On August 8, the Ninth Circuit issued a key decision clarifying two important aspects of damages under the False Claims Act (FCA) in the government procurement context.
The Ninth Circuit’s holding limits potential damages government contractors may face.
- Statutory penalties tied to number of invoices: The court held that the number of statutory penalties under the FCA and similar state statutes should be tied to the number of fraudulent contracts or invoices at issue—not the number of defective goods provided under the contract.
- Damages means lost value in goods: The court held that actual damages under the FCA should only cover the entire amount paid under a contract if the goods provided under a contract had absolutely no value at all.
The relator in the qui tam action, U.S. ex rel. Hendrix v. J-M Manufacturing Co., alleged that the defendant manufactured and sold PVC pipe to several public agencies across the country despite knowing its PVC pipe failed to comply with industry standards used to estimate the lifespan of plastic pipe material.
The U.S. District Court for the Central District of California bifurcated the trial, and in Phase One the jury rendered a unanimous verdict against the defendant, finding that each of the defendant’s claims was false
Phase Two focused on whether the plaintiffs suffered damages from receiving non-compliant PVC pipe. But Phase Two ended in a mistrial after the jury was unable to reach a verdict. The district court thereafter granted the defendant’s motion for judgment as a matter of law (JMOL) on actual damages. The Ninth Circuit subsequently affirmed both of the district court’s JMOL rulings, although this blog post will focus on the Ninth Circuit’s ruling on statutory penalties and actual damages.
- Statutory Penalties: Both the federal and many state FCAs authorize district courts to impose statutory penalties for each violation of the FCA. The plaintiffs took a maximalist approach, urging the court to award a statutory penalty for each piece of pipe supplied under the contract. But the Ninth Circuit disagreed, observing that the jury’s finding that the defendant could have delivered some non-compliant PVC pipe did not necessarily mean that every piece of pipe was non-compliant. The Ninth Circuit reasoned that it is often more appropriate to craft statutory penalties around the number of contracts or invoices implicated in the fraudulent conduct rather than the actual number of goods provided under the contract.
- Actual Damages: The FCA also provides for damages totaling “the difference between the value of the goods or services actually provided by the contractor and the value the goods or services would have had to the government had they been delivered as promised.” The Ninth Circuit held that this language does not mean the government is entitled to the entire value it spent on a fraudulent contract, especially where there is no evidence that the plaintiffs’ PVC pipe failed to operate as promised or that any of the plaintiffs returned or ceased using the PVC pipe at issue. In short, without evidence establishing the difference in value between the goods as actually provided and as promised, a jury cannot make a just and reasonable estimate of actual damages and, as a result, cannot render a verdict on actual damages.
The Ninth Circuit closed by holding that the plaintiffs also could not recover the cost of replacing the PVC pipe they purchased from the defendant because they had not replaced any pipe or provided any evidence that the plaintiffs would need to replace the non-compliant PVC pipe before they would have needed to replace the compliant pipe. While the extent of damages under the FCA can depend on the facts of a specific case, the Ninth Circuit’s ruling on how to frame statutory penalties and actual damages provides additional ammunition for FCA defendants trying to cabin and minimize damages, which can quickly skyrocket.
For additional analysis of recent FCA settlements in the government procurement context, please click here. For more information about the False Claims Act generally, please subscribe to this blog or contact a member of the Bass, Berry & Sims Healthcare Fraud & Abuse Task Force.