In a February 4, 2016, decision, United States ex rel. Wall v. Circle C. Construction, LLC, the Sixth Circuit summarily rejected the government’s assertion that the measure of damages in a False Claims Act (FCA) suit involving a violation of prevailing wage rate requirements was the total amount paid for the work.  The Sixth Circuit’s rejection of the “total contract value” theory of damages in the prevailing wage rate context is a welcome development for FCA defendants who are faced with increasingly creative damages theories asserted by the government and the relator’s bar.

Circle C’s Army Contract

For a case that involved a relatively minor non-compliance with the prevailing wage rate requirements applicable to federal construction contracts, the Circle C. Construction case has a long history.  Circle C entered into a contract to construct warehouses at the U.S. Army base at Fort Campbell, located in Kentucky and Tennessee.  Pursuant to the Davis-Bacon Act, Circle C was required to pay electrical workers at least $19.19 per hour, plus a fringe benefit rate of $3.94 per hour.  Circle C was also required to submit certified payroll for itself and its subcontractors.

One of Circle C’s subcontractors, Phase Tech (the Sixth Circuit’s February 2016 decision spells the name “Phase Tec,” while prior decisions use “Phase Tech”), did 98% of the electrical work on the project.  Although Circle C alerted Phase Tech of the Davis-Bacon Act requirements, it did not monitor Phase Tech’s compliance, did not require certified payroll from Phase Tech, and did not otherwise verify that Phase Tech was paying the required wage rate.

The First Round – FCA Liability for Davis-Bacon Misrepresentations

Brian Wall, a Phase Tech employee, filed a qui tam action in January 2007 alleging a violation of the Davis-Bacon Act.  Department of Labor (DOL) special investigators subsequently found multiple payroll certifications by Circle C, as well was some certifications belatedly filed by Phase Tech, that were inaccurate, as well as certifications that showed electrical workers were paid less than the required wage rate.  The Department of Justice (DOJ) intervened in October 2007, and filed an amended complaint in 2008 alleging a violation of the FCA, unjust enrichment and payment by mistake.

In March 2010 the district court granted DOJ’s motion for summary judgment, finding Circle C violated the FCA by submitting false payroll records to the government regarding wages of its subcontractor’s employees.  The district court awarded a judgment against Circle C in the amount equal to 98% of the money Circle C was paid for electrical work, $553,807.71 trebled, a total of $1,661.423.13.  According to Circle C, the government knew at the time of the award that it had only paid Phase Tech $124,901.81 for the electrical work.  The total amount of the Davis-Bacon underpayment was $9,916.

Circle C filed its first notice of appeal to the Sixth Circuit in May 2010.  On appeal, Circle C argued that DOL has primary jurisdiction over Davis-Bacon wage rate non-compliance, therefore such violations cannot be the basis of FCA liability.  The Sixth Circuit rejected that argument, distinguishing between misclassification of workers, which is subject to DOL’s primary jurisdiction, and misrepresentation of wages, which can be the basis of FCA liability.  That opinion is available here.

After affirming the district court’s summary judgment decision that Circle C had violated the FCA, the Sixth Circuit reversed the district court’s damages calculation, finding that the testimony supporting the damages calculation lacked sufficient detail, among other infirmities.

The Second Round – Actual, Not “Fairyland,” Damages

On remand, the district court held that the Davis-Bacon non-compliance, which, again, totaled $9,916, tainted all of the electrical work done by Phase Tech, and that the government’s actual damages were $259,298.18, the entire amount the government paid for Phase Tech’s electrical work.  The district court awarded the government treble damages totaling $777,894.54 minus $15,000 that Phase Tech had already paid in settlement of the same underpayment issue.  Circle C appealed.

The Sixth Circuit was not receptive to the government’s position.  The opening lines of the February 4 decision telegraph the result:

Samuel Johnson would have had little patience for this case.  Johnson once responded to the metaphysics of George Berkeley – a contemporary English philosopher who argued that matter has no existence – by kicking a large stone and declaring, “I refute it thus.”  One can do rather the same thing with the government’s theory here.

The Sixth Circuit stated that the government bargained for two things, the buildings and the payment of Davis-Bacon wages.  The government received the warehouses, which it continued to use, but was shorted by $9,916 on the wages.  That, the court concluded was the amount of the government’s actual damages.

The decision quickly dispatched the government’s arguments that (1) it should pay nothing for Phase Tech’s work because the work was valueless because all of the electrical work was tainted by the underpayment and (2) the government would have suspended payment had it known that Phase Tech was underpaying its workers.   The taint argument, the court held, was belied by the government’s continued use of the buildings, stating that “in all of these warehouses, the government turns on the lights every day.”  This distinguished Circle C from cases in which goods delivered were worthless or dangerous to use, such as U.S. ex rel. Compton v. Midwest Specialties, Inc., 142 F.3d 296, 304 (6th Cir. 1998) (contractor delivered defective brake-shoe kits for jeeps).  The Sixth Circuit also distinguished cases where some “unalterable moral taint makes the goods worthless to the government” such that no money damages could remedy the breach, such as where “a contractor delivers uniforms manufactured by child laborers in Indonesia or silicon chips shipped from Iran,” concluding that the money damages were easily damages in this cases – the required wage rate was $19, and Phase Tech paid $16, a difference that could be remedied by “simply writing a check.”

The court was similarly dismissive of the government’s argument that it should pay nothing because it would have suspended payment had it been aware that Phase Tech was underpaying its workers, holding that the Davis-Bacon Act regulations themselves were contrary to that position.  Those regulations require the government to withhold payment of “an amount equal to the estimated wage underpayment and estimated liquidated damages …,” not the entire amount.  48 C.F.R. 22.406-9(a).

In a passage that will no doubt be cited in FCA defendant’s briefs for the foreseeable future, the Sixth Circuit explained

Actual damages by definition are damages grounded in reality.  And in the real world the government could not forever withhold all payments to a contractor for work on several dozen warehouses, and yet have the work continue to completion and the government continue to use the warehouses to this day.  The damages the government seeks to recover here are fairyland rather than actual.

Emphasis added.

The court concluded that the actual harm trebled is $29,748, and after deducting Phase Tech’s $15,000 settlement payment the court concluded that Circle C was liable for a total of $14,748.

Lessons Learned

While the Circle C decision has undermined the FCA damages theory that non-compliance taints goods or services accepted and in use by the government such that the actual damages are the full value of those good or services, that damages theory has not been completely put to rest.  As both the majority and the concurrence point out, there are two situations in which the total value of the goods or services delivered might be appropriate: (1) where the goods are defective or dangerous; and (2) where some “unalterable moral taint,” as described by the majority, or cases in which the government would have refused to pay had it known at the time of the non-compliance, as stated in the concurrence.  This signals that the total contract value theory of FCA damages has continued viability in certain contexts, such as domestic source restriction violations.  However, where an FCA case is premised on a prevailing wage rate violation, whether it be the Davis-Bacon Act, Service Contract Act or Walsh-Healy Public Contracts Act, at least in the Sixth Circuit, “fairyland” damages are now off the table.