Services that are Worth Less Aren’t Necessarily Worthless

The Sixth Circuit brought a refreshing sense of reality to the government’s sometimes unreal calculation of damages in False Claims Act (FCA) cases.  In this case the government had sought, and won at the trial level, an award of $763,000 against a contractor because of a subcontractor’s underpayment of workers by $9,916: 77 times the underpayment.

Circle C had a contract to build 42 warehouses at Fort Campbell.  The contract required payment of wages at the Davis-Bacon Act level.  It turned out that one of Circle C’s subcontractors underpaid its electricians by $9,900.

The government cried foul and on the basis of the FCA’s triple-damage provision, demanded three times the total $259,000 paid to that subcontractor—not three times the $9,900 underpayment but three times the total paid to the subcontractor.  That made sense to the trial court, and it awarded $763,000, i.e., three times the total less $15,000 already paid by the subcontractor.

The Sixth Circuit unanimously rejected the government’s “taint theory”—the theory that the underpayment tainted all payments to the subcontractor and made the work “valueless.”  How did the court know that the work had some value?  Because “the government turns on the lights every day” in the warehouses.

The court reversed, ruling that the actual damages were $9,916 and reducing the award against Circle C to $14,748, i.e., three times $9,916 minus the subcontractor’s $15,000 payment.

This decision has important implications for the health care industry.  Traditional thinking is that the actual damage—the amount to be tripled—in Medicare and Medicaid FCA cases may be the total amount of the payments.  This decision reflects the theory that when the services have some value, the actual damage is limited to the excess of a payment above that amount.

The case is U.S. ex rel. Wall v. Circle C Construction, No. 14-6150 (Sixth Cir., Feb. 4, 2016).

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