United States: Fourth Circuit Orders $24 Million In FCA Civil Penalties Despite No Proven Economic Harm

Last Updated: January 27 2014
Article by Franklin D. Annand

Companies that conduct business with the government should pay attention to a recent ruling from the Fourth Circuit. The ruling opens the door to increased False Claims Act (FCA) liability through the FCA's civil penalties provision.

Through this provision, the FCA imposes civil penalties of $5,500 to $11,000 for each false claim submitted to the government, which typically includes every false invoice, bill, and any other type of false demand for payment. This provision is in addition to the FCA's well-known treble damages provision. In some cases, the total number of false claims can be in the thousands, tens of thousands, or even hundreds of thousands. This can lead to huge exposure for FCA defendants — for example, 50,000 false invoices would equal $27.5 million to $55 million in civil penalties alone. Thankfully, when this issue arises, courts typically conduct an Eighth Amendment excessive fines analysis and either reduce or eliminate the civil penalties component to be proportional to the gravity of the offense. The Eighth Amendment provides: "Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." U.S. Const. amend. VIII.

In December, though, the Fourth Circuit instructed the Eastern District of Virginia to enter a judgment of $24 million in FCA civil penalties in a bid-rigging case where the qui tam relator (i.e., plaintiff) actually chose not to seek damages at trial and where the government's total expenditure on the relevant portion of the contract equaled only $3.3 million. United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369, 2013 WL 6671270, at *10-15 (4th Cir. Dec. 19, 2013).

The Fourth Circuit's decision reversed a much-discussed February 2012 Eastern District of Virginia decision awarding zero civil penalties on the basis that the required minimum civil penalties in the case of $50.248 million — 9,136 false claims times $5,500 — would be grossly out of proportion to the defendant's misconduct, and thus would be an unconstitutionally excessive fine under the Eighth Amendment. United States ex rel. Bunk v. Birkart Globistics GmbH & Co., No. 1:02CV1168 AJT/TRJ, 2012 WL 488256, at *13 (E.D. Va. Feb. 14, 2012). The district court awarded zero penalties because it held that it was not permitted to reduce the FCA's mandatory civil penalties provision below the minimum amount allowed by the provision. Instead, it declined to award any civil penalties pursuant to its conclusion that the minimum mandatory total was an excessive fine under the Eighth Amendment. Id. at *12-13. Alternatively, the district court held that, if it was in fact allowed to reduce the civil penalties via the excessive fines analysis, the total civil penalties component could not exceed $500,000. Id. at *14.

In the Fourth Circuit's analysis, it recognized that some FCA actions involve thousands of invoices, thus exposing defendants to millions of dollars of liability in civil penalties, and concluded that it is "entirely comfortable with that proposition" because it helps ensure the primary purpose of the FCA to make the government completely whole. Bunk, 2013 WL 6671270, at *13.

The Fourth Circuit chose the $24 million figure, rather than the FCA-mandated minimum of $50.248 million, because the relator had offered after trial to accept the lower figure, probably to avoid the likelihood of an excessive fines analysis rejecting the higher number on appeal. Id. at *10-13. The Fourth Circuit applied a limited excessive fines analysis to the $24 million award. Quoting Supreme Court precedent, it recognized that the excessive fines inquiry revolves around proportionality, that the forfeiture to be imposed must bear some relationship to the gravity of the offense it punishes, and that a monetary penalty that is grossly disproportionate to the gravity of the defendant's offense runs afoul of the Eighth Amendment. Id. at *13.

In its excessive fines analysis, the Fourth Circuit acknowledged that the district court had found $500,000 to be the highest civil penalties amount allowable under the Eighth Amendment because the relator had not proven damages at trial and because the government's total expenditure on the corresponding portion of the contract was only $3.3 million. Id. at *6. However, the Fourth Circuit indicated that the harms to be considered in an excessive fines analysis are not just economic harms, but also non-economic harms, such as the effect of the defendant's wrongdoing on the public's faith in the government's competence and the likelihood that the wrongdoing may encourage others to act in a similar fashion. Id. at *15. Ultimately, considering the circumstances of the case, the court found that the $24 million in civil penalties did not constitute an excessive fine under the Eighth Amendment, stating that the amount "appropriately reflects the gravity of [the defendant's] offenses and provides the necessary and appropriate deterrent effect going forward." Id.

The Fourth Circuit's focus on qualitative, non-economic harms in its excessive fines analysis is contrary to the approach taken by most other courts, which assess the proportionality of the total mandatory civil penalties to quantitative, economic harms, such as the government's actual damages and/or the government's total corresponding expenditures.

It is likely the defendants will move for a rehearing of the Fourth Circuit's decision en banc and/or petition the Supreme Court for review. If the decision stands, courts that choose to follow it will no longer be anchored to the quantifiable harm to the government and may instead assess proportionality based on unquantifiable, non-economic harms to the government and general public.

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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