In a case that has gone from bad to worse for the government and qui tam relators, the Sixth Circuit has fired another shot across the bow against overreaching False Claims Act (“FCA”) damages theories. In United States ex rel. Wall v. Circle C Construction, LLC, the government relentlessly sought a windfall FCA recovery against a warehouse construction contractor that had falsely certified that two subcontractor electricians were paid wages in accordance with the Davis-Bacon Act. The government argued that as a result of those two wage violations, the contractor was liable for three times the amount it was paid for all of the electrical work performed on the warehouses. The government’s extreme “worthless services” stance drew a sharp rebuke from the Sixth Circuit in a 2016 opinion which drastically reduced the judgment amount and accused the government of demanding “fairyland rather than actual” damages. See FraudMail Alert No. 16-02-10. After that decision, the action returned to the district court, where the contractor sought recovery of the attorneys’ fees it incurred defending the action. After the trial court rejected that application, the Sixth Circuit had occasion to weigh in again. And in its most recent opinion in this case, United States ex rel. Wall v. Circle C Construction, LLC, No. 16-6169, 2017 WL 3568497 (6th Cir. Aug. 18, 2017), the appeals court rebuked the government again, this time ruling that the contractor was entitled to its attorneys’ fees under the Equal Access to Justice Act (“EAJA”)—even though it was not the prevailing party (as the contractor had been found liable for making false claims)— because the government’s “worthless services” theory was “unreasonable” and not “substantially justified.” Moreover, the Sixth Circuit displayed no sympathy in response to the government’s plea that such an award would chill future FCA enforcement efforts, responding instead that the court indeed “hoped” that would be the outcome in circumstances such as this, given that the government relentlessly pursued a “nearly frivolous” theory for close to a decade.
The Wall decision also serves as another signal that the expansive “false certification” theory of FCA liability, promoted by the Department of Justice and relators alike, is eroding. In that respect, just as the Supreme Court set rational liability limits on the false certification theory through its 2016 Escobar decision, the Sixth Circuit in Wall has both limited potential damages awards and served notice on the plaintiffs’ side that excessive damages demands may expose the government itself to attorneys’ fees liability.
Escobar’s Curtailment of Overreaching “False Certification” Claims
In its watershed decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Supreme Court curtailed the reach of FCA liability under the false certification theory. According to the government’s pre-Escobar approach, liability under this theory could arise from a violation of any ancillary contractual, statutory, or regulatory violation, even in the face of otherwise compliant performance with the government contract or program in question. In a memorable reference to “American-made staplers,” the Supreme Court flatly rejected the government’s stance:
At oral argument, the United States explained the implications of its position: If the Government contracts for health services and adds a requirement that contractors buy American-made staplers, anyone who submits a claim for those services but fails to disclose its use of foreign staplers violates the False Claims Act. To the Government, liability would attach if the defendant’s use of foreign staplers would entitle the Government not to pay the claim in whole or part—irrespective of whether the Government routinely pays claims despite knowing that foreign staplers were used. Likewise, if the Government required contractors to aver their compliance with the entire U.S. Code and Code of Federal Regulations, then under this view, failing to mention noncompliance with any of those requirements would always be material. The False Claims Act does not adopt such an extraordinarily expansive view of liability.
136 S. Ct. at 2004 (internal citation omitted) (emphasis added). Recognizing that the FCA is not “an allpurpose antifraud statute” or “a vehicle for punishing garden-variety breaches of contract or regulatory violations,” the Court imposed stringent materiality and scienter requirements to limit the reach of this expansive theory. Id. at 2003.
Notwithstanding the Supreme Court’s direction, the post-Escobar era has been most notable for the government and qui tam relator efforts to expand the scope of the false certification theory and to limit Escobar’s reach. See Douglas W. Baruch & Jennifer M. Wollenberg, FCA Implied Certification Claims— Justice Department’s Aggressive Post-Escobar Briefing Signals Its Concern Over the Decision’s Potential Impact, 58 Gov’t Contractor ¶375 (Oct. 26, 2016). One prominent example of the government’s false certification overreach is its argument that the “taint” from a false certification renders worthless the entire value received by the government under the contract or government program (also referred to as “worthless services” in some contexts). Even though it preceded Escobar by a few months, the Sixth Circuit’s 2016 decision in Wall essentially rejected that theory, and the Sixth Circuit’s most recent decision in Wall confirms and compounds that rejection.
The Wall Case and the Sixth Circuit’s Decision
In its most recent opinion in Wall, the Sixth Circuit granted the defendant’s request for EAJA fees and renewed its pointed criticism of what it perceived to be government overreach under the false certification theory of liability:
This case is before us for a third time. The defendant, Circle C Construction, is a familyowned general contractor that built 42 warehouses for the United States Army in Kentucky and Tennessee. In the course of building all those warehouses, over a period of seven years, a subcontractor, Phase Tech, paid two of its electricians about $9,900 less than the wages mandated by the Davis-Bacon Act. That underpayment rendered false a number of “compliance statements” that Circle C submitted to the government along with its invoices. As a result, the government thereafter pursued Circle C for nearly a decade of litigation, demanding not merely $9,900—Phase Tech itself had paid $15,000 up front to settle that underpayment—but rather $1.66 million, of which $554,000 was purportedly “actual damages” for the $9,900 underpayment. The government’s theory in support of that demand was that all of Phase Tech’s electrical work, in all of the warehouses, was “tainted” by the $9,900 underpayment—and therefore worthless. “The problem with that theory,” we wrote in the last appeal, was that, “in all of these warehouses, the government turns on the lights every day.” United States ex rel. Wall v. Circle C Constr., LLC, 813 F.3d 616, 617 (6th Cir. 2016). We therefore reversed a $763,000 judgment in favor of the government and remanded for entry of an award of $14,748—less than 1% of the government’s demand.
2017 WL 3568497, at *1 (6th Cir. Aug. 18, 2017).
Overruling the government’s protests that its theory must have been reasonable since the district court had twice validated it, the Sixth Circuit had little difficulty finding otherwise and ordering the government to pay the contractor almost $500,000 in attorneys’ fees.
The Sixth Circuit’s Reasoning for the EAJA Fees Award
In the appeal, the government initially challenged the applicability of EAJA, arguing that the “title” of FCA Section 3730(g) limited its application to “prevailing defendant[s],” thereby rendering the provision inapplicable in Wall where the contractor was found liable and therefore had not prevailed. But the Sixth Circuit ruled that the provision’s title is not controlling, given that the text of Section 3730(g) clearly and plainly states that EAJA, 28 U.S.C. § 2412(d), “shall apply” in “civil actions brought under this section by the United States.” Notably, in its briefing to the Sixth Circuit, the government conceded that the action was “brought…by the United States” because the government had intervened in the qui tam action.
Under Section 2412(d)(1)(D) of EAJA, the party seeking fees has the burden of proving that: (1) the government’s demand was “substantially in excess” of the judgment award obtained, and (2) the government’s demand was “unreasonable” compared to the judgment. The Sixth Circuit easily found that the government’s $1.66 million treble damages demand was far in excess of the final judgment of $14,748.
The Sixth Circuit next found that the government’s demand was “unreasonable” within the meaning of Section 2412(d)(1)(D), equating it to the inquiry undertaken by courts to determine—in EAJA cases— whether the government’s position was “substantially justified.” Pointing to its earlier ruling, the court stated:
The short answer to that question, as we said in the last appeal, is that the damages the government sought to recover in this case were “fairyland rather than actual.”
2017 WL 3568497, at *3.
The government’s theory that the underpayment of wages tainted all of the electrical work and rendered it valueless was belied by common sense and the reality that “the government in fact benefits from that work every minute of every day.” Id. at *1, *3 (reaffirming that the problem with the government’s theory is that “in all of these warehouses, the government turns on the lights every day”).
The Sixth Circuit took a final opportunity to drive this “common sense” point home in response to the government’s warning that this fee award would have a “chilling effect” on the government’s efforts to “vigorously enforce” the FCA. The court quickly embraced the warning by responding:
One should hope so. In this case the government made a demand for damages a hundredfold greater than what it was entitled to, and then pressed that demand over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous. The consequences for Circle C included nearly a half-million dollars in attorneys’ fees. Section 2412(d)(1)(D) makes clear that the government must bear its share of those consequences as well.
Id. at *5 (emphasis added).
The Wall decision underscores the importance of curtailing unrealistic and unreasonable damages demands, particularly in FCA cases brought under the false certification theory, and sets forth the standards for awarding attorneys’ fees to FCA defendants even in cases where liability has been proven. But, beyond that, the Sixth Circuit’s Wall decisions, coupled with the Supreme Court’s Escobar decision, should give great pause to the government and relators alike who want to pursue FCA cases based on ancillary contractual or regulatory violations that have little or no impact on the value of the goods or services provided.