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:
- the extent of the harm caused;
- the gravity of the offense relative to the fine;
- whether the violation was related to other illegal activity, and the nature and extent of that activity; and
- 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. What is the harm to the government? Another key damages issue in False Claims Act cases is the question of whether the violation causes any actual harm to the government. Even when there has been a violation of the False Claims Act, the government often does receive a significant benefit from the goods or services it receives. The difference between what the government contracted for and what it received is the primary measure of damages in such cases. In the case of a contractor that violates the False Claims Act by performing its work with an organizational conflict of interest, for example, the question is what is the value of the work if it had been performed without an organizational conflict of interest? See United States v. Science Applications International Corp., 626 F.3d 1257 (D.C. Cir. 2010) (the trier of fact must “set an award that puts the government in the same position as it would have been if the [contractor’s] claims had not been false”). Obviously this question is not always easily resolved. The measure of damages would be the entire amount paid under the contract if the contractor’s goods or services are worth nothing. But if the False Claims Act violation in no way affects the value, then the government suffers no damages. This was precisely the result in United States ex rel. Davis v. District of Columbia, No. 11-7039 (D.C. Cir. May 15, 2012). The District of Columbia public school system allegedly violated the False Claims Act by submitting Medicaid reimbursement requests without maintaining proper records. Although the school system still faces statutory civil penalties (unless they can be shown to be grossly disproportionate to the harm), the court concluded that the damages assessment must be zero because the violation could in no way affect the value of the services provided. “The government got what it paid for.” Related entries— Statutory noncompliance does not always violate the False Claims Act (Apr. 15, 2012) False Claims Act exposure for contract disputes after U.S. v. Kellogg Brown & Root (Aug. 15, 2011) Secrecy in whistleblower lawsuits under the False Claims Act (July 20, 2011)