The United States Court of Appeals for the Sixth Circuit issued a dramatic reduction to an False Claims Act (FCA) damages award on February 4, 2016, reducing the award from  $762,894.54 to a mere $14,748, and labeling the government’s “tainted goods” damage calculation as “fairyland rather than actual.” The Sixth Circuit’s ruling in United States ex rel. Wall v. Circle C Construction, LLC highlights the importance of evaluating the actual value of goods received by the government in calculating FCA damages, and presents a forceful rejection of “tainted goods” damage theories in cases where the value of the injury to the public interest is precisely ascertainable.

The suit alleged that government contractor Circle C Construction, LLC had violated the FCA by knowingly submitting payroll certifications to the United States Army, falsely stating that the company had met the minimum wage requirements of the Davis-Bacon Act while building military warehouses.  Specifically, it was alleged that Circle C’s subcontractor, Phase Tech, paid its electricians a total of $9,916 less than required by the Davis-Bacon wages specified in the government contract. The district court litigation resulted in a bench trial and a ruling that the government was entitled to treble damages on the full amount paid by the government for the electrical work performed on the warehouses: $259,298.18, trebled to $777,894.54. (This award was reduced by $15,000 to $762,894.54 as a result of a settlement payment made to the government by Phase Tech.) The district court held that Circle C’s fraud tainted all electrical work performed under the contract, and that therefore the $9,916 underpayment rendered all electrical work valueless as the government “would not have paid for that work had it known the truth.”

The Sixth Circuit wholly rejected this ruling on appeal, reiterating that the FCA provides for trebling of “actual damages”—namely the difference in value between what the government bargained for and what it received. The circuit court found that the actual damages were $9,916, the underpayment amount, and differentiated this case from ones where a contractor delivers defective goods or goods imbued with “some unalterable moral taint” such as products manufactured by child labor or purchased from a country the United States has embargoed.  Here, the court noted that there was no evidence that there were any defects with the electrical work performed, noting that the government uses the warehouses Circle C built and turns on the lights.

The Court of Appeals further pilloried the government’s argument that it would have withheld all payments to Circle C had it known about the underpayments, finding that applicable regulations require the government to withhold “an amount equal to the estimated wage underpayment and estimated liquidated damages”—nothing more. Underscoring this point, the court wrote:  “Actual damages by definition are damages grounded in reality. And in the real world the government could not forever withhold all payments to a contractor for work on several dozen warehouses, and yet have the work continue to completion and the government continue to use the warehouses to this day. The damages the government seeks to recover here are fairyland rather than actual.” With that, the court held that the district court’s award of damages was an abuse of discretion and directed that damages be entered in the amount of $14,748 ($9,916 trebled, minus Phase Tech’s $15,000 settlement payment).

This ruling provides an important guidepost for future FCA cases involving “tainted goods” theories, and establishes a strong precedent for rejection of overreaching damage calculations, particularly where actual damages can be determined with a precise dollar value.