Sixth Circuit Brings False Claims Act Damages Back Down to Earth

Heather L. Petrovich

In a welcomed decision, the Sixth Circuit placed sensible parameters on damages in False Claims Act (“FCA”) cases, which will significantly reduce exposure for contractors.  In United States ex rel. Wall v. Circle C Construction, LLC No. 14-6150, 2016 WL 423750 (6th Cir. Feb. 4, 2016), the Sixth Circuit rejected the government’s argument that where the contractor’s alleged fraud or false certification induced the government to enter into the contract or was a condition for participation or eligibility, damages should be treble the full contract value, even if the work has been performed to the government’s satisfaction.

Under the FCA, while the government may recover “3 times the amount of damages which the Government sustains because of the act,” 31 U.S.C. § 3729(a), damages are not defined and have thus led to varying formulations among the circuits.  Wall involved a construction contract for Army warehouses and required the contractor to certify compliance with certain minimum wage requirements, but a subcontractor paid its employees less than the required minimum. Even though there were no performance issues with the work itself, and instead of seeking damages based on the subcontractor’s compensatory shortfall, the government argued, and the district court agreed, that damages should be treble the full contract value.  This resulted in assessed damages that were approximately 76 times more than the subcontractor’s wage deficit, which was the actual harm to the government.

The Sixth Circuit reversed.  In rejecting the government’s forfeiture theory, the court held that FCA damages should be based on the actual harm sustained by the government and not on the full value of the contract.  In doing so, the Sixth Circuit returned to the “benefit of the bargain” approach used by the Supreme Court in United States v. Bornstein, 423 U.S. 303, 316 (1976), which assesses the difference in value between what the government contracted to receive and what it actually received.  Holding that “[t]he damages the government seeks to recover here are fairyland rather than actual,” the Sixth Circuit overturned the lower court’s award and applied the Supreme Court’s “benefit of the bargain” approach in Bornstein to consider the government’s actual loss or harm.  The court’s decision is not only consistent with well-established concepts of damages, but prevents further compounding the already punitive nature imposed by the FCA’s treble damages and penalty provisions.

Nevertheless, despite Wall, the government has gained traction on its fraudulent inducement and forfeiture damages theory in the Second, Fifth, and Seventh Circuits.  For example, in United States ex rel. Longhi v. Lithium Power Technologies Inc., the Fifth Circuit held that because of the contractor’s false statements in a proposal, the government did not receive any benefit and was therefore entitled to recovery of the full amount of the award.  575 F.3d 458, 473 (5th Cir. 2009).  Likewise, in United States v. Rogan, 517 F.3d 449, 452 (2008), the Seventh Court held that the government was entitled to damages equal to the full subsidies it paid the contractor because the contractor’s false certifications rendered it ineligible to receive the payments, notwithstanding that the services were performed.  Finally, in United States. ex rel. Feldman v. Von Gorp., 697 F.3d 78, 96-97 (2d Cir. 2012), the Second Circuit held that damages equaled the full amount of the government’s payments due to false statements that also rendered the contractor ineligible for participation, even though, again, the contractor provided the services and there were no defects as to their quality.

As evident in the Supreme Court’s pending review on certiorari of the validity of the implied certification theory of FCA liability in Universal Health Services Inc. v. U.S. et al. ex rel. Escobar, the circuits have split on the interpretation of key issues under the statute.  The Sixth Circuit’s Wall decision is the latest example of this continued fracturing, which may again require the Supreme Court’s intervention to establish a consistent standard for assessing damages under the FCA.  In the meantime, the split in circuit authority regarding the valuation of damages emphasizes the importance of strategic considerations for contractors in defending FCA suits, including jurisdictional, venue, and other procedural considerations regarding where to defend the case.