Government's Trip to Fairyland Comes at a Price: Sixth Circuit Vindicates FCA Defendant's Demand for Attorneys' Fees
The Sixth Circuit on Friday issued a decision holding that where the
government had pursued a “nearly frivolous” theory of FCA damages wildly in
excess of actual damages, defendants were entitled to recover the costs of
defending themselves — even where the fraud itself was substantiated. This
decision is welcome news to defendants who may not “prevail” in the common
sense of the word (by fending off liability entirely) but for whom the cost of
defending is driven disproportionately high by the government’s aggressive and
unjustified litigation positions. And in the process, the court cast doubt on some
applications of the government’s common “taint” theory of liability, under
which it argues that (sometimes minor) frauds deprive the government of the
full value of a contract.
In United States ex rel. Wall v.
Circle C Construction, the defendant (“Circle C”) was a family-owned
construction company that contracted to build warehouses for the Army. No.
16-6169, 2017 WL 3568497 (Aug. 18, 2017 6th Cir.). During performance of that
contract, one of Circle C’s electrical subcontractors paid two of its employees
less than they were entitled to under the Davis-Bacon Act, thus rendering
several compliance statements Circle C submitted to the government inaccurate.
While the total value of the misstated subcontractor wages was only $9,900, the
government argued that the false compliance statements tainted all the work
performed under the contract, rendering the entire $554,000 of electrical work
worthless. Once trebling and penalties were included, the government sought
$1.66 million in damages for fraud of
less than $10,000.
If you think that math sounds a little crazy, you are in good company.
The Sixth Circuit last year reversed
the district court’s judgment against Circle C and awarded trebled damages
of nearly $763,000, holding that the proper award of damages should have been
only $14,748. But vindication came at a high cost to Circle C — literally: Over
the course of this decade-long litigation, it had spent almost a half-million
dollars in attorneys’ fees. Circle C
filed a motion for attorneys’ fees under the Equal Access to Justice Act (28
U.S.C. § 2412(d)(1)(D)), arguing that the government’s original demand was
substantially in excess of, and unreasonable in comparison to, the final
judgment. The district court denied the motion, putting aside the mathematical disparity
as irrelevant and concluding that the government’s theory could not possibly
have been unreasonable, because after all, the district court had adopted it.
Re-enter the Sixth Circuit. The disparity between demand and judgment, it
held, could not simply be “put aside,” particularly where that disparity is so
patent — here, the judgment was less than 1% of the government’s original
demand. As to the reasonableness of the government’s position, the court hearkened
back to its decision last year in which it characterized the application of the
taint theory there as a “fairyland” measure of damages, given that the electrical
work in the warehouses was complete and usable by the government (and in fact was being used). While goods or services
could be legally worthless if, for example, they are dangerous due to
noncompliance, or when the damages are not calculable in terms of market value,
“those conditions are . . . obviously absent” here. And, while perhaps the
district court had found the theory reasonable (twice!), the circuit court
pointedly stated that a reasonable person
could not have done so. The panel closed by remanding the case to the district
court for an award of fees and expenses incurred in defending against the
government’s excessive demand.
Judge John M. Rogers wrote a one-paragraph dissent in which he argued
that the district court was justified in concluding the government’s position
was reasonable, because the government had prevailed on its “taint” theory of
damages before the district court, and “something like that theory had
prevailed” before a handful of courts of appeals.
This decision is pure music to the ears of beleaguered False Claims Act
defendants nationwide who all too often feel like guinea pigs in the
government’s laboratory of ever-expanding FCA liability and damages theories.
If the government is consistently made to bear the financial burden of
defending against “novel” — and “nearly frivolous” — theories of liability such
as the one here, such aggressive enforcement will be chilled somewhat. Or at
least, as the Sixth Circuit put it, “One should hope so.”