False Claims ActPublications

FCA Defendant Strikes Back Against DOJ for Seeking Unreasonable Recovery

August 25, 2017Insight
Dinsmore on FCA

It is rare that FCA defendants have their legal defenses paid for, and rarer still that DOJ must bear the expense. In United States ex rel. Wall v. Circle C Construction, the Sixth Circuit held that the government must pay roughly $500,000 in legal fees and expenses the defendant incurred as a result of the government’s unreasonable litigating position.

In Wall, the United States Army contracted with Circle C Construction, a family-owned business, to build 42 warehouses in Kentucky and Tennessee. The contract’s terms included compliance with minimum wages mandated by the Davis-Bacon Act. An electrical subcontractor paid two electricians $9,900 under the Davis-Bacon Act’s mandated wage, which rendered false a handful of compliance statements Circle C sent to the government along with its invoices. The subcontractor paid $15,000 to settle the underpayment. The government went after Circle C for almost a decade, claiming that the $9,900 underpayment resulted in $554,000 in actual damages. When trebled (as the FCA allows), these asserted damages rose to $1.66 million. The government’s theory: the $9,900 underpayment tainted all of the subcontractor’s electrical work throughout the warehouses, rendering that work worthless. Over the course of a decade, Circle C paid its attorneys almost $500,000 to defend against the government’s lofty demand. The government was ultimately awarded $14,748 in damages, which was less than 1% of the government’s demand.

Circle C moved for recovery of its attorneys’ fees, relying upon a fee-shifting provision of the Equal Access to Justice Act. The provision states 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.” The district court denied Circle C’s motion based on the fact that the court itself had twice accepted the government’s theory, meaning the theory was not “unreasonable.”

The Sixth Circuit, in a 2-1 opinion, concluded that the district court abused its discretion in denying Circle C’s motion. The key point, according to the majority: the government’s theory was that the electrical work in the 42 warehouses was worthless even though the government enjoyed the benefit of that electrical work. The majority said that the government’s position must have been “substantially justified” to avoid liability under the fee-shifting provision. And to be “substantially justified,” the government’s position must have been “justified to a degree that could satisfy a reasonable person.” The majority deemed the government’s asserted damages “fairyland rather than actual” and so untethered from the ultimate damages award that the position was indeed “unreasonable.”
The district court’s two-time acceptance of the government’s theory did not render the damages position “substantially justified.” Although the majority noted that “a string of successes” in a litigation position might indicate that the position is reasonable, the government had not shown such “a string of successes” here. The merits of the litigation position matter more, and the government’s position here was meritless.1

In Wall, Circle C Construction earned a rare victory. FCA defendants are often forced to defend against meritless cases and litigating positions, and those defenses can be costly. Wall is helpful precedent for defendants who are effectively coerced to litigate by unreasonable government damages theories.

1 Judge Rogers dissented. He agreed with the district court that the government’s damages position was “substantially justified” based on the facts that (1) the district court had bought the government’s theory on more than one occasion, and (2) other courts had bought similar theories in different contexts. He concluded that, when viewed through the deferential lens of abuse of discretion, the district court did not err.