23 February 2012

Court Rejects Mandatory FCA Penalties As An Unconstitutionally Excessive Fine

In a groundbreaking decision announced last week, a federal court in Virginia held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. This case is the first in which a federal court has determined that it does not have the authority to fashion an alternative penalty under the FCA where the statutory penalty is grossly disproportionate to the government’s loss or defendant’s gain arising from fraudulent conduct. Judge Anthony Trenga’s decision in U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012) should give pause to those pursuing claims under the FCA when they allege the number of “false claims.”

A jury this past summer found the Bunk defendants liable under the FCA for conspiring with subcontractors to fix prices in advance of a bid for a government contract and submitting a false Certificate of Independent Pricing. The Relator did not seek damages, apparently unable to obtain the necessary evidence from the government, but only penalties under the FCA based on the parties’ stipulation that the defendant had filed 9,136 invoices under the fraudulently obtained contract. While Relator proposed a $24 million civil penalty, under the FCA’s mandatory penalty provisions the court calculated the required penalty as no less than $50,248,000 ($5,500 x 9,136).

To determine whether the mandatory minimum penalty violated the Excessive Fines Clause of the Eighth Amendment, the court considered the harm – economic and non-economic – to the government. Based in part on evidence that the defendant’s charges to the government under the fraudulently obtained contract were substantially the same as charges under other contracts as to which there had been no fraud established, and not higher than what the government had paid other contractors in prior years, the court concluded that the Relator failed to establish that the defendant’s fraud caused any economic harm to the government. Significantly with respect to the lack of evidence of non-economic harm, the court relied on evidence that the government twice renewed the defendant’s contract, even after it had received the Relator’s allegations of fraud. Noting that this evidence “does not constitute ‘government knowledge’ sufficient to preclude or estop the government from pursuing claims against the Defendants,” the court did find it probative of the value received by the government. Thus, in light of the lack of evidence of harm to the government, the court deemed the mandatory minimum penalties in excess of $50 million unconstitutionally excessive.

While other courts have concluded that FCA penalties are constitutionally excessive in certain circumstances, what sets Judge Trenga’s decision in Bunk apart is his conclusion “that [the court] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.” The government, with Relator having elected not to seek damages, is thus left with nothing on the claim at issue.

Interestingly, Judge Trenga went on to discuss potential alternative penalties in the event that the Fourth Circuit determines the lower courts do have discretion to fashion alternative penalties under the FCA. He first considered imposing only one penalty for the submission of the false certification. Second, he considered a penalty equal to treble the amount of defendant’s financial gain, totaling approximately $1.5 million. Finally, he considered an alternative amount sufficient to sanction defendant and deter future wrongdoing, and concluded $500,000 would be an alternative penalty. Judge Trenga’s opinion suggests that if ordered to select an alternative penalty, he would impose one $11,000 penalty under the first alternative methodology.

This opinion should be a strong warning to the government and relators’ counsel carefully to consider the calculation of claims and avoid seeking the imposition of penalties that significantly exceed any measure of harm to the government.

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