The federal government, through its agencies, offers grant funding opportunities to private individuals and entities. Numerous federal agencies offer grants, including the Department of Defense, Health and Human Services and the Department of Energy. Often federal grants are aimed at funding innovative research.
In a nutshell, the grant process involves applying for the grant, obtaining the grant award and then conducting the research required under the grant. Grant fraud can occur during any stage of this process. A grant recipient may make false and misleading statements to the federal agency in order to obtain the grant award or may deceive the government as to how the award funding is being used. As a result, grant recipient entities may be liable under the False Claims Act (“FCA”) and subject to treble damages for any violations of the FCA.
One question may arise with regard to grant fraud under the FCA: How are damages calculated? When the government funds a research grant, the end result is abstract and not easily measurable, as compared to the classic FCA case involving non-conforming products or goods. As discussed below, courts have found that the government is entitled to the full amount of the funding under the research grant in calculating single damages. And, the FCA provides for trebling of single damages for FCA violations.
The Government is Entitled to Recover the Full Amount of the Research Grant in Single Damages
When a defendant obtains grant money under false pretenses, the measure of single damages under the FCA is the amount the government actually paid to the defendant under the research grant. United States ex rel. Laymon v. Bombardier Transp. United States, 656 F. Supp. 2d 540, 546 (W.D. Pa. 2009) (“where there is no tangible benefit to the government and the intangible benefit is impossible to calculate, it is appropriate to value damages in the amount the government actually paid to the Defendants.”); see also United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 88 (2d Cir. 2012) (holding same).
Put slightly differently, “when a third-party successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.” Feldman, 697 F.3d at 88. “[T]he government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved.” Id.
The Fifth Circuit First Addressed How to Calculate Damages Under the False Claims Act for Fraudulently Induced Research Grants
In 2009, the Fifth Circuit became the first circuit court to address the proper method of calculating damages for a fraudulently induced research grant. U.S. ex rel. Longhi v. Lithium Power Techs., Inc. 575 F.3d458, 472-73 (5th Cir. 2009). In that qui tam case, the defendants had been found liable for violations of the FCA based on false and misleading statements made in grant proposals to obtain federal funds aimed at supporting small businesses’ research and commercial development of thinner battery technology. Id. 575 F.3d at 462. The district court assessed damages in an amount equal to three times the total amount the government had paid to defendants for the research grants. Id. at 575 F.3d, at 472.
On appeal, the defendants argued that because the government had suffered no actual injury, as the grant program’s intended purpose was to support small businesses to conduct research and advance commercial development, and not to provide anything to the government, the government was not entitled to any damages. Id. In rejecting this argument, the Court held that “where there is no tangible benefit to the government and the intangible benefit is impossible to calculate, it is appropriate to value damages in the amount the government actually paid to the Defendants.” Id. 575 F.3d at 473; see also United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 88 (2d Cir. 2012) (holding same).
In finding that defendants owed the government the full amount paid under the research grants, the Court reasoned:
The contracts entered into between the government and the Defendants did not produce a tangible benefit to the BMDO or the Air Force. These were not, for example, standard procurement contracts where the government ordered a specific product or good. The end product did not belong to the BMDO or the Air Force. Instead, the purpose of the SBIR grant program was to enable small businesses to reach Phase III where they could commercially market their products. The Government’s benefit of the bargain was to award money to eligible deserving small businesses. The BMDO and the Air Force’s intangible benefit of providing an “eligible deserving” business with the grants was lost as a result of the Defendants’ fraud.
Longhi, 575 F.3d at 473.
Other Circuit Courts Have Agreed that the Government Should Receive the Full Amount of the Grant
The Second Circuit case of United States ex rel. Feldman v. van Gorp, 697 F.3d 78, 88 (2d Cir. 2012) held that “when a third-party successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.” “[T]he government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved. Id.
The Feldman court further explained that, in other FCA cases, whether it be “medical care, security on mortgages, or subsidized housing,” the government got “what it bargained for but it did not get all that it bargained for” whereas in the third-party benefit grant context, the government bargains for “something qualitatively, but not quantifiably, different from what it received. Id. (emphasis in the original).