False Claims In Independent Research & Development (IR&D): Federal District Court Adopts ATK THIOKOL As The Knowledge Standard

Morrison & Foerster LLP - Government Contracts Insights

Many government contractors, like other private enterprises, invest heavily in research and development (R&D) to improve the products and services they offer, in hopes of better meeting their customers’ needs.  When those R&D efforts are “independent” of any particular contract—hence “IR&D” or “IRAD”—the associated costs are properly allocated to the contractor’s indirect cost pools, rather than charged directly to any one customer.  This makes good sense, and is reflected in the Federal Acquisition Regulation (FAR) cost principles at 31.205-18, which provides that costs of performing basic or applied research, development, and systems and other concept formulation studies are generally allowable as IR&D so long as they are not “sponsored by a grant or required in the performance of a contract.”  This regulatory guidance is vague, though, and years of debating what it really means for R&D efforts to be “required in the performance of a contract” ultimately led to the Federal Circuit’s landmark decision in ATK Thiokol, Inc. v. United States, 598 F.3d 1329 (Fed. Cir. 2010), in which the court held that such costs are properly charged as IR&D unless they are “specifically required” by a contract, rather than merely necessary for successful performance.

For the first time, a federal court has applied this standard in the context of the False Claims Act (FCA).  In an opinion published last week, United States ex rel. Steuert v. L3 Harris Technologies, No. 11-cv-3385 (D.N.J. Mar. 31, 2022), the U.S. District of New Jersey held that, to survive dismissal, a plaintiff alleging fraudulent mischarging of IR&D costs in violation of the FCA must plead sufficient facts, with sufficient particularity, to show the contractor knew or recklessly disregarded both (1) costs were being charged to IR&D and (2) those costs were for efforts specifically required by a contract.  Because the qui tam relator-plaintiff in Steuert failed to “identify anyone at L3 who knew both that L3 was billing the Government for [R&D] work [as IR&D] and that billing the Government for [such] work was improper,” the court dismissed his claims.[1]

Fraud against the United States is a serious allegation. But one cannot defraud the government by honest accident, and not every cost accounting noncompliance is a false claim.  Instead, the FCA requires knowledge of a claim’s falsity, either through actual knowledge or by acting in deliberate ignorance or reckless disregard of the truth.  See 31 U.S.C. § 3729(b)(1).  This often is referred to as the FCA’s “scienter” requirement.  As the court recognized in Steuert, showing a defendant “knew” that false claims were submitted to the government for purposes of scienter requires a plaintiff to establish the defendant knew the claims at issue were false.  And when it comes to claiming costs as IR&D, under ATK Thiokol, such claims “are not ‘false’ simply because [a specific customer] informally requested or benefitted from the work underlying the claims.”[2]  Instead, scienter under the FCA “depends on whether [a defendant] actually knew that the work underlying its IR&D claims to the Government was ‘specifically required by’ [a particular contract], or recklessly disregarded the fact that bills to the Government were generated by work ‘specifically required by’ [that contract].”[3]  Thus, to meet the heightened pleading standards for fraud allegations under Federal Rule of Civil Procedure 9(b), the government or a qui tam relator must plead particular facts sufficient to plausibly establish such knowledge.

The district court’s opinion marks a significant positive development in the law for its affirmation of the principles in ATK Thiokol and their applicability under the FCA.  IR&D should be encouraged, not deterred; it spreads costs equitably among customers (within and without the government) and creates incentives for private investment in government technology, reducing taxpayer burden for what are often high-risk projects.  The FAR cost principles and the standard established by ATK Thiokol—and now also as applied under Steuert—foster this goal, even as government officials and the growing qui tam plaintiffs’ bar too often forget it.

L3Harris is represented in the Steuert litigation by Morrison & Foerster LLP.

[1] Slip op. at 13 (emphases in original).

[2] Id. at 11.

[3] Id.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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