United States: Case Study: Bunk v. Birkart

Last Updated: March 5 2012
Article by Craig D. Margolis, Tirzah S. Lollar and Randall Warden

First published in Law360, February 2012

In a landmark decision on Feb. 14, 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 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 pretrial 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 U.S. 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 an 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.

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.

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.

Conclusion

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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