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28 sign professionals can subject them to FCA liability. In United States v. Peters,188 an architect was providing services to a school district to obtain EPA funding for an asbestos abatement contract. The architect was re- tained to design the removal work and supervise the contractor. During the course of the work, the architect recognized that the funding would exceed the estimated cost. The architect and contractor submitted false claims to the Federal Government involving work not yet undertaken and renovation work that did not in- volve asbestos removal and did not fall within the scope of the abatement statute. Ultimately, the architect and contractor were found criminally liable and civ- illy liable for conspiring to submit false claims.189 Design-builders may also face FCA liability. In Riley Construction Co. v. United States,190 the design-builder performed a design-build contract for the Navy. Dur- ing the course of the project, a fee dispute arose in which the design-builder was seeking a percentage of final construction costs in a fixed-fee contract for de- sign work, although it was not certain whether the designer had actually incurred additional costs. The Government cross-claimed, asserting a FCA violation. The court, denying a motion for summary judgment, determined that it needed additional evidence and testimony. The court noted that the defendant did not make a limited inquiry into the accuracy of the addi- tional architectural and engineering fees sought by its claim, which might rise to the level of reckless disre- gard, depending on the testimony and legal argu- ments.191 E. Liability for Construction Managers Construction managers also need to be aware of the risk of potential exposure to FCA liability. Con- struction managers who are in contractual privity with government agencies must be aware of potential false claims involving false statements made in the course of assisting or representing an owner in ob- taining federal funds. In United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall, an engineering firm performing construction management functions faced false claim liability involving reports prepared by its employees concerning earthquake damage in California.192 The dispute involved a certification sub- mitted to the Federal Emergency Management Agency indicating that a damaged building was in use at the 188 United States v. Peters, 927 F. Supp. 363 (D. Neb. l996). 189 Id. at 367; see discussion in Sink & Pages, supra note 130, at 63. 190 65 Fed. Cl. 264 (2005); see discussion in Sink & Pages, supra, note 130, at 63. 191 Id. at 270, 271. The court ultimately denied both par- ties' motions for summary judgment, and requested that the parties confer on the likelihood of further litigation. 192 United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall, 355 F.3d 1140 (9th Cir. 2004); see discussion in Sink & Pages, supra note 130, at 65. time of the earthquake and thus eligible for federal aid. SECTION VIII. DAMAGES UNDER THE FCA A. Civil Penalties A person who violates the FCA is liable for treble damages, plus penalties for each false claim submit- ted.193 The underlying theory and foundation for FCA damages is the desire to make the government whole for damages and for the costs of investigation and prosecution of those who defraud the United States.194 The FCA provides that a person who violates the FCA is liable to the United States Government for a civil pen- alty of not less than $5,000 and not more than $10,000, plus as a civil penalty, three times the amount of damages the Government sustains because of the act of a person. The three times or treble damages provision also serves as a deterrent to discourage fraud against the Government. The statute also makes the civil penalty of $5,000 to $10,000 subject to adjust- ment pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, codified at 28 U.S.C. § 2461.195 Under the applicable adjustment provisions, the civil penalties are currently $5,500 to $11,000.196 The qui tam relator or the Government has the burden of proving damages by a "preponderance of evidence."197 The treble damage provisions may be reduced to two times the amount of damages in cases in which a de- fendant has voluntarily disclosed information about its wrongdoing, if the court finds that 1) the person dis- closes such information within 30 days after the date on which the defendant first obtained the informa- tion; 2) the person fully cooperates with any Gov- ernment investigation of such violation; and 3) at the time the information is furnished no criminal or civil action or administrative action has commenced with respect to such violation, and the person did not have actual knowledge of the existence of an investigation into such violation.198 Note that this exception reduces by one-third, but does not eliminate, the damages pro- visions, and involves what would appear to be relatively rare occurrences. 193 31 U.S.C.A. § 3729(a). 194 United States v. Peters, 927 F. Supp. 363, at 368 (D. Nebraska 1996); for a good discussion of FCA damages issues, see Sink & Pages, supra note 130, at 69â93. 195 The statutory penalties are adjusted upward for in- flation under the Federal Civil Penalties Inflation Adjust- ment Act of 1990, Pub. L. No. 101-410, § 5, 104 Stat. 891, note following 28 U.S.C. § 2461. 196 28 C.F.R. § 85.3(a)(9) (2002). 197 31 U.S.C. § 3731(d). 198 31 U.S.C.A. § 3729(a)(2).
29 B. Measure of Damages The FCA does not specifically describe how to quan- tify damages, but instead provides that the government shall be awarded damages that it "sustains because of' the contractor's fraudulent act.199 Damages under the FCA are determined in a flexible manner to ensure re- covery of direct and non-consequential damages arising from false claims.200 Some courts have measured damages based upon the loss of value to the Government caused by the defendant's submission of a false claim. In United States v. Bornstein,201 a case decided in 1976, a subcontractor had supplied falsely-branded radio tubes to a prime contractor, which caused the prime contractor to submit false claims to the Gov- ernment for radio kits. The U.S. Supreme Court stated that the proper measure of damages of the Govern- ment's loss was the difference between the market value of the goods or services received and retained and the market value that the goods would have had if they had been of the specified quality. A landmark analysis of false claim damages in the construction context is provided by Commercial Gen- eral Contractors, Inc. v. United States. 202 In that case, the U.S. Army Corps of Engineers had contracted with Commercial General (CCI) to build portions of a flood control channel, which involved excavation, pouring of concrete, and backfilling. After completion of the work, CCI filed several claims for extra compensation, and the Government counterclaimed, asserting violation of the FCA. The Federal Circuit Court found that CCI had built the channel shorter than specified in the contract to avoid difficult work and had knowingly submitted false claims for the noncompliant work. The court fur- ther found that CCI had knowingly backfilled the channel with construction debris, contrary to the pro- hibition in the contract, and had improperly heated concrete test cylinders and knowingly submitted claims for work violating contract quality requirements. The trial court noted the general rules set forth in Bornstein, and relying on the Restatement (Second) of Contracts, indicated that if it was not possible for the injured party to prove the loss of value caused by the contractor's deficient performance, damages could be computed on an alternative basis. The CCI court indi- cated it was difficult to determine the loss of value because no market exists for a flood control channel. The court focused on the cost to remedy the construc- tion defects and determined that the damages for the improperly shortened channel should be measured by 199 31 U.S.C.A. 3729(a). 200 BMY-Combat Systems Div. of Harsco Corp. v. United States, 44 Fed. Cl. 141, at 148, which determined that damages for the cost of inspection and repair by govern- ment are recoverable under the FCA. 201 423 U.S. 303 (1976); see Sink & Pages, supra note 130, at 72. 202 154 F.3d 1357 (Fed. Cir. 1998); see Sink & Pages, su- pra note 130, at 74â75. the full cost to repair the channel, and damages for the improper use of debris backfill would be the full cost of removal of the construction debris and rebuild- ing the affected sections of the channel.203 The Federal Circuit affirmed the trial court's find- ings on damages, but reversed the trial court's decision on damages for defective concrete testing, stating that an injured party is not entitled to recover the full re- placement costs for any deviation from the exact terms of the contract, however minor. In the unusual case in which actual cost is cannot be ascertained, the injured party may recover the replacement cost, but only, if that cost is not clearly disproportionate to the prob- able loss in value caused by the defects in question.204 The appellate court reversed the trial court's damage award because the government was unable to show that the quality control violations affected the structural integrity of the channel, and the cost of tearing down and rebuilding the affected portions was clearly disproportionate to the probable loss in value caused by CCI's deficient work. The premise that there must be a causal link be- tween the false claim (misrepresentation) and the damages sustained is not well settled. The circuit courts often have different interpretations, ranging from insisting on a causal link to damages to relaxing the link to adopt a "but for" test under which "but for" the false statement is sufficient to establish the causal relationship necessary to permit FCA recovery.205 C. Consequential Damages Consequential damages are not recoverable as part of the government's losses, but the issue is not al- ways simple. In Cook County, Ill. v. United States ex rel. Chandler,206 the court stated that "the treble dam- age provision was adopted by Congress to substitute for consequential damages." In United States v. Aerodex, lnc.,207 the Fifth Circuit held that the FCA does not provide for consequential damages resulting from the delivery of defective goods. Since consequential dam- ages are not recoverable, damage recovery may often depend on how the specific damages are categorized. In Commercial General, for example, the Government's recovery of cost to repair the shortened flood channel 203 154 F.3d at 1372. 204 Id. at 1373â75. 205 Cf. United States v. Hibbs, 568 F.2d 347, 349 (3d Cir. 1977), where the court required a causal link between the misrepresentation and the government's damages, with United States v. National Bank of Cicero, 957 F.2d 1362 (7th Cir. l992), which rejected the Hibbs causal require- ment and determined that the government would not have guaranteed the SBA loan but for the bank false statement was sufficient to establish the causal relationship between the government's damages necessary to permit recovery under the FCA. 206 538 U.S. 119, at 130, n.9, 123 S. Ct. 1239 (2003). 207 United States v. Aerodex, Inc., 469 F.2d 1003 (5th Cir. 1972).
