Survey of Penalties and Damages in False Claims Act Cases

By: Joel M. Androphyi, Rachel L. Grier

Because Section 3729(a) of the FCA requires courts to impose a penalty for each false claim, inevitably cases will exist in which courts must hold FCA defendants liable for substantial penalties even where actual damages to the government are minimal or nonexistent.1 In these cases, the FCA’s damages and penalties provisions are viewed as punitive rather than compensatory, as recognized by the Supreme Court in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens.2 Although courts have not establish a bright-line test for determining what is a non-excessive damages-to-penalties ratio, in a non-FCA case, the Supreme Court stated that “in practice, few awards exceeding a single digit ratio between punitive and compensatory damages . . . will satisfy due process.”3

A. Cases allowing penalties greatly in excess of damages.

Fourth Circuit

In United States v. Byrd, the defendant redeemed illegally-accepted food stamps on 264 occasions.4 After considering the Excessive Fines Clause, the court held that the statutory minimum penalty of $1,325,000 ($5,000 for each of the 264 offenses) was not grossly disproportionate given the gravity of the offense, and the court ordered the defendant to pay $255,036 in treble damages and $1,325,000 in penalties.5 The noted that imposing penalties on the defendant for his conduct protected the integrity of the food stamp program.6

Sixth Circuit

In United States v. Outland, the defendant submitted six claims, for which he received a total of $1,728, for unemployment insurance benefits to the Railroad Retirement Board while he was incarcerated.7 The court held that the plaintiff was entitled to summary judgment against the defendant in the amount of $35,184 ($1,728 trebled plus $30,000 in penalties) plus costs—an amount more than twenty (20) times the actual damages.8

Seventh Circuit

In U.S. ex rel. Tyson v. Amerigroup Illinois, Inc., the relators brought qui tam action on behalf of United States against healthcare providers, alleging discriminatory marketing practices as to pregnant women and ill persons in course of conducting Medicaid health maintenance organizations (HMOs).9 The jury returned a verdict of $48,000,000 in actual damages based on a finding of 18,130 false claims.10 On appeal, the court ruled in favor of the plaintiffs and trebled the actual damages for a total of $144,000,000 in damages and awarded $5,500 for each claim, for a total of $99,715,000 in penalties under the federal FCA ($190,365,000 in total, including state penalties).11 The court held that the penalties awarded did not violate the Excessive Fines Clause because Defendant’s failed to prove the amount was grossly disproportionate.12

Ninth Circuit

In United States v. Mackby, the government brought a qui tam action against the owner of a physical therapy clinic for violations of the FCA.13 On appeal, the court affirmed the finding of liability, but remanded for a determination of whether the judgment violated the Excessive Fines Clause.14 On remand, the district court upheld the judgment, and again, the defendant appealed.15 On appeal, the Ninth Circuit held that imposing $174,454 in damages and $550,000 in penalties (9.5 times the single damage amount) where the government sought and the district court awarded the minimum statutory fine of $5,000 per claim for 111 of the claims did not violate the Excessive Fines Clause.16 In reaching this conclusion, the court reasoned that the government could have sought damages and penalties for all 8,499 false claims proven, and the defendant would have faced a maximum judgment of approximately $85 million, including $993,234 in treble damages.17

B. Cases holding that penalties were excessive and disproportionate to damages.

Third Circuit

In United States v. Southern Maryland Home Health Services, Inc., the court held that FCA damages of $1 million were punitive when the actual loss for the false claims was only $59,320.18 The court reasoned that an employer should not be held liable for such excessive damages for its employee’s submission of false claims unless “the employer [was] culpable in some degree in order to have the employee’s knowledge and acts imputed to it for punitive damage liability.”19

Fifth Circuit

In Peterson v. Weinberger, a physician and his brother appealed a judgment against them for submitting false Medicare claims.20 The district court had limited the forfeiture penalty to 50 claims totaling $100,000 even though it found that 120 false claims had been filed and the statutory minimum penalty was $2,000 per claim (at that time)—i.e., the minimum penalty under the FCA should have equaled $240,000 ($2,000 * 120 claims).21 On appeal, the Fifth Circuit upheld the judgment and stated that “[t]he court may exercise discretion where the imposition of forfeitures might prove excessive and out of proportion to the damages sustained by the Government. The forfeiture should reflect a fair ratio to damages to insure that the Government completely recoups its losses.”22

In United States ex rel. Garibaldi v. Orleans Parish School Board, a suspended school board director and auditor brought a qui tam action against the school board, alleging that the rates it charged to federal programs for federal unemployment insurance violated the FCA.23 The jury returned a verdict in favor of the plaintiff. The court relied on the “fair ratio” rule from Peterson v. Weinberger to reduce the statutory penalty.24 The district court held that a reduction in statutory penalty under FCA was warranted because applying the minimum $5,000/claim penalty for each of the 1,570 false claims would result in an excessive penalty of $7,850,000 and a $22,800,000 in treble damages, for a total award of $30,650,000.25 The district court reasoned that a fine of $30,650,000 “against a public school district responsible for educating children, many of them poor . . . is excessive.”26

Sixth Circuit

In United States ex rel. Smith v. Gilbert Realty Co., Inc., the court agreed with the defendant’s argument that under the Excessive Fines Clause, the penalty of $290,000 was excessive when compared to the $4,890 in damages.27 In analyzing the issue, the court noted that the ratio of 1:178 damages to penalties was so disproportionate that it “suggests that some portion of the penalty is excessive.”28 The court also considered “the nature of the conduct” at issue in each of the fifty eight (58) violations by the defendant and concluded that only seven violations were of a nature that warranted a penalty.29 The court held that such an excessive penalty violates the Excessive Fines Clause of the Eighth Amendment.30

Eighth Circuit

In United States v. Advance Tool Co., the defendant submitted 686 false invoices for misbranded and defective tools that it sold to the government.31 In determining that the $3,430,000 penalty was excessive under the Eighth Amendment’s Excessive Fines Clause, the court considered the following: “Plaintiff’s inability to prove actual damages at trial, the government’s poor investigative procedures, and its confusing regulatory and contractual purchasing arrangements which virtually encourage the type of conduct at issue here.”32 The court reduced the penalty from $3,340,000 to $365,000 by imposing a $5,000 penalty for each type of tool defendant sold to the government, rather than for each invoice submitted.33

 

  1. In setting the penalty between $5,500 and $11,000 per claim, courts often weigh various factors. See e.g., United States v. Bottini, 19 F. Supp. 2d 632, 641 (W.D. La. 1997) (imposing a $7,500/claim penalty on an individual defendant who was “not wealthy” but whose “conduct was most opprobrious”).
  2. 529 U.S. 765, 784 (2000) (holding that the FCA’sdamages and penalties “are essentially punitive in nature”).
  3. State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 425 (2003).
  4. 100 F. Supp. 2d 342, 343 (E.D.N.C. 2000). The court noted that the Double Jeopardy Clause did not bar the government’s qui tam action even though the defendant had already pled guilty to charges based on the same conduct in a criminal case. Id.
  5. Id. at 344, 346.
  6. Id.at 345.
  7. No. 5:00-CV-123-J, 2001 WL 1793736, at *1 (W.D. Ky. Mar. 19, 2001).
  8. Id. at *3.
  9. 488 F. Supp. 2d 719 (N.D. Ill. 2007).
  10. Id. at 739-41.
  11. Id. at 741-42.
  12. Id. at 742-48.
  13. 339 F.3d 1013, 1014-15 (9th Cir. 2003).
  14. Id. at 1015.
  15. Id. at 1016.
  16. Id. at 1016-19.
  17. Id. at 1018.
  18. 95 F. Supp. 2d 465, 469 (D. Md. 2000).
  19. Id. at 470.
  20. 508 F.2d 45, 47 (5th Cir. 1975).
  21. Id. at 49.
  22. Id. at 55.
  23. 46 F. Supp. 2d 546, 554 (E.D. La. 1999) vacated on other grounds, 244 F.3d 486 (5th Cir. 2001).
  24. Id. at 564.
  25. Id. at 564-65.
  26. Id. at 565.
  27. 840 F. Supp. 71, 74 (E.D. Mich. 1993).
  28. Id. at 74-75.
  29. Id. (noting that the other fifty one violations only involved cashing checks).
  30. Id. at 75.
  31. 902 F. Supp. 1011, 1015-16 (W.D. Mo. 1995).
  32. Id. at 1018.
  33. Id. at 1018-19.

iAuthor of treatise, Federal False Claims Act and Qui Tam Litigation, Law Journal Press (2010), research source of the issues discussed in this article.

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