Davis-Bacon Act
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Seventh Circuit Affirms Summary Judgment for Federal Subcontractor in FCA Suit Regarding Fringe Benefit Withholdings

On July 7, 2016, the US Court of Appeals for the Seventh Circuit affirmed the US District Court for the Southern District of Indiana’s grant of summary judgment in favor of a federal subcontractor defendant facing False Claims Act (FCA) allegations. Notably, the Seventh Circuit rejected the district court’s original grounds for summary judgment, an “advice-of-accountant” defense, instead finding that applicable regulations and the trial record created ambiguity making it impossible to demonstrate the defendant’s knowing submission of false claims.

The relator’s FCA claims were premised on alleged violations of the Davis-Bacon Act, which requires that federal construction contractors pay their workers the “prevailing wage.” 40 U.S.C. § 3142(a). US Department of Labor regulations provide further specifics on base wage rates and fringe benefits (i.e., life, dental, vision and health insurance) for varied types of workers. The relator, a union comprised of workers who performed work for the defendant, alleged that its workers had not been paid the prevailing wage under Davis-Bacon due to the defendant’s deduction of $5.00 per hour from each employee to cover fringe benefits. These withholdings were deposited into a trust created by the defendant for its employee insurance benefits, and were withheld from employees whether or not they were eligible for fringe benefits. In the lawsuit, the defendant subcontractor was alleged to have submitted false Certified Payroll Reports to the government including statements attesting compliance with the Davis-Bacon Act, despite the $5.00/per hour withholding which allegedly resulted in payments to workers below the “prevailing wage.”

While upholding the grant of summary judgment for the defendant, the Seventh Circuit based its ruling on different grounds than the district court. The district court had ruled that the defendant’s reliance on the advice of its accountants with respect to withholdings negated any potential showing of knowing submission of false statements. The Seventh Circuit rejected this conclusion, finding that the defendant had failed to demonstrate the facts necessary to provide a basis for an “advice-of-accountant” defense, noting “[w]e do not know precisely what it told its accountants, whether they provided all necessary details, or what exactly the accountants recommended.”

Rather, the Seventh Circuit affirmed the grant of summary judgment for defendant subcontractor on the basis of the “ambiguity” surrounding regulations regarding employer accounting of fringe benefit contributions and absence of evidence as to any withholding requirements contained in the contract. Walking through applicable DoL regulations, the Seventh Circuit found that it was unclear whether the withholdings made by the defendant necessarily violated the Davis-Bacon Act and, further, that the record was unclear as to whether the defendant was contractually obligated to make contributions to the fringe benefit trust for ineligible employees. The Court held, therefore, that it could not be inferred that the defendant “either knew or must have known that it was violating the Davis-Bacon Act.”

In short, the Seventh Circuit embraced the logical premise that contractors cannot reasonably be subjected to multiple damages and penalties under the FCA – which the Supreme Court has characterized as an [...]

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Sixth Circuit Slashes “Tainted Goods” FCA Damages Award by over 95%

The United States Court of Appeals for the Sixth Circuit issued a dramatic reduction to an False Claims Act (FCA) damages award on February 4, 2016, reducing the award from  $762,894.54 to a mere $14,748, and labeling the government’s “tainted goods” damage calculation as “fairyland rather than actual.” The Sixth Circuit’s ruling in United States ex rel. Wall v. Circle C Construction, LLC highlights the importance of evaluating the actual value of goods received by the government in calculating FCA damages, and presents a forceful rejection of “tainted goods” damage theories in cases where the value of the injury to the public interest is precisely ascertainable.

The suit alleged that government contractor Circle C Construction, LLC had violated the FCA by knowingly submitting payroll certifications to the United States Army, falsely stating that the company had met the minimum wage requirements of the Davis-Bacon Act while building military warehouses.  Specifically, it was alleged that Circle C’s subcontractor, Phase Tech, paid its electricians a total of $9,916 less than required by the Davis-Bacon wages specified in the government contract. The district court litigation resulted in a bench trial and a ruling that the government was entitled to treble damages on the full amount paid by the government for the electrical work performed on the warehouses: $259,298.18, trebled to $777,894.54. (This award was reduced by $15,000 to $762,894.54 as a result of a settlement payment made to the government by Phase Tech.) The district court held that Circle C’s fraud tainted all electrical work performed under the contract, and that therefore the $9,916 underpayment rendered all electrical work valueless as the government “would not have paid for that work had it known the truth.”

The Sixth Circuit wholly rejected this ruling on appeal, reiterating that the FCA provides for trebling of “actual damages”—namely the difference in value between what the government bargained for and what it received. The circuit court found that the actual damages were $9,916, the underpayment amount, and differentiated this case from ones where a contractor delivers defective goods or goods imbued with “some unalterable moral taint” such as products manufactured by child labor or purchased from a country the United States has embargoed.  Here, the court noted that there was no evidence that there were any defects with the electrical work performed, noting that the government uses the warehouses Circle C built and turns on the lights.

The Court of Appeals further pilloried the government’s argument that it would have withheld all payments to Circle C had it known about the underpayments, finding that applicable regulations require the government to withhold “an amount equal to the estimated wage underpayment and estimated liquidated damages”—nothing more. Underscoring this point, the court wrote:  “Actual damages by definition are damages grounded in reality. And in the real world the government could not forever withhold all payments to a contractor for work on several dozen warehouses, and yet have the work continue to completion and the government continue to use the warehouses [...]

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