POWER OF INTELLIGENCE

Insight Center: Publications

When a Defendant Loses, but Still Collects Attorney Fees, in a False Claim Act Case

Client Alert

Authors: Ted R. Gropman and Aria Soroudi

October 2017
When a Defendant Loses, but Still Collects Attorney Fees, in a False Claim Act Case

This article was published in the October 2017 issue of AGC's ConsensusDocs Construction Law Newsletter (Volume 3, Issue 5). It is reprinted here with permission.

Under the federal False Claims Act (FCA) the prevailing plaintiff — be it the government or a qui tam plaintiff — is automatically entitled to recover attorney fees. 31 U.S.C. § 3730(d)(1) and (2). Prevailing defendants, however, must not only defeat the lawsuit, but also persuade the court that the claim was clearly frivolous, vexatious, or brought primarily to harass. But in a recent and significant case, the U.S. Court of Appeals for the Sixth Circuit held that attorney fees were available to a nonprevailing defendant. In doing so, the Sixth Circuit relied not on the FCA’s attorney fees provisions, but on the attorney fees provisions of the Equal Access to Justice Act. United States ex rel. Wall v. Circle C Constr., LLC, No. 16-619, 2017 U.S. App. LEXIS 15646 (6th Cir. Aug. 18, 2017). In Circle C Construction, the court found that, while the government was the prevailing party at trial, attorney fees were nevertheless available to the defendant as a necessary means to curtail the government’s overreaching damage claims, stating that the government’s claims were “fairyland rather than actual.”

At its core, the FCA is designed to impose liability on individuals and companies who defraud the federal government. As a primary tool in combating fraud, the FCA includes a fee-shifting provision, which goes against the usual “American rule” of each party bearing its own attorney fees and expenses. Pursuant to sections 3730(d)(1) and (2) of the FCA, a prevailing plaintiff is entitled to a mandatory award of attorney fees and expenses. Defendants are only entitled to attorney fees when the “defendant prevails in the action and the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” 31 U.S.C. § 3730(d)(4). However, a close examination of section 3730(g) provides that,“in civil actions brought under this section by the United States, the provisions of Section 2412(d) of Title 28 shall apply.”

Section 2412(d) of Title 28 refers to the Equal Access to Justice Act, which the defendant in Circle C Construction relied on in seeking attorney fees. In this seminal case, the government sought recovery against a warehouse construction contractor that had falsely certified that two subcontractor electricians were paid wages in accordance with the Davis-Bacon Act. Rather, the two subcontractor electricians were paid $9,900 less than the mandated wages. As a result, the government sought a windfall recovery of $1.66 million, which included all electrical expenses, of which $554,000 was purportedly "actual damages" for the $9,900 underpayment.

Ultimately, the government’s extreme demand drew a sharp rebuke from the Sixth Circuit, and, in its earlier 2016 opinion, the court drastically reduced the judgment to $14,748 — less than 1 percent of the government’s original demand. Thereafter, the action returned to the district court, where the contractor sought recovery of the $468,704 of attorney fees it incurred defending the action against the government. After the trial court denied the defendant’s fee request, the Sixth Circuit once again overturned the district court’s decision, ruling that the contractor was entitled to its attorney fees under section 2412(d)(1)(D) of the Equal Access to Justice Act.

Section 2412(d)(1)(D) provides, in relevant part:

If, in a civil action brought by the United States . . . the demand by the United States is substantially in excess of the judgment finally obtained by the United States and is unreasonable when compared with such judgment, under the facts and circumstances of the case, the court shall award to the party the fees and other expenses related to defending against the excessive demand, unless the party has committed a willful violation of law or otherwise acted in bad faith, or special circumstances make an award unjust.

The government challenged the Equal Access to Justice Act’s applicability, arguing that the title “Fees and expenses to prevailing defendant” rendered the provision inapplicable to the nonprevailing defendant. However, the majority panel found that the plain text of section 3730(g) provides that “the provisions of Section 2412(d) of title 28 shall apply —‘which means that all of those provisions apply, including Section 2412(d)(1)(D).’” In addition, the court found the federal government’s demand for $1.66 million as compensation for the defendant’s underpayment was excessive and unreasonable compared to the final judgment of $14,748. The court pointed to its earlier ruling, stating that “the damages the government sought to recover in this case were ‘fairyland rather than actual.’”

In conclusion, Circle C Construction serves as a warning to the federal government and qui tam relators that excessive damage demands under the FCA may be met with increased scrutiny. Indeed, the Equal Access to Justice Act was passed in response to congressional findings that certain parties, particularly small businesses, were deterred from pursuing their rights in opposition to unreasonable government action because of the expense involved. As a last result, the government attempted to persuade the court that its ruling “would have a chilling effect on its efforts to vigorously enforce the False Claims Act.” Despite its plea, the court provided the following response:

One should hope so. In this case the government made a demand for damages a hundredfold greater than what it was entitled to, and then pressed that demand over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous. The consequences for Circle C included nearly a half-million dollars in attorneys’ fees. Section 2412(d)(1)(D) makes clear that the government must bear its share of those consequences as well.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.