Righting the Wrong of Corruption: How the False Claims Act Provides for Recovery of the Full Value of Corruptly Procured Contracts

On Behalf of | March 26, 2018 | Whistleblower Law

Under the False Claims Act (FCA), the Government is entitled to recover money paid to private parties as a result of fraudulent conduct. Specifically, the Government is entitled to recover up to three times the primary damages it suffered as a result of the fraud, in addition to statutorily fixed penalties for each false claim for payment that the contractor submitted. Whistleblowers who meet certain criteria and disclose information that leads to the Government’s recovery from fraud are entitled to receive a reward of between 15% and 30% of the Government’s recovery.

That seems straightforward, but what is not always straightforward is how to measure the Government’s damages. For example, it is clear that the Government is entitled to recover every dollar it spent if it contracted with a supplier to purchase bullets, only to discover later that the supplier had, in fact, sold the Government sawdust. The appropriate measure of the Government’s damages is less clear when the Government contracts with a provider of goods or services who unquestionably defrauds the Government but nonetheless provides some purported value to the Government under the contract. For example, what happens if a contractor bribes a Government official to win a contract to build a Government building, and then builds the building pursuant to the terms of the contract? We will assume, for the purposes of this brief article, that bribery of a Government official suffices to bring the corruptly procured contract within the orbit of the FCA’s penalties. But in such a case, can the Government recover the full value of that contract because it was procured through fraudulent means?

As is always the case in the law, the answer depends on the specific factual circumstances of every individual case. In the case of contracts procured through bribery, however, the answer is likely that the Government is entitled to recover damages based on the full value of those contracts. Damages under the FCA must be measured by the amount wrongfully paid to satisfy a false claim.[1] Generally speaking, there have been two circumstances in which courts have awarded damages based on the amount of the full value of the contract despite the contractor’s purported performance of the contract. The first circumstance is one in which the defendant was ineligible to receive payment under the contract, and therefore was not entitled to payment.[2] The second circumstance is one in which the defendant provided an alleged benefit to the Government that was, in fact, worthless to the Government.[3] In the case of contracts procured through corruption, both rationales for awarding damages based on the full value of the contract seem to apply.

First, when a contractor engages in corruption to procure a contract, the contractor is not eligible to make claims for payment under the contract. That is because a contract that is procured by corrupt means is void ab initio, and, thus the contractor is not eligible to receive any payments under the contract.[4] Every court that has squarely addressed the issue has held that an ineligible contractor that fraudulently presents itself as eligible to receive payment under a Government contract is not entitled to receive any payments under the contract, even if it performs its obligations under the contract.[5] Thus, because a contractor procuring a contract through corruption is ineligible to receive payment, such contractors are similarly liable for primary damages equal to the full amount of all claims paid under those contracts.

Second, where a contract or its performance is infected with fraud and corruption—as is the case with a corruptly procured contract—the resulting contract and any work performed pursuant to it can be so tainted as to be entirely worthless to the Government.[6] This is because the harm that the Government suffers due to corruption is extraordinarily great and can easily outweigh whatever pecuniary value the Government may receive from the corrupt contractor.[7] Indeed, the Senators who drafted the modern FCA, the Supreme Court, and numerous lower courts have explicitly stated that the negative value of corruption is significant and that the value of the tangible benefit that the Government receives under a contract tainted by corruption is diminished significantly by corruption’s significant negative value.[8] Accordingly, in corruption cases, the harm that the Government suffers as a result of the contractor’s misdeeds often eliminates any net value to the Government.

Although cases of outright corruption may seem to rarely occur, the process of federal contracting can, unfortunately, be rife with corruption and fraud. If you have information about a Government contract that has been sullied by corruption or fraud, you should contact an experienced whistleblower attorney, such as those at Sanford Heisler Sharp who specialize in Government contracting fraud cases and have offices in Washington, DC, New York, Nashville, San Diego, and San Francisco. You could be eligible to recover between 15% and 30% of the entire value of that contract.

[1] U.S. v. Aerodex, Inc., 469 F.2d 1003, 1011 (5th Cir. 1972).

[2] United States v. Mackby, 339 F.3d 1013, 1018 (9th Cir. 2003).

[3] United States ex rel. Compton v. Midwest Specialties, Inc., 142 F.3d 296, 304-305 (6th Cir. 1998).

[4] Godley v. United States, 5 F.3d 1473, 1476 (Fed. Cir. 1993); United States v. Mississippi Valley Generating Co., 364 U.S. 520, 563 (1961); K&R Engineering Co., Inc. v. United States, 222 Ct. Cl. 340, 355 (Ct. Cl. 1980).

[5] U.S. ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 473 (5th Cir. 2009).

[6] Godley, 5 F.3d at 1475.

[7] Id.

[8] S. Rep. No. 99-345, at 3 (“The cost of fraud cannot always be measured in dollars and cents…fraud erodes public confidence in the Government’s ability to efficiently manage its programs.”); Mississippi Valley, 364 U.S. at 562; United States v. Killough, 848 F.2d 1523, 1532 (“When an official acting on behalf of the Government receives money to which he is not entitled for the purpose of inducing that official to act in a certain manner, the Government has been damaged to the extent that such corruption causes a diminution of the public’s confidence in the Government.”).