Contractors sued for False Claims Act violations face a potential judgment assessing stiff civil penalties and treble damages. Even assuming that the government can meet its burden of proving a violation of the False Claims Act, defenses to the damages elements of the case should not be ignored. Grossly disproportionate penalties One important limit on the assessment of civil penalties appears in the 8th Amendment to the United States Constitution, which prohibits the assessment of excessive fines. To prevail on an 8th Amendment defense, a contractor must show that the fine would be grossly disproportionate to the gravity of the offense. Four factors are relevant here:

  1. the extent of the harm caused;
  2. the gravity of the offense relative to the fine;
  3. whether the violation was related to other illegal activity, and the nature and extent of that activity; and
  4. the availability of other penalties and the maximum penalties which could have been imposed.

In one recent case, the court accepted an 8th Amendment argument that wiped out a $50 million civil penalty against a contractor found guilty of bid rigging. See United States ex rel. Bunk v. Birkart Globistics GMBH & Co., No. 1:02cv1168, 1:07cv1198 (E.D. Va. Feb. 14, 2012). The contract involved moving services for military personnel stationed in Europe. The contractor submitted a bid with 51 line item prices. The court found a violation of the False Claims Act because one of the line item prices was affected by a subcontractor bid-rigging scheme. The government sought to assess a $5,500 penalty for each of the contractor’s 9,136 invoices, yielding a penalty of $50,248,000. Despite the False Claims Act violation, the court refused to assess the penalty because it was grossly disproportionate to the gravity of the offense. The entire contract price was only $3.3 million and the contractor’s profit was only $150,000. There was no evidence of economic harm to the government because the contractor’s services were acceptable and the prices were lower than any competitor’s prices.

Secrecy is not often associated with fairness in the American system of justice. One law that requires secrecy is the False Claims Act, which encourages and rewards private citizens who bring actions against those whom they believe have defrauded the government. Because these cases must be filed under seal, the defendant remains blind to the allegations until a government investigation is well underway. Even before the government is notified of alleged fraudulent behavior, the whistleblower or “qui tam relator” can obtain documentation and information necessary to investigate and file suit without going through a formal discovery process. Whistleblowers and their attorneys may even use a “ringer” to obtain evidence and avoid alerting a contractor of the potential suit.

The False Claims Act encourages individuals with knowledge of fraud against the Government to file a court action seeking damages for the fraud.  It does this by promising a bounty. The relator receives a percentage of the amount recovered in a false claims case.  But there is a constant tension between encouraging plaintiffs to bring cases alleging fraud and protecting defendants from frivolous cases. The January 11, 2011 decision in United States ex rel. Folliard v. Hewlett-Packard Co. illustrates how the requirement that a plaintiff include all of the details of an alleged fraud in the initial complaint helps strike this balance.

The Justice Department’s most recent fraud statistics are worth checking out if you follow enforcement of the False Claims Act.  The federal government is reporting that it collected over $3 billion in judgments and settlements in False Claims Act cases resolved through the end of Fiscal Year 2010. About 80 percent of the recoveries were