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Second Circuit Issues Important Opinion on Damages and Materiality Under the FCA


October 4, 2012

Background

On  September 5, 2012, the Second Circuit issued its decision in U.S. ex rel. Feldman v. Van Gorp., 2012 U.S. App. LEXIS 18667 (2nd Cir. Sept. 5, 2012), a case with important implications for the "materiality" standard under the False Claims Act ("FCA") as well as the issue of how to properly calculate FCA damages.
  
This case, brought under the qui tam provisions of the False Claims Act, involved false statements allegedly made on National Institute of Health ("NIH") grant renewal applications by Dr. Wilfred Van Gorp and Cornell University Medical College.  According to the complaint, Dr. Van Gorp and Cornell University Medical College ("Defendants") initially applied for and received, a grant for a fellowship program to study the neurophsycology of HIV/AIDS from NIH in 1997.  As part of the application, Defendants allegedly described the structure of the program including the "key" faculty involved in the fellowship program, the curriculum used, and the training and evaluation of fellows in HIV/AIDS research.  According to the terms of the grant, Defendants allegedly were required to immediately notify NIH of any developments that would have a significant impact on the research program.  Additionally, Defendants allegedly were required to file renewal applications each year in order to continue receiving grant funds.
 
In 2003, Daniel Feldman, a former fellow in Cornell's HIV/AIDS fellowship, filed a suit against Defendants.  Feldman alleged that Defendants falsely claimed in their renewal applications that no changes were made to the fellowship program, when in fact the fellowships' resources, curriculum, faculty and training were much different than what was initially described in the initial grant application.
 
The case was eventually unsealed and went to trial in the Southern District of New York.  In 2010, a jury found that Defendants were liable under the FCA for making false statements in three of their renewal applications and awarded damages of $855,714.  Defendants moved for judgment as a matter of law, or alternatively a new trial.  The Southern District of New York denied this motion, finding that there was sufficient evidence for the jury to find that Defendants made false statements material to NIH's funding decision.  Defendants appealed this decision and also appealed the jury's award of damages to the Second Circuit.
 
Damages

As a matter of first impression, the Second Circuit examined the proper means of calculating damages under the FCA in a case involving government grants or subsidies to third parties.  Defendants argued that a benefit of the bargain calculation would be appropriate and as a result, the district court was in error in awarding the government the full amount of the grant award for the three non-conforming years.  Under this calculation, a plaintiff is entitled to the difference between the value of what the plaintiff received and the amount that the plaintiff paid.
 
The Second Circuit rejected this argument, finding that in cases where the U.S. receives no tangible benefit, the proper calculation of damages is the full amount of the grant.  The Court cited U.S. v. SAIC, 626 F.3d 1257, 1279 (D.C. Cir. 2010), U.S. ex rel. Longhi v. United States, 575 F.3d 459, 473 (5th Cir. 2009), and U.S. v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008), to support this position.  In contrast with cases in which the U.S. contracted for a service for which it received a tangible benefit that was less than it bargained, the Second Circuit found that the U.S. in this case did not receive what it bargained for at all: a program wholly different than what was specified in the application.
 
The Second Circuit also rejected Defendants' argument that this "actual amount" theory of damages would only apply in cases involving fraudulent inducement, which they argued did not apply to their alleged false statements.  According to Defendants, one could only be liable for the entire amount of funds fraudulently received, if, as an initial matter, that defendant fraudulently induced the government to provide them with those funds.  Defendants argued that because the jury did not find any false statements in the initial grant application (but only in the renewal applications), the fraudulent inducement theory of damages should not apply.
 
The Second Circuit rejected this argument, finding "no principle distinction" between requiring payments based on a defendant's initial fraudulent inducement to be returned to the government, and "requiring payments based on false statements to be returned...when those false statements were made after an initial contractual relationship" was established.  If the government "made payment based on a false statement" then there is liability in a FCA case, regardless of whether that false statement was made at the beginning of the contractual relationship or later.  The Second Circuit affirmed the jury's award of the entire amount of the grant for the false statements made by Defendants in the renewal applications for years three, four, and five of the grant.
 
Materiality

The Second Circuit addressed Defendants' argument that the false statements they made to the government were not "material" to the NIH's decision to renew their grant funding.  Defendants argued that the district court erred in denying their motions for judgment as a matter of law and for a new trial because none of the statements they made in their grant application actually influenced the NIH's decision to renew the grant.  Defendants pointed to the testimony of Dr. Robert Bornstein, a member of the "peer review" committee that reviewed Defendants' initial grant application and recommended it for funding by the NIH, as proof that their false statements were not material.  Bornstein testified that when he reviewed the grant application, he did not expect that every faculty member identified in the initial application would be involved with the fellowship program or that the fellowship program would exactly follow the curriculum described in the grant application.  For this reason, Defendants argued that not all the false statements in their grant application were material.
 
Affirming the district court's decision, the Second Circuit found that the test for "materiality" is objective rather than subjective.  To prove materiality, a plaintiff need not show that a particular government official relied upon the specific falsehoods alleged.  The fact-finder need only determine if the falsehoods alleged by the plaintiff have a "natural tendency to influence or be capable of influencing, the payment or receipt of money or property."  The focus is on what could have influenced a reasonable decision-maker, rather than on what actually influenced the decision-maker.

The Second Circuit noted that to hold otherwise would make the language of the FCA superfluous.  Applying this objective standard, the Second Circuit found that because the Defendants did not inform NIH of the key information such as the lack of involvement of certain faculty in the grant's implementation, the lack of access of students to research and clinical resources, and the fact that core courses described in the initial grant were never implemented, that a reasonable jury could find the Defendants' false statements to be material.

Conclusion

This decision has significant implications for the calculation of damages under the FCA.  If the government does not get what it bargained for, a defendant can be held liable for three times the entire amount of what it received in addition to statutory penalties.
 
Additionally, this case reinforces that the test for "materiality" under the FCA is objective.  A qui tam relator does not need to show that any particular government official actually relied on a defendant's false statement in making a funding decision, but rather that the statement could have influenced a reasonable decision-maker.