The Sixth Circuit recently awarded a defendant $468,704 in attorney’s fees, despite the government winning its FCA suit. The Court found that the defendant was entitled to recover its fees under the plain language of the Equal Access to Justice Act (“EAJA”), even though it was not the prevailing party, because the government’s demand for $1.6 million in damages was “unreasonable” and “substantially in excess” of the final judgment of $14,748.

Over the course of nearly a decade of litigation, the United States sought treble damages in connection with 42 warehouses Circle C built for the United States Army based on $9,900 in underpayments to two electricians by Circle C’s subcontractor, Phase Tech. Specifically, the government argued that claims for all 42 warehouses were “tainted” by the underpayments because the underpayments resulted in Circle C’s submission of false compliance statements and invoices. The United States prevailed and was awarded $763,000 by the trial court. On appeal, the Sixth Circuit rejected the tainted claims theory and reduced the damages to just $14,748.

Circle C subsequently moved for recovery of its legal fees under the EAJA, which provides that “if, in a civil action brought by the United States,…the demand by the States is substantially in excess of the judgment finally obtained by the United States and is unreasonable when compared with such judgment”, the court must “award to the [defendant] the fees and other expenses related to defending against the excessive demand.” 28 U.S.C. § 2412(d)(1)(D). The District Court denied the motion on grounds that the government’s damages theory was “not unreasonable.” In a 2-1 decision, the Sixth Circuit reversed, holding the District Court failed to consider the actual merits of the government’s position and that the EAJA was unambiguous. To the Sixth Circuit the application of the EAJA was clear: the final judgment amounted to less than 1% of the government’s initial demand; thus, it “could hardly be plainer” that the government’s demand was “substantially in excess” of the judgment, and the demand was then clearly “unreasonable.” Indeed, the Court characterized the government’s proposed damages as “fairyland,” and noted that the government received the benefit of its bargain “every minute of every day” through use of the electricity in the 42 buildings.

Turning to the exceptions to the EAJA, the Court found that none of the stated exceptions applied because the Defendant had not “committed a willful violation of law or otherwise acted in bad faith”, and the government had not shown that any “special circumstances make an award unjust.” The Court reasoned that Circle C’s underpayment was merely an “honest mistake” and was not the result of a “sinister motive.” Further, while the Court acknowledged that an award of legal costs might have a chilling effect on future FCA actions, it reasoned that the government should “bear its share” of the consequences for seeking damages “a hundredfold greater than it was entitled…over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous.”

Judge John M. Rogers dissented, arguing that “it is a matter of judgment” whether the government’s position was reasonable and that the government had provided numerous examples of cases in which similar tainted claims arguments were found to be reasonable. As a result, Judge Rogers argued, the District Court’s decision should be given substantial deference and its denial of fees should be affirmed.

The decision helps define limitations of the tainted claims theory. More importantly, it should serve as a strong warning to government lawyers inclined to pursue aggressive damages theories.

A copy of the court’s opinion can be found here.