In a humorous yet stern rebuke of the government’s damages theory, the Sixth Circuit in United States ex rel. Wall v. Circle C Construction, LLC, No. 14-6150, 2016 WL 423750 (6th Cir. Feb. 4, 2016), reversed a lower court’s ruling and drastically reduced the damages in a False Claims Act (FCA) lawsuit. The Court opened its opinion by invoking Samuel Johnson:

Samuel Johnson would have had little patience for this case. Johnson once responded to the metaphysics of George Berkley—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 the same thing with the government’s theory here.

Not surprisingly after that opening, the Court’s opinion did not improve for the government or its theory. Instead, the Court roundly rejected the government’s argument that FCA damages are automatically the full amount the government pays for goods under a contract. Preferring an approach “grounded in reality,” the Court embraced the common-sense notion that damages should reflect “the difference in value between what the government bargained for and what the government received.” The result was a decisive win for government contractors and others who may be subject to FCA exposure.

Background

Circle C was a contractor that built warehouses on a military base. Its contract with the Army required it and any subcontractors to pay their employees above-market wages under the Davis-Bacon Act. The contract further required it to expressly certify compliance with the Davis-Bacon wage requirement each week.

During the project, one of Circle C’s subcontractors underpaid its electricians approximately $9,900. That underpayment rendered Circle C’s “certifications” to the government false under the FCA. In 2007, a whistleblower brought an FCA complaint. After the government intervened and filed an amended complaint in October 2008, it settled with the subcontractor—for $15,000—several months later. The government later was awarded summary judgment against Circle C.

“Tainted” work and damages

For damages, the government argued that its total $259,296 payment for electrical work was “tainted” and therefore that figure should constitute single damages. The district court agreed, trebled the damages as permitted under the FCA, and ultimately awarded over $750,000. Circle C appealed.

Government’s creative theory rejected on appeal

On appeal, the Sixth Circuit applied a straightforward analysis: What did the government bargain for and what did it get? Answering its own questions, the Court stated that the government bargained for the warehouses and the payment of Davis-Bacon wages, and it got the buildings and the wages less a $9,916 shortfall.

By contrast, the government’s “more creative” theory suggested that the electrical work in the buildings was worthless because it was tainted by the wage shortfall. As the Court noted, however, that theory refuted itself because, in all of the now-constructed warehouses, the government “turns the lights on every day.” The Court further observed that this case did not involve a true worthless good—such as a defective transmission that causes a helicopter to crash—that could not be used, nor a “moral taint”—such as using foreign child laborers—that could not be remedied by money damages. Instead, the Court found this to be a simple case in which the government got about $9,900 less than it bargained for. Consequently, $9,900 was the proper measure of single damages.

After calculating that single damages figure, the Court trebled it and deducted the $15,000 settlement from the subcontractor. The resulting award imposed by the court, $14,748, represented a 98% reduction in the original amount requested by the government and granted by the lower court.

Three Takeaways

  • While Wall is a government contracting case, it has significant implications for the healthcareand other industries that are often targets of FCA enforcement. Damages calculations in false certification cases—e.g. truthful claims for medical services that were indisputably provided but nonetheless rendered “legally false” because of a contractual violation—will be subject to Wall’s benefit-of-the-bargain analysis.
  • Perhaps most practically, Wall weakens the government’s pre-complaint settlement leverage by undermining its threats of gargantuan trebled damage awards in what otherwise might be routine contractual disputes.
  • For purposes of liability, Wall involved express false certification theory. As a result, it differs from the (more controversial) implied false certification theory of liability under review at the U.S. Supreme Court in Universal Health Services Inc. v. U.S. ex rel. Escobar. Nonetheless, if the Supreme Court upholds implied false certification as a basis for FCA liability in Escobar, the damages analysis in Wall should apply to implied certification cases.