February 16, 2016

Sixth Circuit Holds That FCA Damages Are Not All or Nothing, To Contractors’ Relief

Arnold & Porter Advisory

In a refreshingly witty and succinct opinion, the Sixth Circuit rebuked the government’s harsh damages theory in the False Claims Act case United States ex rel. Wall v. Circle C Construction, LLC, No. 14-6150, 2016 WL 423750 (6th Cir. Feb. 4, 2016). In the first paragraph of the two-page opinion, the majority rejects the government’s position that FCA damages automatically equal the total amount paid for performance and chooses instead to limit damages to the actual difference in the value of the performance promised and the value of the performance obtained:

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. The defendant, Circle C, is a contractor that built several dozen warehouses at an Army base. In doing so, over the course of seven years, the contractor (actually a subcontractor) paid a handful of electricians about $9,900 less than the Davis-Bacon wages specified in its contract with the Army. As a remedy for that underpayment, the government sought and obtained a damages award of $763,000. The government's theory in support of that award is that all of the electrical work, in all of these warehouses, is “tainted” by the $9,900 underpayment—and therefore worthless. The problem with that theory is that, in all of these warehouses, the government turns on the lights every day. We reject the government's theory, reverse the damage award, and remand for entry of an award of $14,748.

This outcome is a step in the right direction toward reining in the government’s and qui tam relators’ efforts to obtain treble damages based on the entire value of a contract, grant, or benefit program. Nonetheless, Wall does not completely eliminate the viability of the damages theory that a false claim can taint the entire value of performance and require the contractor to repay up to three times the amount of the entire contract, regardless of the benefits of performance that the government received.

The government’s argument typically goes like this: had the government known about the contractor’s failure to comply with even just a portion of the contract—regardless of how small the failure was—the government would not have accepted any performance and would have paid the contractor nothing. This tainted performance theory aligns with the Uniform Commercial Code’s approach to rejection of performance, which provides that a buyer may reject goods completely “if the goods or the tender of delivery fail in any respect to conform to the contract.”1 

This approach to damages has succeeded in some cases. For example, in U.S. ex rel. Compton v. Midwest Specialties, Inc., the Sixth Circuit found that the brake-shoe kits for Army jeeps that the contractor delivered were “completely valueless” because the contractor failed to comply with the contract’s testing requirement, making the kits dangerous and unusable.2 More recently, in U.S. ex rel. Roby v. Boeing Co., the contractor remanufactured an Army helicopter that flew for 56 of the minimum required 200 flight hours before crashing.3 The Sixth Circuit held that the helicopter provided no value to the government because it included defective transmission gears and crashed prior to reaching the minimum flight hour warranty requirement.

The defendant in Wall, Circle C Construction, built 42 warehouses at an Army base pursuant to a contract that required Circle C and its subcontractors to pay employees wages in accordance with the Davis-Bacon Act. The contract also required weekly compliance statements certifying, among other things, that employees were being paid as required. One of Circle C’s subcontractors for electrical work underpaid at least some of its electricians by three dollars an hour, resulting in a total underpayment of US$9,916. The parties did not dispute that the underpayments rendered false a number of Circle C’s compliance statements and thus created liability under the FCA.4

To establish its damages, the government relied on the theory of tainted performance, which was accepted in Sixth Circuit cases like ex rel Compton and ex rel Roby described above. The government argued that Circle C’s fraudulent claims tainted the entire value of the electrical work for which the subcontractor improperly paid, and thus rendered whatever the contractor delivered worthless. The district court agreed and held that the government’s actual damages were equal to the total amount the government paid Circle C for electric work attributable to the subcontractor that violated the Davis-Bacon Act: US$259,298.18. When trebled and adjusted for partial settlement payments, the total judgment equaled a whopping US$762,894.54.5

On appeal, the Six Circuit reversed, finding that the trial court abused its discretion when calculating damages. The Court explained that the FCA allows for recovery of three times “actual damages,” and that “actual damages” are “the difference in value between what the government bargained for and what the government received.”6 The majority then reasoned that:

The government bargained for two things: the buildings, and payment of Davis-Bacon wages. It got the buildings but not quite all of the wages. The shortfall was $9,916. That amount is the government’s actual damages.7

To distinguish the facts in Wall from those in prior decisions accepting the tainted performance theory, the majority explained that, in Wall, the government received the goods and services that it asked for, as opposed to goods and services either rendered technically defective and thus useless, or provided in a morally repugnant manner:

This case is not like U.S. ex rel Compton v. Midwest Specialties Inc., 142 F.3d 296, 304 (6th Cir. 1998), where the contractor delivered defective brake-shoe kits for jeeps, or Roby, 302 F.3d at 648, where the contractor delivered a helicopter with a defective transmission that cause it to crash. In those cases the goods were worthless because they were dangerous to use. Nor is this case one where some unalterable moral taint makes the goods worthless to the government. Suppose that, contrary to the contract’s terms, a contractor delivers uniforms manufactured by child laborers in Indonesia or silicon chips shipped from Iran. In those cases no award of money damages could remedy the contractor’s breach.8

In drawing these distinctions, the majority rejected the government’s assertions that the false certification regarding compensation at issue in Wall rendered the entire electrical work valueless, concluding that the government’s claim “is belied by the government’s own conduct in using the buildings.”9

The concurrence took exception to the majority’s focus on the fact that the government was using the electricity in the warehouses. It proffered instead that “the reason that such damages [full contract performance] are not proper in this case before us is not that the goods are still being used, but instead that it is easy to place a market value on Davis-Bacon Act damages in particular.”10

The majority seems to create a test for calculating damages that turns on whether “some unalterable moral taint makes the goods worthless to the government”—compelling rhetoric, perhaps, but not an easily workable rule. The concurrence would limit the effect of the majority’s holding, only limiting the government’s actual damages to the difference in the value the government received and the value the government bargained for in those cases where the market value of that difference is readily calculable: “My concern is that the majority opinion might be read to suggest more generally that the price of irreversibly provided goods or services—because still in use—cannot be the measure of False Claims Act damages. Such a suggestion would not be necessary to our holding.”11

While the Sixth Circuit’s willingness to point out the government’s overreaching in Wall is a step in the right direction, we are at best cautiously optimistic that the Wall opinion will meaningfully limit the government’s ability to assert damage equal to the full amount paid for performance. Without a clear rule from the majority, the government will be able to make arguments that distinguish future cases from Wall on the facts. The concurring opinion provides a blueprint to do just that: the underpayments in Wall made it extremely easy to calculate the market value of the difference between what the government bargained for and what it received. That is not often true in FCA cases. As such, contractors and grantees operating with federal funds should think twice before reading Wall to substantially reduce the cost of FCA liability.
  1. UCC § 2-601.

  2. U.S. ex rel. Compton v. Midwest Specialties, Inc., 142 F.3d 296 (6th Cir. 1998).

  3. U.S. ex rel. Roby v. Boeing Co., 302 F.3d 637 (6th Cir. 2003).

  4. Ex rel Wall, at *1.

  5. Id. at *2.

  6. Id.

  7. Id.

  8. Id.

  9. Id. at *2-3.

  10. Id. at *3.

  11. Id. at *4.

Subscribe Link

Email Disclaimer