6th Circ. Rejects 'Fairyland' FCA Damages Theory

Transcription

1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: th Circ. Rejects 'Fairyland' FCA Damages Theory Law360, New York (February 19, 2016, 10:27 AM ET) -- Douglas W. Baruch John T. Boese Jennifer M. Wollenberg In rebuke of a favored government damages theory in false certification cases under the civil False Claims Act,[1] the Sixth Circuit overturned a lower court ruling and limited FCA damages to the small, easily calculable difference in value between the goods/services the government bargained for and the goods/services the government actually obtained. In United States ex rel. Wall v. Circle C Construction LLC,[2] the court rejected as fantastical the notion that FCA damages automatically equal the total amount the government pays for goods/services provided under a contract, grant, or benefit program, even if the defendant violates an ancillary statute or rule. This ruling is a setback to oft-repeated relator and government arguments in false certification cases that the government would not have paid anything, or would have suspended payment, had it known of the underlying false certification, and therefore the government s damages are the full payment amount. The Sixth Circuit expressed its incredulity at this reasoning by opening its opinion with the following passage: Samuel Johnson would have had little patience for this case. Johnson once responded to the metaphysics of George Berkeley a contemporary English philosopher who argued that matter has no existence by kicking a large stone and declaring, I refute it thus. One can do rather the same thing with the government s theory here.[3] Rather than robotically allowing FCA damages to be based on theoretical claims of contract taint divorced from the value of the services/goods obtained, the court stated in clear terms that the focus must be on the actual loss to the government i.e., the damages must be grounded in reality. [4] This result is consistent with and reinforces the benefit-of-the-bargain analysis of FCA damages enunciated by the U.S. Supreme Court in United States v. Bornstein,[5] and reiterated by the D.C. Circuit in United States v. Science Applications International Corp.[6]

2 After Bornstein: Competing Damages Analyses in False Certification Cases In United States v. Bornstein, the Supreme Court set forth the benefit-of-the-bargain formula for calculating damages in FCA cases.[7] Under this formula, where the government received goods/services of lesser value than what it contracted, the damages are the difference between the market value of what the government received and the market value of the contracted and paid for goods/services.[8] Notably, the analysis of damages and application of this formula were relatively straightforward in Bornstein because, there, the defendant s bills were factually false (rather than legally false ) that is, the defendant charged the government for radio kits containing electron tubes that were of lesser quality than the contract required. Since Bornstein, courts have faced difficulties calculating benefit-of-the-bargain damages in false certification cases because the government and relators routinely claim that the government would not have paid anything at all for the goods/services had it known of the defendant s false certification. For example, in the most commonly cited case advancing this theory, United States ex rel. Longhi v. Lithium Power Technologies Inc., the Fifth Circuit calculated single damages as the full amount of the government s payments in a fraudulently induced grant case, accepting the government s theory that its actual losses were the entire amount of the grants, based on the reasoning that the defendant s research provided no tangible benefit to the government. [9] While the Fifth Circuit accepted this damages theory, the court made clear that its scope should be limited by the context in Longhi. As the court itself recognized, no circuit court had addressed the proper measure of damages in a fraudulently induced grant case. Indeed, the grant program in Longhi was itself unusual in that the grant was designed to give the government no direct, tangible benefit (because the grant was intended to assist in providing more qualified contractors and thus strengthen free enterprise and the economy), which is not typical of almost all other government grants, contracts, or programs. Nevertheless, seizing upon the damages theory applied in Longhi, relators and the government have been attempting to apply it more broadly in false certification cases even where there is no plausible denial that the government received a tangible benefit and that benefit is easily identifiable and calculable. In a leading damages decision in a false certification case, United States v. Science Applications International Corp.,[10] the government alleged that the defendant falsely certified that it had no organizational conflicts of interest (i.e., a legally false certification case because the goods/services were provided as contracted but the government contended there was a misrepresentation with underlying statutes, regulations, or contract terms). Following a trial, the jury concluded that the defendant was liable for breach of contract damages and for damages under the FCA. The contrast between these two damages awards was stunning: $78 for the breach of contract claim, and $6.49 million under the FCA (based on the jury s single damages award of $1.97 million, trebled, plus penalties). As a result, the FCA single damages award which arose from a contract violation (the presence of a conflict of interest) was more than 25,000 times the amount of the contract damages, which are properly viewed as the actual loss to the government. On appeal, the D.C. Circuit vacated the FCA damages award, finding that the district court erroneously instructed the jury to assess FCA single damages as the full amount of the government s payments to the defendant. Relying on Bornstein, the D.C. Circuit instructed the lower court to reassess the damages award, noting the following:

3 The government... bears the burden of proving damages, see 31 U.S.C. 3731(d), and we see no basis for adopting an irrebuttable presumption essentially what the government seeks that treats services involving expert advice and analysis affected by potential organizational conflicts as categorically worthless.[11] The Sixth Circuit s Damages Analysis in Wall The FCA liability in Wall resulted from the underpayment of hourly wages for electricians (in violation of the Davis-Bacon Act) during the construction of Army base warehouses. The defendant falsely certified that it had paid the requisite wages when, in fact, its subcontractor had underpaid some of the electricians by $3 per hour, resulting in a total underpayment of $9,916. The government settled with the subcontractor for $15,000 and then went on to obtain summary judgment against the defendant for the FCA violation. For damages purposes, the government claimed that its entire $259,298 payment for the electrical work on the warehouses was tainted by the underpayment, and that it should recover that amount as single damages. This argument prevailed in the district court, resulting in a treble damage award in excess of $750,000, even though it was undisputed that the underpayment was no more than $10,000. The Sixth Circuit reversed. For the Sixth Circuit, the issue was simple. Under the Bornstein benefit-of-the-bargain analysis, the government bargained for two items: the warehouses and the payment of Davis-Bacon Act wages to the electricians. In the end, the government received (and used) the warehouses, but it obtained not quite all of the wages. [12] The court rejected the government s hypothetical scenario in which it would have withheld payments on the contract if it had known about the minor wage violation.[13] Instead, the Sixth Circuit focused on the concrete question of whether the government in fact got less value than it bargained for. [14] Using this straightforward and logical construct, the court readily determined that the government received all of the value of the electrical work on dozens of warehouses minus the $9,916 wage shortfall. Since there was no evidence of any moral taint to the contract (such as might have resulted if the warehouses had been built through the use of illicit child labor), the actual damages, based on a $3 per hour wage underpayment, were easily identifiable and calculable. The $14,748 damages award (after trebling and then offsetting by $15,000 for the prior settlement payment by the subcontractor) was a far cry from the damages recovery advocated by the government, which the Sixth Circuit aptly characterized as fairyland rather than actual. [15] The Reach of the Wall Decision In Wall, the Sixth Circuit used common sense in rejecting the government s overreaching contention that its single damages are the full amount paid for the defendant s electrical work on dozens of warehouses. The court exposed the incongruity between the government s theory and its actual losses with the observation that, in all of those warehouses, the government turns on the lights every day. [16] This logic is unassailable and should be applied broadly in FCA cases. The false certification theory of liability in Wall differed from the theory of liability currently under review by the Supreme Court in United States ex rel. Escobar v. Universal Health Services Inc.[17] It is important to note, however, that should the Supreme Court rule that an implied false certification is a viable basis for FCA liability, the Sixth Circuit s damages analysis would apply to implied false certification cases as well. The larger question is whether courts steadfastly will apply the logic from Wall to FCA cases predicated on violations of the Stark law (i.e., restriction on physician self-referrals)

4 and the Anti-Kickback Statute. By Douglas W. Baruch, John T. Boese and Jennifer M. Wollenberg, Fried Frank Harris Shriver & Jacobson LLP Douglas Baruch is a partner in Fried Frank s Washington, D.C., office and leader of the firm s False Claims Act and Financial Institutions Reform, Recovery, and Enforcement Act practice. John Boese is of counsel and Jennifer Wollenberg is special counsel in the firm's Washington office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] 31 U.S.C [2] No , 2016 WL (6th Cir. Feb. 4, 2016). [3] Id. at *1. [4] Id. at *2. [5] 423 U.S. 303 (1976). [6] 626 F.3d 1257 (D.C. Cir. 2010). [7] 423 U.S. at 316 n.13. [8] For reverse false claims asserted pursuant to 31 U.S.C. 3729(a)(1)(G), this formula becomes the difference between what the government should have received due to the defendant s obligation to pay or transmit money or property to the government and what the defendant actually paid or transmitted. [9] 575 F.3d 458, 473 (5th Cir. 2009). Interestingly, the Fifth Circuit cited Bornstein, but not for its benefit-of-the-bargain formula. Id. [10] 626 F.3d [11] Id. at [12] Wall, 2016 WL , at *1. [13] Id. at *2. [14] Id. [15] Id. [16] Id. at *1. [17] 780 F.3d 504 (1st Cir.), cert. granted in part sub nom. Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 582 (Dec. 4, 2015). Unlike in Wall where the contractor expressly certified compliance with the wage regulations, in Escobar the implied false certification theory is at issue

5 because the defendants made no express certifications of compliance with the regulations at issue. Basing liability on false implied certifications of compliance with requirements raises a host of issues beyond the measurement of damages including with respect to due process, notice, falsity, and intent. See FraudMail Alert No , Will the Supreme Court Rein in the Implied False Certification Theory? (Dec. 9, 2015), %2010%20-% %20-%20FraudMail%20Alert%20- %20Will%20the%20Supreme%20Court%20Rein.pdf. All Content , Portfolio Media, Inc.