U.S.’s claim for $550K actual damages not reasonable, so FCA violator awarded attorneys’ fees
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Tuesday, August 22, 2017

U.S.’s claim for $550K actual damages not reasonable, so FCA violator awarded attorneys’ fees

By Joy P. Waltemath, J.D.

Reversing the denial of attorneys’ fees to a general contractor whose subcontractor failed to pay two of its electricians about $9,900 less than their Davis-Bacon required wages, for which the United States sued them for $554,000 in “actual damages” (tripled to $1.66 million), the Sixth Circuit found that the government’s fee demand was both “substantially in excess of the judgment finally obtained”—a mere $14,748—and “unreasonable when compared with such judgment” to justify awarding fees under a federal fee-shifting statute, 28 U.S.C. § 2412(d)(1)(D). In the appeals court’s view, the government bargained for two things: the buildings, which it got, and the payment of Davis-Bacon wages, which it got save a shortfall of $9,916. That true actual damages amount could not support a finding that the government’s demand for roughly $554,000 in actual damages, and $1.66 million overall, was reasonable, based on its theory that all of the subcontractor’s electrical work was “tainted” by the $9,900 underpayment and therefore valueless. Judge Rogers dissented (U.S. ex rel Wall v. Circle C Construction, LLC, August 18, 2017, Kethledge, R.).

Davis-Bacon Act violation. The general contractor built 42 warehouses for the U.S. Army over a period of seven years, during which time a subcontractor paid two of its electricians about $9,900 less than the wages mandated by the Davis-Bacon Act. That underpayment rendered false a number of “compliance statements” that the general contractor submitted to the government along with its invoices, making it liable to the government under the False Claims Act, under which the government could recover three times its “actual damages.” The government sought $1.66 million, of which $554,000 was purportedly “actual damages” for the $9,900 underpayment. The government’s “taint” theory in support of that demand was that all of the subcontractor’s electrical work, in all of the warehouses, was “tainted” by the $9,900 underpayment—and therefore worthless.

How much in actual damages? The district court had concluded that the government’s actual damages were $260,000 (the entire amount the government had paid for the electrical work on the warehouses), trebled to over $777,000 (less amounts already paid). In an earlier appeal, the Sixth Circuit reversed that $763,000 judgment in favor of the government and remanded for entry of an award of $14,748—less than 1 percent of the government’s original demand, discounting the government’s taint theory because the warehouses were not worthless: “In all of these warehouses, the government turns on the lights every day.”

Attorneys’ fees. The general contractor had paid an estimated $468,704 in attorneys’ fees to defend itself and, back in the district court, it argued that a 1996 amendment to the Equal Access to Justice Act applied here. That statute, 28 U.S.C. § 2412(d)(1)(D), provides that, if a court awards damages to the government, but the government’s original demand for damages was both “substantially in excess of the judgment finally obtained” and “unreasonable when compared with such judgment,” then the court must “award to the [defendant] the fees and other expenses related to defending against the excessive demand.” Exceptions apply, of course.

The district court did not agree, choosing not to address the disparity between the damages sought and the eventual award and reasoning, in any event, that the government’s “taint” theory was not unreasonable because courts—including itself—had accepted it. The general contractor appealed.

Fee-shifting statute. The Sixth Circuit first found that Sec. 2412(d)(1)(D) (the fee-shifting section) applied, regardless of the government’s argument that it did not because the False Claim Act provision referencing its applicability is entitled, “Fees and expenses to prevailing defendant,” and the general contractor was not technically a prevailing defendant because the district court on remand entered a judgment of $14.7K in the government’s favor. However, a provision’s title “cannot limit the plain meaning of the text,” and the court found the text pretty clear and clearly applicable to this situation.

Substantially in excess. Sec. 2412(d)(1)(D) says that the party seeking fees bears the burden of proving that the government’s demand was substantially in excess of the award obtained by the judgment and that the government’s demand was unreasonable compared to that judgment. Here, the government demanded $553,807 in purported actual damages, trebled to about $1.66 million, but the award it finally obtained was $14,748. That qualified as a demand substantially in excess of the judgment.

Was demand unreasonable? As to reasonableness, the Sixth Circuit looked to case law concerning a similar inquiry under a related provision: namely, whether the government’s position was “substantially justified” under Sec. 2412(d)(1)(A). That standard says the government’s position must be “justified to a degree that could satisfy a reasonable person.” On this point, the Sixth Circuit had already made its opinion known: in the last appeal, it called the damages the government sought to recover from the contractor “fairyland rather than actual.”

After recounting what the government bargained for (the buildings and the Davis-Bacon wages) and what it got (the buildings and the Davis-Bacon wages less $9,916), the appeals court could not find the demand of roughly $554,000 in actual damages, and $1.66 million overall, was reasonable. The government’s theory that all the subcontractor’s electrical work was “tainted” by the $9,900 underpayment and therefore valueless belied common sense, since “the government in fact benefits from that work every minute of every day.” Plus, “the fact that one other court agreed or disagreed with the Government does not establish whether its position was substantially justified,” said the court, focusing on the “actual merits” of the government’s litigating position, which it again found unreasonable.

Exceptions. That meant the general contractor was entitled to a fee award unless it fell within one of the exceptions—a “willful violation of law” or “bad faith or “special circumstances [that] make an award unjust.” Although the government attempted to argue that by definition, the general contractor had been found liable under the False Claims Act for “knowingly” making or causing “false or fraudulent claims,” which constituted bad faith, the appeals court pointed out that the general contractor submitted compliance statements that were inaccurate as to only $9,900 in a project costing more than $20 million. Plus, “knowingly” is a term of art under the False Claims Act, which refers to three mental states: “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” Here, the general contractor was reckless—the least culpable of these states—as to whether its compliance reports were accurate, and that is not bad faith, concluded the appeals court.

No special circumstances. The government also was unsuccessful in its argument for special circumstances here. The court didn’t completely buy its argument that it should be allowed to present “novel but credible” interpretations of law; in general, the court agreed, but here the government’s theory was not credible. And though the government also argued that a fee award in this case would have a “chilling effect” on its efforts “to vigorously enforce” the False Claims Act, the Sixth Circuit quipped: “One should hope so,” finding the government’s approach “nearly frivolous.”

Dissent. Under abuse of discretion review, where “substantial deference” is accorded to the judgment of the trial court, the dissenting judge believed the district court’s denial of fees should be affirmed, as it was a matter of that court’s judgment whether the government’s litigating position in the case was reasonable.

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