B. Calculating Damages Under the False Claims Act

• Library: South Carolina Damages (SCBar) (2009 Ed.)

B. Calculating Damages under the False Claims Act

"Damages under the False Claims Act are to be determined in a flexible manner to ensure recovery of direct, and not consequential, damages resulting from the making of a false claim."⁶⁷

The general rule in calculating single damages under the Act is that the government is entitled to recover the amount of money it actually paid minus the amount if would have paid but for the false claim or statement. The legislative history to the Act reveals that Congress intended to give courts a wide range of discretion in calculating damages under the Act:

No single rule, can be or should be, stated for the determination of damages under the Act ....[T]he Committee believes that the courts should remain free to fashion measures of 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.⁶⁸

Ascertaining single damages under the Act, however, is not as simple as the general rule suggests because there are many different types of contexts in which damages claims arise under the Act.

1. Procurement Fraud

The False Claims Act was enacted originally to combat fraud against the government which had been committed by defense contractors during the Civil War. Government contracting remains plagued with fraud committed in connection with its contracts. In addition to bringing claims under the Act, the government has the option of canceling contracts obtained through the making of false statements, in violation of title 18, section 1001 of the United States Code.⁶⁹

Calculating damages under the Act in the context of government contracting can be difficult. In United States ex rel. Taxpayers Against Fraud v. Singer Company et al,⁷⁰the United States alleged that the defendant had engaged in a long term scheme between 1980 and 1988 to defraud the government in the negotiation of sole source, fixed price contracts for flight simulators with the Department of Defense. One of the defendants, Link Flight, had failed to disclose certain contingency costs designed to offset price reductions expected to occur during negotiations with the government in violation of its "best estimate" of the costs to perform the contract. In calculating the government's damages, the court agreed with the United States that the law provides for a rebuttable presumption that the government is damaged dollar for dollar by the nondisclosed amount once nondisclosure is shown. Therefore, because the evidence showed that "Link Flight padded its best estimate figures by 4% to 17% (usually in the 7%-10% range) and that the government alleged at least 77 million dollars in undisclosed negotiation loss reserves, the United States was entitled to damages under the False Claims Act of $231 million (treble damages of $77 million).

When a government contract has been obtained by fraud in the bidding process, some courts have ruled that the entire price of the contract is the government's damage in United States v. Cripps,⁷¹The basic premise for the recovery of the these types of damages is that the government would not have agreed to the price of the contract without the false statement and, in turn, would have paid a lower price. In Peterson v. Weinberg,⁷²the defendant was sued under the Act for falsely representing claims to Medicare for physical therapy services. The services had been provided by a non-qualified individual for which Medicare did not reimburse. The damages in this case was the entire amount of the claim because the service rendered did not qualify for any type of payment. If a portion of the claim had been allowable, the damages would have consisted of the portion which was unallowable. In United States v. Barnette,⁷³the court ruled that the government's damages are the difference between the amount the government paid as a result of the fraud and that amount the government would have paid had there been no false statement in the bidding process.

Where bribes are involved, some courts have held that the amount of the bribe is the proper measure of the damages.⁷⁴

2. Government Contract for Services/Products

Generally, when a government agency contracts for a particular product or service, courts have held that it is entitled to the value of what it was supposed to receive. In United States v. Bornstein,⁷⁵a subcontractor delivered substandard goods to the prime contractor on a government contract. The United States Supreme Court concluded that the government's actual damages in a case such as this are "equal to the difference between the market value of the tubes it received and retained and the market value of the tubes it would have had if they had been of the specified quality."

When a contractor failed to perform contractually required tests on Jeep brake shoes that it sold to the government, the Sixth Circuit affirmed the awarding of the entire price of the contract as the government's damages.⁷⁶ The district court's award of the total price of the contract was based upon the fact that the brake shoe kits were completely valueless in that they could not withstand 5,000 pounds of force and they did not come with the quality assurance of a product that had been subjected to periodic production testing. The government, in effect, proved it received no value at all.⁷⁷

In United States ex rel. Roby v. Boeing Co.,⁷⁸the court held that a High Value Items Clause did not limit the government's damages under the False Claims Act. In the Roby case, the government paid to upgrade a helicopter which was returned in a defective condition and consequently crashed. The court held that the government's damages were the value of the upgraded helicopter - not the cost of the gear, not the cost of the upgrade, and not the replacement cost of the helicopter.

In United States v. Harrison,⁷⁹the Fourth Circuit affirmed the district court's finding of no damages where the defendant was alleged to have falsely certified to the absence of a conflict of interest, but provided the underlying service. Because the contract at issue did not provide for automatic disqualification, the Court held that proof was required that the government would have actually terminated the contract or otherwise paid less, had it known the truth.

In some cases involving defective products or services, it is rather difficult to measure the amount of the government's loss. For example, when a government contractor constructed a defective flood canal, the court held in Commercial Contractors v. United States,⁸⁰ that it was impossible to determine the loss of the value of the defendant's deficient performance. Alternatively, the court awarded the government the cost of remedying the construction defects.

3. Kickbacks

Kickbacks have been defined as money paid in exchange for another to act in a certain manner. An example would be when a contractor gives an inside person something of value for help in obtaining a contract or other benefit. Another type of kickback case may occur when one contractor bribes a government official or informants and receives inside information about a competitor's bid for a government contract. In the typical kickback case the general rule of thumb is that the damages are the difference between what the government actually paid minus what the government would have paid if the contractor had not received the government contract or the inside information.

In United States v. Killough,⁸¹the Eleventh Circuit rejected the argument that the government's damages were the amount of the kickbacks paid. The court, however, allowed the government to include in its calculation of damages the government's loss of reputation.

In determining what the government should have paid in these types of cases, the government can present evidence of previous contracts entered into, expert testimony and the bid proposals of competitors who did not have inside...