False Claims Act Damages and Penalties
Damages are the most critical issue in a qui tam case. The False Claims Act (the “FCA”) was enacted to provide restitution to the government for losses sustained as a result of fraud. The statute authorizes the award of actual damages and civil penalties to ensure that the government is made whole for losses caused by fraudulent acts. Any fraud intended to cause the government to pay money falls within the scope of the FCA. Because the FCA covers a wide range of fraudulent acts, there is no “one size fits all” measure of damages for every false claim. Damage calculations vary according to the type of fraud involved in a particular case. Because the goal of the FCA is to make the government whole, different types of fraud require different remedies to ensure full compensation. For examples, see below:
- Damages for Mischarging and Overcharging Cases. The most common action brought under the FCA occurs when a contractor overcharges or mischarges the government.
- Overcharges. Generally, the measure of the government’s damages in an overcharge case is the difference between the amount paid and the amount that would have been paid if the claims were truthful. An overcharge case occurs when the government receives goods or services of less value than intended.
- Mischarges. A mischarge case occurs when false claims are submitted to the government for goods or services that are not delivered. Damages in a mischarge case are calculated as if the government received nothing in return for its payment. Thus, damages in a mischarge case are measured by the entire amount of the government’s payment.
- Variations of Mischarge and Overcharge Damage Models in Substandard Product and Services Cases. A substandard product or service case may be treated as either an overcharge or a mischarge case for the purpose of calculating damages. Because the facts of every substandard product or service case vary, several variations of the standard mischarge and overcharge models have emerged. Therefore, like the standard damage calculation in mischarge and overcharge cases, a key issue in determining damages in substandard product cases is whether the product or service provided had any value, and, if so, what value should be used. There are generally three methods of calculating damages when the government receives a substandard product or service from a defendant:
- When the value of the goods or services can only be ascertained by referencing the contract price, the “out of pocket” calculation is used to measure damages. Instead of determining the intrinsic value of the goods or services, the “out of pocket” measure calculates damages based on the amount the government actually paid and the market value of the goods or services received or actually used by the government.
- When the value of the goods or services supplied may be calculated with reasonable certainty without reference to a contract price, the government may be entitled to damages based on the “benefit of the bargain” measure. Damages awarded under a benefit of the bargain theory are derived from the intrinsic value of the good or service without reference to a contract price. To award damages under this theory, the value of goods and services must be ascertainable with reasonable certainty. Damages under this measure may often exceed the contract price. The Supreme Court has held that the government’s actual damages in substandard product or service cases, when intrinsic value is ascertainable, should be calculated by determining the difference between the market value of the good or service received and the market value of the good or service had it been of the specified quality.
- In rare cases where goods or services are so defective they are deemed to have no value to the government, the “entire amount expended” measure of damages may be appropriate. The entire amount expended approach measures damages as the total amount paid as a result of the false claim.
- Damages in False Negotiation Cases. False claims made or illegal actions undertaken during negotiating or bidding on government contracts may constitute a violation of the FCA. These cases present a different issue than that of the mischarge and overcharge cases, because they involve the government paying the price it actually contracted to pay. FCA liability attaches because the government would not have entered into the contract had it known the facts at the time of contracting. Because the government pays an amount it has contractually agreed to pay, calculation of damages is difficult. Three common cases in this area of FCA liability are bid rigging, defective pricing, and cases involving illegal kickbacks.
- Bid Rigging Cases. Damages in a collusive bidding case are measured by the difference between the amount actually paid by the government in reliance on the false claims and the amount it would have paid had there been open and competitive bidding. While the artificially inflated amount is included in damages, the percentage of profit a defendant would normally earn for performing the work in a competitive market is not included. Because the government cannot recover as damages the amount that would have been paid in a competitive market, any profit that would have made in an open bidding process is retained by the defendant. However, any excess profit exceeding this amount earned due to collusive bidding will be awarded to the government as damages. Because these profits are taken by collusive bidders from the fraudulently inflated portion of the invoice, they represent the amount the government paid as a result of the fraud.
- Defective Pricing Cases. The typical defective pricing case involves a contractor submitting false price data or making false representations during pre-contract negotiations with the government. The government relies on the false data and agrees to a contract at a higher price. These situations normally arise in “Multiple Award Schedule” cases and cases involving the Truth in Negotiations Act (“TINA”)
- Damages in Medicare and Medicaid Kickback Cases. In FCA cases based on an underlying violation of the Anti-Kickback statute, courts have taken different approaches to measuring damages. Many kickback cases result in the government suffering an actual loss, and courts use this actual loss as the measure of damages. Some courts refuse to award damages to the government in cases of illegal self-referrals and kickbacks if the government pays only a fixed amount of reimbursement provided by Medicare regulations.
- Damages in False Certification Cases. False certification cases involve a defendant claiming entitlement to certain statutory benefits after either explicitly or implicitly falsely declaring that specific criteria have been met. The basic measure of damages in false certification cases is the amount the government paid higher than the amount it would have paid if the statements were true. Under the broad “but for” measure of damages, the calculation may also include incidental expenses paid as a result of the fraud. Because it includes incidental expenses, the “but for” measure leads to greater recovery than the “actual loss” test. Circuits are split regarding measuring damages in a false certification cases. Any amount paid to the government as compensation reduces the amount of damages awarded.
- Damages in Reverse False Claim Cases. A violation of the FCA occurs in the context of a reverse false claim when a defendant makes a false statement to conceal, avoid, or decrease an obligation to the government. Damages under a reverse false claim theory of liability are usually measured by the difference between the amount paid and the amount that should have been paid to the government.
In any action brought under the FCA, the government is required to prove all essential elements of the cause of action, including damages, by a preponderance of the evidence. The government need not prove damages with mathematical precision; it is enough that the calculation is not based on speculation and guesswork.
Reduction of Damages for Voluntary Disclosure
The FCA requires that defendants violating the statute pay the government a civil penalty and three times the amount of damages resulting from the fraudulent act. The statute provides for a civil penalty not less than $5,500 and not more than $11,000, plus three times the amount of actual damage to the government resulting from any violation of the FCA. The express language of the statute requires a court to impose the trebling feature of the statute without exercising discretion. However, the statute allows court discretion to reduce statutory trebling if a defendant voluntary discloses. Nonetheless, a person committing an offense under the FCA is not automatically saved from the trebling feature by disclosing to the government relevant information relating to an offense. To qualify for the exception, the person must make the disclosure to the government within thirty days after first obtaining such information. Additionally, the person making the disclosure must do so before having actual knowledge that a criminal prosecution, civil action, or administrative action has commenced with respect to the violation. If all of these requirements are met, the court may forego trebling damages and may only double the actual damages. It is important to note that the exception only reduces potential damages and does not exonerate an individual from FCA liability.
The 1986 amendments set the new range of civil penalties from $5,000 to $10,000, in addition to trebling actual damages. In 1990, the Federal Civil Penalties Inflation Adjustment Act (“FCPIA”) was enacted to adjust federal fines and penalties to the rate of inflation. The FCPIA permits inflation adjustments to be made every five years, if needed, to maintain the effectiveness of civil fines and penalties. In 1999, pursuant to the FCPIA, the Department of Justice increased the range from $5,500 to $11,000. Like the trebling feature, the penalties authorized under the FCA are mandatory and not subject to a court’s discretion.
The 1986 amendments to the FCA expressly stated that each separate false claim constitutes a claim for which a penalty shall be imposed, even if separate claims are combined and submitted together. To impose a civil penalty it is necessary for the court to determine how many distinct violations occurred. This is most difficult in cases where a subcontractor causes a prime contractor to submit false claims to the government. The key issue to determine is whether the subcontractor should be liable for each claim submitted by the prime contractor or only for acts committed by the subcontractor. In addition, determining the number of claims in the Medicare fraud context can be difficult. A single Medicare reimbursement form may include several distinct claims for payment.
The FCA does not expressly provide a method to determine the penalty amount to assess within the range of $5,500 to $11,000. The Supreme Court has held that a district court has discretion in determining the amount awarded as civil penalties. Courts have differed in exercising this discretion. Some courts consider government expenses incurred investigating and litigating a violation when determining the level of penalty to assess. Other courts refuse to award penalties greater than the minimum amount if the government fails to justify a higher penalty. Some courts base the level of penalty on the gravity of the offense, even if the government fails to present evidence supporting a higher amount, or if it has been fully compensated by actual damage awards.
For more information and case citations, please see “Federal False Claims Act and Qui Tam Litigation,” published by Law Journal Press (2010).
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You should be aware that qui tam claims are subject to a Statute of Limitations. The area of limitations periods is complex. There are also first to file rules, public disclosure bars, original source issues, and varying limitations in pursuing retaliation claims. If you wish to pursue your claims, you should promptly seek the opinion of an attorney regarding the merits of your qui tam claim and the applicable statute of limitations.