Litigation: Damages Under the False Claims Act

Inside Counsel

Among other things, the False Claims Act (FCA) imposes liability on anyone who submits a false or fraudulent claim for money or property to the United States or who improperly avoids an obligation to pay money or property to the United States. In addition to civil penalties, the FCA provides for treble damages, i.e., liability for "3 times the amount of damages which the Government sustains because of the act of that person." The damages to be trebled are the actual losses sustained by the United States. However, based on an incorrect reading of the Supreme Court's decision in United States v. Bornstein, many courts hold FCA defendants liable for excessive damages.

In Bornstein, a prime contractor entered into a fixed-price contract with the government to provide radio kits, each of which was to contain electron tubes meeting certain specifications. The prime contractor then subcontracted with the defendant to provide the tubes. The defendant provided tubes that did not meet the specifications, but that were falsely marked to indicate they did. The government paid for the tubes, but later discovered the fraud. The government recovered $40.72 per tube from the prime contractor in a settlement. The government then filed an FCA action against the defendant. The government successfully argued that it had been damaged in the amount of $40.82 per tube – the cost to replace each non-conforming tube. From that amount, the lower courts deducted the $40.72 received in settlement from the prime contractor, leaving single damages of only $0.10 per tube, which the courts then doubled. (At the time, the FCA provided for double, not treble, damages.) Reversing the lower courts, the Supreme Court held that the government's "actual damages are to be doubled before any subtractions are made for compensatory payments previously received by the Government from any source."

Unfortunately, many courts have improperly applied Bornstein to the computation of the government's actual loss in the first instance, as opposed to applying the case only to the trebling of those actual losses. Take for example the following situation from the mortgage fraud context: Assume that a defendant has fraudulently made a federally-insured home loan, that the home buyer later defaults on the loan, and that the government pays out a $100,000 claim to the holder of the defaulted mortgage. Assume also that the home – which the government now owns by virtue of paying out the mortgage insurance claim – is still valuable and that the government sells the home and nets $90,000 after expenses. The actual loss sustained by the government is $10,000, which should then be trebled to $30,000. However, most courts will first treble the $100,000, and then subtract the $90,000 in sales proceeds, for total trebled damages of $210,000.

To properly assess FCA damages, a court should first compute the actual loss to the United States. Only then should damages be trebled. Indeed, the Supreme Court in Bornstein recognized that there were two distinct steps in the process and that some credits were to be deducted before trebling. The Supreme Court held that "[t]he Government's actual damages are equal to the difference between the market value of the tubes it received and retained and the market value that the tubes would have had if they had been of the specified quality." This calculation was done first – before applying the multiplier to the damages – in order to compute the actual loss sustained by the United States. Only then were the damages doubled. Similarly, in the mortgage fraud example cited above, the actual loss to the United States is the $100,000 paid out, minus the $90,000 in value received by the government by virtue of its becoming the owner of the house. That $10,000 difference is the only amount that should be subject to trebling.

A court's incorrect computation of trebled damages under the False Claims Act can have devastating, and unfair, consequences for a defendant. Those accused of FCA violations should make sure to carefully analyze the damages issues and argue forcefully that the actual loss to the government should be computed before any trebling takes place.

This article appeared in the January 20, 2011 edition of Inside Counsel.

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