When The Government Knows Too Much For Its Own Good - Liability Under The Federal False Claims Act And 'Knowing' Submission

Originally published in Law360 (September 9, 2011)

Liability under the federal False Claims Act ("FCA") (31 U.S.C. §§ 3729 et seq.) hinges upon the "knowing" submission of a false or fraudulent claim, which means that the person presenting or causing presentation of the claim "(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information." 31 U.S.C. §3729(b).

But what happens when the government has advance knowledge of all the elements of a claim that renders it false and invites submission of the claim anyway? Would presenting that claim to the government still be deemed a "knowing" submission of a false claim creating liability under the statute? That dilemma is the rationale for the "government knowledge inference" — also referred to by the misnomer "government knowledge defense" — and why facts sufficient to trigger the inference can serve to negate the mental state required for liability under the FCA.

Before the FCA was amended in 1986, the statute provided that a relator could not pursue a qui tam action if the government was already in possession of the evidence or information forming the basis of the allegations in the complaint.1 That jurisdictional bar was eliminated in the 1986 amendments. Today, the FCA is principally concerned only with certain qualifying "public disclosures" of information that can result in dismissal of the action unless the relator is deemed to be an "original source" of the information as defined in the statute.2 Even absent such "public disclosures," however, government knowledge of facts underlying a false claim remains relevant to whether an action under the FCA may be successfully maintained.

There is wide agreement in the case law that prior government knowledge of the facts underlying a false claim, together with other government conduct implicitly or explicitly approving submission of the claim, can negate the scienter required for an FCA violation. While often referred to as the "government knowledge defense," it is not, in actuality, an affirmative defense to an FCA action, but rather refers to factual circumstances that impede the government's ability to carry its burden of proving a "knowing" submission of a false claim.

Application of the rule is sui generis, and is predicated on the unique facts of a given case that can give rise to an inference that, due to specific government knowledge and behavior, a defendant's submission of an allegedly false or fraudulent claim cannot be deemed "knowing" under the statute.3 As explained by the Tenth Circuit in United States ex rel. Burlbaw v. Orenduff, 548 F.3d 931, 951-952 (10th Cir. 2008):

"The 'government knowledge inference' helps distinguish, in FCA cases, between the submission of a false claim and the knowing submission of a false claim — that is, between the presence and absence of scienter. ... This inference arises when the government knows and approves of the facts underlying an allegedly false claim prior to presentment. ... The classic example is when the government, with knowledge of the facts underlying an allegedly false claim, authorizes the contractor to make that claim. ... In such a situation, an inference arises that the contractor has not 'knowingly' presented a fraudulent or false claim.

Orenduff involved allegations that past administrators of New Mexico State University had falsely certified that the university was a minority institution eligible for U.S. Department of Defense contract grants. The Tenth Circuit applied the inference to facts showing that the defendant had relied upon government "assurances and invitations in certifying NMSU as a minority institution" and that, therefore, both "governmental knowledge and governmental cooperation [in the submitted claims were] present." Id. at 953.

Other federal courts around the country likewise have recognized that the government's advance knowledge and approval of the particulars underlying an allegedly false or fraudulent claim can negate liability under the FCA.4 The law is still evolving regarding "who" within the government must possess such prior knowledge, but a recent appellate decision in the Fourth Circuit suggests that application of the inference does not require that the government employees with knowledge be from the same agency that pays the claims or oversees the contracts under which claims are submitted.5

A government knowledge inference is not appropriate, however, where a defendant is not "'forthcoming' with the government about the contractual failures and billing inflations that formed the basis for the false claims."6 Further, as the cited cases illustrate, a government knowledge inference is not...