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In February, the Sixth Circuit in U.S. ex rel. Wall v. Circle C Construction rejected the government’s FCA damages theory that it is entitled to three times the amount of the total contract value, regardless of any value received, because the claim for payment was “tainted” by the underlying legal violation.  In a “Feature Comment” published in The Government Contractor, C&M attorneys explore the origins of the tainted claim damages and plaintiffs’ increasing reliance on the theory in cases where the market value of the harm is not readily calculable such as in cases of fraudulent inducement and small business fraud.

In Wall, the defendant’s subcontractor underpaid its employees for electrical work at numerous Army warehouses by a total of $9,916 in violation of the Davis-Bacon Act and the contract requirements. The district court awarded treble damages on the entire value of the contract, or $763,000.

The government argued that it was entitled to three times the value of total value of the contract, regardless of any value received, because the claim for payment was “tainted” by the underpayment. Circle C, on the other hand, argued for application of the benefit of the bargain principal such that damages should be limited to the difference between the market value of the products the government actually received from the defendant and the market value of what the government should have received from the defendant, but for the alleged fraud.

The Sixth Circuit applied the benefit of the bargain principle. It noted that the government was actually using the electricity in the warehouses and should only be entitled to the amount of underpayment of Davis-Bacon Act wages. The concurrence, however, noted that while the facts of Wall made application of this principle straight forward, in cases of fraudulent inducement or cases in which the value of the injury to the public is nebulous—such as when the government is denied an intangible societal goal such as increasing small business participation—application of the taint theory may still be appropriate.

Accordingly, the full impact of the Sixth Circuit’s decision in Wall remains to be seen. Defendants will rely on the case if plaintiffs claim damages based on the full value of the contact even though the market value of the actual injury is ascertainable. Plaintiffs will continue to use the tainted claim theory to argue for the full value of the contract. This posture will likely prove effective in driving settlements in cases where contractors face enormous exposure. The concurrence serves as an important reminder that the facts of Wall made it an easy case in which to determine the proper measure of damages because the market value of the government’s injury was readily ascertainable. As such, the Wall decision may be helpful in circumstances of clear overreach by FCA plaintiffs, but the case law is far from settled in tainted claim cases in which the market value of the government’s injury cannot be easily calculated.