Second Circuit Adopts Special Damages Calculation For False Claims Submitted To Federal Grant Programs

Posted by Jonathan Cohn and Brian Morrissey

Last month, in United States ex rel. Feldman v. van Gorp., __ F.3d __, 2012 WL 3832087 (2d Cir. Sept. 5, 2012), the Second Circuit joined four other circuits in holding that damages arising from a false claim submitted to a federal grant program may equal the full amount of the grant funds paid to the defendant, and that the traditional “benefit of the bargain” test need not be applied in such cases.

Feldman involved a grant application submitted to the National Institutes of Health (“NIH”) by researchers at Cornell University Medical College. The application proposed a two-year research fellowship program entitled “Neuropsychology of HIV/AIDS” that would train post-doctoral fellows in the neuropsychology of child and adult HIV/AIDS patients. The NIH approved the grant application, along with several subsequent renewal applications. A fellow in the program brought a qui tam suit under the FCA, alleging that the actual fellowship was not what had been advertised in the grant applications. According to the relator’s complaint, faculty members identified in the applications as “Key Personnel” did not contribute in any substantive way to the program, lectures promised in the applications were never delivered, and much of the program’s research had no relation to HIV/AIDS patients at all.

The United States did not intervene, and the relator pursued the litigation on its behalf. The district court entered summary judgment in favor of the United States, and entered damages equal to the full amount of the grants awarded to the defendants. The Second Circuit affirmed.

The FCA provides for treble damages and civil penalties, 31 U.S.C. § 3729(a)(1), but does not specify how damages are to be calculated. In most FCA cases, damages are calculated in the same way as a traditional breach of contract case, using a “benefit of the bargain” analysis in which damages equal the difference between the amount the government paid and the amount it received. See, e.g., United States v. Foster Wheeler Corp., 447 F.2d 100, 102 (2d Cir. 1971). When a false claim relates to a federal grant, however, the government often receives no tangible benefit at all. That was the case here—the grant program was designed to benefit third parties, rather than the government itself.

Nonetheless, the defendants argued that the “benefit of the bargain” calculation should control. Since the fellowship program provided many services promised in the applications, the defendants argued that damages should equal the amount paid by the government minus the value of the services that had been promised, but were not provided. The Second Circuit rejected that argument, refused to apply the benefit of the bargain test, and held that damages should equal the full amount of the grant funds paid. Feldman, 2012 WL 3832087, *9-*10. This required the defendants to surrender the full amount of the grant awards—times three—notwithstanding the fact that the fellowship program provided at least some of the services on which the grant awards were based. The Court held that this result was appropriate because, when a defendant “successfully uses a false claim regarding how a grant will be used in order to obtain the grant, 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.” Id. at *9. In reaching this conclusion, the Second Circuit joined the Fifth, Seventh, Ninth, and D.C. Circuits in holding that the traditional benefit of the bargain test should not apply when the false claim relates to a federal grant or other program from which the government derives no tangible benefit. United States ex rel. Longhi v. United States, 575 F.3d 458, 473 (5th Cir. 2009); United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008); United States v. Mackby, 339 F.3d 1013, 1018-19 (9th Cir. 2003); United States v. Science Application Int’l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010).

The Second Circuit’s decision in Feldman imposes an especially heavy burden on FCA defendants in federal grant cases, and appears to reflect a growing consensus among the federal courts of appeals that a special damages calculation is necessary in such cases.