Adopting a view that has been roundly rejected by federal circuit courts (including the Seventh Circuit), the U.S. District Court for the Northern District of Illinois in United States & City of Chicago ex rel. Chicago Regional Council of Carpenters v. Sound Solutions Windows & Doors, Inc. endorsed the “taint” theory of FCA damages, awarding the full value of contracts as damages based on the defendants’ non-compliance with a contractual term, notwithstanding their complete performance of the tangible work under the contracts.

Sound Solutions contracted with the City of Chicago to install sound-proofing on private homes located near airports. The contracts required, among other things, that Sound Solutions use disadvantaged or minority business enterprises (DBEs/MBEs) as subcontractors for a certain portion of the work. The relator brought suit under the federal FCA and Chicago’s municipal FCA, alleging that Sound Solutions and its president, Ronald Spielman, failed to use a valid DBE or MBE, and thus each claim for payment submitted under the contracts was impliedly false. The United States and the City of Chicago intervened, and a default judgment was subsequently entered against both defendants. After Spielman settled the federal FCA claims against him, the magistrate judge issued a report and recommendation (R&R) awarding the full value of the contracts as damages on the municipal FCA claims.

The district court adopted the R&R in its entirety, concluding that “even though the physical or tangible work set forth in the contract was completed,” only private homeowners benefited from that work; the City received no tangible benefit. Rather, the sole benefit to the City, which was intangible, was the use of DBE or MBE subcontractors. The court held that because the City did not receive that benefit and “there was no finite dollar value ascribable” to it, the proper measure of damages was the full value of the contracts.

We at LLB believe that Sound Solutions cannot be squared with Seventh Circuit precedent. In United States v. Anchor Mortgage Corp., a case involving false claims related to federal mortgage loan guarantees, the Seventh Circuit held that FCA single damages are measured by the difference between the value the government contracted to receive and the value it actually received — not the full value of the contract. Further, while it is true (as Sound Solutions noted) that the Seventh Circuit previously held in United States v. Leahy that the government does not receive all that it bargained for where a contractor fails to comply with a contractual provision requiring the use of DBEs or MBEs, the court there did not award the full value of the contract as damages. Rather, it concluded that because the contractor completely performed the tangible work, the government still received 90 percent of the contract’s value. Sound Solutions, by contrast, found that the defendants’ completion of the tangible work was worthless to the City — taking it into the damages "fairyland" that has been so sharply criticized by appellate courts across the country.

Given the conflict with circuit precedent, we are surprised that the defendants did not appeal. The reason may be that Spielman, Sound Solutions’ president, sole member, and sole manager, filed for bankruptcy after the case was filed and may have chosen to cut his losses rather than litigate an appeal.