February 18, 2020 Public Contract Law Journal

Calculating Intangibles: Assessing the Argument for Actual Damages Equal to the Contract's Total Value

by Thomas E. Daley III

Thomas E. Daley III (tdaley@law.gwu.edu) is a J.D. candidate at The George Washington University Law School.

I.  Introduction

Each year, the federal government awards contracts and grants totaling nearly one trillion dollars,1 and each year it loses over a hundred billion dollars to fraud and improper payments.2 Although the government has been reducing improper payments, it continues to fall short of achieving its desired level of fiscal efficiency.3

The government’s primary tool for combatting fraud is the federal civil False Claims Act (FCA).4 Since its enactment in 1863, the FCA’s scope has greatly expanded and now applies to “virtually any individual or entity that [conducts] business with the federal government.”5 In fiscal year 2014, the government recovered a record $5.69 billion from civil cases involving fraud against the government.6

Legislative changes and court decisions have expanded the government’s use of the FCA and created different methods for calculating actual damages.7 With actual damages potentially being trebled under the FCA,8 multiple approaches for actual damages can produce calculations that differ by hundreds of millions of dollars.9

One of the catalysts for the differing damages calculations comes from the U.S. Court of Appeals for the Fifth Circuit’s decision in United States ex rel. Longhi v. Lithium Power Technologies.10 There, the Fifth Circuit determined that the actual damages suffered by the government were equal to the full grant value when the grantee falsely certified itself as eligible for a socioeconomic set aside grant.11 The court reasoned that the government’s “benefit of the bargain was to award money to eligible deserving small businesses” and that the grantee deprived the government of any benefit by fraudulently obtaining the grant.12

Following the Fifth Circuit’s decision, the government has increasingly relied on Longhi when arguing for actual damages equal to the full value of the contract or grant at issue.13 While this approach may be appropriate in certain socio-economic set-aside grant and contract situations, the government’s frequent use of this damage calculation often ignores the tangible value of the goods that the government has received.14

This Note focuses on the calculation of actual damages in the “fraud-in-the- inducement” context. First, Part II explains fraud-in-the-inducement, discusses recent fraud-in-the-inducement case law, examines how and why the government uses socio-economic set-aside contracts, and highlights the problems associated with the use of socio-economic set-aside contracts. Part III argues that when an ineligible firm utilizes fraudulent schemes to become eligible for a socio-economic set-aside contract or grant and wins the contract or grant, the firm should be liable for the entire contract or grant value because the government’s entire purpose for awarding the contract or grant is thwarted. Further, Part III reasons that the government’s universal application of Longhi to all fraud-in-the-inducement cases defies case law and Supreme Court precedent. Finally, Part IV concludes by urging courts to be cognizant of the differing damages calculations and to accept the government’s argument for actual damages equal to the full value of the contract only in certain situations.

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