A good internal investigation gives equal scrutiny to people and processes. It may be easier to replace or reprimand the "bad apple" employee than to overhaul a system with which employees are familiar and has become ingrained in the operational culture. Nevertheless, it is increasingly vital that companies take a hard look at systems, structures, and processes. A recent opinion from the D.C. Circuit indicates that these organizational elements will be the next battleground in False Claims Act ("FCA") litigation.
In United States v. Science Applications
International Corporation, SAIC entered into a
contract with the Nuclear Regulatory Commission ("NRC")
to provide technical assistance and expert analysis. The contract
included strict provisions on conflicts of interest, including a
requirement that SAIC seek NRC's prior written approval if it
had reason to believe that a proposed arrangement may raise a
conflict of interest. SAIC subsequently entered into two contracts
that potentially conflicted with its NRC work. SAIC had a
computerized compliance system, but it did not capture all of
SAIC's business relationships and did not adequately associate
keywords with descriptions of work. The descriptions were also
incomplete. SAIC did not disclose the new contracts to the NRC. The
NRC eventually learned about SAIC's other work from a member of
the public and terminated SAIC's contract. The government then
sued SAIC under the False Claims Act.
The district court aided the government's case by adopting the
"collective knowledge" doctrine. Collective knowledge,
the court instructed the jury, means that a corporation is liable
for the collective knowledge of all its employees, as long as they
obtained their knowledge while acting on behalf of the corporation.
SAIC appealed, pointing out that the FCA requires the government to
prove "knowledge" in one of three forms: actual knowledge
of the false claim, conduct in deliberate ignorance of its truth or
falsity, or conduct in reckless disregard of its truth or falsity.
The collective knowledge instruction would allow the government to
prove liability without demonstrating that any particular employee
acted with "knowledge."
The D.C. Circuit agreed with SAIC that the collective knowledge
doctrine is inconsistent with the FCA. The court noted that the
FCA's triad of actual knowledge, deliberate ignorance, and
reckless disregard was designed to capture "ostrich-like"
conduct and that, even without the collective knowledge doctrine,
companies are already subject to liability if they insulate their
officers from the knowledge of subordinates. The D.C. Circuit found
that the collective knowledge doctrine exceeded the statute by
allowing liability based on nothing more than scraps of innocent
information. Collective knowledge would punish companies for
behavior that is merely negligent, or possibly even completely
blameless.
This is an important victory for contractors, but it may merely
shift the argument. The FCA's loose definition of
"knowledge" can partially fill the gap left by the
rejection of the collective knowledge doctrine. As the court
explained, "if a plaintiff can prove that a government
contractor's structure prevented it from learning facts that
made its claims for payment false, then the plaintiff may establish
that the company acted in deliberate ignorance or reckless
disregard of the truth of its claims." The court reiterated
that a jury can properly find liability based on "systems and
structure."
Plaintiffs may seize on this language to argue that a contractor
recklessly impeded the free flow of information. "If only
there were better databases or more inclusive meetings," they
will argue, "then Employee X would have learned Employee
Y's information, and the company would have discovered the
impropriety." Thus, instead of arguing about who knew which
pieces of information, FCA litigation may focus on why the
problematic pieces of information remained segregated.
The FCA does not demand perfection. Unfortunately, litigation is an
activity performed in hindsight. Contractors can take some solace
in knowing that they need not extract every last bit of information
from every employee. However, it is now likely that plaintiffs will
structure their allegations in a way that attempts to link an
imperfect outcome to alleged defects in contractors' systems,
structures, and processes.
Internal investigations provide an opportunity to improve systems,
structures, and processes. It is rarely the case that problematic
issues point to nothing more than rogue employees. An investigation
should address the larger structural implications: is there
adequate coordination among supervisors and managers? Do different
organizations and business units communicate properly? Are
compliance systems designed well? Are they being used to their full
potential?
Contractors would be wise to use every internal investigation, in
particular the raft of internal investigations prompted by the
mandatory disclosure requirements imposed by FAR 52.203-13, as an
opportunity not only to reverse the monetary consequences of
improper conduct and to punish those responsible, but to implement
internal process improvements designed to prevent a recurrence of
the problem. Improvements will not only demonstrate a lack of
recklessness, but they will also catch issues before they become
FCA concerns.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.