United States: CIVIL FALSE CLAIMS ACT: Fourth Circuit Holds That A $24 Million FCA Penalty Is Not An "Excessive Fine" Even Where The Relator Fails To Prove That The United States Suffered Any Economic Harm

Sometimes, an opinion has an "Alice in Wonderland" quality to it, where a court seems to come up with a theory out of thin air. That quality certainly seems to permeate an important aspect of the recent decision by the U.S. Court of Appeals for the Fourth Circuit in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369 (4th Cir. Dec. 19, 2013). Dispensing with decades of Supreme Court jurisprudence—including one case argued by Chief Justice Roberts before he took the federal bench—the Fourth Circuit ordered the trial court to impose $24 million in FCA penalties against the defendants following a trial at which the relator pointedly sought no FCA damages and no proof of economic harm to the United States was ever established. This result is squarely at odds with a number of constitutional protections, particularly the Eighth Amendment‟s Excessive Fines Clause, as well as a number of decisions applying that constitutional provision to FCA penalty awards. The Fourth Circuit‟s sole reliance on intangible and non-economic factors such as "deterrent effects" and public policy considerations to override the traditional excessive fines analysis lacks precedent and should result in en banc, and, if necessary, Supreme Court review.

Background in the Bunk Case

The penalties at issue in Bunk arose in a consolidated case that began as separate qui tam suits brought by two relators who alleged that the defendants engaged in bid-rigging schemes designed to inflate the rates charged to the Defense Department for the movement of U.S. military household goods between the United States and Europe and within Europe. The government intervened with respect to the cross-ocean moves, but did not intervene with respect to the intra-Europe moves—the so-called Direct Procurement Method or "DPM" claims—which were the focus of the Fourth Circuit‟s penalty analysis. By the time of trial in the Eastern District of Virginia, Gosselin and its executive were the only remaining defendants.1

As to the DPM claims, one of the relators—Mr. Bunk—claimed that the defendants violated the FCA by falsely certifying that their prices were independently determined. However, Mr. Bunk decided to pursue only FCA penalties, not damages. Following lengthy trial proceedings, the jury held that Gosselin was liable under the FCA for its role in the DPM scheme. Subsequently, the trial judge determined that each of the 9,136 invoices that had been submitted under the DPM contract constituted a separate "false claim" under the FCA. As a result, the court determined that, under the statute, the minimum penalty that it could impose was approximately $50 million ($5,500 per claim) and that it had no discretion to impose any lesser amount, notwithstanding the relator‟s offer—with Justice Department concurrence—to accept a remittitur in the amount of $24 million. The trial court held that penalties at the minimum statutory level were grossly disproportionate to the misconduct and the potential economic harm to the government, particularly since the government had paid a total of $3.3 million for the services in question. The trial court noted that, under an excessive fines analysis, the maximum penalty that would pass constitutional muster would have been $1.5 million and that, if the trial court had been permitted to impose penalties less than the statutory minimum, it would have imposed $500,000. In the end, the trial court did not impose any penalties for the DPM scheme. The Fourth Circuit reversed this penalty decision and remanded the case to the trial court with the instruction that judgment should be entered against Gosselin in the amount of $24 million on the DPM scheme cause of action.

The Fourth Circuit's Faulty Reasoning

The Fourth Circuit‟s penalty holding is contrary to precedents that apply the Eighth Amendment‟s excessive fines prohibition to FCA judgments. In United States v. Halper, 490 U.S. 435, 446 (1989), the Supreme Court applied the Eighth Amendment to reverse an FCA penalty that was more than 200 times the amount of the damages to the government caused by the defendant‟s fraud, ruling in part that the FCA recovery did not "remotely approximate" the government‟s harm. At the Supreme Court‟s invitation, Chief Justice Roberts (then in private practice) argued in support of the judgment for Halper and filed an amicus brief on Halper‟s behalf. Later, in Hudson v. United States, the Supreme Court rejected its Double Jeopardy rationale in Halper, but continued to strongly support challenges to disproportionate penalties on excessive fines grounds. 522 U.S. 93, 103 (1997) ("The Due Process and Equal Protection Clauses already protect individuals from sanctions which are downright irrational . . . [and t]he Eighth Amendment protects against excessive civil fines"). In applying the excessive fines standard, the Supreme Court stated that

the district courts in the first instance, and the courts of appeals, reviewing the proportionality determination de novo, must compare the amount of the forfeiture to the gravity of the defendant's offense. If the amount of the forfeiture is grossly disproportional to the gravity of the defendant's offense, it is unconstitutional.

United States v. Bajakajian, 524 U.S. 321, 336-37 (1998) (assessing the degree of harm, level of culpability, and loss to the public fisc, and determining that the degree of proportionality of the forfeiture to the harm was grossly disproportional in violation of the excessive fines standard). This principle has been applied consistently by courts facing constitutional challenges to penalty awards in FCA cases where those penalties vastly outstrip the proven damages. See JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS §3.06[B] (Wolters Kluwer Law & Business) (4th ed. & Supp. 2013-1) (citing cases).

Given that the Fourth Circuit recognized in Bunk that "[t]he touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality" and that the "amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish," its conclusion that a $24million penalty passes constitutional muster in a case where the relator did not even pursue—let alone prove—any FCA damages is impossible to understand. The Fourth Circuit did not compare the penalty with the amount of economic harm to the government, and the court did not seem troubled by its own conclusion that there was insufficient evidence of any such harm—the touchstone of the excessive fines analysis. Bunk, slip. op. at 44 ("Thus, to analyze whether a particular award of civil penalties under the FCA is grossly‟ disproportionate such as to offend the Excessive Fines Clause, we must consider the award‟s deterrent effect on the defendant and on others perhaps contemplating a related course of fraudulent conduct."). Similarly, the Fourth Circuit did not assess—as the trial court did below—the ratio between the penalty and the government‟s payments under the contract. Rather, for its excessive fines analysis, the Fourth Circuit relied solely on non-economic factors to deem the $24 million penalty to be fully in accord with the Constitution. The result of this stunning ruling, if it stands, would be to open the door once again to a world in which FCA defendants can face statutory penalties grossly disproportionate to any economic harm caused by their conduct.

Another byproduct of this decision may be a new groundswell of qui tam cases. Whereas relators previously may have been dissuaded from pursuing actions where there is little or no evidence of actual loss to the government, they may now be incentivized to do so, particularly in those instances in which there are multiple invoices or statements that could be deemed separate "claims" for penalty purposes. Any such outcome would tend to make the FCA into an even greater bludgeon.


1 Readers should note that the authors‟ law firm represented certain parties involved in the underlying actions, but those parties were not involved in the trial or the appeal.

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