January 8, 2015

Fifth Circuit Finds Government Knowledge Defense Not Appropriate On Motion To Dismiss

By the C|C Whistleblower Lawyer Team

Under the so-called “government knowledge” defense, the government’s awareness of a fraud can defeat False Claims Act liability on the ground the defendant did not “knowingly” defraud the government since the government acted with full information.  It is not a statutory defense but merely a way for a defendant to rebut the intent (or scienter) element of a False Claims Act challenge.  It is an escape hatch largely designed to capture those situations where the government and a contractor are openly working together, perhaps outside their contractual relationship, to reach a common goal or solution to a problem.  And it is a defense defendants routinely employ to fend off False Claims Act suits.  In US v. Bollinger Shipyards, the Fifth Circuit recently joined a chorus of other circuits in finding there is no place for this defense on a motion to dismiss.

The case involved the government’s claim that Bollinger defrauded the US Coast Guard in connection with a fleet of vessels the government contracted the company to repair.  Specifically, the government charged the shipmaker with intentionally submitting to the Coast Guard faulty calculations which misrepresented the structural integrity of the work Bollinger had performed.  The district court dismissed the government’s case, finding the complaint failed to satisfy the plausibility and particularity requirements relating to Bollinger’s alleged intent to defraud the Coast Guard.  Part of the court’s decision was based on the government’s apparent decision to continue to pay Bollinger and accept delivery of the ships even after it learned of the alleged fraudulent calculations.

The Fifth Circuit reversed the district court’s decision.  On what it referred to as the “inaptly-named” government knowledge defense, the Court ruled “it is not appropriate at the motion to dismiss stage, which requires us to draw all inferences in favor of the United States.”  The Court noted this is the prevailing view among all the circuit courts that have considered the issue.  Indeed, the Court identified only one district court that has ever allowed the defense at the pleading stage and found the court’s reasoning there quite “suspect.”  The Fifth Circuit acknowledged the relevance of what the government did and did not know about an alleged fraud as it relates to the defendant’s intent or reckless disregard in its actions.  But it is only a “factor weighing against the defendant’s knowledge, as opposed to a complete negation of the knowledge element.”  It therefore is an issue “more proper” at summary judgment or trial.

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