Seventh Circuit Rejects Constructive Corporate Knowledge in False Claims Act Retaliation Case

The Seventh Circuit, in Halasa v. ITT Educational Servs., Inc., No. 11-3305, 2012 U.S. App. LEXIS 16930 (7th Cir. Aug 14, 2012), Judge Diane Wood writing for the panel, categorically rejected the “broad (and unprecedented) doctrine of constructive knowledge.”  In Halasa, a False Claims Act retaliation case, Judge Wood emphasized that the statute requires that the employee’s termination be “because of” her protected conduct, and thus “[t]he law is clear that it is the decisionmakers’ knowledge that is crucial.”  Further, Judge Wood stated as follows: “Apart from narrow exceptions like the one that has come to be called the ‘cat’s paw’ theory, see Staub v. Proctor Hospital, 131 S.Ct. 1186 (2011), which does not apply here, companies are not liable under the False Claims Act for every scrap of information that someone in or outside the chain of responsibility might have.”

In so holding, the Seventh Circuit is in accord with a prior holding of a panel of the D.C. Circuit, Judge Tatel writing for the panel, in United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1274-75 (D.C. Cir. 2010).  In that opinion, the panel held that “under the FCA, ‘collective knowledge’ provides an inappropriate basis for proof of scienter because it effectively imposes liability, complete with treble damages and substantial civil penalties, for a type of loose constructive knowledge that is inconsistent with the Act’s language, structure, and purpose.”

For more on the D.C. Circuit’s ruling in the above SAIC case, see Audrey Strauss, Collective Knowledge Ruling is a Victory for Defendants, New York Law Journal Corporate Update (Mar. 3, 2011), available here; Roderick L. Thomas and Nathan Cardon, D.C. Circuit Rejects FCA Liability for a Company’s “Collective Knowledge”, Wiley Rein LLP (Dec. 7, 2010), available here; Amir C. Tayrani, D.C. Circuit Rejects the Government’s Sweeping “Collective Knowledge” and Damages Theories Under the False Claims Act, Gibson, Dunn & Crutcher LLP (Dec. 6, 2010), available here.

On a related issue under a different statute, for in-depth analysis of the issue of aggregation of knowledge under the Securities Exchange Act, see Craig L. Griffin, Corporate Scienter Under the Securities Exchange Act of 1934, 1989 BYUL. Rev. 1227, 1242-44 (1989), available here.

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