Sixth Circuit Rejects “Fairyland” Definition of FCA Damages

The Sixth Circuit recently issued a strongly worded rebuke to the government in response to its proposition that “actual damages” in a FCA suit premised on wage underpayment equals the full amount of the government’s payment for the contractor’s services.  See United States ex rel. Wall v. Circle C Constr., No. 14-6150 (6th Cir. Feb. 4, 2016).  The defendant contractor—hired to build warehouses for the Army—had certified to compliance with certain laws and regulations, including one requiring payment of above-market wages.  The contractor underpaid several employees by a total of $9,900, and the government argued that the contractor’s noncompliance “tainted” all of its claims, resulting in damages equal to the full amount the government paid for the services.  Trebling these so-called damages yielded a total FCA damages award in excess of $750,000.

The Sixth Circuit noted that the concept of “actual damages” means “the difference in value between what the government bargained for and what the government received.”  The government argued it should be able to recover everything it paid to the contractor because had it known of the non-compliance, it would have suspended payment.  The court rejected this “creative accounting” and “fairyland” interpretation of actual damages.  As the court explained, damages cannot be measured by looking to a “hypothetical scenario” of withheld payments; instead, courts must measure the extent to which the government “got less value than it bargained for.”  And as the court noted, any assertion the warehouses were “valueless” as a result of the contractor’s non-compliance “is belied by the government’s own conduct in using the buildings.”  The court contrasted the circumstances before it to situations where contractors deliver defective items, although it acknowledged that goods could be worthless to the government if they had “some unalterable moral taint.”  This was not such a case, and the court ruled that the government had suffered actual damages of $9,900.

Interestingly, in a concurring opinion Judge Rogers rejected the majority’s focus on whether the goods and services were still in use.  Judge Rogers agreed that where “the value of the injury to the public interest is calculable in terms of market value,” such as the present case, the government’s actual damages equals the diminished value.  But where goods or services are provided in a manner that violates the public interest yet defies ready calculation, Judge Rogers maintained that the government may seek to recover the full amount it paid, even “while continuing to use the goods or take advantage of the services.”

A copy of the court’s opinion can be found here.