Last week, the United States Court of Appeals for the Sixth Circuit vacated a federal district court’s award of $657 Million for treble damages under the False Claims Act (“FCA”), restitution, and prejudgment interest.  See United States v. United Technologies Corp., No. 13-4057, 2015 WL 1516215, *11-17 (6th Cir. Apr. 6, 2015).  The Sixth Circuit’s decision serves as a useful reminder that it is the government’s burden to prove its actual damages caused by an FCA violation and that in appropriate circumstances, such damages should be measured by the difference between what the government paid for and the fair market value of what was provided.  However, “[w]hen the Government gets what it paid for . . . it has suffered no actual damages.”  Id. at *12.  The Court of Appeals further stressed that the preferred method for establishing the fair market value is a comparable sales analysis, which both the district court and government failed to properly undertake in this instance.

The litigation arose from a 32-year-old procurement to provide jet engines for six years, under which the two competing contractors, appellant Pratt & Whitney (“Pratt”) and GE Aircraft (“GE”), would each be awarded a portion of the contract to supply the engines based on their offer price.  To increase competition, each year the Air Force requested that the contractors revise their original offers and it would redistribute the shares of the contract between them, resulting in perpetual competition throughout the life of the contract.  In the first year of bidding, however, Pratt submitted false statements in the form of inflated prices in its best and final offer (“BAFO”), a fact that was discovered approximately 14 years later pursuant to a Department of Justice investigation.  Based on Pratt’s false statements, in 1999 the government filed suit in federal court seeking relief under the FCA and common law restitution.

The district court originally found Pratt liable under the FCA and awarded the government $7 Million in statutory penalties, but held that Pratt’s false statements did not cause any actual damages to the government because its yearly discounts offset any cost overruns from the original BAFO.  In so finding, the district court rejected the government’s submitted damage calculation, which was based on the incorrect assumption that each dollar of falsely stated cost directly converted to a dollar of damage to the government.  On appeal, the Sixth Circuit affirmed the $7 Million dollar penalty award, but vacated the no-damage award, asking the district court to consider three discrete flaws in its damages analysis to determine whether “the government paid above what it should have for what it received in terms of fair market value.”  The Sixth Circuit noted that the revised analysis may not lead to a different conclusion.  On remand, the District Court awarded $657 Million to the government in treble damages under the FCA, restitution, and prejudgment interest, adopting the government’s damage calculations in full that had previously been rejected.  The decision was again appealed to the Sixth Circuit.

In its decision last week, the Sixth Circuit again reversed the district court’s damage award, finding, among other things, that it was error for the district court to fail to consider the impact of competition on the fair market value of the jet engine contract as a whole, including consideration of the comparable prices that were paid to its competitor, GE.  The Court of Appeals found that the government had failed to meet its burden of proof to show that, after considering comparable sales (among other factors), it suffered any damages.  On remand, the Court of Appeals left it to the district court’s discretion to determine whether the government should have another bite of the apple to prove its damages, given that it had failed to do so after 17 years of litigation.

The Sixth Circuit’s decision provides a useful analysis for lower courts to utilize in computing and determining actual damages in FCA litigation.  The decision also reinforces that when the government gets what it paid for despite a contractor’s misstatements amounting to an FCA violation, the government is not entitled to an award of actual damages.

The Sixth Circuit’s decision can be found here.