United States: In Calculating FCA Damages, Another Court Rejects Government Windfalls Based on Purportedly Tainted Claims

Last month, the US District Court for the District of Columbia delivered another blow to the "tainted claims" theory of False Claims Act (FCA) damages frequently espoused by the government and qui tam relators.

From the 1990s through 2004, the US Postal Service sponsored a professional cycling team led by Lance Armstrong, who won the Tour de France seven consecutive times during that span shortly after surviving metastatic cancer. It was later revealed that Armstrong and his teammates had used performance enhancing drugs (PEDs) during the relevant time period. Armstrong ultimately was stripped of his titles and banned from the sport permanently. After years of denials, Armstrong publicly admitted his PED use in a 2013 interview with Oprah Winfrey.

In 2010, former Armstrong teammate Floyd Landis filed a qui tam FCA suit under seal against Armstrong, the team's owner (Tailwind Sports Corporation) and others. United States ex rel. Landis v. Tailwind Sports Corp., et al., No. 1:10-cv-00976 (CRC) (U.S. Dist. Ct. D.D.C.). The government intervened against certain defendants, including Armstrong, shortly after the 2013 interview aired. The government and Landis seek to recover as damages the entire $32 million the Postal Service paid to Tailwind during the last four years of the sponsorship, trebled to nearly $100 million, on the grounds that the defendants sought payment while actively concealing Armstrong's and his teammates' PED use, which violated both the rules of the sport and the Postal Service's sponsorship agreement—thereby violating the FCA.

Last year, Armstrong and his co-defendants moved for summary judgment on several issues including damages, arguing that, notwithstanding any PED-related false statements or concealment, the discovery record indisputably showed that the Postal Service had reaped benefits from the sponsorship that outweighed its $32 million price tag—through a combination of measurably increased revenue and positive media exposure. The government countered that the sponsorship ultimately was worthless in light of the team's later-disclosed PED use, because the Postal Service would not knowingly have paid anything to sponsor a PED-tainted team—rendering the entire $32 million sponsorship amount damages to be trebled.

The court disagreed with aspects of both sides' arguments, instead applying the "benefit of the bargain" rule as articulated in United States v. Science Applications Int'l Corp., 626 F.3d 1257 (D.C. Cir. 2010) (SAIC), to reserve the issue of damages for the jury if liability were to be proven. As the court explained, under that approach, "the [g]overnment's actual damages are equal to the difference between the market value of the [products or services] it received and retained and the market value that the [products or services] would have had if they had been the specified quality" (quoting United States v. Bornstein, 423 U.S. 303, 324 n.13 (1976)). The court observed that Armstrong and his co-defendants had marshaled significant evidence of the value of benefits the Postal Service actually reaped through the sponsorship, notwithstanding the PED issues, but also that the government would be free to challenge that evidence at trial and offer its own evidence of offsetting costs the Postal Service incurred. For example, the government could introduce evidence of negative media coverage the Postal Service suffered around the public revelation of Armstrong's PED use to offset the positive media coverage it earlier had obtained during the string of Tour de France wins.

The court explained that the proper measure of actual (single) damages to be calculated upon a determination of liability would be the $32 million paid in sponsorship, minus the actual value (if any) of the net benefits the Postal Service received from that sponsorship. Thus, despite the government's argument that the Postal Service would never have entered the sponsorship in the first place had it known of the PED use, the court ruled that the government could not retain as a windfall any actual net value the Postal Service received from the arrangement. This ruling was in line with the 6th Circuit's recent decision in United States ex rel. Wall v. Circle C Construction, LLC, 813 F.3d 616 (2016), on which we previously reported. There, the court explained that: "the relevant question [in calculating actual FCA damages] is not whether in some hypothetical scenario the government would have withheld payment, but rather, more prosaically, whether the government in fact got less value than it bargained for." Similarly, as stated in SAIC and quoted in Landis, "the government will sometimes be able to recover the full value of payments made to the defendant, but only where the government proves that it received no value from the product delivered." These decisions roundly rejected the government's arguments that it should be entitled to recoup its entire payments on "tainted" claims, regardless of any value it might actually have received and retained despite the "taint."

Recall, however, that damages remain only part—and sometimes a fairly small part—of the overall FCA liability equation. Generally, in addition to multiple damages, a defendant found to have violated the FCA must also pay the government's litigation costs plus a per claim civil penalty, which the US Department of Justice recently adjusted up to a minimum of $10,781 and maximum of $21,563 to account for years of accrued inflation (as we previously reported). 31 U.S.C. § 3729(a)(1)?(3). In Armstrong's case, with only 41 allegedly false claims at issue, the exposure focus will be on the tens of millions of dollars in purported (single) damages, subject to trebling once determined through the analysis discussed above. In contexts such as health care, however, the government and relators frequently argue that the acts or omissions alleged to have caused FCA violations "taint" thousands of (smaller) individual claims for payment in courses of dealing over extended periods of time—which quickly can lead to astronomical penalty totals at $10,000+ per claim. That said, because the Supreme Court has tied constitutional due process and excessive fines concerns to the ratio between compensatory damages and punitive damages (of which civil penalties and damage multipliers are species), decisions such as Landis, SAIC and Circle C still play an important limiting role in overall FCA liability exposure.

In Calculating FCA Damages, Another Court Rejects Government Windfalls Based on Purportedly Tainted Claims

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