 2008). Although the district court recognized that SAIC's payment invoices themselves made no factually false statements about the services performed and contained no false express certifications of compliance with legal requirements, it nonetheless concluded that the government could proceed on a theory of "implied false certification" because it had presented unrebutted evidence that SAIC's allegedly false certifications of compliance with no-conflict requirements "constituted
'information critical to the [government's] decision to pay[.]' " Id. at 50 (quoting United States v. TDC Mgmt. Corp. ("TDC II"), 288 F.3d 421, 426 (D.C. Cir. 2002) (alterations in original)). In so holding--and setting the stage for the central issue before us--the court rejected SAIC's argument that the implied certification theory requires the government to show that compliance with the contractual conflict of interest provisions is an express condition precedent to the receipt of payment. See Science Applications I, 555 F. Supp. 2d at 49- 51. The district court also found that the government had offered sufficient evidence to create triable issues as to whether SAIC submitted false claims and made false statements in support of those claims "knowingly," as well as whether the government had suffered actual damages as a result of the alleged false claims and statements. See id. at 54-56.
Following a four-week trial, the jury found SAIC liable under FCA sections 3729(a)(1) and 3729(a)(2) and for breach of its 1992 NRC contract. Specifically, the jury determined that SAIC had "knowingly presented or caused to be presented sixty false or fraudulent claims for payment or approval by the government" and had "knowingly made, used, or caused to be made or used seventeen false records or statements to get a false or fraudulent claim paid or approved by the United States government." See United States v. Science Applications Int'l Corp. ("Science Applications II"), 653 F. Supp. 2d 87, 94 (D.D.C. 2009). Based on the district court's instruction, the jury concluded that the government suffered FCA damages of $1,973,839.61--the full amount of payments made by the government for the claims the jury concluded were knowingly false. Pursuant to FCA section 3729(a), the district court then trebled this amount and added an additional $577,500 in civil penalties. As to the government's breach of contract claim, the jury awarded only $78. The district court entered final judgment in the amount of $6,499,096.83.
SAIC moved for judgment as a matter of law under Federal Rule of Civil Procedure 50(b) and in the alternative sought a new trial under Rule 59(a). See id. at 92. As is relevant to this appeal, SAIC argued (1) that the government failed to prove that the company submitted false claims under an implied certification theory because the record contained no evidence that payment under the contract was expressly conditioned on SAIC's compliance with organizational conflict of interest obligations, (2) that the evidence precluded the jury from finding, as it did, that SAIC acted "knowingly" under the FCA when it submitted false claims and statements because SAIC's belief that it had no conflicts as defined by the applicable contractual provisions and regulations was reasonable, (3) that various jury instructions were erroneous and prejudicial, including an instruction that the jury could find that SAIC possessed knowledge based on the "collective knowledge" of its employees, and (4) that the government failed to prove that it suffered any damages from SAIC's false claims, and in the alternative that the district court's damages instruction was erroneous and prejudicial. See id. at 95-99, 102-04, 107-09.
The district court rejected each argument. With respect to implied certification, the court reiterated its earlier holding that this theory of liability has no express condition precedent requirement. Id. at 102-03. The court therefore concluded that its instruction to the jury that "[a] claim for payment or a statement made in order to get payment is false if there is a withholding of information that is critical to the government's decision to pay" accurately stated the law of this circuit. Id. at 103. The court also found sufficient record evidence to support the jury's determination that SAIC's false representations that it had no conflicts of interest were critical to the government's decision to pay. In support, it pointed to testimony by NRC and SAIC employees describing the importance of the company's organizational conflict of interest obligations to the overall contract and indicating that the NRC would have withheld payments under the contract had it been aware of SAIC's undisclosed potential conflicts of interest. Id. As to scienter, the district court concluded that the record contained sufficient evidence to have allowed the jury to infer that SAIC's false claims and statements were made knowingly, either on the basis of actual knowledge of undisclosed organizational conflicts or as a result of reckless disregard for or deliberate ignorance of the truth. Id. at 96-99. In particular, the court found that "SAIC knew that it had relationships with entities . that were subject to the regulations of the NRC, regardless of whether these entities were doing other work for DOE excluded from the NRC's regulatory authority." Id. at 97. The court also found reasonable the government's use of a "collective knowledge" theory to help establish scienter, explaining that its instruction was appropriate "because the jury could have properly inferred SAIC's fraudulent intent from its ...