False Claims Act and Excessive Fines Clause: 4th Circuit Upholds Relator's Decision to Accept Smaller Judgment to Avoid Unconstitutional Result

Just recently, the U.S. Circuit Court of Appeals for the Fourth Circuit addressed whether the penalties assessed against a defendant under the False Claims Act ("FCA") can ever violate the 8th Amendment's protection against "excessive fines" in the appeal, United States ex rel Kurt Bunk & Daniel Heuser v. Birkart Globistics GmbH & Co et al., Case No. 12-1369 (4th Cir. 12/19/2013), a case about which I previously blogged. The 4th Circuit overturned the District Court's decision which had  found the $50 million in penalties to be an excessive fine in light of the government's lack of damages. Essentially, the 4th Circuit avoided the constitutional issue by agreeing to the Relator's offer to accept $24 million in penalties in lieu of the entire $50 million that the District Court believed the FCA required to be imposed on the defendant. A few observations about the decision:

• This FCA case concerned defendant contractors who moved the furnishings of U.S. military service personnel overseas to Europe and whether they colluded with subcontractors, resulting in the defendants charging inflated moving prices to the military. The Court began its opinion by observing, "An army may march on its stomach, but when a fighting force is deployed to a foreign front, familiar furnishings also serve to fuel the foray." These personnel whose goods were being transported were going to "encamp" in Europe. Once the Court characterizes these military personnel as "fighting forces deployed to a foreign front," you know for certain that the defendants will be losing and the court will fudge the constitutional issue.

• One of the Relators, Bunk, who actually prevailed in this action never pled or proved any monetary damages caused by the defendants. The defendants sought to challenge Bunk's standing to bring this action in the absence of any damages, but the 4th Circuit found Bunk had standing.

• Other settling defendants had already paid the government $14 million, which the District Court found "was far in excess of the presumptive damages" which were $895,000. The defendant had already paid that as restitution in a parallel criminal case.

• The 4th Circuit affirmed that penalties were to be imposed on the basis of the false certifications contained in a defendant's claims for payments submitted to the government and that each certification qualified as a false claim giving rise to a penalty. Unfortunately for this defendant, there were 9,136 false claims or bills, and that amount multiplied by the minimal $5,500 penalty came to just shy of $50 million.

• The Court acknowledged that the "perceived tension between the FCA and the Excessive Fines Clause of the 8th Amendment . . . is a monster of our own creation." To its credit, the Court candidly stated that "the FCA as enacted could arguably have been construed as authorizing a total civil penalty not to exceed $11,000." But, the Court observed further that it was following precedent -- bereft of any "our hands are tied" complaints -- in concluding that "FCA liability . . . attaches to the claim for payment."

• The Court avoided a finding that the $50 million in penalties qualified as an excessive fine because the Relator agreed to accept only $24 million. The Relator's "voluntary remittitur," the Court observed, was "just the sort of arrow that a plaintiff is presumed to possess within his quiver" and that a plaintiff's discretion to take a "lesser judgment . . . is virtually unbounded." Here again, the Court relied on a prior FCA case, U.S. v. Mackby, 339 F.3d 1013 (9th Cir. 2003), in permitting this remittitur.

• Essentially, the Court states that a District Court "must permit the government or its assignee [the Relator] the freedom to navigate its FCA claims through the uncertain waters of the Eighth Amendment."

• As for the $24 million, the Court upheld the constitutionality of that amount by apparently disregarding the lack of evidence of any harm and finding that the "notion [that the government suffered no injury] seemingly inconsistent with [defendant's] apparent profit motive in making the statements at issue." The Court went on that "there is no doubt" -- even though the Court cites no evidence otherwise -- that "the government has suffered significant opportunity costs from being deprived of the use of those funds for more than a decade."  

• Finally, as mentioned above, the $24 million was not viewed as violating the Excessive Fines clause because it was not "grossly disproportionate" to the crime against the military. "The prevalence of defense contractor scams . . . shakes the public's faith in the government's competence and may encourage others similarly situated to act in a like fashion."

In short, given that the victim was the military, there was no way the Court was going find the FCA's penalties to be unconstitutional or use this decision as a vehicle to curb the FCA's excesses. Moreover, there is just something vaguely unsettling about hinging a court's determination of this statute's constitutionality not on its application and consequences, but on what the government and Relator will accept.

A. Brian Albritton

January 1, 2014

Court Refuses to Impose FCA Civil Penalty in False Certification Case On Grounds That $50.2 Million Penalty Violates Excessive Fines Clause

The Blog of Legal Times recently featured an interesting case where a District Court Judge refused after the trial of a False Claims Act ("FCA") case to impose the minimum $50.2 million Civil False Claims Act penalty on the grounds that the penalty was unconstitutionally excessive in violation of the 8th Amendment:  United States ex rel Kurt Bunk & Daniel Heuser v. Birkart Globistics GmbH & Co et al., Case No. 1:02 cv 1168 (AJT/TRJ)(E. D. VA.  2/14/12).  As reported in The BLT, Judge Trenga refused to impose the statutorily mandated fine based on the number of invoices submitted to the government on the grounds that the fine was "grossly disproportional" to harm --more precisely, the lack of harm-- caused by the defendant, Gosselin Worldwide Moving N.V. 

The FCA claim against Gosselin was based on a false certification theory.  Gosselin had submitted a bid to the Department of Defense Contracting to pack and move military household goods owned by service personnel and their families between the United States and various countries in Europe. In submitting their bid, Gosselin met with two of its competitors about one subcontracting portion of their overall bid.  They agreed "as to the prices each would charge and the territories they would service as subcontractors to the winning bidder, regardless of who actually was awarded" the contract.  Gosselin was the winning bidder, and in performing its contract with the government it had to submit a "certificate of independent pricing" wherein it falsely affirmed that "the prices in the offer have been arrived at independently, without . . . agreement with any other offferor or competitor."  Gosselin lost at trial, and the relators sought a civil penalty of an amount between $5,500 and $11,000 based on the 9,136 invoices that Gosselin had submitted for payment.  Calculated, the minimum civil penalty provided by the FCA was $50,248,000.

The Court found that the statutory penalty violated the Excessive Fines Clause on the grounds that it was grossly disproportionate to the offense.  The Court identified several factors that demonstrated the lack of proportion between the harm and the offense, including: (1) there was no evidence of any cognizable financial harm to the United States as a result of the bid and neither the Relator nor the government sought to prove any damages at trial; (2) there was no evidence that the fixed price as to the subcontractor resulted in higher prices, and in fact there was evidence that the contract price was less than Gosselin had agreed to in previous years; and  (3) there was no evidence that the government could have obtained a lower bid or obtained the "subcontractor" services at issue at a lower cost absent the subcontractor pricing conspiracy.  The Court pointed out further that there was no evidence that Gosselin's services were deficient in any way, and noting that Gosselin's "profit" for the disputed subcontracting portion of the overall contract was $150,000, the Court observed:  "there is nothing about this level of gain that would justify the minimum mandated civil penalty of over $50 million."

In the end, the Court concluded that having founded the statutorily mandated penalty constitutionally excessive, it could "not substitute its own fashioned penalty due to the language and structure of the FCA itself."  The Court explained suggested an alternative construction of the FCA statute that would avoid the application of an unconstitutional fine: based on the plain language of the statute, an alternative reasonable interpretation is that a civil penalty should be applied for each act that violated the prohibition, ie., "each factually false statement, not each claim paid as a result of that false statement." Gosselin, the Court noted, had only made one false certification, and thus should be subject to a fine of between $5,500 and $11,000.

The incredible fines faced by Gosselin are calculated based on the number of invoices it submitted to the government for payment.  Health care providers facing False Claim Act litigation face this same dilemma: the false claims alleged against them are most often based on the number of bills submitted.  They too can face incredible penalties as there can be thousands of individual bills, and as a result, it is very rare to see health care providers contest liability at trial.  There is just too much exposure if they should lose.