DAMAGES AND CIVIL PENALTIES UNDER THE FALSE CLAIMS ACT: RELEVANT CASES

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1 DAMAGES AND CIVIL PENALTIES UNDER THE FALSE CLAIMS ACT: RELEVANT CASES A person who violates the FCA is liable to the United States Government for a civil penalty of not less than [$10, 957] and not more than [$ 21,916], as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C note; Public Law ), plus 3 times the amount of damages which the Government sustains because of the act of that person. 31 U.S.C. 3729(a). FCA Civil Penalties for Violations Occurring on or Minimum Maximum after Effective Dates (20 C.F.R ) January 1, $10,957 $21,916 August 1, 2016 December 31, 2016 $10,781 $21,563 October 24, 1996 July 31, 2016 $5,500 $11,000 Proviso: The list below is not intended to be exhaustive, but rather to provide starting points for research and suggest ways of thinking about damages that will continue to deter bad behavior and achieve good results for taxpayers and our client Purpose of FCA Damage Provisions Cook Cnty. v. United States ex rel. Chandler, 538 U.S. 119, (2003). - It is important to realize that treble damages have a compensatory side, serving remedial purposes in addition to punitive objectives. - multiplication can be viewed as part of the make whole scheme because the Government incurs additional expenses including investigational costs, prejudgment interest, and consequential damages. United States ex rel. Marcus v. Hess, 317 U.S. 647, (1943). - Civil penalties plus multiplied damages together are intended to make sure that the Government would be made completely whole. U.S., v. Sci. Applications Int l Corp., 626 F.3d 1257, 1278 (D.C. Cir. 2010). - In calculating FCA damages, the fact-finder seeks to set an award that puts the government in the same position as it would have been if the defendant s claims had not been false. 1

2 All That Is Required: Just and Reasonable Estimate of Damages Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946) (non-fca case). - A jury "may not render a verdict based on speculation or guesswork," it "may make a just and reasonable estimate of the damage based on relevant data...[and] act upon probable and inferential, as well as direct and positive proof. (citations omitted)." Id. at 264. "Any other rule would enable the wrongdoer to profit by his wrongdoing at the expense of his victim." Faulk v. United States, 198 F.2d 169, 172 (5th Cir. 1952). Citing Bigleow, and stating that [a]ny other rule would enable the wrongdoer to profit by his wrongdoing at the expense of his victim. It would be an inducement to make wrongdoing so effective and complete in every case as to preclude any recovery, by rendering the measure of damages uncertain. Failure to apply it would mean that the more grievous the wrong done, the less likelihood there would be of a recovery. Gulf Grp. Gen. Enters. Co. W.L.L. v. United States, 114 Fed. Cl. 258, 391 (2013). - "In cases where the responsibility for damage is clear...'it is enough if the evidence adduced is sufficient to enable a court or jury to make a fair and reasonable approximation.' [citations omitted]." Grantham & Mann v. Am. Safety Prods., 831 F.2d 596, (6th Cir. 1987) (non-fca case). -noting that the rule that damages are remote and speculative in nature are not permitted serves to preclude recovery, however, only where the fact of damage is uncertain, i.e., where the damage claimed is not the certain result of the wrong, not where the amount of damage alone is uncertain. [citations omitted]. Once the existence of damages has been shown, all that an award of damages requires is substantial evidence in the record to permit a factfinder to draw reasonable inferences and make a fair and reasonable assessment of the amount of damages. [citations omitted]. Benson v. City of Wellston, 201 F. App x 350, 353 (6th Cir. 2006) (non-fca case). - damages must be established to a reasonable certainty, but the existence of some uncertainty as to the amount of damages does not foreclose recovery. Wrongdoer Bears the Risk of Uncertainty Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265 (1946) (non-fca case). - The most elementary conceptions of justice and public policy require that the wrongdoer shall bear the risk of uncertainty which his own wrong has created.... Difficulty of ascertainment is no longer confused with right of recovery for a proven invasion of the plaintiff s rights. [citation omitted]." Faulk v. United States, 198 F.2d 169, 172 (5th Cir. 1952). - Adopting Bigelow in FCA context. 2

3 United States ex rel. Harman v. Trinity Indus., 166 F. Supp. 3d 737, 754 (E.D. Tex. 2015) the courts have consistently explained that the computation of damages need not be performed with mathematical precision but, rather, may be based upon a reasonable estimate. (Citing cases from the 11th and DC Circuits.) - The fact that such damages are difficult to measure and by their nature are uncertain in amount does not render such damages unrecoverable... this is particularly true where a party breaches his contract and seeks to escape liability merely because it is impossible for the other party to state or prove a perfect measure of damages. (Citing case from 5th Cir.) Actual Damages - The Whole Enchilada Non-Conforming Goods: Full Amount U.S. ex rel. Feldman v. van Gorp, 697 F.3d 78, 80 (2nd Cir. 2012). - As the Second Circuit has held, where the government has provided funds for a specified good or service only to have defendant substitute a non-conforming good or service, a court may, upon a proper finding of False Claims Act liability, calculate damages to be the full amount of the grant payments made by the government after the material false statements were made. Fraud in the Inducement: Full Amount In re Baycol Prods. Litig., 732 F.3d 869, 876 (8th Cir. 2013). - When an agreement with the Government involving the payment of monies has been induced by fraud, FCA liability attaches to each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct. United States v. United Techs. Corp., 626 F.3d 313, 320 (6th Cir. 2011). - False statements underlying multi-year contracts generate a stream of related invoices and cause the government to pay all of the invoices related to the contract. United States ex rel. Longhi v. United States, 575 F.3d 458, 468 (5 th Cr. 2009). - Subsequent claims for payment become actionable false claims when made under a contract derived from original fraudulent misrepresentations. Kickbacks: Full Amount U.S. v. Rogan, 517 F.3d 449, 453 (7 th Cir. 2008). - When the government offers a subsidy... with conditions and the conditions are not satisfied, nothing is due. - The Court also noted that the kickback tainted services were not furnished to the Government, but to the public, and the Government was focused on protecting the public. United States ex rel. Freedman v. Suarez-Hoyos, Civ. No. 04-cv-933-T-24 EAJ, 2012 WL (M.D. Fla. Sept. 21, 2012). - the amount of the Government's damages resulting from the payment of false claims tainted by a kickback arrangement equals the full amount that Medicare paid on such claims. 3

4 One Purpose in Contrast to But-For Causation in AKS Context United States ex rel. Cairns v. D.S. Med., LLC, No. 1:12CV00004 AGF, 2017 U.S. Dist. LEXIS , at *1, *12 (E.D. Mo. Aug. 31, 2017). Trial to commence October 25, Court states it will try the kickback case using the one purpose standard agreed to by five circuits; rejects the primary purpose standard suggested by the Eighth Circuit Model Instructions for AKS cases. United States ex rel. Arnstein v. Teva Pharm. USA, Inc., 2016 U.S. Dist. LEXIS 22554, at *2, *49-50, (S.D.N.Y. Feb. 22, 2016). - Rejecting but-for standard and following One-Purpose rule for establishing liability adopted by Third, Fifth, Seventh, Ninth, and Tenth Circuits - Notes that the focus of the AKS is not the success of the bribe, but the bribe itself When Government Seeks Intangible Benefits: Full Amount United States ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 464, 473 (5th Cir. 2009). - Defendant had submitted Small Business Innovation Research proposals containing false statements that caused the DoD to conclude the Defendant was far more qualified than it actually was to engage in the proposed research; - Court found where there is no tangible benefit to the government and the intangible benefit is impossible to calculate, it is appropriate to value damages in the amount the government actually paid to the Defendants. SBA Violations Small Business Act, 15 U.S.C. 631 et seq. - In every contract, subcontract, set aside for award to small business concerns, there shall be a presumption of loss to the United States based on the total amount expended on the contract, subcontract, whenever it is established that a business concern other than a small business concern willfully sought and received the award by misrepresentation U.S.C. 632(w)(1). The proposed regulation supporting this legislation characterizes the presumption as irrefutable, based on Senate Rep. No , p. 8. See 76 Fed. Reg , 62314, United States v. R.J. Zavoral & Sons, Inc., No (MJD/JJK), 2014 U.S. Dist. LEXIS , at *1, *39-40 (D. Minn. Oct. 21, 2014). - Although Government suffered no actual damages due to defendants false representations as to their small business status, Court held where the benefit of the Section 8(a) program is to benefit small businesses controlled by socially and economically disadvantaged individuals, the Government is entitled to argue to the jury that it received no value under the Contract and that the proper measure of damages is the amounts paid to Defendants. Buy America/Trade Agreement Act Violations U.S. ex rel. Liotine v. CDW Gov't, Inc., DRH, 2012 WL , 2012 U.S. Dist. LEXIS 94837, at *2, *32 (S.D. Ill. July 10, 2012). - Noting that the issue is not that goods sold in violation of the Trade Agreements Act (TAA) were inferior in quality, but that the transaction fails to protect the interests that the TAA is designed to protect; and finding that damages are the full amount of the transaction. 4

5 Stark Act Violations United States ex rel. Drakeford v. Tuomey, 792 F.3d 364, 386 (4th Cir. 2015). - The Stark Law prohibits the government from paying any amount of money for claims submitted in violation of the law. 42 U.S.C. 1395nn(g)(1). Compliance with the Stark Law is a condition precedent to reimbursement of claims submitted to Medicare. When Tuomey failed to satisfy that condition, the government owed it nothing. United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008). - Jury verdict of $237 million; case settled for $74 million. Facts Make a Difference U.S. ex rel. Wall v. Circle C. Construction, 813 F.3d 616, (6th Cir. 2016). - Failure to pay wages under Bacon-Davis act for construction project. - Because defendant could and did pay the unpaid wages, court did not buy argument that entire project was tainted and full damages were warranted. Note: damages were $9,916. Actual Damages - Not the Whole Enchilada: Benefit of the Bargain United States v. Bornstein, 423 U.S. 303, 314 n.13 (1976). - Case involved non-conforming electron tubes. - The Government's actual damages are equal to the difference between the market value of the tubes it received and retained and the market value that the tubes would have had if they had been of the specified quality. United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010). - Explains benefit-of-the-bargain framework, including when the benefit is zero. U.S. v. Ehrlich, 643 F.2d 634, (9th Cir. 1981). - Finding cost of overcharges appropriate remedy in a housing project overcharge case. Actual Damages - Not the Whole Enchilada: Alternative Remedies Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1372 (Fed. Cir. 1998). - Suggests using alternatives to benefit-of-the bargain where appropriate, such as cost to remedy the fraud. BMY-Combat Systems v. United States, 44 Fed. Cl. 141 (1998). - Damages under the FCA are to be determined in a flexible manner to ensure proper recovery of direct, and not consequential, damages resulting from the making of a false claim. - In this failure to inspect case, damages proposed involved the costs of determining whether products posed risk of catastrophic failure. Conspiracy Damages United States v. Macomb Contracting Corp., 763 F. Supp. 272, 274 (M.D. Tenn. 1990). - U.S. was entitled to civil penalty for violation of the conspiracy clause of the FCA as well as civil penalties for the false claims submitted. 5

6 U.S. v. St. Luke s Subacute Hosp. & Nursing Centre, Inc., No. C MHP, 2004 WL , 2004 U.S. Dist. LEXIS at *1, *18-19 (N.D. Cal. Dec. 16, 2004). - Holding that the Government does not have to prove actual damages to establish a conspiracy claim and that a civil penalty can be imposed regardless of whether any false claim was ever filed. -Note: case followed by courts in 6th, 9th and D.C. circuits; decision cites other courts that have found actual damages necessary to a conspiracy claim. Proving Damages by Statistical Sampling Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1049 (2016). (non-fca case) - Court rejected categorical exclusion of statistical sampling evidence in this Fair Labor Standards case. - The fairness and utility of statistical methods in contexts other than those presented here will depend on facts and circumstances particular to those cases. Mich. Dep't of Educ. v. U.S. Dep't of Educ., 875 F.2d 1196, 1205 (6th Cir. 1989). - Affirmed the validity of random sampling as reliable and acceptable evidence of determining the amount of overpayment when an individual audit of the thousands of cases at issue would be impossible; stating that mathematical and statistical methods are well recognized as reliable and acceptable evidence in determining adjudicative facts. [citation omitted]. United States v. Robinson, No. 13-cv-27 GFVT, 2015 U.S. Dist. LEXIS 41123, at *1, *28-30 (E.D. Ky. March 31, 2015). - Affirming use of statistical methods for liability and damages, stating statistical sampling methods and extrapolation have been accepted in the Sixth Circuit and in other jurisdictions as reliable and acceptable evidence in determining facts related to FCA claims as well as other adjudicative facts and citing cases. U.S. v. Vista Hospice Care, Inc., 2016 WL , 2016 U.S. Dist. LEXIS 80160, at *1, * (D.D.C. 2017). - court refused use of sampling for liability or damages because the data was unreliable for purposes of extrapolation. Application of Offsets in Damage Calculations Gross Trebling (Apply multiplier, then deduct offset) United States v. Bornstein, 423 U.S. 303, 314 n.10 (1976). - Holding that gross trebling is most faithful to the language and purpose of the FCA. The statute speaks of doubling "damages" and not doubling "net damages" or "uncompensated damages." United States v. Eghbal, 548 F.3d 1281, 1285 (9th Cir. 2008). - Following Bornstein. Net Trebling (Deduct offset, then apply multiplier) United States v. Anchor Mortgage Corp., 711 F3d. 745, 751 (7th Cir. Mar. 21, 2013). - Rejecting Bornstein and ordering net trebling. 6

7 United States v. United Technologies Corp., 711 F3d. 745, (6th Cir. 2010). - Focusing on actual damages defined as the difference between what the Government actually paid and what it should have paid. United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010). - Using benefit-of-the-bargain framework. Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1372 (Fed. Cir. 1998). - Suggests that alternate types of damage calculations are available, such as cost to remedy the fraud. Civil Penalties Are Mandated United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 917 (7 th Cir. 2005). - The statute provides for penalties even if (indeed, especially if) actual loss is hard to quantify. Harrison v. Westinghouse Savannah River Company, 176 F.3d 776, 787 (4 th Cir. 1999). - Including in damages each claim submitted to the government under a contract obtained originally through false statements or fraudulent conduct. In re Schimmels, 85 F. 3d 416, 419 n. 1 (9 th Cir. 1996). - the FCA requires a court to award [civil penalties] for each false claim or statement submitted to the government United States v. Hughes, 585 F.2d 284, 286 (7 th Cir. 1978). - This forfeiture provision is mandatory; it leaves the trial court without discretion to alter the statutory amount. Ab-Tech Constr. V. United States, 31 Fed. Cl. 429, 435 (1994). - Every submission is a separate false claim, even when made pursuant to an overall contract. Relator May Seek Civil Penalties Without Seeking Actual Damages U.S. ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390, (4 th Cir. 2013). - To deny a relator its bounty on the ground that it cannot pursue penalties alone would be to deny the United States due recompense, or, in the alternative, to deprive the government of its choice to forgo intervention, and instructed district court to amend its judgment to award $24 million based on civil penalties alone. U.S. v. Sci. Applications Int l Corp., 626 F.3d 1257, 1277 (D.C. Cir. 2010). - A defendant who submits a false claim or makes a false statement to get a false claim paid is liable for civil penalties regardless of whether the government shows that the submission of that claim caused the government damages. Accord., U.S. ex rel. Davis v. Dist. of Columbia, 679 F.3d 832, 840 (D.C. Cir. 2012). Note: under benefitof-the-bargain analysis, court found no actual damages. In re Schimmels, 85 F. 3d 416 (9th Cir. 1996). - Requiring the award of civil penalties even where no damages were caused by the false statements. 7

8 United States v. Rohleder, 157 F. 2d 126 (3rd Cir. 1946). - Permitting recovery of a forfeiture without actual damages being proven. United States v. United Techs. Corp., 190 F. Supp.3d 752, 757, 764 (S.D. Ohio 2016). - After remand, entering judgment of $7,090,000 in FCA civil penalties for years where damages were difficult to prove. U.S. ex rel. Liotine v. CDW Gov't, Inc., DRH, 2012 WL , 2012 U.S. Dist. LEXIS 94837, at *1, *46 (S.D. Ill. July 10, 2012). - A false claim is actionable under the Act even though the United States has suffered no measurable damages from the claim. United States v. Hughes, 585 F.2d 284, 286 n. 2 (7th Cir. 1978) (citing Fleming v. United States, 336 F.2d 475, 480 (10th Cir. 1964)). United States ex rel. Anti-Discrimination Ctr. of Metro N.Y., Inc. v. Westchester Cnty, 668 F.Supp. 2d 548, 568 (S.D. N.Y. 2009). - Affirming that damages to the United States need not be shown in order to establish FCA liability. (Citing Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 785 n.7 (4 th Cir. 1999). United States ex. Rel. Morris v. Christ, Case No. C , 2000 U.S. Dist. LEXIS 21912, at *1, *23-24 (S.D. Ohio 2000). - Relator does not have to seek specific damages, but may seek only civil penalties because the government is injured by violations of the FCA, regardless of whether these injuries may be difficult or impossible to ascertain. (Citing Rex Trailer Co. v. U.S., 350 U.S. 148, 153 (1956) characterizing civil penalties as a type of liquidated damages). Excessive Fines Issue United States v. Halper, 490 U.S. 435, (1989). - Finding that where criminal liability exists, civil penalties may raise double jeopardy issue. United States v. Mackby, 339 F.3d 1013, 1017 (9th Cir. 2003). - Award of treble damages and civil penalties are at least in part punitive and subjected to 8th Amendment excessive fines provision. - Applied excessive fines analysis and found that size of particular penalty is not grossly disproportional to [Defendant s] level of culpability. United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390, 409 (4th Cir. 2013). - Accepted Relator s voluntary remittitur amount as appropriately reflecting gravity of the offense and providing appropriate deterrent effect going forward. United States v. MedQuest Assocs., No. 3: , 2011 U.S. Dist. LEXIS , at *1, *2 (M.D. Tenn. Oct. 21, 2011). - contains helpful analysis of multiple factors for assessing whether excessive fines provision should be applied; finds award not excessive. NOTE: 6th Circuit overturned the case on liability grounds and did not reach excessive fines analysis. 8

9 United States v. Phung, No. CIV L, 2011 U.S. Dist. LEXIS 93125, at *1, *16-17 (W.D. Okla. Aug. 15, 2011). - Court accepted Government s proposal to impose civil penalties based on the number of patients rather than number of claims. Note: actual damages were very small. Ability to Pay: Joint and Several Liability Mortgages, Inc. v. U.S. Dist. Court for Dist. of Nev. (Las Vegas), 934 F.2d 209, 212 (9th Cir. 1991) (citing cases). - Where one or more persons have committed a fraud upon the government in violation of the FCA, each is joint and severally liable for the treble damages and statutory penalty. 31 U.S.C. 3729(a). United States v. Cabrera-Diaz, 106 F. Supp. 2d 234, 242 (D.P.R. 2000). - As with other civil claims, when two or more persons act in concert in violation of the False Claims Act, they are jointly and severally liable. United States ex rel. Abbott-Burdick v. Univ. Med. Assocs., No. 2: , 2002 U.S. Dist. LEXIS 26986, at *2, *19-20 (D.S.C. May 23, 2002). - applying joint and several liability to attorneys fees as well as damages. Acknowledgements: A big thank you goes Melanie Ewald, law clerk at Halunen Law, and all of the TAF listserv members who share their wisdom and insights so freely. Susan M. Coler Halunen Law 1650 IDS Center 80 South 8 th Street Minneapolis, Minnesota, coler@halunenlaw.com 9