February 11, 2016

Sixth Circuit Adds Further Uncertainty to the Question of Limits on False Claims Act Damages

By Hamsa Mahendranathan

Violators of the False Claims Act can be subject to significant damages: the Act provides treble damages and civil penalties of between $5,500 and $11,000 for each false claim.  But in some cases, the correct measure of damages can be a murky subject. This is especially true when considering whether the damages should account for any value the government received on the contract.  Last week, the Sixth Circuit’s United States ex rel. Brian Wall v. Circle C Construction, LLC decision weighed in on this issue, holding that the government’s damages for a contractor’s illegal underpayment to its workers is the amount of the underpayment itself, and not the entirety of the government’s payments on the contract.

The case involves a construction company, Circle C, that contracted with the government to build warehouses at an Army base.  Circle C’s contract required the company and its subcontractors to pay their employees above-market wages per the Davis-Bacon Act and submit weekly “compliance statements” to that effect.  One of Circle C’s subcontractors, Phase Tec, underpaid its electricians by $9,916.  It was undisputed that these underpayments rendered Circle C’s compliance statements false and that Circle C was liable under the False Claims Act—the issue on review was the correct measure of the resulting damages.

The government alleged, and the district court agreed, that Circle C was liable for three times the entire amount the government paid for Phase Tec’s electrical work, totaling $777,894.54.  The government argued that all of Phase Tec’s work was “valueless” because it is tainted by the company’s underpayment to its electricians.  The Sixth Circuit was not convinced by this reasoning, stating “[t]hat claim is belied by the government’s own conduct in using the buildings.”  It distinguished this case from those where the contracted for goods were unusable, or where “some unalterable moral taint” made the goods worthless to the government and no amount of money damages could remedy the contractor’s breach.  The court also noted that the Davis-Bacon Act only requires the government to withhold from the contractor an amount equal to the estimated wage underpayment for violations, suggesting that this is the amount of money damages that would remedy Circle C’s breach.

The court was equally unimpressed by the government’s argument that it would have suspended payments had it known of Phase Tec’s underpayments.  The relevant question in determining actual damages “is not whether in some hypothetical scenario the government would have withheld payment, but rather, more prosaically, whether the government in fact got less value than it bargained for.”  Finding the actual damages were Phase Tec’s underpayments to its electricians, the Court awarded three times this amount minus a settlement payment that Phase Tec had previously made.

This case thus sharply differs from those where the courts have measured the government’s damages as the total amounts paid out under the contracts or as the total amounts tripled and then reduced these damages by the value provided by the contractor.  In this way, the decision may end up significantly limiting the measure of damages litigants can expect to receive in these kinds of False Claims Act cases in the Sixth Circuit.  Exactly how much limitation the decision will impose remains to be seen given the “moral taint” escape hatch the Court explicitly preserved and how broadly that exclusion will be viewed.  There also remains the question of how the Court would have ruled had the injury to the government not been so readily calculable.

This was what Judge Rogers picked up on in his concurrence by raising the concern that the opinion could suggest that the full price of goods can never be the measure of False Claims Act damages when the government continues to use and cannot return those goods—and he did not consider this necessary to the holding.  Hopefully, the decision will be limited to the specific facts at issue and not serve as a broader bar to the government’s ability to recover complete damages when its contracting decisions are undermined by fraud and deceit.

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