Court Refuses to Impose Mandatory Civil Penalties in False Claims Act Case

The United States District Court for the Eastern District of Virginia recently issued a decision that may have broad implications to the calculation and imposition of civil penalties in False Claim Act (FCA) cases, because, for the first time, a court refused to issue mandatory civil penalties against a contractor that was found to have violated the FCA.

More specifically, United States ex rel. Bunk v. Birkart Globalistics GmbH & Co., et. al., No. 1:02-CV-1168 (E.D. Va. February 14, 2012), involves a qui tam claim that was filed against a contractor for violations of the FCA. The alleged violations stem from a bid submitted to the Department of Defense, which included a Certificate of Independent Pricing that stated:

The prices in this offer have been arrived at independently, without, for the purposes of restricting competition, any consultation, communication, or agreement with any other offeror or competitor relating to (i) those prices, (ii) the intention to submit an offer, or (iii) the methods of factors used to calculate the prices offered.

The quit tam claim, however, asserted that the contractor’s Certificate of Independent Pricing was false, because prior to submitting the bid, the contractor and its competitors agreed among themselves as to the prices each would charge and the territories they would service as subcontractors to the winning bidder, regardless to whom the contract was actually awarded.

Following an 11-day trial, a jury returned a verdict that found the contractor’s Certificate of Independent Pricing was false. Therefore, pursuant to the FCA, each claim for payment under the contract, which was fraudulently approved, constituted a false statement actionable under the FCA. As a result, because the contractor submitted 9,136 invoices under the contract, according to the FCA, the contractor committed 9,136 violations of the FCA, and was liable for mandatory civil penalties of no less than $5,500.00 for each violation of the FCA. Accordingly, the contractor was liable for a minimum penalty of $50,248,000.00.

The court, however, held that these mandatory penalties were excessive and a disproportionate penalty in violation of the Eight Amendment to the United States Constitution. Therefore, the court refused to impose the minimum penalty on the contractor. As part of its reasoning, the court found that because the contractor’s liability arose from one certification in a bid, the number of invoices did not reflect the contractor’s actual level of culpability. Instead, the court reviewed the total value of the contract, which was $3.3 million, and the contractor’s profit of approximately $150,000, and found that the $50 million penalty was excessive and grossly disproportionate.

Moreover, the court also found that it lacked the statutory authority to modify or reduce the penalty. Thus, although the contractor was guilty of violating the FCA, the court did not impose any civil penalties.

This case may open the door for contractors to pray for “mercy” by arguing that their FCA violations do not warrant the imposition of penalties for a number of economic and practical reasons. Whether or not this case survives an appeal, or if other courts are willing to listen to such a challenge, remains to be seen.

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