The Federal False Claims Act, 31 U.S.C. § 3279 ("FCA"), penalizes contractors for, among other false claims,  presenting a claim for payment to the Federal Government for goods or services that were not performed. A contractor that violates the FCA may be liable to the Government for three times the Government's "actual damages." Actual damages are the difference in value between what the government bargained for and what the government received. U.S. ex rel. Roby v Boeing Co, 302 F.3d 637, 646 (6th Cir. 2002). In a simplistic example, when a contractor invoices the Government for 30 units of goods, but only provides 20 units, the Government's actual damages would be the overpayment of 10 units.

However, what are the Government's actual damages when the contractor provides goods or services that do not comply with the technical requirements of the contract, and where the technical violation cannot be remedied? Are these goods or services considered "tainted" and therefore "worthless," which means that the Government's actual damages consist of all funds paid for the alleged "tainted" goods?

The United States Court of Appeals in the Sixth Circuit recently addressed this issue in U.S. ex rel. Brian Wall v Circle C Construction LLC, 2016 U.S. App. LEXIS 1871 (February 4, 2016).  Defendant, Circle C, built several dozen warehouses at an Army base. The contract required Circle C to submit weekly "compliance statements" to the effect that Circle C and its subcontractors had paid their respective employees the required Davis-Bacon wages. However, over the course of seven years, Circle C paid a handful of electricians about $9,900 less than the required Davis-Bacon wages specified in the contract with the Army. As a remedy for that underpayment, under the FCA, the Government argued that all of the electrical work, in all of the warehouses, was "tainted" by the $9,900 underpayment and therefore worthless. The trial court agreed and entered a judgment against Circle C in the amount of $777,894.54 (payment for all services rendered in the amount of approximately $259,000 * 3).

Circle C appealed the trial court's decision to the United States Court of Appeals. The Court of Appeals did not agree that Circle C's services were "worthless." The Court of Appeals noted that the government bargained for two things: the buildings and payment of Davis-Bacon wages. The Government received (and used) the buildings, but not quite all the Davis-Bacon wages were paid to Circle C's employees. The Court of Appeals held that Circle C's breach of contract could be remedied by requiring Circle C to pay the Government the underpayment amount. Therefore, the Court of Appeals held that the measure of actual damages was the difference in wages ($9,900) and not a refund of payment for all services rendered (approximately $259,000).

The Court of Appeals distinguished this case from situations in which the government received "worthless" goods because the goods were defective and too dangerous to use or where "some unalterable moral taint" makes the goods worthless to the Government. (e.g. goods manufactured by child laborers in Indonesia or silicon chips shipped from Iran). The Court of Appeals noted that in those cases, no award of money damages could remedy the contractor's breach. The concurring opinion cautioned, however, that the majority opinion should not be read to suggest that the price of irreversibly provided goods or services - because still in use - cannot be the measure of FCA damages.

While Circle C ultimately prevailed (to date) in limiting the Government's damages to the difference in wages times three (i.e. $9,916 x 3 = $29,748), this case demonstrates the potentially devastating risks federal contractors (and their subcontractors and suppliers) face under the FCA when they receive payment for goods or services that do not comply with the technical requirements of the contract.

Contractors should also be aware that the FCA may extend to projects funded in whole or in part by the Federal Government (even where the contractor does not know the Federal Government is involved in the public project), and that some states have similar false claims acts that may specifically apply to state, county and local projects. Furthermore, a subcontractor can be liable under the FCA as well for submitting a false claim to the prime contractor on a federally funded project, where the claim ultimately seeks compensation from the Federal Government.