In rebuke of a favored government damages theory, the Sixth Circuit, in United States ex rel. Wall v. Circle C Construction, LLC, No. 14-6150, 2016 WL 423750 (6th Cir. Feb. 4, 2016), overturned a lower court ruling and limited FCA damages to the small, easily calculable difference in value between the services the government bargained for and the services the government actually obtained. In so doing, the court rejected as fantastical the notion that FCA damages automatically equal the total amount the government pays for goods or services provided under a contract, grant, or benefit program. This ruling is a setback to oft-repeated relator and government arguments in FCA “false certification” cases that the government would not have paid anything, or would have suspended payment, had it known of the underlying false certification, and therefore the government’s damages are the full payment amount. The Sixth Circuit expressed its incredulity at this reasoning by opening its opinion with the following passage:

Samuel Johnson would have had little patience for this case. Johnson once responded to the metaphysics of George Berkeley—a contemporary English philosopher who argued that matter has no existence—by kicking a large stone and declaring, “I refute it thus.” One can do rather the same thing with the government’s theory here.

Wall, 2016 WL 423750, at *1.

Rather than robotically allowing FCA damages to be based on theoretical claims of contract “taint” divorced from the value of the services obtained, the court stated in clear terms that the focus must be on the actual loss to the government—i.e., the damages must be “grounded in reality.” Id. at *2. This result is consistent with and reinforces the benefit-of-the-bargain analysis of FCA damages enunciated by the Supreme Court in United States v. Bornstein, 423 U.S. 303 (1976) and reiterated by the D.C. Circuit in United States v. Science Applications International Corp., 626 F.3d 393 (D.C. Cir. 2010). See FraudMail Alert No. 10-12-06.

Background in Wall

The FCA liability in Wall resulted from the underpayment of hourly wages for electricians (in violation of the Davis-Bacon Act) during the construction of Army base warehouses. The defendant falsely certified that it had paid the requisite wages when, in fact, its subcontractor had underpaid some of the electricians by $3 per hour, resulting in a total underpayment of $9,916. The government settled with the subcontractor—for $15,000—and then went on to obtain summary judgment against the defendant for the

FCA violation. For damages purposes, the government claimed that its entire $259,298 payment for the electrical work on the warehouses was tainted by the underpayment and that it should recover that amount as single damages. This argument prevailed in the district court, resulting in a treble damage award in excess of $750,000, even though it was undisputed that the underpayment was no more than $10,000. The Sixth Circuit reversed.

The Sixth Circuit’s Damages Analysis

For the Sixth Circuit, the issue was simple. Under a benefit-of-the-bargain analysis, the government bargained for two items: the warehouses and the payment of Davis-Bacon Act wages to the electricians. In the end, the government received (and used) the warehouses but it obtained “not quite all of the wages.” Wall, 2016 WL 423750, at *1. The court rejected the government’s “hypothetical scenario” in which it would have withheld payments on the contract if it had known about the minor wage violation. Id. at *2. Instead, the Sixth Circuit focused on the concrete question of “whether the government in fact got less value than it bargained for.” Id. Using this straightforward and logical construct, the court readily determined that the government received all of the value of the electrical work on dozens of warehouses—minus the $9,916 wage shortfall. Since there was no evidence of any moral taint to the contract (such as might have resulted if the warehouses had been built through the use of illicit child labor) the actual damages, based on a $3 per hour wage underpayment, were easily identifiable and calculable. The $14,748 damages award (after trebling and then offsetting by $15,000 for the prior settlement payment by the subcontractor) was a far cry from the damages recovery advocated by the government, which the Sixth Circuit described as follows: “[t]he damages the government seeks to recover here are fairyland rather than actual.” Id.

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It is important to note that the false certification theory of liability in Wall differed from the theory of liability under review by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7. See FraudMail Alert No. 15-12-09. In Wall, where the contractor, on a weekly basis through “compliance statements,” expressly certified compliance with the wage regulations, liability was predicated on the express false certification theory. Whereas in Escobar, where the “implied false certification” theory is at issue, the defendants made no express certifications of compliance with the regulations at issue. Basing liability on false implied (rather than express) certifications of compliance with requirements in regulations is far more controversial, and it raises a host of issues—including with respect to due process, notice, falsity, and intent—not necessarily present in Wall. Should the Supreme Court rule that an implied false certification can be the basis for FCA liability, however, the Sixth Circuit’s damages analysis should then apply in cases pursued under that theory as well.