Sixth Circuit reverses $657 million judgment and again holds government to burden of proving damages under False Claims Act

Sixth Circuit reverses $657 million judgment and again holds government to burden of proving damages under False Claims Act

April 16, 2015

In United States v. United Technologies Corp., the 6th U.S. Circuit Court of Appeals found that a $657 million judgment awarded to the U.S. government for the defendant’s overbilling on military jet engines was not supported by the evidence.  Under the False Claims Act (FCA), the government bears the burden to prove its damages by a preponderance of the evidence. See 31 U.S.C. § 3731(c).  In the opinion, Circuit Judge Jeffrey Sutton could not have been more clear on this point: “The government had the burden of proving damages, and it never did.”  While the 6th Circuit was tempted to end the dispute, it remanded the matter to the District Court to possibly give the government yet another opportunity to establish damages. 

Causation of economic loss 

The FCA provides for statutory penalties and the potential for treble damages.  The statutory penalty imposes a $5,500 to $11,000 civil fine per violation on any defendant who submits a false claim or makes a false statement for payment of a false claim.  The government may also recover “actual damages,” which are the difference between what it paid and what it should have paid for the goods.  The FCA provides for treble actual damages – recovery of “3 times the amount of damages the Government sustains because of the act of [the defendant].”  31 U.S. Code § 3729(a).  While causation is not an explicit element of a FCA prima facie case, the treble damages provision contemplates a causal connection between the defendant’s false act and the government’s injury.  

Before the government may recover treble damages, it must demonstrate that the false claim caused a loss.  How closely must the false act relate to the government’s loss?  Some courts have held that a defendant’s act must be the reason for the government’s loss.  This is considered a narrow test that requires a direct relationship between the unlawful act and the government’s injury.  Other courts require only that the defendant’s falsity be the “but for” cause of the government’s loss, rather than the source, as is required in the first approach.   

Protracted proceedings  

The United Technologies litigation has been raging for 17 years, over which time the case has twice been before the 6th Circuit. 

In 1983, Pratt & Whitney Aircraft Engines (Pratt), now owned by United Technologies, made false statements to the Air Force in the course of competing with GE Aircraft to supply the Air Force with engines for fighter jets.  In an effort to discourage the military from dividing the work between Pratt and GE Aircraft, Pratt misstated projected costs in its 1983 bid in three ways – its  bill of materials, inflation forecasts, and expected discounts from suppliers.  Despite these false statements, Pratt did not obtain more business.  The Air Force divided the engine orders, and in the first year of the new six-year contract it purchased three-quarters of the engines from GE Aircraft and only a quarter from Pratt.

Round one
 
In its first opinion, the District Court applied the “natural tendency” test and determined that the cost estimates provided to the government in 1983 were materially false and violated the FCA.  The District Court entered a judgment in favor of the government for the statutory maximum fine at that time of $10,000 per invoice submitted, for a total of $7.09 million.  In so doing, the District Court noted that fines are most appropriate when potential damages are large, but actual damages small.  The court, however, rejected the government’s claims for additional FCA damages because the false statements did not prompt the government to award additional business during the years charged.  As a result, “in the years under review, the Government’s actual damages were none.”  

Both parties appealed the District Court’s decision.  The 6th Circuit affirmed the District Court’s FCA liability determination, but reversed the damages calculation and remanded for a recalculation.  It directed the District Court to calculate what the government paid each year, what it should have paid based on what the government received, and the difference between the two.  If the District Court concluded that Pratt’s prices represented the fair market value (FMV) of the fighter jet engine contract – or were below FMV – the government would not be entitled to damages.  

Round two 
 
On remand, the District Court made an about-face on the question of whether the government had suffered a loss.  In addition to the $7 million it had previously ordered in penalties, it awarded the government $657 million in damages – a combination of treble damages under the FCA, restitution, and prejudgment interest.  With regard to the FCA damages calculation, the court reasoned that the comparable sales approach was inapplicable; the market at issue was highly regulated and only consisted of two sellers – Pratt and GE.  As an alternative measure of loss, the court adopted wholly the testimony of the government’s damages expert – who had assigned a loss figure of approximately $228 million.  The expert testified that the court should adjust the amount the government had paid in each contract year by removing the amounts the government proved it paid as a result of United Technologies’ fraud in each year of the fighter engine contract and add in any amounts proved as an offset. 

In December 2013, the Justice Department dubbed this initial judgment as the largest “in the history of the False Claims Act” and said it would be “the largest procurement recovery in history” if upheld on appeal, according to a department press release

Did the government get what it paid for?  

Pratt appealed a second time.  The 6th Circuit considered whether the evidence supported the $657 million award where the government’s expert refused to account for the competition between GE Aircraft and Pratt in setting a FMV for the engines.  When addressing this question, the 6th Circuit reiterated the controlling rule: “When the government gets what it paid for despite a contractor’s misstatements, it has suffered no ‘actual damages.’”  The court also noted that FMV is “what a willing buyer would pay in cash to a willing seller at the time.”  The preferred method of proving FMV in a FCA case is the comparable sales analysis.  The comparable sales valuation method applied in United Technologies even though the market for fighter jet engines is heavily regulated, has only two sellers, and results in few sales per year.  The 6th Circuit observed that GE Aircraft’s engine prices were a natural place to look for evidence of the value the government had received.  The only question was whether those engines are adequately comparable to Pratt’s.

The government argued that GE Aircraft’s engine sales were not comparable because its prices were tainted by Pratt’s fraud.  The 6th Circuit rejected this as circular reasoning, noting that the taint argument works only if the evidence shows that Pratt’s prices were inflated by fraud.  That is the question that, after two rounds of appeals and counting, the trial court has still not addressed.  The answer begins with comparable sales and potentially other indicators of value: the government’s price estimates; prior sales by Pratt; and foreign resales of the engines.  So far, the government has failed to meet its burden to show damages based on comparable sales (and other factors).

Round three? 

The Court of Appeals concluded its second opinion with a remand to the District Court to determine whether the government should have a third opportunity to prove damages notwithstanding the FMV price Pratt charged due to its competition with GE Aircraft.  Stay tuned for more on the critical issue of damages in FCA cases.  

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