How Should False Claims Act Damages be Calculated?

Submitting a False Claim & Calculating Government Damages

A party who has been found to have submitted a false claim, or who has caused the submission of a false claim to the United States under the False Claims Act is liable for civil penalties of no more than $11,000 and no less than $5,500 for each violation of the FCA that occurred after September 29, 1999 but before November 2, 2015, and no more than $21,916 and no less than $10,957 for each violation of the FCA that occurred on or after November 2, 2015, plus three times the amount of damages that the Government sustains. Although the False Claims Act is not new and the application of this formula may appear to be straight forward, exactly how these damages are calculated can depend on in which federal judicial circuit the false claims action was brought.

Benefit of the Bargain Analysis in False Claims Cases

The courts can look at different measures in order to determine the amount of damages. Generally, the courts use a “benefit of the bargain” analysis in false claims cases. In other words, as is done in many  breach of contract cases, they look at the difference in value between what the government received and what it paid.  Where the goods or services received by the government have a market value, that amount is then compared to the market value the product would have had it met the government’s requirements .  Where the goods or services did not provide any tangible benefit, and any intangible benefit cannot be valued, as, for example, where the  government funded scientific research,  damages to the government are measured by the amount the government paid for the false claim, U.S. ex rel. Feldman v. van Gorp, 697 F.3d 78, 87-88 (2d Cir. 2012);  see, U. S. ex. rel Longhi, 575 F. 3rd 2009); United States v. Science Applications Int’l Corp., 626 F.3rd 1257, 1279 (D.C. Cir 2010).

Gross Trebling Approach vs. Net Trebling Approach

A further issue that arises is the question of what is trebled. The answer to this question has led to two different results, a “gross trebling” approach  or a “net trebling”  approach.  In the gross trebling approach, the court trebles the amounts paid by the government and then subtracts any value received by the government.  In the net trebling approach, any amounts  or value the government has received is subtracted from the amount the government has paid and the result is then trebled.  The difference between gross trebling and net trebling is significant. Assume that as a result of false claims, the government paid $300,000 for services that had a value of $185,000. A comparison of the two methods illustrates the impact of these different   methods of damage calculation:

• Gross Trebling (300,000 x 3) minus 185,000 equals 715,000
• Net Trebling (300,000 minus 185,000) x 3 equals  345,000

The gross trebling approach is the one that the government has long advocated and applied.  In doing so, the United States and the Department of Justice rely on a decision of the Supreme Court in United States v. Bornstein, 423 U.S. 303, 314  (1976)  where the court  agreed that False Claims Act “damages  should be [multiplied] before any compensatory payments are deducted because that method of compensation most faithfully conforms to the language and purpose of the Act” . This view has also been accepted by the Ninth Circuit, United States v. Eghbal, 548 F.3rd 1281, 1285 (9th Cir. 2008).

In a recent case, however,  the Seventh Circuit rejected the government’s approach to calculating damages, United States v. Anchor Mortgage Corp., 711 F.3rd. 745 (7th Cir. 2013).  The court found that the defendants provided false information with regard to a number of residential mortgage loans insured by the Federal Housing Administration (FHA). The trial court had adopted the gross trebling damage calculation. The appellate court disagreed, holding that a net trebling approach should be used with the government’s damages, before trebling, being “the amount paid on the guarantee less the value of the collateral”, id, at 751. In doing so, based on its interpretation of a footnote,  it read Bornstein to support the net trebling approach .  The Anchor court  rejected the conclusion of Eghbal.

Even though there is a split in the circuits on this issue, the Justice Department did not appeal the Anchor decision. We can certainly expect that defendants in false claims cases will assert that the Anchor court  reached the correct conclusion  and that net trebling is the correct way to calculate damages. Plaintiffs, of course, will argue that net trebling is the correct method to be used in assessing damages.

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