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United States ex rel. Costner v. United States

Court of Appeals for the Eighth Circuit
2003 WL 173965, 317 F.3d 883 (2003)
ELI5:

Rule of Law:

Under the False Claims Act, a contractor does not knowingly present a false claim if the government possesses full knowledge of the alleged deficiencies yet continues to approve payments and work cooperatively with the contractor. Additionally, allegations of fraud must be pled with particularity under Federal Rule of Civil Procedure 9(b), requiring specific details regarding the time, place, and nature of the misconduct.


Facts:

  • The Vertac Chemical Plant site in Arkansas was heavily contaminated with dioxin and hazardous waste, requiring significant environmental cleanup.
  • The EPA hired URS Consultants and other defendants to oversee and conduct the incineration of hazardous waste at the site.
  • Throughout the cleanup operation, the EPA maintained a strong on-site presence, utilizing a Remedial Project Manager and engineers to monitor daily operations.
  • The contractors experienced various operational problems, including 'kiln puffs,' leaks, and OSHA violations, which were documented in reports to the EPA.
  • Despite these documented issues, the EPA continued to work with the contractors to resolve problems and approved their requests for payment.
  • Plaintiffs alleged that the contractors tampered with air quality monitors (specifically the PT-125 kiln draft monitor) and concealed violations to secure payment.
  • The plaintiffs specifically identified only two instances of alleged tampering (July 14, 1992, and mid-July 1993) but claimed other instances occurred on unspecified dates.

Procedural Posture:

  • Plaintiffs filed a qui tam action against the defendants in the United States District Court for the Eastern District of Arkansas.
  • The district court granted summary judgment for defendants on most claims, citing a lack of materiality and intent.
  • The district court dismissed specific tampering claims for failure to plead with particularity under Rule 9(b).
  • The district court held a trial on the two remaining specific tampering claims.
  • The district court entered final judgment in favor of the defendants on all counts.
  • Plaintiffs appealed the judgment to the United States Court of Appeals for the Eighth Circuit.

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Issue:

Does a government contractor violate the False Claims Act by submitting payment requests while experiencing operational difficulties and regulatory violations, when the government agency is fully aware of those issues and continues to approve performance?


Opinions:

Majority - Judge Wollman

No, the submission of claims for payment does not constitute fraud under the False Claims Act when the government is aware of the contractor's performance issues. The court reasoned that the 'knowing' element (scienter) required for fraud is negated when a contractor is open with the government about problems and engages in a cooperative effort to solve them. Because the EPA knew about the kiln puffs, leaks, and monitoring data yet continued to pay the defendants, the alleged omissions were not material to the government's payment decision. Regarding the pleading requirements, the court held that Rule 9(b) requires plaintiffs to plead fraud with particularity—identifying the who, what, where, when, and how—so that defendants can adequately defend themselves. Therefore, vague allegations of tampering on 'unspecified occasions' were properly dismissed.



Analysis:

This decision reinforces the 'government knowledge defense' in False Claims Act litigation. It clarifies that the FCA is not intended to punish simple contract breaches or operational difficulties that the government is willing to tolerate or fix cooperatively. By establishing that government knowledge negates the scienter (intent) required for fraud, the court limits the ability of qui tam relators to sue based on regulatory violations that the agency itself chose not to penalize. Furthermore, the ruling underscores the strict application of Rule 9(b), preventing plaintiffs from using discovery to go on a 'fishing expedition' for fraud without specific initial evidence.

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