Lamson, Dugan and Murray, LLP, Attorneys at Law

The Expanding Reach—and Allure—of the False Claims Act: Part III

Posted in In-House Counsel, Legislation

This is part III in a series of posts authored by Stacy Morris, a partner in LDM’s litigation department.  Mr. Morris has agreed to draw upon his experiences with the False Claims Act to provide information about the growing issues for businesses and individuals.

By Stacy Morris

The allure of a claim under the FCA is due in large part to the built-in damages provisions.  There is a two-step process for the damage calculation.  This post will explore those steps. 

First, the fact finder will determine the amount of damages the government has sustained by reason of the false claim.  Ordinarily, the measure of damage is the amount the government paid out by reason of the false claim over and above what it would have paid had the claim been truthful.   United States v. Woodbury, 359 F.2d 370 (9thCir. 1966).  Take, for example, the extremely simplistic case of a contractor that submits five invoices to the government claiming that it performed $750,000 worth of labor in the construction of a federal office building.  If the government and/or whistleblower successfully proves that the contractor actually performed, say, only 1/3 of that amount, and that the contractor submitted the claim for the entirety with the requisite degree of knowledge regarding the falsity of the claim (see Part II of this post), the court could reasonably determine that the defendant caused $500,000 in damages.

Courts have, however, also cited the legislative history of the FCA to reject the theory that FCA damages are always capable of being calculation under a precise mathematical formula:

No single rule can be, or should be, stated for the determination of damages under the Act…[T]he courts should remain free to fashion measures for damages on a case by case basis.  The Committee intends that the courts should be guided only by the principles that the United States’ damages should be liberally measured to effectuate the remedial purposes of the Act, and that the United States should be afforded a full and complete recovery of all of its damages.

S. Rep. No. 96-615, at 4 (reporting on S.B. 1981).

Thus, courts have significant discretion in coming up with a damages calculation that fits the facts and circumstances of each case.

In the second step of the analysis, the court then triples the amount of actual damages that has been calculated.  The treble damages provision is mandatory, not discretionary, though there are allowances for awarding only double damages under certain scenarios based on the extent of the defendant’s cooperation.  Using the contractor example from above, the damages award quickly soars from $500,000 to $1.5 million.  In the event the government has received restitution from alleged conspirators, the defendant is entitled to a credit; however, any credit will be applied only after the damages have been trebled, not before.  This essentially diminishing the value of any credit for payments which the government may have already collected for the same alleged violation from dollar-for-dollar to something much less.

But we’re not done yet.  A defendant found liable for a violation under the FCA is subject not only to the treble damages, but must also pay a penalty of between $5,000 to $11,000 for each false claim, along with costs of the suit.  For illustrative purposes then, a common law claim against our contractor which caused the government to pay out $500,000 over and above what it would have normally paid would, outside of the FCA context, be worth somewhere around $500,000.  By contrast, successful prosecution of the claim as a violation of the FCA could result in damages of $1.5 million, along with penalties of $25,000 to $55,000, and costs.

On Tuesday, we’ll post the fourth and final installment of this series.  The final installment will look at why private citizens have been eager to initiate claims under the FCA.  It will also revisit the Verizon case which we cited last week.

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