In Brief

  • Fourth Circuit finds $24 million penalty award does not violate Eighth Amendment ban on excessive fines despite disproportion to payments at issue.
  • Other courts have yet to react and ruling provides no guidance.

A three-judge panel of the Fourth Circuit Court of Appeals has ruled that an award of $24 million in penalties for violations of the False Claims Act did not violate the constitutional ban on excessive fines, even where the damages had not been proven and the total government payments at issue amounted to just over $3 million. This ruling may open the door to other large damage awards in similar cases, but its applicability has yet to be considered by other courts.

The federal False Claims Act (“FCA”) prohibits fraud in billing the government and allows for whistleblowers to bring suits alleging such fraud and collect a portion of any recovery. In United States ex rel. Kurt Bunk v. Gosselin World Wide Moving, whistleblowers alleged that a logistics company had swindled the U.S. Department of Defense by fraudulently manipulating contract prices for services it provided. Gosselin, the defendant, was a subcontractor that was involved in shipping U.S. service members’ personal goods and effects to and from locations in Europe. Gosselin had colluded with its supposed competitors to artificially inflate the charges for the services it provided in 2001 and 2002.

Kurt Bunk and another whistleblower plaintiff, Ray Ammons, filed suit in 2002 against numerous companies involved in the scheme, and their claims were consolidated in the Eastern District of Virginia in 2007. All defendants other than Gosselin were dismissed or settled the claims. The U.S. government decided to intervene in the Ammons claim, but not the Bunk claim; Bunk therefore pursued the case on his own, but as part of a consolidated action with the government. The case was tried before a jury in July 2011. At trial, Bunk chose to forgo proof of actual damages, which meant he was limited to the civil penalties available under the FCA, which the statute sets at no less than $5,500 per claim. In this case, Gosselin had issued 9,136 invoices to the government pursuant to its fraudulent scheme.

At trial, the jury found in favor of Bunk and the government on various portions of their claims. With regard to the government’s claims, the trial court entered judgment of $5,500, indicating that it saw the scheme as one single offense. The trial court determined that a per-invoice penalty for Bunk’s claims, which would have totaled over $50 million, was excessive in light of the Eighth Amendment to the U.S. Constitution. The Eighth Amendment is most widely known for its prohibition on cruel and unusual punishment, but it also prohibits “excessive fines.” The government had paid a total of roughly $3.3 million under the contracts that were part of the scheme, so the trial court viewed a $50 million award as disproportionate to the harm suffered. Bunk proposed an award of $24 million, but the trial court rejected that because it determined that the FCA did not allow a penalty of anything less than the statutorily-mandated $5,500 per claim. Because it saw the Eighth Amendment as prohibiting an award of that amount, the trial court awarded no damages to Bunk.

Bunk appealed to the Fourth Circuit, arguing that the trial court should have awarded his proposal of $24 million. The Fourth Circuit, in a ruling issued in December 2013, determined that Bunk’s proposal of a $24 million penalty was within the discretion the FCA grants to plaintiffs, even though it was a departure from the statutorily-imposed penalty amounts for the invoices at issue.

The Fourth Circuit emphasized that each separate invoice constituted a “claim” under the FCA and noted that “[w]here an enormous public undertaking spawns a fraud of comparable breadth, [that rule] helps to ensure what we reiterate is the primary purpose of the FCA: making the government completely whole.” The Fourth Circuit pointed out that “an award of nothing at all because the claims were so voluminous provides a perverse incentive for dishonest contractors to generate as many false claims as possible, siphoning ever more resources from the government.”

The Fourth Circuit also stated that a penalty under the FCA will violate the Eighth Amendment where “it is ‘grossly disproportional to the gravity of a defendant’s offense.’” The Appeals Court determined that in these cases, the penalty must not be assessed in proportion only to the amount the government actually paid, but that a court “must consider the award’s deterrent effect on the defendant and on others perhaps contemplating a related course of fraudulent conduct.” The Fourth Circuit viewed a $24 million award in this case as proportionate to the gravity of Gosselin’s offense. The Fourth Circuit therefore amended the trial court’s judgment to incorporate the award of $24 million on Bunk’s claims.

Although the Fourth Circuit determined that the award in this case was not excessive, it provided no guidance for other courts to determine what level of FCA penalties the Eighth Amendment would prohibit. Other courts have not yet reacted to the Fourth Circuit’s ruling here, but given that many such actions involve large numbers of invoices or claims, this may open the door to large damage awards in future FCA cases. That possibility may in turn serve as an incentive for future whistleblower plaintiffs to file suit and pursue such awards. Until courts determine the applicability of Bunk v. Gosselin, it may stand as an unwelcome development for defendants in FCA cases.