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Law360 (October 19, 2020, 7:05 PM EDT )
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| Ellen London |
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| Derek Adams |
Last month, the Select Subcommittee on the Coronavirus Crisis released a preliminary report on the program that led its chairman to state that "a lack of oversight and accountability from [Small Business Administration] and [the U.S. Department of the Treasury] may have led to billions of dollars being diverted to fraud, waste and abuse, rather than reaching small businesses truly in need."[1]
While the enforcement activity that has become public thus far has been criminal, SBA Inspector General Hannibal "Mike" Ware has described these cases as the "smallest and tiniest tip of the iceberg."[2]
While criminal charges to date have focused on alleged phony businesses, creation of nonexistent employees, and purchases of Lamborghinis and other exotic items, civil enforcement under the FCA will likely be less flashy but result in far more taxpayer recovery. This is so for several reasons.
First, the government must only establish that a defendant acted with reckless disregard under the FCA, a much lower burden for intent than under most criminal statutes.
Second, the government must only prove its case by a preponderance of the evidence, rather than the higher criminal standard of proof beyond a reasonable doubt.
Third, rather than simply recovering restitution, the FCA allows the government to recover treble damages, plus hefty penalties per violation.
Civil FCA cases under the PPP will likely focus on alleged false statements in connection with eligibility under SBA regulations, size-based standards, affiliation rules, need-based certifications and other more technical violations.
Damages Under the False Claims Act
How damages are calculated under the FCA is complicated and can make the difference between a case being litigated or settled. Thus, being aware of the legal complexities surrounding damages is an essential tool for those who are defending potential defendants or bringing claims as potential whistleblowers.
Basic Principles of FCA Damages
The FCA provides that if someone has violated the act they will be:
These rules do not provide a lot of guidance, which is why courts have often come to differing conclusions on the correct approach to making the government whole in the face of fraud.liable to the U.S. government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted [for inflation], plus 3 times the amount of damages which the government sustains because of the act of that person.[3]
In U.S. v. Bornstein, the U.S. Supreme Court explained that FCA damages should be the difference between the value of what was received by the government and what was actually delivered.[4] In Bornstein, a substandard products case, this was the difference between the market value of electron tubes of the required quality and the value of the electron tubes actually supplied.
These principles are fairly straightforward to apply in FCA cases involving contracts for tangible benefits to be provided to the government. When the goods or services are defective, "damages are measured as they would be in a run-of-the-mine breach-of-contract case — using a 'benefit-of-the-bargain' calculation in which a determination is made of the difference between the value that the government received and the amount that it paid."[5]
When the nonconforming goods or services have a market value, damages can be fairly easily measured by comparing the market value of the contracted-for goods with the market value of the nonconforming goods.[6] However, if it is not possible to determine the market value of the goods or services, "then the fact-finder determines the amount of damages by calculating the difference between 'the amount the government actually paid minus the value of the goods or services the government received or used,' as judged by the fact-finder."[7]
Cases Involving Intangible Benefits
The law is neither settled nor clear when it comes to intangible benefits. That could be very important in some of the anticipated PPP fraud cases. The calculation gets complicated when the benefit for which the government contracted is, at least in part, intangible, or, to put it another way, when "the government bargained for something qualitatively, but not quantifiably, different from what it received."[8]
In these cases, the government may be entitled to the full amount of its money back, under the so-called taint theory, which means that the fraud has tainted the payments such that they should be returned in their entirety.
In U.S. v. Van Gorp, the jury found that grant renewal applications submitted to the National Institutes of Health contained false statements because the program did not actually focus on clinical work with HIV-positive patients, as was required by the grant in question.
In assessing the appropriate measure of damages, the court explained that because the government lost an opportunity to award a grant to someone who would have used the money as the government intended, the government received no tangible benefit and was entitled to damages in the full amount of the grant.[9]
Van Gorp and similar cases involve benefits provided to third parties, rather than a tangible benefit to the government: Van Gorp involved a grant, U.S. v. Lithium Power Technologies Inc. and U.S. v. Anghaie involved research funds that the government intended to award to eligible small businesses, and U.S. v. Rogan and U.S. v. Mackby involved medical care provided to third parties.
There also are cases in which the government will argue that it is entitled to the full amount of the contract as damages, even though it has received benefits or items of value. In these cases, the government asserts that it has been harmed by the fact that it gave its money to a company that it would otherwise not have chosen.
Some courts have accepted this argument. For example, in U.S. v. Abhe and Svoboda Inc., the court explained that in the U.S. Court of Appeals for the Fourth Circuit, there is not one clear standard for calculating FCA damages, and that in a case in which there was a fraud regarding the use of a disadvantaged business enterprise, it might be possible to show that disgorgement would be the appropriate remedy, citing Lithium Power.[10]
In cases involving a disadvantaged business enterprise and similar fraud, one additional issue to note is the presumption of loss set forth in the Small Business Act, which provides:
While the presumption may be refuted under narrow circumstances, there are cases that have applied it to award the full amount of the contract amounts as damages, without subtracting the value of any services that may have actually been provided.[11][T]here shall be a presumption of loss to the U.S. based on the total amount of the contract ... whenever it is established that a business concern other than a small business concern willfully sought and received the award by misrepresentation.
In U.S. v. Circle C Construction LLC, the U.S. Court of Appeals for the Sixth Circuit rejected the government's use of the taint theory in a case in which the contractor failed to pay appropriate wages to employees.[12] Specifically, the contract with the government (for warehouse construction) required that the defendant and its subcontractors pay above-market wages in compliance with the Davis-Bacon Act. However, one of the subcontractors underpaid its electricians, which meant that the weekly compliance statements that the defendant submitted to the government were false.
The government argued that it was entitled to recover the full amount of the money paid for the electrical work on the warehouses. The court rejected this approach, stating that "the government bargained for two things: the buildings, and payment of Davis-Bacon wages. It got the buildings but not quite all of the wages. The shortfall was $9,916. That amount is the government's actual damages."[13]
In rejecting the government's approach, the court explained that, in its view, the claim that the work was tainted was belied by the government's own conduct in using the buildings, and that the "putative taint washes out easily enough with money damages, particularly the treble-strength kind available here."[14]
The court distinguished those situations in which the goods were worthless because they were dangerous to use or as a result of some unalterable moral taint — it gave as examples of this goods manufactured by child laborers or technology shipped from Iran.[15]
In what may be viewed as a compromise position, the U.S. Court of Appeals for the D.C. Circuit has held that services that were tainted by a potential conflict of interest could lead to a recovery of the full contract amount, if the government could prove that there was no value provided, but that the defendant had a right to put in evidence to the contrary, including evidence about the quality of the work that was provided even though there was an underlying conflict of interest.[16]
The court acknowledged that it would not be easy to calculate the damages, but explained that "[t]he government ... bears the burden of proving damages, ... and we see no basis for adopting an irrebuttable presumption — essentially what the government seeks — that treats services involving expert advice and analysis affected by potential organizational conflicts as categorically worthless."[17]
Practical Implications
The uncertainty in the law regarding damages may play a significant role in how a matter is resolved. Depending on the circuit in which you find yourself, there may be room for making arguments as to how to value a case. In addition, the PPP program — which is a quasi-loan/grant program — is particularly ripe for debate as to damages.
As a loan program, perhaps damages should be thought about as a loss of taxpayer funds. If a borrower pays back its loan in full, then the taxpayer arguably has suffered no losses. On the other hand, as a grant program, the government did not obtain the benefit of its grant — money designated for use by small qualified businesses and nonprofits.
Moreover, there will likely be FCA PPP cases in which a borrower may have qualified for the loan, but made other misrepresentations that caused it to receive a larger loan than it qualified for, or more loan forgiveness than it was eligible to receive. In those cases, the damages arguments and strength of those arguments may look different.
While the government will certainly be looking to send a strong message about true PPP and other pandemic-related fraud, it will also be aware of the implications of cases such as Circle C. Having a deep understanding of these issues will mean that you can assess and negotiate a case from the best possible position.
Ellen London is a partner at Alto Litigation PC.
Derek Adams is a partner at Potomac Law Group PLLC and former trial attorney with the U.S. Department of Justice's Civil Fraud Section.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firms, their clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See https://coronavirus.house.gov/news/press-releases/select-subcommittee-releases-preliminary-analysis-paycheck-protection-program.
[2] See https://www.nytimes.com/2020/08/28/business/ppp-small-business-fraud-coronavirus.html.
[3] 31 U.S.C. §3729(a)(1)(G).
[4] U.S. v. Bornstein
, 423 U.S. 303, 315 (1976). The Bornstein court also held that when a defendant has attempted to mitigate damages, the proper method is to first apply the multiplier (which, under the current version of the statute is treble) and then to make any deductions for payments already received from any source. Id. at 316. In this way, defendants cannot simply escape FCA liability for repaying amounts owed. [5] U.S. ex rel. Feldman v. Van Gorp
, 697 F.3d 78, 87 (2d Cir. 2012); see also U.S. v. Woodbury , 359 F.2d 370, 379 (9th Cir. 1966) ("Ordinarily the measure of the government's damages would be the amount that it paid out by reason of the false statements over and above what it would have paid if the claims had been truthful."). [6] Van Gorp, 697 F.3d at 87-88.
[7] Id. at 88 (quoting U.S. v. Science Applications Int'l Corp.
, 626 F.3d 1257, 1279 (D.C. Cir. 2010)).[8] Id. at 90.
[9] Id. at 88. See also U.S. ex rel. Longhi v. Lithium Power Techs. Inc.
, 575 F.3d 458, 473 (5th Cir. 2009) ("[W]here there is no tangible benefit to the government and the intangible benefit is impossible to calculate, it is appropriate to value damages in the amount the government actually paid to the Defendants."); U.S. v. Anghaie , No. 15-10454, 2015 WL 7720313, at *5 (11th Cir. Nov. 30, 2015) (the fraud "deprived the government of the benefit of funding deserving and eligible research"), U.S. v. Rogan , 517 F.3d 449, 453 (7th Cir. 2008) (full amount of claims that resulted from kickbacks could be recovered regardless of whether medical services actually were provided); U.S. v. Mackby , 339 F.3d 1013, 1018-19 (9th Cir. 2003) (damages equaled full amount of Medicare payments made to provider because he was not eligible to bill Medicare, even though he provided services to patients).[10] 199 F. Supp. 3d 945, 956-57 (D. Md. 2016).
[11] 15 U.S.C. § 632(w)(1). See U.S. ex rel. Savage v. Washington Closure Hanford LLC
, No. 2:10-CV-05051-SMJ, 2017 WL 3667709, at *4 (E.D. Wash. Aug. 24, 2017) (explaining that the presumption may be rebutted but only in narrow circumstances in which the misrepresentation was not intentional); U.S. v. Singh , 195 F. Supp. 3d 25, 30-31 (D.D.C. 2016) (applying the presumption in a criminal case, as part of the sentencing calculation).[12] 813 F.3d 616, 617 (6th Cir. 2016).
[13] Id. at 617.
[14] Id. at 618.
[15] But see Washington Closure Hanford
, 2017 WL 3667709, at *3 (distinguishing Circle C, because the "alleged harm is business and experience being improperly shifted away from small businesses and women-owned small businesses," and explaining that "[t]here is no simple formula for calculating 'actual damages' in this context"); U.S. v. Sound Solutions Windows & Doors Inc. , No. 09 C 6948, 2017 WL 9517514, at *3 (N.D. Ill. May 11, 2017) (finding Circle C "unpersuasive" in light of the fact that while the government did receive the insulation for which it had bargained, it did not receive the "intangible benefit of MBE and DBE participation, which is inherently impossible to calculate").[16] Science Applications Int'l Corp, 626 F.3d at 1279-80.
[17] Id. at 1280.
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