Government Contracts Monitor

Sixth Circuit Rejects DOJ “Fairyland” Damages Theory, and Bases False Claims Act Damages on Actual Underpaid Davis-Bacon Act Wages

February 16, 2016

The U.S. Court of Appeals for the Sixth Circuit recently struck a ringing blow for common-sense, logic and reality in overturning a District Court’s $763,000 damages award in a case involving Davis-Bacon Act (DBA) wage underpayments of only $9,916. United States ex rel. Wall v. Circle C Construction, LLC, 6^th Cir. Case No. 14-6150, decided Feb. 4, 2016. The Court flatly rejected what it characterized as the government’s “creative” accounting and “fairyland” damages. The Court specifically rejected the government’s theory that all of the provided electrical work was “tainted” by the $9,916 wages underpayment, stating that such claim was belied by the reality that “the government turns on the lights every day” and is using the buildings. The Court reduced the award to $14,748, representing the trebled $9,916 actual underpaid wages less $15k previously paid by Circle’s C’s offending subcontractor.

The case arose out of a contract awarded to Circle C for the construction of 42 warehouses at Fort Campbell, an Army base straddling the border between Kentucky and Tennessee. The contract required Circle C and its subcontractors to pay what the Court described as “above-market wages per the Davis-Bacon Act,” 40 U.S.C. § 3142. The contract also required Circle C to submit weekly certified payroll compliance statements on DOL Form WH-347, certifying that Circle C and its subcontractors had paid the required minimum wages during each relevant week.

According to the Sixth Circuit, the evidence established that Circle C’s electrical subcontractor, Phase Tec, paid two electricians working in Kentucky $16 an hour vs. the $19 required under Davis-Bacon, resulting in wage underpayments totaling $9,916 over a seven-year period. These underpayments rendered false a number of Circle C’s payroll compliance statements, which in turn rendered Circle C liable to the government under the False Claims Act, 31 U.S.C. § 3279.

The government argued that the wage underpayments “tainted” all of the electrical work in the warehouses, which had a total contract paid value of $259,298.18. The District Court accepted this measure of damages, and then trebled the same under the False Claims Act. 31 U.S.C. § 3729(a)(1)(G). After subtracting the $15k previously paid by Phase Tec, Circle C was hit with a net damages award of $762,894.54

The Sixth Circuit ruled that this award was an “abuse of discretion.” First, the Court stated that the amount to be trebled under the False Claims Act is the government’s “actual damages.” Second, the Court stated that “[a]ctual damages by definition are damages grounded in reality,” and constitute “the difference in value between what the government bargained for and what the government received.” (Emphasis added.) Here, the Court stated that “the government bargained for two things: the buildings, and payment of Davis-Bacon wages. It got the buildings but not quite all of the wages. The shortfall was $9,916. That amount is the government’s actual damages.”

Third, as noted above, the Court squarely rejected the government’s theory that the entirety of the electrical work was rendered “valueless” by the “taint” of Phase Tec’s $9,916 wages underpayment. In addition to noting that this claim was “belied by the government’s own conduct in using the buildings,” the Court stated that “this putative taint washes out easily enough with money damages, particularly the treble-strength kind available here.” Circuit Judge Rogers, concurring, stated that “the market value of the public harm can be precisely ascertained: it is the amount of additional wages that should have been paid.”

Fourth, the Court also rejected the government’s further argument that it should pay nothing, since the FAR authorizes the suspension of payments had the government known that Phase Tec was underpaying its workers. The Court stated that “the relevant question is not whether in some hypothetical scenario the government would have withheld payment, but rather, more prosaically, whether the government in fact got less value than it bargained for.” Moreover, the Court stated that this argument “fails on its own terms,” and is “refute[d]” by the specific language of the applicable FAR provisions, which limit the permissible withholding to “the estimated wage underpayment and estimated liquidated damages,” or “sufficient funds to compensate employees for back wages.” FAR 22.406-9(a) & (9)(b) (emphasis added).

For the foregoing reasons, the Court unanimously reversed the District Court’s $762,894.54 damages award, and remanded with instructions to enter judgment in favor of the United States in the reduced amount of $14,748.

The Sixth Circuit’s practical, real-world, approach is refreshing, and hopefully will discourage such unreasonable overreaching by the government in future cases.

However, the favorable result achieved on appeal should not overshadow the underlying messages of this case, reminding (1) contractors and their subcontractors that they must pay their covered employees the full DBA wages and benefits specified in the applicable wage determinations, and properly report the same weekly on DOL Form WHD-347, and (2) prime contractors that they are jointly and severally liable for subcontractor underpayments, and as here, can be subject to treble damages under the False Claims Act, even where the subcontractor actually made good on the underpaid wages. Moreover, while successfully reducing its liability here, both Circle C and Phase Tec were left bearing the costs of their respective compliance investigations, as well as Circle C having to pay the likely substantial litigation costs here in both the trial court and on appeal.

Finally, of course, and as we previously have discussed, the FCA damages awarded here are by no means the only available sanction in such a situation. Both contractors, subcontractors and their respective principals need to remember that they also could face criminal penalties (see prior blog article here), as well as possible suspension and debarment from doing business with the government. It therefore behooves all contractors and subcontractors to ensure that they comply fully with all applicable minimum wage laws and related requirements.