False Claims Act Damages

When a person commits an act that violates the False Claims Act, the United States is entitled to recover “a civil penalty of not less than $ 5,000 and not more than $ 10,000” [adjusted up for inflation], plus three times the amount of damages which the government sustains because of the act of that person.” However, calculating the “damages sustained” by the government is not always a straightforward process.

When the government is damaged by fraud, the defendant is liable for three times the amount of money it would take to make the government “whole”—in other words, to make it as though the fraud never occurred. Because each case is unique and damages the government in a different way, there is no universal formula for calculating False Claims Act damages, and courts will apply very different techniques depending on the facts of the case and nature of the fraud.

Sometimes, when the government purchases a good or service that is so materially deficient as to be worthless, then the “damage” is the full price that the government paid for that good or service. Often, however, the government has received some sort of benefit despite the falsity of the claim, or the damages due to fraud are too complex to objectively quantify. This can happen when the fraud occurred in just one portion of a larger project, or when the fraud is unrelated to the quality of the contractor’s performance.

In these cases, the court will typically perform a “benefit of the bargain” analysis that examines the difference between the fair market value the good or service would have had if the fraud had not occurred, and the actual value of what the government received. For example, if the government hires a contractor to construct a bridge that is supposed to last for 100 years, but the contractor uses inferior materials and an expert determines that the bridge will begin to seriously deteriorate within 30 years, the court may decide that the service provided is worth just 30 percent of what the government was supposed to receive. The court might therefore find that the damages were 70 percent of what the government paid to construct the bridge.

What Factors Can Impact The Amount of Damages Awarded?

The first thing that can matter a great deal when determining False Claims Act damages is whether or not the fraud in question relates to a government contract for a service provided directly to the government, or whether it’s a contract for a service such as Medicare for which the government would pay but the beneficiary of the payment is somebody else.

Another thing that matters a great deal is if, in spite of the fraud, the defendant performed to some degree under the contract. They may have committed fraud getting the contract, but they might not be liable for as much in damages if, in performing the contract, they did everything they were supposed to. For example, in some jurisdictions, falsifying a small business loan application can constitute fraudulent behavior even if the defendant performed the underlying loan.

Damages are tricky under the False Claims Act, though, and there are several important things to keep in mind. In government contracting, if it’s a very good case, the damages will usually be enough for most False Claims Act lawyers to want to pursue it, because government contracts are relatively big business. Medicare/Medicaid especially is a really big business.

On the other hand, the numbers that are out there may look very, very attractive to people looking to file cases, but the money really belongs to the government, so whistleblowers and their lawyers only get a percentage of whatever is recovered. They do not get the full amount of the damages because the damages are to the government. Therefore, what sounds like a huge settlement may be far more modest to the whistleblower in the end.

Scope of Damages in Whistleblower Cases

While it’s the False Claims Act damage to the government that is important in such a case, there could be proximate damages as well. It is the damage to the government that counts, but how those damages are counted is the subject of quite a bit of litigation.

A lot depends on what the defendant certified to the government and what associated regulations apply. In a Medicare and Medicaid context, kickback cases can create damages equivalent to the entire value of the charge regardless of whether or not the defendant performed the underlying charge. It can depend a lot on what type of contract it is and what was promised under that contract.

Common Types of Damage Calculations

Note that damage calculations in False Claims Act cases will vary from court to court and are a matter of constant litigation. The below examples serve as guidelines to such a determination, but this is an area of continual change in the law.

Damages when the Government Receives no Benefit

When the government receives no benefit at all from the good or service delivered, then the damages are simply the full amount that the government paid for the good or service. For example, if the U.S. Air Force orders a custom part for a military aircraft, and it receives a part that does not conform to the specifications, the damages are probably the full amount that the Air Force paid for the parts. A custom part likely has no resale market, so if the Air Force cannot use it, the value is effectively zero. Similarly, if a Medicare provider lies on a claim form to get reimbursement for a procedure that Medicare does not cover, the damages are the full amount that the government paid. The government receives no benefit from paying for services that it does not cover.

Fraudulent Grant Applications and Contracts for Small and Minority-Owned Businesses

When the government limits a contract or grant to a certain class of bidder — e.g. grants for a particular type of cancer research, or contracts for small and minority-owned businesses — the primary “value” received by the government is supporting that type of research and that type of business. When grant money is fraudulently used for other purposes, or another type of business secures such a contract through fraud, the government’s primary interest is frustrated and some courts have held it effectively receives no value at all. As such, in these types of False Claims Act cases, courts typically calculate the government’s damages to be the full amount paid in the grant or contract, without regard to any other benefit the government might have received.

Cost to Repair or Replace a Defective Product

If the false claims pertain to a defective product or service that is capable of being repaired or replaced, such as using the wrong type of wiring in a building that is otherwise sound, then courts will typically assess the damages to be the total cost of repairing the defect. These costs usually include both time and materials, meaning that a contractor would not only have to buy new wires, but would also have to pay to have the old wires torn out and the new wires installed. If the removed materials have a resale value, the court may deduct that amount from the total damages after they have been trebled.

Damage Proximately Caused by Fraud

Sometimes a defective good or service causes substantially more damage than what the government paid. In such False Claims Act cases, the defendant is liable for any damages that are “foreseeable”—damages that a reasonable person would expect to happen as a natural result of the defect. Such damage is said to be “proximately” caused by the defect.

For example, if an aircraft manufacturer knowingly delivers a helicopter that has a defective motor and that defect then causes the helicopter to crash, the damage to the United States is probably the full amount it paid for the helicopter, since it is reasonable to expect that a defective motor would cause a crash. Similarly, a contractor that used the wrong wiring in a government building would be liable for the labor and materials to replace it, as those would qualify as foreseeable expenses.

However, if the defective motor had been discovered prior to any crash, then the damage would likely be the cost to replace the motor, rather than the cost to replace the entire helicopter. Likewise, if the defective wiring had been discovered prior to installation, the damage would simply be the cost of new wires.

No “Consequential” Damages

In contention with the rule that a defendant is liable for damages that are proximately caused by his or her fraud is the court-created rule that defendants are not liable for “consequential” damages—damages that are related to the fraud but did not flow directly from the defendant’s misconduct. For example, if the helicopter crash in the previous example also damaged valuable equipment that had been loaded onto it, the defendant would probably not be liable for such damage.

While it is certainly foreseeable that a defective motor would cause a helicopter to crash, it is not necessarily reasonable to expect that the helicopter would be loaded with valuable cargo at the time. As this example illustrates, the distinction between damage that is proximately caused by fraudulent conduct and damage that is merely consequential is seldom perfectly clear.

Bid Inflation

In most types of procurement fraud, particularly in cases of collusive bidding and other types of bid inflation, courts have employed a “benefit of the bargain” analysis. Assuming that the good or service is otherwise acceptable, courts will compare the price that the government actually paid for the good or service against an estimate of what the government would have paid had the fraud not taken place and the bidding had been properly competitive. The damages to the government are then usually calculated as the difference between these prices.

Treble damages

Once the government’s damages have been calculated, they are multiplied by three to calculate the defendant’s total liability. This trebling can sometimes occur before any deductions or offsets are made. This means that if the government has already recovered a portion of its damages through some other means—for instance, by reselling defective products or setting with another defendant—these deductions would not be made until after the total damages are trebled.

Thus, if a trial determines that the government incurred $10 million in damages as the result of a contractor’s false statements regarding the quality of its products, the contractor would then owe a total of $10 million x 3 = $30 million. However, if the government was able to resell $2 million worth of products, the defendant would then owe $30 million – $2 million = $28 million. Some jurisdictions hold that the deductions occur prior to trebling of the damages, and others present an even more complex determination of damages in False Claims Act cases.

When Do Treble Damages Come Into Play?

At trial, technically, but because they’re out there, they also enter into negotiations with defendants because they know that if they are liable for the damages, they would have to pay three times what the damages are. They come into any negotiation because the defendants want to avoid paying triple damages if they can and it’s an incentive for them to settle the case.

Civil Penalties

In addition to being liable for three times the actual damages incurred by the government, a defendant is also liable for a “civil penalty” of between $5,000 and $10,000, adjusted for inflation (presently the highest fine is more than  $20,000). A defendant incurs liability for this penalty for each distinct violation of the False Claims Act, and it is entirely separate from any damages the government might have incurred.

However, the calculation of civil penalties is often not so straightforward. Some courts seem to disfavor assessing large penalties and will count the number of distinct violations very conservatively, while others count much more liberally. For example, where a contractor makes a materially false statement in order to obtain a government contract, some courts have held that every claim presented to the government under that contract is false and therefore incurs a separate civil penalty. Other courts considering the same situation have found that each claim is simply a continuation of the original false statement and therefore assessed only a single civil penalty.

On the other hand, courts are largely in agreement that the number of civil penalties should be based on the knowing acts of the parties involved. Thus, if a subcontractor knowingly makes a materially false statement to a general contractor, and the general contractor then unknowingly presents 100 false claims to the government, the subcontractor is probably only liable for civil penalties for its single false statement. However, if the subcontractor and general contractor had instead conspired together to present 100 false claims, and the subcontractor made a single false statement in furtherance of that conspiracy, then they would each probably be liable for the 101 knowing violations committed by the conspiracy.

Alternative Remedies

When a person violates the FCA, they usually have also committed a number of criminal and administrative violations. As such, it is not uncommon for the Department of Justice to pursue criminal or regulatory charges in addition to, or instead of, damages under the False Claims Act. When the government pursues the claims alleged in a relator’s qui tam complaint through some other proceeding, the government is said to have pursued an “alternate remedy.” When this happens, the relator is still entitled to a share of any proceeds, exactly as if the proceeds had come from his or her qui tam suit.

To qualify as an “alternate remedy,” courts have held that a non-qui tam action must do one of two things:

  1. Pursue the same fraud alleged in the qui tam complaint, or;
  2. Somehow prevent or impair the relator from pursing the qui tam

If a relator files a qui tam suit alleging a conspiracy to rig the bidding and present false claims on a large defense contract, and the government instead prosecutes the conspirators under the Racketeer Influenced and Corrupt Organizations Act (RICO) alleging the same misconduct, then the criminal case would probably qualify as an alternate remedy. If the government succeeds in obtaining criminal penalties, the relator should receive the same 15 to 25 percent share of the penalties that he or she would have received if the government had instead pursued the qui tam action.

Likewise, if a relator files a qui tam case and the government does not intervene but then settles the relator’s claims as part of an agreement with the defendants in another case, the government would have made it impossible for the relator to pursue the case. In these circumstances, the relator would be entitled to a 15 to 25 percent share of the settlement related to his or her claims.

Alternative remedies can theoretically include almost any type of proceeding, but in practice it is quite rare for a court to find that a proceeding is actually an alternative remedy. In fact, to date, only three types of proceedings have been found to be alternative remedies:

  1. A criminal forfeiture case seeking to remedy the same fraud alleged by the qui tam complaint;
  2. A debarment proceeding to sanction the same fraud alleged by the qui tam complaint;
  3. A settlement between the government and the defendants in another case that included the fraud alleged in the relator’s qui tam

Pre- and Post-Judgment Interest

Pre-judgment interest—interest on the government’s damages for the time between the violation and the settlement or trial—is typically not allowed under the False Claims Act. Post-judgment interest—interest on the amount awarded by the court for the time between the settlement or trial and the day the defendant actually pays the money—typically is permitted. Obtaining post-judgment interest is particularly important in the event that the defendant appeals the judgment, as appeals typically take a year or more. The interest rate is calculated according to the procedures set out in 28 U.S.C. Section 1961.

Joint and Several Liability for all Defendants

Liability for damages under the False Claims Act is joint and several for all defendants who participated in the fraud. This means that each defendant is fully liable for all of the damages incurred by the government, including those related to actions that they did not themselves commit. If three defendants each participated in the fraud but only one of them actually presented any false claims, all three would nevertheless be liable for all damages caused by those claims.

However, the government can only collect its damages once. If a trial determines that the government incurred $10 million in damages—for a total of $30 million after trebling—but the government settled with one of the defendants before trial for $4 million, the remaining defendants would owe only $26 million.

Reduced Damages for Voluntary Disclosures

In the rare case that a person who has committed an FCA violation promptly and voluntarily comes forward to disclose the violation, the Act permits the court to assess double damages instead of treble. To qualify for this reduction, each of the following must be true:

  1. The person came forward and provided the Department of Justice with all of the information known to the person about the violation within 30 days after the person learned of the violation;
  2. The person fully cooperated with any government investigation of the violations;
  3. At the time the person comes forward, the government had not already filed a criminal, civil, or administrative action concerning the violation, and;
  4. The person did not have actual knowledge of any government investigation into the violation.

If any one of these is not true, then the person would be liable for treble damages.

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