In a troubling decision that could have significant implications for grant recipients, the Second Circuit recently held that the proper measure of damages in a False Claims Act (“FCA”) case against a grant recipient is the full amount of the grant, regardless of any benefit that the government may have received. United States ex rel. Feldman v. van Gorp, --- F.3d ----, 2012 WL 3832087 (2d Cir. Sept. 5, 2012). In reaching its decision, the Second Circuit joined the Fifth, Seventh, Ninth, and D.C. Circuits in finding that the proper measure of damages in cases of FCA violations by federal grant recipients is the full amount of the grant because “the government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved.”

In Feldman, the relator, a former student in the fellowship grant program at Cornell University, brought the action against Cornell and the psychiatry professor that applied for the grant from the National Institute of Health (“NIH”) for the fellowship research and training program in the neuropsychology of HIV/AIDS. The government declined to intervene and the relator pursued the case. The relator presented evidence at trial that the actual fellowship program deviated in material respects from how it was described in the grant application to NIH, including that faculty identified as “Key personnel” did not participate in the program; core courses identified in the application were not regularly conducted; and much of the research that was performed under the grant program had no relation to HIV or AIDS at all. A jury found the defendants not liable for false statements in the initial grant application and the first renewal application, but found liability based on the renewal applications for the third, fourth and fifth years of the grant. Pursuant to the FCA statute, the district court, in calculating damages, trebled the amounts NIH paid for the last three renewal years of the grant to a total of $855,714, and added attorneys’ fees, costs, and expenses to bring the total damage award to more than $1.5 million.

The defendants argued the court should have applied a “benefit of the bargain” calculation to determine the difference between the value of the training promised and that actually delivered. The court, however, concluded the full amount of the grant was the proper measure of damages because “the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.”

This result should put grant recipients on notice that a failure to deliver the services as promised may result in liability for the full amount of the grant, trebled in accordance with the FCA. Although the government declined to intervene in this case, grant recipients should be aware that the government may use this outcome as a means to enforce grant requirements in the future.