The Thrill of Victory and the Agony of Calculating Damages
The First Circuit has again confirmed that a relator is not entitled to recover the entire contract price as False Claims Act damages when the government received some value from the services provided. In fact, in United States ex rel. Concilio De Salud Integral De Loiza, Inc. v. J.C. Remodeling, Inc., 962 F.3d 34, 44 (1st Cir. 2020), the court said this measure of damages cannot even be assumed as the baseline. This is the latest court of appeals decision to reject the so-called "taint" theory of FCA damages, upholding a zero-damages award after the relator failed to present any evidence of damages other than the contract price. Consistent with other courts that have addressed the issue, the First Circuit made clear that FCA damages must be calculated based on the "benefit of the bargain" to the government.
Relator Concilio De Salud Integral De Loíza (CSILO) is a nonprofit organization based in Loíza, Puerto Rico that provides healthcare services to the uninsured. In 2010, CSILO used federal grant funds to repair the roof of its main structure, which had sprung a leak. After a competitive bidding process, CSILO selected defendant J.C. Remodeling (JCR), which was, at the time, Puerto Rico's exclusive distributor of the "Wetsuit®" roof waterproofing system. Although JCR guaranteed its installation for 15 years, CSILO's roof began leaking again within a year. JCR eventually returned to make repairs, but allegedly used an inferior product rather than the Wetsuit® system.
Concluding that "it had received a sieve of a 15-year warranty on Wetsuit®," CSILO filed a qui tam action claiming that JCR had violated the FCA by intentionally misrepresenting its services, defrauding CSILO and illegally appropriating federal funds. 962 F.3d at 37-38. In preparation for trial, the parties submitted a Joint Pretrial Report, which the court adopted as its Pretrial Order, that was silent on damages. CSILO subsequently moved to amend the Pretrial Order to include a discussion of damages. The court denied the request, citing CSILO's failure to include any damages computation in earlier pretrial filings and the prejudice to JCR if damages were added on the eve of trial after discovery had concluded. Following a seven-day trial, the jury found that JCR had violated the FCA. But, because CSILO had not presented any evidence on damages, the court entered judgment and imposed only the statutory $5,500 civil penalty.
On appeal, CSILO argued that the district court had erred by not amending the Pretrial Order because CSILO had submitted evidence of the contract price and in its complaint had requested treble damages based on that price. The First Circuit rejected the argument that the defendant was thereby aware of the "baseline" damages claimed and thus would not have been prejudiced were more specific damages included in the pretrial order. The panel reasoned that damages are normally measured by a "benefit of the bargain" calculation—not the full contract price. Under the benefit of the bargain analysis, "[t]he Government's actual damages are equal to the difference between the market value of the [goods] it received and retained and the market value that the [goods] would have had if they had been of the specified quality." Id. (quoting United States v. Bornstein, 423 U.S. 303, 316 n.13 (1976)). The court recognized that the full contract price is awarded as damages only in cases where the government receives no tangible benefit and the intangible benefit is impossible to calculate. Since JSR actually performed the work for which the funds were approved, "albeit in a shoddy manner," the court concluded the government might have received something of value, making it "far from clear" that the proper measure of damages was the full contract price. Id. at 44.
The lesson: Although relators and DOJ continue to press a "taint" theory of FCA damages—under which the full contract price is recoverable as FCA damages—that theory continues to be shot down by courts. CSILO serves as an excellent reminder that FCA damages, like damages in any other context, must account for the value of the services actually provided. The other lesson? Choose your roofing contractor wisely.
*James Mestichelli contributed to this blog post. Mr. Mestichelli is a graduate of the University of Michigan Law School and is employed at Arnold & Porter's Washington, DC office. Mr. Mestichelli is admitted only in Oregon. He is not admitted to the practice of law in Washington, DC.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.