False Claims Counsel

On April 24, District Judge Jane Triche Malazzo of the Eastern District of Louisiana largely denied a prime and a subcontractor’s motions for summary judgment (and that of the relator, as well), in a case involving FEMA contracts for relief efforts in the wake of Hurricanes Katrina, Rita, and Ike. The relator made three principal allegations:

• Local-Bid Preference Claim: In one of the contracts (for maintaining and deactivating trailers), FEMA offered bidding preference to local businesses, which it defined as one which regularly conducted business prior to Hurricane Katrina’s landfall in August 2005; the offer made clear that local businesses receiving the preference could subcontract only with other local businesses. The relator alleged that the prime contractor defendant, CMC, had violated both of these requirements, and the court found that material questions of fact regarding each precluded summary judgment.
  As for the local business status, the court concluded that the defendants’ arguments – that post-Katrina, it had obtained a business license retroactive to a date before the hurricane, and that it was actually doing business despite not having a license (which it asserted was a mere formality). The court reasoned that evidence in the record regarding FEMA’s intent in requiring a business license precluded summary judgment.
  CMC had some relationship with a subcontractor defendant, MJI, but the evidence was inconclusive whether that relationship comprised a joint venture which would have violated the local subcontracting requirement.
• Service-Disabled Veteran Claim A second offer, for “group site maintenance” services, was set aside for firms primarily owned by a service-disabled veteran. The owner of CMC had served in the Navy for three years as a personnel clerk, and claimed that she injured her back while on duty. Although medical records existed from the time of her injury, they disagreed with her description of how it occurred, and there was no evidence that she had visited a physician in the 32 years since the injury. She had also left blank a line on a VA form which asked her to describe how her injury related to her service. Other evidence, too, cast doubt on the legitimacy of her claim, including the VA’s denial of her disability application (though this remained on appeal), her filing for disability status only after the announcement of the solicitation, and emails she sent to MJI expressing concern about the propriety of bidding on the contract before the VA had granted her disability. These factors all raised a question of fact which could not be resolved on summary judgment (though the court granted MJI’s motion on this claim because CMC’s owner had assured MJI that she had no doubt about her ability to obtain disabled status from the VA).
• Performance Claim The relator alleged that the two companies had been paid for work they never completed on the trailer maintenance and deactivation contract, but Judge Malazzo ruled for both companies on this aspect of the whistleblower’s case, reasoning that these allegations either overstated the contract requirements, or were lacking in evidence.

In another significant part of the opinion, the court addressed the manner by which damages would be computed in the case – an issue that has vexed other courts in fraud-in-the-inducement cases. Judge Malazzo surveyed the caselaw, and concluded:

This Court believes that a general rule as to the proper calculation of damages can be deduced from the foregoing case law. The cases appear to hold that, as a general rule, the government may only recover the damages it actually sustains as a result of a false or fraudulent claim. See Sci. Applications, 626 F.3d at 1279. In order to determine the government’s “actual damages” the Court must first determine the amount which was paid out because of the false claim (the governments “gross damages”). Id. In fraudulent inducement cases, where the government claims that it would not have awarded the contract in the absence of the false statement, the gross damages are the total amounts paid under the contract. See Id.; Longhi, 575 F.3d at 473. Then, the Court must subtract from the “gross damages” the value of any performance the government received under the contract (the “benefit of the bargain”). Sci. Applications, 626 F.3d at 1279. The result is the government’s actual damages.

However, as several courts have recognized, there will be cases where the government receives nothing of value from the defendant. In those cases, the governments gross damages and its “actual damages” will be the same, because the value of the performance is zero. There are several cases where courts have been able to determine, as a matter of law, that the defendant’s performance was worthless to the government. See TDC Mgmt., 288 F.3d 421; Rogan, 517 F.3d 449; Longhi, 575 F.3d 458. In other cases, such as Science Applications, there will be questions of fact regarding whether the defendant’s fraudulent conduct completely vitiated the government’s purpose in awarding the contract at issue. See Sci. Applications Int’l Corp., 626 F.3d 1257. In the latter category of cases, the government should be permitted to argue to the jury that the defendant’s performance was rendered worthless by the false statements and the defendants should be permitted to argue that their performance was of some value to the government despite the false statements. As the Court explains below, the instant matter falls into the latter category.

Relator argues that Defendants’ false representations regarding their qualifications for the contracts completely vitiated the government’s purpose in awarding the contracts (benefitting small businesses and service‐disabled‐veterans). Alternatively, Defendants argue the government received all of the maintenance services for which it bargained. This is a factual dispute for the jury to decide. The jury will be instructed to determine the value of Defendants’ performance to the government. Based on the answer provided by the jury, the Court will then determine the government’s “actual damages” in this matter by subtracting the benefit of the bargain from the total amounts paid “because of the false claims.”

She then concluded that under U.S.v. Bornstein, and Fifth Circuit caselaw interpreting it, the gross amount of the contracts would be trebled before applying any offset for the value of the services the defendants provided.

Judge Malazzo also denied the defendants’ unusual motion for sanctions (dismissal) against the United States for failing to preserve records, and limited expert legal testimony.