One Potential Remedy for FCA Overreach?

by Pillsbury Winthrop Shaw Pittman LLP
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Sixth Circuit awards attorneys’ fees to False Claims Act defendant against the U.S. government in case involving underpayment of Davis-Bacon Act wages.

Takeaways

  • Decision opens door for FCA defendants to recover attorneys’ fees in cases where the government recovers significantly less than it demands.
  • Decision discredits government theory that the underpayment of wages “tainted” all of the electrical subcontractor’s work.
  • Court forcefully rejects government’s argument that awarding attorneys’ fees would have a “chilling effect” on FCA enforcement actions.

In a unique and important decision issued by the U.S. Court of Appeals for the Sixth Circuit on August 18, 2017, United States v. Circle C Construction, 2017 WL 3568497, the Court held that a defendant could recover its attorneys’ fees from the U.S. government in a False Claims Act (FCA) case in which the government sought $1.66 million in damages but recovered only $14,748.

The case has a lengthy procedural history going back nearly a decade, but it involved claims by the government against the defendant, Circle C Construction, arising from Circle C’s alleged false statements concerning its compliance (and the compliance of its subcontractors) with the minimum wage requirements of the Davis-Bacon Act. The underlying contract involved the construction of 42 warehouses for the U.S. Army in Kentucky and Tennessee over a seven-year period at a cost of more than $20 million. One of Circle C’s electrical subcontractors underpaid two of its employees by $9,900. The government claimed actual damages of $554,000, which when trebled under the FCA yielded a total claim by the government against Circle C in the amount of $1.66 million. In the predecessor appeal, the Sixth Circuit reversed a $763,000 judgment in favor of the government and remanded the case to the trial court for entry of judgment in the amount of $14,478. After that appellate decision, Circle C sought recovery of approximately $468,000 in attorneys’ fees under the Equal Access to Justice Act (EAJA), as codified in part at 28 U.S.C. § 2412(d)(1)(D). The trial court, on remand, denied Circle C’s claim for attorneys’ fees, concluding that the government’s claim under the FCA was not “unreasonable.”

The Sixth Circuit, in a 2-1 decision, reversed, found that the trial court abused its discretion, and concluded that the Government’s $1.66 million claim—when compared against its actual recovery of $14,748—was unreasonable and therefore that Circle C was entitled to recover its attorneys’ fees under EAJA. The decision is noteworthy for several reasons. First and foremost, it opens the door for FCA defendants to recover their attorneys’ fees in cases in which the government recovers significantly less than it demands under the FCA. Second, the decision casts doubt on the theory espoused by the government that the underpayment of wages “tainted” all of the electrical subcontractor’s work on the warehouses; the government used this “taint” theory to claim actual damages of $554,000, which represented the value of all of the electrical subcontractor’s work on the project. As the Court noted in rejecting this argument, “a reasonable person could not accept the government’s argument that Phase Tech’s [the subcontractor] electrical work was worthless.” Finally, the Court unequivocally and forcefully rejected the government’s argument that awarding attorneys’ fees to Circle C would have a “chilling effect” on the government’s FCA enforcement actions. The Court’s language in rejecting that argument is worth quoting:

[T]he government warns that a fee award in this case would have a “chilling effect” on its efforts “to vigorously enforce” the False Claims Act. One should hope so. In this case the government made a demand for damages a hundredfold greater than what it was entitled to and then pressed that demand over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous. The consequences for Circle C included nearly a half-million dollars in attorneys’ fees. Section 2412(d)(1)(D) makes clear that the government must bear its share of those consequences as well. [Emphasis added and citation to brief omitted.]

FCA defendants faced with—and able to prove—government overreach have been provided with a potentially powerful remedy by the Sixth Circuit’s Circle C decision.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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