No single rule can be, or should be, stated for the determination of damages under the Act. ... Fraudulent interference with the government's activities damages the government in numerous ways that vary from case to case. Accordingly, the 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 construed to effectuate the remedial purposes of the Act and that the United States should be afforded full and complete recovery of all its damages.
The complexity of these issues is apparent in a typical military contract case where the defendant has not tested key components of an on-board computerized navigational system. "False testing" cases commonly arise where contractors fail to meet contractual obligations to test products to certain levels of specification, and conceal this failure from the government. Even though testing is only one phase of manufacturing and delivery, and the products were actually delivered, testing cases are still false claims.
A true "benefit of the bargain" measure of damages would require one to subtract the value of the inferior product from the amount paid by the government. But how many of the components are actually faulty? Is it reasonable to wait until they fail and people die before we know the answer?
Obviously not. Which means that the aircraft would need to be taken off line, the navigational systems removed, and the suspect components tested. That this expense is an inevitable consequence of the contractor's malfeasance in the first place should be obvious. Although consequential damages are not recoverable, direct damages are. Thus, in BMY-Combat Systems v. United States the court held that damages in a case where a contractor failed to perform tests should include the costs of inspection and repair incurred by the government.
In U.S. ex rel Roby v. The Boeing Company, 1999 U.S. Dist. Lexis, 20079 (S.D. Ohio 1999), Judge S. Arthur Spiegel tackled the consequential damages question head-on, with logic, a commitment to justice, and careful legal scholarship. While agreeing that under the statute, consequential damages are not recoverable, Judge Spiegel finally inquired into exactly what consequential damages are, noting that Black's Law Dictionary defines them as: "such damage, loss or injury as does not flow directly and immediately from the act of the party ... damages which arise from the intervention of special circumstances not ordinarily predictable." In contrast, direct damages are those "which arise naturally or ordinarily from a breach of contract; they are damages which in the ordinary course of human experience can be expected to result from a breach."
In the Roby case, the government contracted with Boeing for the purchase of CH-47(D) Chinook Army helicopters. Boeing then subcontracted with SPECO, which manufactured defective transmission gears for the helicopters. In 1991, during the Gulf War, one of the SPECO-made gears failed in flight while a helicopter was over Saudi Arabia. Just 56 hours into operation, the defective transmission gear exploded, causing the Chinook to crash and catch fire. Several servicemen were injured. The fire consumed the entire helicopter, a Humvee truck, ammunition, equipment, a howitzer and its tow vehicle.
Although the overall replacement cost exceeded $12 million dollars, Boeing maintained that its liability was limited to the $4,874 it paid SPECO for the defective gear. The relator and government pointed out that the United States had not contracted to buy a gear, but an entire helicopter, of which the gear was an integral part. This set the stage for the decision about the proper measure of damages under the False Claims Act.
Faced with a conflict between the "benefit of the bargain" measure, enunciated in United States v. Bornstein, supra, and the "out of pocket" measure used in U.S. ex rel Marcus v. Hess, supra, Judge Spiegel returned to first principles. He began by reviewing Hadley v. Baxendale, observing that the first rule of Hadley is that "certain damages will so naturally and obviously flow from the breach that everyone is deemed to contemplate them." This is to be distinguished from "consequential damages" which arise only where there are special circumstances.
Noting that the United States was buying helicopters, not gears, the court sought to apply this principle, turning to a long line of cases in which direct damages were held recoverable. In United States v. Aerodex, 469 F.2d 1003 (5th Cir.1972), a defendant delivered 300 non-conforming ball bearings at the price of $90.00 each, for a total contract price of $27,000.00. In assessing damages, the District Court included not only the contract price, but also the $160,000.00 in repair costs. This was found to be consistent with the teachings of Marcus and Bornstein that damages should completely indemnify the government for the injury done it. Thus, the relator and the government argued that when the helicopter crashed and burned and the servicemen were nearly killed, the government could recover "damages that naturally and proximately resulted from the fraud." As BMY-Combat, supra, concluded:
Because each case under the FCA involves unique types of damage to the government, a formula for calculating damages must be created for each case that will provide the government with its damages directly caused by the filing of the false claim.
n.5, supra.
As the 11th Circuit explained in United States v. Killough, n. 3, supra
[n]o single rule can be, or should be, stated for the determination of damages under the Act ... fraudulent interference with the government's activities damages the government in numerous ways that vary from case to case. Accordingly, the [Congressional Committee] believes that the court should remain free to fashion the measure of damages on a case by case basis.
There are two further policy arguments supporting this approach:
An economic analysis of the false testing cases is that the Government loses the "insurance value", a concretely valuable aspect of quality control, inherent in a fully operative product testing and certification system. The government loses something it pays competing producers to provide; the fraudulent producer frees itself from something its competitors would have counted as one of their costs to provide. There is economic loss to the government if it cannot trust contractors' disclosure of their internal accounting. The loss is created by additional needs for government auditing.
From a regulatory analysis, the FAR contracts include self-inspection clauses, both General Inspection requirements and Higher Level Contract Quality Requirement Clauses. The false testing cases involve loss of a governmental interest as specified by those clauses. Thus, one court held that where defective parts were supplied in an indeterminate number, the entire value of the contract was the measure of single damages, since it was impossible to ascertain which parts would have to be replaced. This court rejected the defendant's argument that a lower price, the "market value," was the proper measure of damages.
Whatever damages are finally computed will be trebled, and the defendant will be also be subject to a $5-10,000 penalty for each such claim, subject only to the challenge of the Eighth Amendment's excessive fines clause. (See n.10, supra.).
It is also noteworthy that in narcotics cases courts have seldom hesitated to base convictions and sentencing decisions on non-random samples. There is no logical reason that the relative generosity the courts have extended to narcotics prosecutors ought not be extended to the civil fraud arena.
The uproar over materiality stems from the failure to distinguish damages from penalties. Although proof of harm would be necessary before damages could be recovered under the FCA, the false claim need not result in any economic harm to the government for the United States to obtain penalties under the FCA. This is because liability attaches to anyone who "knowingly presents or causes to be presented ... a false or fraudulent claim for payment or approval."
This is not novel, and should be unsurprising to students of the Act. Ten years ago a court held that a medical center which falsified a cost report by concealing that it was doing business with economically related entities could be liable under the False Claims Act. Although Oakwood Downriver Medical Center was not, strictly speaking, a kickback case, all of the legal prerequisites were present. The government relied upon a false statement in a cost report, without any reported evidence that the false statements had been coupled with overcharges, concealed costs, or any economic injury other than the hospital's false certification by the Center that it was eligible to receive Medicare money because it had honestly reported its organizational status.
Eight years ago a court permitted use of the FCA in an anti-kickback case. Kensington cited to controlling Supreme Court and Third Circuit precedents reaching back more than fifty years which hold that the government need not show actual damage in order to prove a violation of the False Claims Act. In Marcus electrical contractors submitted fraudulent bills to the government for work on numerous projects. In some instances, the government discovered the fraud before payment was made. This did not, however, preclude recovery under the False Claims Act.
In determining what misconduct is actionable under the FCA the Supreme Court, in U.S. v. Neifert-White instructed that the Act is to be read broadly, and extends "to all fraudulent attempts to cause the Government to pay out sums of money." Such a conclusion may only be buttressed by the legislative history of the 1986 amendments which teaches that:
The False Claims Act is intended to reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or services. Accordingly, a false claim may take many forms, the most common being a claim for goods or services not provided, or provided in violation of contract terms, specification, statute, or regulation.
Administering a federally funded program in violation of funding conditions was also held to constitute a false claim in United States v. Village of Island Park. Village of Island Park involved a community that defrauded HUD's Community Development Block Grant Program by pre-selecting only white applicants for subsidized housing. The court found that the defendants, in obtaining grant funds, falsely stated that persons would not be excluded from the program on the basis of race.
In concluding that the False Claims Act was intended to include those situations in which the claimant engaged in fraudulent conduct in order to receive payment, the court considered the legislative history of the False Claims Act, which demonstrates that the False Claims Act was intended to cover "each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation...." In addition, the legislative history indicates that "claims may be false even though the services are provided as claimed if, for example, the claimant is ineligible to participate in the program, or though payments on the Government loan are current, if by means of false statements the Government was induced to lend an inflated amount."
It should be clear that the False Claims Act was intended to cover not only those situations in which the claims themselves are false but also those situations in which a claimant engages in fraudulent conduct with the purpose of inducing payment by the government. Recently, the U.S. Supreme Court addressed the issue of materiality when the term does not appear in a statute. In United States v. Wells, the Supreme Court refused to add "materiality" as an element where the defendant was charged with knowingly making false statements to a federally insured bank and, thus violating 18 USC § 1014. The Supreme Court noted that the statute itself does not require that the subject of the false statement be a fact which is material to the fraudulent scheme. The same conclusion has been reached with respect to the False Claims Act. The Sixth Circuit has recently rebuffed a defendant's attempt to add materiality as an element to a statutory claim which, like the FCA, did not contain such a requirement.
The government need not even prove that it was damaged since "forfeiture is automatic and mandatory for each claim which is found to be false. The United States is entitled to recover such forfeiture solely upon proof that false claims were made, without proof of any damages." Similarly, 31 U.S.C. §3729(a) requires that defendants pay for "the costs of a civil action brought to recover any such penalties or damages". In a "penalties only" case, this sum, too, is recoverable.
In one case involving an actual loss of only $550, the United States sought and obtained the then-minimum penalties of $2000 for each false claim, for a total of $79,098.08. The court held that under the False Claims Act's plain language, it lacked discretion to depart from its severe command. Although another court has, in contrast, reduced penalties it found grossly disproportionate, the court stressed that this was because the penalties were being assessed "against a public school district responsible for educating children, many of them poor..."
"...in a relatively minor way. There was no fraud on the government, and no loss to the public fisc. Had his crime gone undetected, the Government would have been deprived only of the information that $357,144 had left the county. Thus, there is no articulable correlation between the $357,144 and any government injury."
The same, of course, may hardly be said of false claims cases.
A RELATOR'S GUIDE TO DAMAGES
UNDER THE FALSE CLAIMS ACT
1. DAMAGE CALCULATIONS
During the Gulf War General Schwarzkopf referred to the skies over Kuwait as a "target rich environment." The same, alas, may be said of certain fields enterprises. Often the task of establishing liability is far less challenging than the task of calculating damages. It seems a simple thing to say that damages are three times the economic value of the claims, and a $5,500-- 11,000 fine for each false claim. The prospect of treble damages, however, begs the question: "Three times what?" Although damages are relatively easy to calculate where the government is billed for goods which are not provided, the issue becomes murky when substandard products or services are provided, -- and murkier still where the products may be acceptable -- but were not properly tested. How are damages valued when contractors have rigged bids, or when the "false claim" is that the party receiving the contract or government benefit falsely certified that it was eligible?
Since the Supreme Court has stated that the statute's purpose is to provide "complete indemnity" to the government, all damages flowing from the false claim should be recoverable. Similarly, the legislative history teaches that:
2. Using Sampling Methodology to Calculate Damages
Courts have allowed extrapolation from samples in non-FCA cases. However, one insufficient sample was recently rejected in United States ex rel Trim v. McKean, 31 F.Supp. 2d 1308, 1314 (W.D. Okla. 1998). Because of the complexity of generating a scientifically supportable random sample, a practitioner in any case which is litigated would do well to engage an experienced statistician, rather than relying on crude sampling by either the Office of the Inspector General in the victimized agency, or, in the case of health care, private Medicare carriers or fiscal intermediaries. Happily, OIG/HHS has developed a package of statistically valid software tools which can withstand judicial scrutiny.
3. Penalties Without Damages
A. Materiality
4. Penalty Calculations
It is simple enough to state that a penalty will apply to each false claim or record submitted, but what is a claim? In United States v. Bornstein supra, n. 4, The Supreme Court held that the focus must be on the conduct of the defendant. Thus, an appellate court concluded, in the context of an overbilling case, that each HCFA 1500 form was a claim, rejecting the government's contention that each procedure billed on each form (which allows for listing of multiple procedures) was a separate claim.
5. Constitutional Issues
The old rule that the penalties imposed by the FCA, when combined with criminal sanctions, constitutes double jeopardy has been abolished. Hudson v. United States thus eliminated the commonly used double jeopardy defense against imposing statutory FCA penalties. However, another challenge exists based upon the Eighth Amendment's excessive fines clause. Bajakajian pled guilty to attempting to smuggle $357,144 out of the country, but contested the law's requirement that the entire sum be forfeited. Justice Thomas, writing for a 5-4 majority, termed the penalty grossly disproportional. He did, however, note that the failure to report the currency affected the government: