The False Claims Act case against Lance Armstrong lasted longer than his 7 year Tour de France win streak.

While the settlement of the False Claims Act case against Lance Armstrong has generated a press release, a quick online search didn’t produce a copy of the actual agreement. So I filed a Freedom of Information Act request and the next day the Department of Justice provided me a copy of the Lance Armstrong settlement agreement.  Thank you, Team DOJ!  Below is my take on that agreement and what it tells us about the case.

The settlement amount

The settlement agreement provides that Lance Armstrong will pay $5 million to the Government and $1.65 million to the relator Floyd Landis. To put this in context, the Postal Service had paid about $40 million to sponsor Team Postal. Trebling that amount, and throwing in civil penalties and investigative costs, bumps up potential damages to well over $100 million. The settlement amount was thus less than 7 cents on the dollar.

Damages was always the Government’s weakness – because there weren’t any. This should have been apparent at the outset from the contemporaneous USPS reports on how much publicity and new revenue the Team Postal sponsorship had generated. These reports were poppycock, of course, but they still posed insurmountable problems for the Government’s case.

The USPS-generated reports on the value of the Team Postal sponsorship came in response to criticism over the deal. The Postal Service is often wrongly criticized for anything it spends on advertising. In my view, it should be spending a lot more, especially to defend the remains of First Class Mail. But these critics had a point. Why spend tens of millions of dollars on an event that takes place on foreign soil, and that most Americans have never seen and don’t care about?  And how will promoting the U.S. Postal Service in foreign countries generate more U.S. Mail?

To counter these criticisms, USPS needed to show that the six-year agreement made economic sense, so it generated report after report calculating the value it received.  Armstrong’s attorneys say these reports show USPS earned over $163 million in quantifiable benefits from the sponsorship – more than four times what USPS spent on it. These reports were backed by statements from high level USPS officials attesting to the great deal it had made. Armstrong’s summary judgment motion cited some of these beauties, including:

  • “I can assure you that the value of the brand advertising we receive from the USPS Pro-Cycling Team more than offsets the cost of the sponsorship.”
  • “The sponsorship has provided a substantial return-on-investment and has been a real bargain.”
  • “While postal officials decline to say how much they pay, spokesman Joyce Carrier said the free advertising they received ‘is way more than we ever spent’ to sponsor it. ‘Anyone who was looking at it on a return from investment, and everybody does . . . they think it’s pretty darn good.’”

How could the Government get past all of these contemporaneous statements from top USPS officials on the tremendous value USPS obtained from the sponsorship contract? And while Lance Armstrong later admitted to rampant doping during the Team Postal years, how did this revelation negate all of these previous economic benefits?

Yes, Lance Armstrong violated the no-doping clause of the USPS sponsorship agreement. But Armstrong somewhat successfully concealed the truth for a long time, thus allowing the Postal Service to get the benefit of the bargain.  If Armstrong had admitted to doping when the contract was in effect, maybe there would have been some damages, but his success at hiding the truth prevented that from happening. While that may be hard to swallow, the False Claims Act was not designed to mete out just desserts for all bad acts related to a government contract.

The round dollar figure

Next, let’s analyze the nice round $5,000,000 settlement figure itself. Having represented clients in various Government fraud investigations, most involving the Postal Service, I can tell you that the Government’s standard opening position is that it will only settle at twice the amount of actual damages. The Government prefers talking about damages, not entitlement, and its settlement offer is normally some specific dollar amount, multiplied by two.

The perfectly round number of the $5 million settlement shows it was not arrived at by an attempt to measure actual damages and multiplying by two. It is a number based on perceived litigation risk by both sides. From the Government’s side, the question was how much it could get from Armstrong without going to trial. Given its weakness on damages, the Government was staring at the possibility of getting only statutory penalties, which didn’t amount to much and would not have justified its pursuit of the case. From Armstrong’s side, the question was how much was finality worth?  Even though the Government was unlikely to recover significant damages, there is no telling what a jury would do.  Moreover, statutory penalties were likely, and an appeal would be required if the damages issue went the wrong way. Armstrong was looking at the possibility of spending millions more on professional fees with no assurance he would prevail.

The $1.65 million settlement with the Relator tells a different story. In context, this amount is not a perfectly round number – one hardly picks $1.65 million out of thin air. Instead, it is an approximation or discount on Relator’s attorney fees and expenses, likely based on actual numbers that were presented to Armstrong.

The payment terms

Typically, when the settlement amount is in this range and the defendant can afford it, the Government demands full or substantial payment upon agreement or soon afterwards, often within 10 days of signing. The settlement’s payment terms are lenient. Armstrong’s first payment was due 30 days after signing and was only $75,000; his second payment, due in 90 days, was $677,000. Armstrong then had 180 days to make the next payment of $1,879,000. No further payment was due until one year after signing, when Armstrong owed a balloon payment of $2,368,000. Nice payment terms, if you can get them.

Armstrong had similarly leisurely terms to pay the Relator. The first payment was due in 30 days and was only $25,000. The next payments were $223,000 in 90 days; $620,000 in 180 days; and the final $782,000 within one year.   [Rounded payment numbers used above.]

The settlement agreement’s layaway plan thus gives Armstrong plenty of time to sell “the Texas Collateral,” the proceeds of which he presumably intends to use to pay the settlement. Armstrong granted the Government and the Relator a lien on that property until it is sold. He also signed a Consent Judgment decree that can be filed against him should he default on his payment obligations.

Relator’s share

Now let’s look at the Relator’s share of the Government’s $5 million bounty. Since the Government intervened in the case, the Relator’s share could have been anywhere between 15 and 25 percent. The settlement agreement grants Relator a 22 percent share, which works out to $1.1 million. The Department of Justice has taken the positon that a 15 percent share is appropriate for a case that settled early (before trial or discovery) and a 25 percent share is reserved for fully litigated cases in which the relator’s contribution is substantial. All things considered, 22 percent was a healthy reward for the Relator in this case. One wonders whether the Government would have sought a lower Relator’s share if the recovery from Armstrong had been greater.

FCA claims with no real damages

I’ve been practicing long enough to remember when False Claims Act cases involved actual falsehoods, like doctored invoices and fake signatures. Rare is the case today where the Government alleges an affirmative falsehood by the contractor. Instead, modern day FCA cases involving government contracts are normally about a contract interpretation or breach of contract. Not only are these cases really contract disputes at heart, but in many of them, the contractor’s position is the most reasonable one. Evolving FCA standards have resulted in the fraudification of contract disputes.

The Armstrong case goes one step beyond fraudification to cases where the Government is not even monetarily harmed by the defendant’s bad actions.  There have been other FCA cases where the Government has suffered no or minimal damages from an alleged false claim. For example, in U.S. ex rel. Wall v. Circle C Constr., LLC, 813 F.3d 616 (6th Cir. 2016), the Government sought $1.6 million (after trebling) for a relatively minor violation of the Davis Bacon Act.  The Court found that the Government’s actual damages were only $9,900 and later held that the Government must pay the defendant’s attorney fees under 28 U.S.C. § 2412(d)(1)(D) because the Government’s demands were excessive.

With the teachings of the Circle C case, and the settlement of the Armstrong case after a 10 year slog, let’s hope the Government will be more reluctant to intervene in – and maybe even move to dismiss – future qui tam FCA cases where there are no real damages.

Contractors are now familiar with the Supreme Court’s June 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar [PDF]. That decision recognizes False Claims Act liability for implied false certifications. But it also holds that FCA liability is available only when the false statement or omission is “material” to the Government’s decision to pay a claim. Our discussion of Escobar is available here.

Over the last 18 months, courts across the country have been asked to determine the impact of the Escobar decision. Ten of the eleven U.S. Circuit Courts of Appeal have interpreted Escobar. Numerous U.S. District Courts have applied Escobar in resolving pre-trial motions. Cases based on “garden-variety breaches of contract or regulatory violations” are being thrown out. Even jury verdicts are being overturned for insufficient evidence of materiality. There is one inescapable conclusion from these post-Escobar decisions: materiality matters.

In this entry, we discuss two recent decisions that illustrate the impact of Escobar. One reaffirms the notion that, after Escobar, minor non-compliance with a regulatory requirement will not normally support FCA liability. The other highlights the critical role the government’s actions can play in establishing materiality. Together they reject jury verdicts imposing more than $1 billion in False Claims Act liability. Continue Reading After Escobar, materiality matters

After nearly a decade of litigation, justice was finally meted out in an extreme case of Government over-reach against a government contractor. The Government had sought to recover over $1.6 million from a government contractor whose subcontractor had underpaid a handful of employees by $9,900.

When all was said and done, a federal appellate court finally rejected the Government’s legal theory as essentially frivolous and ordered it to pay the contractor’s attorney fees, estimated at roughly $500,000.  When the Government expressed concern that this would have a “chilling effect” on its efforts to vigorously enforce the False Claims Act, the court stated: “One should hope so.”  The case is called U.S. ex rel. Wall v. Circle C Constr., LLC, No. 16-6169, (6th Cir. Aug. 18, 2017).

The story starts when the prime contractor, Circle C Construction, won a contract to construct buildings at the Fort Campbell military base. Circle C hired a subcontractor, Phase Tech, to perform the electrical work. The prime contract required compliance with the Davis-Bacon Act, which is similar to the Service Contract Act but applies to construction work. Like the Service Contract Act, the Davis Bacon Act requires the prime contractor and all subcontractors to pay construction workers the prevailing wages and benefits set by the Department of Labor. The Davis-Bacon Act also requires that the contractor submit certified payrolls as a condition of contract payment.

While Circle C did not have a written contract with its subcontractor Phase Tech, it did provide Phase Tech with the Wage Determinations from its prime contract. But Circle C did not verify whether Phase Tech was in compliance with the Davis Bacon Act. Phase Tech did not submit payroll certifications for two years after the project commenced, and later contended it was not aware it had to do so.

Eventually, one of Phase Tech’s employees brought a qui tam False Claims Act action against both Phase Tech and Circle C based on the under-payment of wages. Phase Tech settled the case by agreeing to pay $15,000, leaving Circle C as the remaining defendant. The Government agreed to take over the case from the employee and pursued the claim against Circle C.

Initially, the case did not go well for Circle C. The federal trial court hearing the case granted plaintiff’s motion for summary judgment and damages of $555,000 (the entire cost of the electrical scope of work on the project), which was trebled to a total award of $1.66 million against Circle C.

Continue Reading Government ordered to pay contractor’s attorney’s fees in False Claims Act case

Just in time for Thanksgiving, the federal government has withdrawn its False Claim Act suit against KBR alleging $100 million in improper charges for private security costs under KBR’s LOGCAP III contract. We criticized the court’s August 3, 2011 decision denying KBR’s motion to dismiss the case last summer. While KBR has good reason to celebrate the withdrawal of the claim, the court’s approach to the case will continue to present problems for government contractors.

The case arose out of a dispute relating to the allowability of private security costs. KBR attempted to seize the initiative by submitting a Contract Disputes Act claim to the Army contracting officer and then appealing to the Armed Services Board of Contract Appeals. The government responded to the Board case with a False Claims Act complaint in the D.C. federal district court. KBR moved to dismiss the FCA case, contending that there was nothing “false” about its claims for payment of private security costs. KBR argued that the issue was just a contract dispute that ought to be resolved as such.

The court denied KBR’s motion, citing internal KBR emails questioning the allowability of private security costs and KBR’s effort to obtain change order allowing them. The court held that that the government’s allegations satisfied the “materiality” element of the implied false certification theory under the DC Circuit’s SAIC decision.

The government’s decision to withdraw the complaint is certainly a positive development for KBR. Perhaps the claim will be resolved as an ordinary contract dispute, as it should have been in the first place. The informal resolution of the case is not as positive for other contractors facing government efforts to wield the False Claims Act sword in connection with resolving ordinary contract disputes. Without further consideration of the issue in the KBR case, some courts will no doubt be tempted to treat the issue of materiality as a factual, and not a legal, question. The risk remains that the government or a qui tam relator can cite a contractor’s internal discussion of the meaning of ambiguous contract terms as evidence of an FCA violation.

Under a recent ruling by the U.S. Court of Appeals for the Ninth Circuit, contractors may face False Claims Act liability for the submission of false estimates, including fraudulent underbidding. In United States ex rel. Hooper v. Lockheed Martin Corporation, No. 11-55278 (9th Cir. Aug. 2, 2012) [pdf], the Ninth Circuit joined the First and Fourth Circuits in holding that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA.”

In this case, a former Lockheed Martin employee alleged that the company intentionally underbid its proposal for the Air Force’s Range Standardization and Automation IIA (“RSA IIA”) program. Lockheed was awarded the RSA IIA contract in 1995, and since then it has been paid more than $900 million on a cost-reimbursement plus award fee basis. Hooper, the qui tam relator and former Lockheed employee, alleged that the employees preparing Lockheed’s RSA IIA bid were told to “lower their estimates without regard to actual costs.”

Continue Reading Underbidding and faulty estimates may carry FCA liability

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. Continue Reading Challenging damages and penalties in False Claims Act litigation

The U.S. District Court for the District of Columbia has issued a decision that may have a far-reaching impact on actions brought by the federal government under the False Claims Act. In United States v. First Choice Armor & Equipment, Inc., No. 09-1458 (D.D.C. Aug. 29, 2011) [pdf], the government asserted claims for fraudulent conveyances under the Federal Debt Collection Procedures Act in addition to its FCA and common law claims.  The court’s August 29 decision allows these claims to survive a motion to dismiss.

Continue Reading Payment of fraudulent claims incurs a “debt” under the FDCPA

Is every routine contract dispute a potential false claim? Is it a false claim to adopt an interpretation of an ambiguous contract provision that was the subject of debate within the company? As a matter of law and common sense, the answer to these questions must be “no.” But Chief Judge Royce Lamberth’s August 3 decision in United States v. Kellogg Brown & Root Services, Inc., No. 10-cv-530 (D.D.C. Aug. 3, 2011) [pdf], casts sobering doubt on this answer.

Continue Reading False Claims Act exposure for contract disputes after U.S. v. Kellogg Brown & Root

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.

Continue Reading Secrecy in whistleblower lawsuits under the False Claims Act

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.

Continue Reading Hewlett-Packard and the need for “particularity” in qui tam cases