The Sixth Circuit on Friday issued a decision holding that where the government had pursued a “nearly frivolous” theory of FCA damages wildly in excess of actual damages, defendants were entitled to recover the costs of defending themselves — even where the fraud itself was substantiated. This decision is welcome news to defendants who may not “prevail” in the common sense of the word (by fending off liability entirely) but for whom the cost of defending is driven disproportionately high by the government’s aggressive and unjustified litigation positions. And in the process, the court cast doubt on some applications of the government’s common “taint” theory of liability, under which it argues that (sometimes minor) frauds deprive the government of the full value of a contract.
In United States ex rel. Wall v. Circle C Construction, the defendant (“Circle C”) was a family-owned construction company that contracted to build warehouses for the Army. No. 16-6169, 2017 WL 3568497 (Aug. 18, 2017 6th Cir.). During performance of that contract, one of Circle C’s electrical subcontractors paid two of its employees less than they were entitled to under the Davis-Bacon Act, thus rendering several compliance statements Circle C submitted to the government inaccurate. While the total value of the misstated subcontractor wages was only $9,900, the government argued that the false compliance statements tainted all the work performed under the contract, rendering the entire $554,000 of electrical work worthless. Once trebling and penalties were included, the government sought $1.66 million in damages for fraud of less than $10,000.
If you think that math sounds a little crazy, you are in good company. The Sixth Circuit last year reversed the district court’s judgment against Circle C and awarded trebled damages of nearly $763,000, holding that the proper award of damages should have been only $14,748. But vindication came at a high cost to Circle C — literally: Over the course of this decade-long litigation, it had spent almost a half-million dollars in attorneys’ fees. Circle C filed a motion for attorneys’ fees under the Equal Access to Justice Act (28 U.S.C. § 2412(d)(1)(D)), arguing that the government’s original demand was substantially in excess of, and unreasonable in comparison to, the final judgment. The district court denied the motion, putting aside the mathematical disparity as irrelevant and concluding that the government’s theory could not possibly have been unreasonable, because after all, the district court had adopted it.
Re-enter the Sixth Circuit. The disparity between demand and judgment, it held, could not simply be “put aside,” particularly where that disparity is so patent — here, the judgment was less than 1% of the government’s original demand. As to the reasonableness of the government’s position, the court hearkened back to its decision last year in which it characterized the application of the taint theory there as a “fairyland” measure of damages, given that the electrical work in the warehouses was complete and usable by the government (and in fact was being used). While goods or services could be legally worthless if, for example, they are dangerous due to noncompliance, or when the damages are not calculable in terms of market value, “those conditions are . . . obviously absent” here. And, while perhaps the district court had found the theory reasonable (twice!), the circuit court pointedly stated that a reasonable person could not have done so. The panel closed by remanding the case to the district court for an award of fees and expenses incurred in defending against the government’s excessive demand.
Judge John M. Rogers wrote a one-paragraph dissent in which he argued that the district court was justified in concluding the government’s position was reasonable, because the government had prevailed on its “taint” theory of damages before the district court, and “something like that theory had prevailed” before a handful of courts of appeals.
This decision is pure music to the ears of beleaguered False Claims Act defendants nationwide who all too often feel like guinea pigs in the government’s laboratory of ever-expanding FCA liability and damages theories. If the government is consistently made to bear the financial burden of defending against “novel” — and “nearly frivolous” — theories of liability such as the one here, such aggressive enforcement will be chilled somewhat. Or at least, as the Sixth Circuit put it, “One should hope so.”