The Department of Justice and qui tam relators were dealt another blow regarding how damages are calculated in False Claims Act (FCA) cases. In an FCA case involving allegations of defective pricing, the U.S. Court of Appeals for the Sixth Circuit in United States v. United Technologies Corporation overturned the lower court’s award of $657 million in damages.1 The Sixth Circuit ruled that the district court erred in accepting the government’s damages calculations, which were based “dollar-for-dollar” on the amounts by which the defendant’s cost and pricing estimates were inflated. The court emphasized that damages must account for whether the government received the benefit-of-the-bargain. If “the government gets what it paid for despite a contractor’s misstatements, it has suffered no ‘actual damages.’”2  

Background

The case arose out of allegations of fraudulent pricing for F-15 and F-16 fighter jet engines that Pratt & Whitney (United Technologies’ predecessor company) submitted to the Air Force in 1983. In a procurement that has been referenced as the “Great Engine War,” the United States Air Force sought proposals from both Pratt and General Electric (GE) Aircraft to provide fighter jet engines. Pratt submitted cost and pricing data with its proposal and in its best and final offer certified that its offered prices “reflect[ed its] best estimates and/or actual costs.” In each subsequent year of the program the Air Force issued “calls for improvement” that invited Pratt and GE Aircraft to provide terms more favorable than those in its prior best and final offer. At the conclusion of the program the Air Force conducted an audit and found that Pratt’s 1983 proposal included false cost estimates.

Based on the audit, the government filed an FCA action against Pratt seeking dollar-for-dollar damages corresponding to the amount that Pratt purportedly had overestimated costs. The district court rejected the government’s damages calculation, finding that it suffered no damages, and awarded the government $7 million in statutory penalties.3 On appeal, the Sixth Circuit affirmed the $7 million fine, but vacated the damages decision for further consideration of warranties, discounts, and the fair market value of the contract. The district court‘s second undertaking adopted the government’s damages calculation and awarded $657 million in damages, after trebling.4

The Sixth Circuit’s Ruling

On appeal for the second time, the Sixth Circuit addressed whether the damages award was supported given the fair market value of the goods and services received by the government, and the role of competition in setting the prices. Answering that question in the negative, the Sixth Circuit remanded the case back to the district court for a third review.

The Sixth Circuit found several errors in the district court’s opinion, including a failure to calculate damages based on a benefit-of-the-bargain theory; that is, examining what the government paid under the contract versus the fair market value of the contract performance that the government received. The court emphasized that the government is entitled to no damages when it gets what it paid for despite a contractor’s misstatements.5 The court stated that Pratt was not bound by its cost estimates and was free to negotiate “whatever it wanted,” notwithstanding the regulatory disclosure requirements that applied to the procurement. To determine “fair market value,” the court pointed to comparable sales, competitor pricing, the government’s own price estimates, foreign sales, and other indicators of fair market value.

The Sixth Circuit ruled also that the district court had incorrectly presumed that “when someone defrauds the government, each dollar of overstated costs translates into a dollar of damages.”6 To the extent any such presumption exists, the Air Force’s reliance on competition between Pratt and GE Aircraft to determine a reasonable price rebutted that presumption. This aspect of the court’s ruling is consistent with the Armed Services Board of Contract Appeals’ (ASBCA) ruling in a related administrative action brought under the Truth in Negotiations Act (TINA). In that action, the ASBCA ruled that United Technologies successfully rebutted the presumption of causation applicable to TINA actions.

Finally, the Sixth Circuit noted its temptation to put an end to the litigation and leave only the government’s imposition of $7 million in FCA penalties. The Sixth Circuit stated that “[t]he government had the burden of proving damages, and it never did.”7 The court, however, remanded the case and instructed the district court to determine whether the government should have another opportunity to prove damages.

Conclusion

The Sixth Circuit’s decision is a reminder that the government’s damages calculations under the FCA must account for the fair market value of the goods or services received by the government, and that the impact of competition on pricing must be considered.8 This rule applies in a wide variety of government contract-related contexts, including cases involving allegations of defective pricing under the Federal Supply Schedules program or TINA; false certifications in Trade Agreements Act, Organizational Conflicts of Interest, and Anti-Kickback cases; and the sale of nonconforming goods or services. Although the government often asserts damages using models that are based on “dollar-for-dollar” increases, or theories that the fraud has tainted the entire value of the contract, the Sixth Circuit’s decision demonstrates that such damages models and theories are unlikely to withstand judicial scrutiny.