Watching for Government Overreach

Photo: iStock

The Department of Justice regularly issues press releases whenever it wins a judgment or settles a False Claims Act case for multimillion-dollar amounts. These headlines make Americans feel good, that their Justice Department is working and protecting the government from paying for something that it did not receive. There are times, however, when the department overreaches.

The Circle C Construction saga is a case in point.

The act imposes liability on “anyone who knowingly presents … a false or fraudulent claim” to the government for payment. Liability can attach to subcontractors as well as to prime contractors — whoever knowingly submitted the false or fraudulent false claim.

The Circle C saga involved a false claims case pressed against a family-owned general contractor for 10 years for the sole reason that one of Circle C’s subcontractors, Phase Tech, an electrical contractor, paid two of its electricians $9,900 less than it should have to satisfy the Davis-Bacon Act, the statute that sets the amounts that contractors should pay construction trade workers.

A complaint was filed in January 2007, and the Justice Department intervened in October 2007, seeking settlement on the wages and trebling of actual damages.

In June 2009, Phase Tech admitted its mistake, paying $15,000 to the government to settle. Unfortunately, getting restitution for these electricians did not stop Justice, nor did it end Circle C’s nightmare.

Circle C had performed a contract for the Army to build 42 warehouses in Kentucky and Tennessee for approximately $20 million. The project took seven years to complete. The warehouses were completed, accepted and were in continual use by the Army.
Nevertheless, the Justice Department claimed damages against Circle C in the amount of $553,807 — the amount of the total subcontract — trebled to equal $1.66 million, as allowed under the False Claims Act. The department’s theory was that Phase Tech’s failure to pay these two electricians tainted the value of its entire effort.

In March 2010, the government was granted summary judgment on the settled wage claim and was awarded $553,807 in damages. The district court accepted the department’s damages theory.

Circle C appealed to the 6th Circuit Court of Appeals a total of three times: twice on the merits, and a third time when the lower court denied its motion to have Justice pay Circle C’s legal fees and costs.

Each time, the 6th Circuit agreed with Circle C and sent the case back to the district court. The Justice Department insisted that it did not get what it paid for — warehouses built at Davis-Bacon wages. The 6th Circuit responded that the Army had fully functional warehouses with electricity and a paid settlement, so any damages needed to be reasonable.

The appellate court remanded the case for entry of an award, in favor of the Justice Department, in the total amount of $14,748. In other words, the appellate court determined the “actual damages” to the government as less than 1 percent of what the department had sought.

The Equal Access to Justice Act provided for payment of attorneys’ fees to the defendant when the government’s demand for damages was “substantially in excess of the judgment finally obtained” and “unreasonable when compared with such judgment.”

When Circle C requested the department pay its attorneys’ fees and costs, to the tune of $500,000, Justice declined. Circle C filed a motion with the district court, which, as it had in the past, sided with the government.

Voila, another trip to the 6th Circuit. The 6th Circuit grew evermore frustrated with the Justice Department’s damages theory. In its last decision to date, it remanded the case to the district court to calculate the attorneys’ fees and costs payable to Circle C — including not only the $468,704 it cost to defend against the government’s FCA claim but Circle C’s fees to recover those fees.

The 6th Circuit’s parting comment is telling:

“[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.”

While there was nothing intrinsically unethical or against department policy, in pressing its case, the department lost sight of the heart of this case — the wage claim. The purpose of Davis-Bacon is to ensure that workers on government construction worksites are paid fair wages for the work performed. Here, the subcontractor paid the proper wages for all but two of its electricians and settled the claim against it long before the department pressed its claim against Circle C.

Moreover, Circle C was not accused of engaging in large-scale, systemic efforts to defraud the government. Yet it appears that Justice was fixated with pressing its damages theory, losing sight of the actual circumstances and the impact of its campaign against Circle C.

Consider the bigger picture: By pursuing this case for a decade, the government consumed resources from the Justice Department, Department of Labor and the Army on claims that had been rectified.

The Justice Department’s vigorous prosecution of Circle C cost the taxpayers more than $500,000, it destroyed the department’s ability to pursue damages based on the “taint” concept and it will encourage False Claims Act defendants to take their cases to court in the hope that the government will have to pay the defendants’ legal fees.

Erin R. Davis is an associate and Barbara A. Duncombe is a partner in the Government Contracts practice at Taft Stettinius & Hollister LLP.

Topics: Ethics, Ethics Corner, Defense Contracting