In an unusual ruling on August 18, 2017, the US Court of Appeals for the Sixth Circuit reversed the Middle District of Tennessee’s denial of the defendant’s motion for attorneys’ fees, and remanded the case for an award of legal fees and expenses related to defending against the government’s “excessive” damages demand, as well as fees incurred during the appeal and remand process. The case is United States ex rel. Wall v. Circle C Construction, LLC, and as we have previously reported, last year the government suffered a major loss when the Sixth Circuit dramatically reduced the damage award in this False Claims Act (FCA) litigation by over 95 percent (from $762,894.54 to $14,748), which resulted in damages of less than 1 percent of the $1.66 million originally claimed by the government. At the time, the Sixth Circuit called the government’s so-called “tainted goods” damage calculation “fairyland rather than actual.”

Following the Sixth Circuit’s ruling reducing the damages, Circle C Construction, a family-owned general contractor that built 42 warehouses for the US Army in Kentucky and Tennessee, moved for an award of attorneys’ fees under the Equal Access to Justice Act, which provides that if a court awards damages to the government but the government’s original demand for damages was both “substantially in excess of the judgment finally obtained” and “unreasonable when compared with such judgment,” then, subject to certain exceptions, 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 US District Court for the Middle District of Tennessee rejected the request, finding the government’s damages theory to not be unreasonable “simply because the court itself had twice accepted that theory.” Circle C appealed to the Sixth Circuit.

The Sixth Circuit did not mince words, observing that the actual damage to the government was $9,916 in underpayment to electricians that was the basis for the FCA claims. Calling this calculation a “simple concept, familiar to any first-year student in law school,” the court noted that the government faced “strong headwinds—both common-sense and legal—in asserting that its demand for roughly $554,000 in actual damages and $1.66 million overall, was reasonable nonetheless.” As the warehouses built for the Army were functional and there were no issues with the actual work performed, the sole damage consisted of the four-figure underpayment of two electricians, which violated the minimum wage requirements of the Davis-Bacon Act. The court concluded that the government’s “demand for $1.66 million as compensation for [the] $9,900 underpayment was unreasonable within the meaning of § 2412(d)(1)(D).” The court then rejected the government’s argument that Circle C acted in “bad faith,” noting that “Circle C submitted compliance statements that were inaccurate as to $9,900 of particulars in a project costing more than $20 million.”

The Court concluded with a stern message: “Second—and finally—the government warns that a fee award in this case would have a ‘chilling effect’ on its efforts ‘to vigorously enforce’ the False Claims Act. . . . One should hope so. In this case the government made a demand for damages a hundredfold greater than what it was entitled to, and then pressed that demand over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous. The consequences for Circle C included nearly a half-million dollars in attorneys’ fees. Section 2412(d)(1)(D) makes clear that the government must bear its share of those consequences as well.”

The Sixth Circuit’s ruling suggests that the Equal Access to Justice Act may act as a deterrent against overreaching, unreasonable government damages claims in future FCA cases.