March 21, 2012

$50 Million False Claims Act Penalty Constitutionally Excessive Where the Plaintiff Failed to Prove Any Actual Damages

Holland & Knight Government Contracts Blog
Thomas M. Brownell

In a case that has the government contract and compliance bars buzzing, Judge Anthony J. Trenga of the U.S. District Court for the Eastern District of Virginia ruled last month that a False Claims Act (FCA) qui tam plaintiff is not entitled to recover more than $50 million in statutory penalties under the Act where he failed to prove that the government had suffered any actual damages. United States ex rel. Bunk v. Birkart Globistics GmbH & Co., 2012WL488256 (E.D. Va. February 14, 2012). The court held that the statutorily-mandated civil penalty was “grossly disproportional to the harm caused by the Defendants,” and that the FCA, as applied to the facts of that case, “results in the imposition of an excessive fine in violation of the Eighth Amendment [of the Constitution].”

The False Claims Act has been around for almost 150 years, but Congress keeps amending it in repeated attempts to plug loopholes and reach even more alleged “fraud, waste and abuse.” Currently, False Claims qui tam plaintiffs (also known as “relators” or “whistleblowers”) can claim up to a 30% share of FCA damages, which include actual government losses (trebled), plus statutory penalties of between $5,500 to $11,000 for each false “claim,” in addition to attorneys’ fees and costs of suit. Recently, a qui tam plaintiff (in a FCA suit also in the Eastern District of Virginia) recovered a relator’s fee amounting to an astounding $40 million in settlement of a major case against a large government contractor. See the  Department of Justice’s Press Release.

If the defendant caused the government to incur significant actual losses, trebling damages plus imposing statutory penalties for a reasonable number of “claims” is a harsh remedy, but usually passes constitutional muster. But where the damages are minimal or the number of false claims is relatively large, some courts are beginning to find that the statutory penalties amount to an unconstitutional excessive fine. See United States v. Bajakajian, 524 U.S. 321 (1998) (“a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant’s offense”); United States ex rel. Smith v. Gilbert Realty Co., Inc., 840 F. Supp. 71 (E.D. Mich. 1993) (where actual damages totaled only $1,630, the court found that a penalty of $290,000, which represents a ratio of approximately 1:178, would be excessive and violated the Eighth Amendment of the United States Constitution).

In the Birkart case, the relator failed to prove that the government had suffered any damages at all, but then sought to charge statutory penalties for each of 9,136 small, allegedly false, invoices rendered under a contract for the packing and transportation of personal goods for U.S. military dependents moving in and out of Europe. The “falsity” of the invoices arose out of an alleged price fixing conspiracy among competitors for the prime contract. But, even though there had been some collusion between bidders, the prices for the services bid were actually lower than those under a predecessor contract, and the relator was unable to prove that the alleged conspiracy had actually cost the government any money. At trial, the relator put on no proof at all of actual damages, but relied only upon the stipulated fact that a large number of separate “claims” had been submitted under the contract to prove its claim for the statutory penalties.

The Birkart court was troubled by the lack of proof of actual damages to the government and held a post-verdict hearing on the issue of whether the government suffered a loss. When the relator even then failed to convince the court that there had been any loss to the government, the court considered the issues of (1) the relationship of the mandated civil penalties to the harm; (2) the benefits the defendants derived from the illegally procured contract; (3) the deference to be afforded to the penalty provisions of the statute; and (4) the criminal penalties that pertain to the subject matter of the defendants’ conduct, and concluded that the $50 million in statutory penalties proposed were grossly disproportionate and thus Constitutionally excessive. While the court considered the possibility of reducing the fines to what it thought to be a constitutionally reasonable amount, it found no statutory or judicial guidance allowing it to do so and thus held that the plaintiff was not entitled to recover any penalties at all.

The Birkart case is a district court case and may not be sustained on appeal. (An appeal to the Fourth Circuit Court of Appeals was noted on March 13, 2012.) In the meantime, however, the decision may be useful to defendants in arguing that the government should not pursue cases where there is no real, out-of-pocket loss to the government, but perhaps only a theoretical or a nominal loss. Whether or not the decision is sustained on appeal, however, the Birkart case will make it extremely unlikely that any future plaintiff will skip proof of actual damages and rely solely upon statutory penalties as the basis of its claims.

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