In a landmark decision last week, the United States District
Court for the Eastern District of Virginia declined to impose
per-claim statutory penalties of more than $50 million in a False
Claims Act (FCA) case with more than 9,000 "false" claims
but no damages. The court held that imposing such a
disproportionate penalty would violate the Eighth Amendment's
Excessive Fines Clause, and that it lacked discretion unilaterally
to reduce the penalty under the statute. As a result, after years
of pre-trial procedural wrangling and following a jury verdict, the
relators (and the United States) recovered neither damages nor
penalties. See United States ex rel. Bunk v. Birkart Globistics
GmbH & Co., et al., No. 1:02-cv-1168 (E.D. Va. Feb. 14,
2012). This case demonstrates the pitfalls for relators and for the
government itself in actively pursuing FCA claims in the absence of
provable damages.
This case involved a Department of Defense contract for the
transportation of military household goods between U.S. military
installations in Europe. The allegation was that bidders colluded
on pricing after meeting with procurement personnel in 2001.
Although a FCA qui tam complaint was filed under seal in
2002, the government did not intervene until 2008 (and then only
partially) and the relators went to trial on the remaining claims
in 2011. At trial, the jury found that the winning contractor
falsely certified in its bid that there was no collusive activity,
and that, as a result, each of its 9,100-plus invoices was deemed
"false." The question for the court was whether to impose
any penalties under the FCA in the absence of evidence that the
collusion resulted in increased prices or any other actual
loss.
1. Penalty of $50 Million Is Excessive Absent Proof of Actual Damages.
FCA penalties of between $5,500 and $11,000 must be imposed per
false claim. 31 U.S.C. § 3729; 28 U.S.C. § 2461. With
over 9,100 false invoices submitted, the court calculated the
statutory FCA civil penalties to be not less than $50.2 million and
not more than $100.4 million. The defendants argued that such a
civil penalty would violate the Eighth Amendment, which provides:
"Excessive bail shall not be required, nor excessive fines
imposed, nor cruel and unusual punishments inflicted."
First, concluding that FCA penalties are "essentially punitive
in nature," Vermont Agency of Natural v. United States ex
rel. Stevens, 529 U.S. 765, 784 (2000), the court analyzed
whether the potential fine "is grossly disproportional to the
gravity of a defendant's offense." United States v.
Bajakajian, 524 U.S. 321, 334 (1998). There was a lack of
"the type of evidence needed to calculate and establish
damages under the FCA: the amount the government paid over and
above what the government would have paid if not for the fraudulent
activity." Bunk, No. 102-cv-1168, Mem. Op. at 13.
Indeed, the relators did not even attempt to prove damages at
trial. There also was no evidence that the contractor's
services were deficient in any way. Id. at 17.
Importantly, the government itself had concluded that the
contractor's price was fair and reasonable, and had exercised
option periods after receiving relators' allegations
about collusion. The contractor's liability resulted from a
single false certification in its bid, leading the court to
conclude that the number of invoices "is not reflective of
Defendants' level of culpability." Id. at 19.
Finally, the court found that the total value of the services
provided in connection with the misconduct was approximately $3.3
million, for which the defendants earned profit of approximately
$150,000. Id. at 22. Under these circumstances, the court
held that a minimum civil penalty of $50.2 million would be
"grossly disproportionate to the harm caused," in
violation of the Eighth Amendment. Id. at 23.
2. The Court Lacked Discretion to Reduce the Penalty.
The court then considered whether it could reduce the penalty to come within constitutional bounds. Noting other courts had done just this, id. at 25, the court found no legal basis in the statute or in these cases for this exercise of discretion. Pointing to FCA language requiring imposition of a penalty of "no less than" $5,500 per claim, the court concluded that imposing less than $5,500 would require it "to rewrite the FCA . . . in order to fashion a constitutional civil penalty under the facts of this case." Id. at 26-27. Ironically, the relators and the government sought a penalty of $24 million, which the court rejected both because the calculation was not derived "from any principled application of the FCA" and also because it would not have solved the constitutional problem. Id. at 32-33 n.19. The court speculated that it might find other lesser penalties constitutional (e.g., one based on trebling the profit) but that these options were unavailable under the FCA. Id. at 28.
This case highlights the dilemma of relators, or even the government itself, in pursuing FCA cases in the absence of proof of actual damages. In recent cases, the government has pursued aggressive theories, including assertions that the payment of kickbacks or gratuities in connection with a contract render the resulting contract fraudulent (and any associated claim false) without proof of economic harm or tangible impact on the contract. This is a cautionary tale that, even were the government to prevail on such a theory, it may be left with a "take nothing" judgment without damages or penalties, particularly if this case marks the start of a jurisprudential trend. The U.S. Constitution proscribes imposing millions of penalties for purportedly "false" claims that result in no actual loss to the government.
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