After nearly a decade of litigation, justice was finally meted out in an extreme case of Government over-reach against a government contractor. The Government had sought to recover over $1.6 million from a government contractor whose subcontractor had underpaid a handful of employees by $9,900.

When all was said and done, a federal appellate court finally rejected the Government’s legal theory as essentially frivolous and ordered it to pay the contractor’s attorney fees, estimated at roughly $500,000. When the Government expressed concern that this would have a “chilling effect” on its efforts to vigorously enforce the False Claims Act, the court stated: “One should hope so.” The case is called U.S. ex rel. Wall v. Circle C Constr., LLC, No. 16-6169, (6th Cir. Aug. 18, 2017).

The story starts when the prime contractor, Circle C Construction, won a contract to construct buildings at the Fort Campbell military base. Circle C hired a subcontractor, Phase Tech, to perform the electrical work. The prime contract required compliance with the Davis-Bacon Act, which is similar to the Service Contract Act but applies to construction work. Like the Service Contract Act, the Davis Bacon Act requires the prime contractor and all subcontractors to pay construction workers the prevailing wages and benefits set by the Department of Labor. The Davis-Bacon Act also requires that the contractor submit certified payrolls as a condition of contract payment.

While Circle C did not have a written contract with its subcontractor Phase Tech, it did provide Phase Tech with the Wage Determinations from its prime contract. But Circle C did not verify whether Phase Tech was in compliance with the Davis Bacon Act. Phase Tech did not submit payroll certifications for two years after the project commenced, and later contended it was not aware it had to do so.

Eventually, one of Phase Tech’s employees brought a qui tam False Claims Act action against both Phase Tech and Circle C based on the under-payment of wages. Phase Tech settled the case by agreeing to pay $15,000, leaving Circle C as the remaining defendant. The Government agreed to take over the case from the employee and pursued the claim against Circle C.

Initially, the case did not go well for Circle C. The federal trial court hearing the case granted plaintiff’s motion for summary judgment and damages of $555,000 (the entire cost of the electrical scope of work on the project), which was trebled to a total award of $1.66 million against Circle C.

Circle C appealed the $1.66 million award. The appellate court agreed with the trial court that the payroll certifications at issue were false statements, but said its damages calculation was wrong. The case was sent back to the district court, which came up with a new total damages award of $762,000.

Reversal of Government’s damages theory

Circle C appealed that decision as well. This time, the appellate court tackled the Government’s damages theory and found it wanting. The Government’s theory was that all of the electrical work was tainted by the subcontractor’s under-payment of a few of the subcontractor’s employees by $9,900. The problem with that theory, the Court held, is that in all of the buildings, the Government turns on the lights every day. The buildings were not valueless.

The court distinguished this case from one in which a contractor had delivered a helicopter with defective transmission that caused it to crash. In that case, the helicopter was worthless because it was dangerous to use. Not so here. No one argues that the wiring is defective or should be torn out. Damages must be grounded in reality, the court said, and the Government’s damages are “fairyland,” not actual.

The Government further contended that if it had known of the under-payments by Phase Tech it would have suspended all payments on the project. But the court held that the relevant question is not whether in some hypothetical scenario the Government would have withheld payment, but rather whether the Government got less value than it bargained for. Here, the Government got all it bargained for, with the exception of the slight under-payment of wages.

The court held that the Government, in essence, bargained for two things: the buildings and payment of Davis-Bacon wages. It got the buildings, but not quite all of the wages. The shortfall was $9,900, which is the amount of the Government’s damages here. Trebling that amount and applying the $15,000 settlement paid by Phase Tech resulted in a grand total of $14,748.

Note that the under-payment of wages by itself did not create liability under the False Claims Act. What made this an FCA violation was the submission of a false payroll statement to the Government showing that proper wages had been paid.

Government liable for contractor’s attorney fees

After winning the damages issue, Circle C went on the offensive, seeking payment of the attorney fees it incurred in defending against the Government’s extreme positions. The Equal Access to Justice Act, 28 U.S.C. § 2412(d)(1)(D), provides that if a court awards damages to the Government that are substantially less than what it originally demanded, and the demand was unreasonable by comparison, the court may award attorney fees to the defendant.

Once again, Circle C lost in the trial court. But Circle C appealed and the appellate court granted its request. The appellate court found that the Government’s $1.6 million demand was “unreasonable” and indeed “fairyland” in relation to its actual damages.

The Government argued that its damages theory was not unreasonable because the courts hearing this very case had twice accepted it. But the appellate court said what matters is the actual merits of the Government’s litigating position, not whether the Government had a string of earlier successes in advocating the position before.

The Government also argued that the submission of false payroll certifications was a bad faith act and thus prohibited Circle C from recovering its attorney fees. The Court found that the liability here was not driven by a sinister motive. Moreover, the compliance statements were inaccurate only as to $9,900 in a project costing over $20 million. The owners of Circle C also testified that they believed the payroll certifications were true, and the Government cited no evidence to the contrary.

So, nearly 10 years after it all started, and after several losses and appeals, the contractor finally received some measure of justice, and the Government will finally be held to account for taking an extreme position. This case is receiving notoriety among government contract attorneys. We hope it will give the Government some pause before taking extreme positions in future legal actions against government contractors.

The Court Opinions in Circle C—

March 2010 District Court Opinion order awarding treble damages of $1,661,423.13

August 2014 District Court Opinion awarding damages of $762,000

February 2016 Sixth Circuit Opinion awarding damaged of $14,478