Monday, April 1, 2013

Contract Damages in False Claims Act Cases: the 7th Circuit Adopts a Net Trebling Approach to Calculating Damages

The Seventh Circuit recently adopted a common sense "contract damages" approach in assessing damages in False Claims Act cases: United States v. Anchor Mortgage Corporation, 2013 WL 1150213 (7th Cir. March 21, 2013). Essentially, the Court counseled that in awarding damages in a False Claims Act case, the "net damages," or damages from which the value of any collateral or mitigation are subtracted, should first be calculated before the damages are trebled as provided for by the False Claims Act.

In Anchor, the District Court found the defendants, a corporation and its CEO, liable under the False Claims Act for lying in connection with applying for federal loan guarantees. Pursuant to 31 U.S.C. 3729(a)(1), the Court imposed treble damages in the total amount of $2.7 million. Using one loan guarantee as an example, the District Court began with the amount paid to the lender under the guarantee, $131,643.05, trebled it for a total of $394,929.15, and only then subtracted from that amount the value of the mortgaged security for the failed loan,$68,000, for a final trebled damage figure of $326,729.15, to which the Court added the $5,500 statutory penalty. The Court followed this same method for each of the 11 loan guarantees at issue.

The Seventh Circuit characterized this method as a "gross trebling approach" and it contrasted this method of calculating damages with what it called a "net trebling approach." In a net damage calculation, the value of the security is subtracted from the loss before it is trebled. Applied to the guarantee above, the net trebling approach would subtract the value of the security, $68,000, from the amount of the overall loss, $131,643.05, and then treble that net amount, to reach a total of $190,329.15 to which the $5,500 penalty would then be added.

The Seventh Circuit observed that while the "False Claims Act does not specify either a gross or a net trebling approach," the FCA also does not "signal a departure from the norm [for damages] -- and the norm is net trebling." Adopting the method used for calculating breach of contract damages, the Court stated: "Basing damages on net loss is the norm in civil litigation. If goods delivered under a contract are not as promised, damages are the difference between the contract price and the value of what arrives. If the buyer has no use for them, they must be sold in the market in order to establish that value. If instead the seller fails to deliver, the buyer must cover in the market; damages are the difference between the contract price and the price of cover. If a football team fires its coach before the contract's term ends, damages are the difference between the promised salary and what the coach makes in some other job (or what the coach could have made, had he sought suitable work). Mitigation of damages is universal."

The Court acknowledged that the Supreme Court's decision in United States v. Bornstein, 423 U.S. 303 (1976) is generally cited for adopting a gross trebling approach in False Claims Acts cases. The Seventh Circuit, however, cited Footnote 13 in Bornstein where the Supreme Court appeared to adopt the "contract measure of loss" which supports a net trebling approach.

In reversing the District Court's damage calculation, the Seventh Circuit instructed the District Court to adopt a net trebling approach, and then explained further that the "United States' loss is the amount paid on the guaranty less the value of the collateral, whether or not the agent has chosen to retain the collateral. The damages should not be manipulated through the agency's choice about when (or if) to sell the property it receives in exchange for its payments."

Overall, the Seventh Circuit has adopted a sensible approach to damages, sorely needed in False Claims Act cases. The Court essentially refused to deviate from the common law approach to damages when the False Claim Act's statutory language did not specify or require a gross trebling method for calculating damages.

A. Brian Albritton
April 1, 2013

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