On February 4, 2016, the United States Court of Appeals for the Sixth Circuit rejected the “tainted claim” theory of damages under the False Claims Act where money damages alone can cure a breach of contract. The court in U.S. ex rel Wall v. Circle C Construction opened its opinion by quoting the famous English author and lexicographer Samuel Johnson to express its skepticism and exasperation with this theory: in rejecting the theories of a contemporary philosopher who argued that matter had no existence, Johnson kicked a large stone and said, “I refute it thus.” In the Court’s view, the government’s damages award in this case was susceptible to a similar refutation.
The scope of this somewhat dramatic ruling, however, will likely be limited by its context. The relator brought the action against a contractor that had underpaid electricians over a period of nine years while constructing forty-two warehouses at Fort Campbell, a massive Army base located partly in Kentucky and partly in Tennessee. The contractor had expressly certified compliance with federal minimum wage regulations promulgated under the Davis-Bacon Act, but had underpaid workers by a total of $9,916.
The government intervened and, after litigation spanning nine years, the court awarded damages of $763,000. That figure drastically exceeded the actual underpayment because the government pursued (and the trial court accepted) a “tainted claim” theory of damages—a framework most frequently applied in to Anti-Kickback Statute and Stark self-referral violations.
Under the tainted claim theory, the court awards damages equal to the gross value of the contract because it deems the value of the services rendered worthless. In Circle C Construction, DOJ argued that this approach governed because it would not have paid the contractor if it had known about the Davis Bacon Act violations, and the trial court agreed.
The Sixth Circuit rejected this logic and ruled that the trial court had abused its discretion. The Court of Appeals reasoned: “The problem with that [tainted claim] theory is that, in all of these warehouses, the government turns on the lights every day.” The court noted that actual damages in the case amounted to the difference in value between what the government bargained for and what the government received. “Here, the government bargained for two things: the buildings, and the payment of Davis-Bacon wages. It got the buildings, but not quite all of the wages. The shortfall was $9,916. That amount is the government’s actual damages.” Ultimately, the court said, the government’s additional damages claims were “fairyland rather than actual.”
The Sixth Circuit did not foreclose the possibility that the tainted claim theory could apply in other settings. The court hypothesized that no amount of money damages could remedy a breach where a contractor “delivers uniforms manufactured by child laborers in Indonesia or silicon chips shipped from Iran.” But in this case, where the breach is a simple shortfall in wages paid, “simply writing a check can make up the difference.”
The Sixth Circuit’s critique of the tainted claim theory may provide a foothold from which to limit damages in other FCA contexts. We will continue to monitor these developments and update you as they occur.
