Determining FCA Damages: Sixth Circuit Urges Comparable Sales Analysis to Assess Fair Market Value, Even Where Number of Market Participants is Small

By on April 13, 2015

On April 6, 2015, the Sixth Circuit reversed a $657 million judgment previously labeled by the Justice Department as “the largest judgment in the history of the False Claims Act,” because the government failed to prove damages.  For the second time in U.S. v. United Technologies Corp., the Sixth Circuit remanded to the district court to determine if the government can prove that false statements made in a 1983 supply bid by Pratt & Whitney, now owned by United Technologies Corp., in resulted in actual damages to the government.  Significantly, the Sixth Circuit opined that comparable sales analysis is the preferred method of determining the fair market value of goods to determine if the government suffered damage, even in a market that appears to be an oligopoly.

The government filed the case in 1999, claiming that Pratt had made false statements to the Air Force while competing with GE Aircraft to supply engines for fighter jets.  Pratt had served for years as the exclusive supplier of engines for the fighter jets, when, in 1982, the Air Force decided to switch to competitive bidding.  This switch led to “the Great Engine War” as Pratt and GE Aircraft tried to undercut the other to sell more engines to the Air Force.  The government alleged that in its 1983 multi-year supply bid, Pratt misstated its projected costs to supply the engines to coax the Air Force to choose Pratt over GE Aircraft.  However, this didn’t work: the Air Force purchased most of its aircraft in 1983 from GE, and in each subsequent year, the Air Force called for the companies to improve their prior “best and final” offers. The resulting lower offers allowed the Air Force to purchase more engines from the supplier who could generate that year’s best offer.

Pratt was held liable for violating the False Claims Act for the statements regarding projected costs in its 1983 bid, but the lower court initially found no actual damages, resulting in an award of $7 million in statutory penalties only.  In the first appeal in 2010, the Sixth Circuit vacated the district court’s damages holding.  On remand, the district court awarded $657 million in damages.  In its April 6, 2015 opinion, the Sixth Circuit again reversed, holding that its earlier remand had not mandated that the lower court find the government suffered actual damages, but simply required a second look at calculation issues.

The Sixth Circuit noted that the government bears the burden of proving its actual damages.  The Sixth Circuit rejected the government’s argument that in evaluating what the government should have paid for the engines, a presumption should apply that a dollar of overstated projected costs in the supply bid translates to a dollar of actual damages.  Rather, to determine whether the government paid more than it should have, the Sixth Circuit stressed that the analysis should focus on the fair market value of the supplied engines:

When the government gets what it paid for despite a contractor’s misstatements, it has suffered no actual damages.… The only benchmark consistent with this benefit-of-the-bargain theory of damages is fair market value by which we meant (and still mean) what a willing buyer would pay in cash to a willing seller at the time.

The Sixth Circuit’s primary problem with the lower court’s approach to damages was its failure to consider the effect of market competition on fair market value.  The district court rejected evidence of GE Aircraft’s prices as comparable sales relevant to fair market value of the engines the Air Force purchased, based on the limited number of players in the market, infrequent sales and GE Aircraft’s cost of market entry.  Instead, the district court relied exclusively on the government expert’s price estimates, even though the expert refused to consider the role that competition played in determining reasonable and fair prices, or whether that competition and the prices that resulted from it eliminated any damages to the government.

The Sixth Circuit disagreed. It instructed that a comparable sales analysis is the preferred method for establishing fair market value, and found the analysis applicable “even though the market for fighter jet engines is heavily regulated (many markets are), it has two sellers, and it results in few sales per year.”  It found that the prices of Pratt’s competitor, GE Aircraft, were a natural place to look for evidence of actual value of the engines to the government, and rejected arguments that the product was too dissimilar for a comparable sales analysis; the Sixth Circuit pointed out that the government annually split its purchase order between the two companies depending on who had the lowest price that year.  In some years, GE Aircraft won and supplied more engines; in later years, Pratt won an increasing percentage.  The competition suggested the companies’ engines were sufficiently comparable for fair market value analysis, notwithstanding the limited numbers of players in the market.