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describing disgorgement of profits from fraud as "a ‘classic’ restitutionary remedy inherently distinct from compensable damages" awarded at law
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03 Civ. 8762 (PAC).
November 3, 2005
MEMORANDUM OPINION
This is a qui tam action brought under the False Claims Act. 31 U.S.C. §§ 3729-812. Plaintiff-Relator, R.C. Taylor, III, alleges that Mario Gabelli, 17 other individuals, and 46 companies (collectively, the "defendants") committed fraud against the United States (the "Government") in their successful bids for and resales of wireless spectrum licenses. Defendants participated in auctions conducted by the Federal Communication Commission ("FCC" or the "Commission"), pursuant to a Congressionally-authorized program intended to diversify ownership of such licenses. For damages, plaintiff seeks both the bidding credits and favorable financing, which the successful bidders were awarded, but also the profits earned by three of the four defendants when they resold their licenses, upon approval of such transactions by the FCC.
Defendants move pursuant to Federal Rule of Civil Procedure 56 for an order granting plaintiff summary judgment. On the Relator's claim for disgorgement of profits. Both parties agree there are no material factual issues and the question before the Court is strictly one of statutory interpretation: does the FCA grant qui tam relators the remedy of disgorgement of profits? It appears that this case is atypical for FCA actions and that the issue, in its peculiar factual context, is one of first impression. The Court holds that the FCA does not permit the relief the plaintiff seeks, and grants defendants' motion for partial summary judgment.
The Relator's Third Amended Complaint characterizes the remedies sought as "forfeitures." Third Am. Compl. ¶ 366 (stating that "[t]his is a claim for treble damages and forfeitures under the False Claims Act").
BACKGROUND I. Standard of Review
II. Facts
5656Cewnick Fund v. Castle.1993 WL 88243Id. Bruschini v. Board of Educ. of Arlington Cent. Sch. Dist.911 F. Supp. 104106-07see also Gadsden v. Fripp 330 F.2d 545547th See United States ex rel. Taylor v. Gabelli345 F. Supp. 2d 313United States ex rel. Taylor v. Gabelli345 F. Supp. 2d 340
This case was reassigned from Judge Scheindlin to this Court on August 8, 2005. Counsel for the parties, jointly, submitted a status letter to the Court on September 20, 2005, which stated: "The parties believe that resolution of Defendants' pending motion for partial summary judgment on damages will have a significant impact on settlement discussions." Letter from parties to the Court, at 3 (Sept. 20, 2005); see also Defendants' Memorandum of Law in Support of Motion for Partial Summary Judgment 4-5 ("The parties agree . . . that certain Defendants profited from the license sales . . ., and that the issue of whether sales profits are allowable as a measure of FCA damages is amenable to summary judgment.") [hereinafter Defs.' Mem. Partial Summ. J.].
Defs.' Mem. Partial Summ. J. 2 ("The Relator's claim for disgorgement of profits Defendants earned from the eventual sale of certain of their wireless spectrum licenses can be rejected as a matter of law with no need for factual determinations."); Relator's Opposition to Defendants' Motion for Partial Summary Judgment 1 ("We agree with defendants that this motion may be decided `as a matter of law with no need for factual determinations'." (citation omitted)) [hereinafter Pl.'s Opp'n Mem. Partial Summ. J.]. In particular, the Court agrees with the Relator that the issue before it is "what damages may the Government recover in an FCA claim that a relator is pressing on its behalf." Pl.'s Opp'n Mem. Partial Summ. J. 21 (italics omitted).
The facts outlined here are taken in main part from the parties' submissions pursuant to Local Civil Rule 56.1 of the Southern District of New York entitled "Statements of Material Facts on Motion for Summary Judgment."
The Relator, Taylor, filed this FCA lawsuit on February 14, 2001. The United States declined to intervene in the case. In the Complaint, Taylor alleges that more than 50 companies and individuals knowingly defrauded the U.S. Treasury in connection with public auctions of spectrum licences held by the FCC from 1995 to 2001. The alleged scheme entailed bids by sham entities to obtain "small business" discounts and spectrum licences, based in part on "material misstatements and omissions." (Citing Third Am. Compl. ¶¶ 2, 5.) The FCC awarded twelve defendants wireless spectrum licenses after competitive bidding in FCC auctions. These bids and grants involved submissions of and review by the FCC of Form 175 applications (short form) and Form 601 applications (long form) from each applicant. Subsequent to their successful bids and receipt of licenses, four of the twelve defendants sold their licenses to private entities. The sale of the licenses required FCC submission of Form 603 and agency approval.
The parties dispute whether Form 603 applications contained statements about defendants' eligibility for small business or other benefits. In addition, at Oral Argument, the Relator's counsel indicated that the parties dispute what would have occurred had the FCC uncovered the alleged fraud. Oral Argument Tr. 32 (Oct. 20, 2005). The Relator maintains that the FCC would have re-auctioned the licenses at a later date. Pl.' Opp'n Mem. Partial Summ. J. 9 n. 8; Oral Argument Tr. 32. Defendants, by contrast, assert that "[t]he profits resulted from increases in the value of certain spectrum licenses, and would not under any circumstances have accrued to the government because the FCC had already awarded the licenses." Defs.' Mem. Partial Summ. J. 1; Oral Argument Tr. 13. In any event, both parties assert that, notwithstanding these disagreements about what might have happened if the FCC had known of the fraud, the issue of damages is nevertheless ripe for decision. Oral Argument Tr. 13, 31-32.
Three of these four defendants sold their licences at higher prices than they had originally paid to the FCC, but the parties dispute the precise amount of defendants' gains. A fourth defendant sold licenses for less than the original amount. Plaintiff estimates the damages in net proceeds from the resale of licenses to be $206 million before trebling; defendants calculate the amount to be $136 million.
The Court agrees with the parties that defendants' motion for partial summary judgement presents soley a question of law and is thus ripe for decision.
III. The Parties' Contentions
Among other arguments (which the Court need not address), defendants mainly contend that the text of the FCA, the Act's legislative history, and governing precedent do not permit disgorgement of resale profits.
On the other hand, Taylor argues that defendants' resale proceeds are recoverable "FCA damages" for two reasons. Relator's Opposition to Defendants' Motion for Partial Summary Judgment 5 [hereinafter Pl.'s Opp'n Mem. Partial Summ. J.]. First, Taylor argues that such "damages" are a standard remedy in fraud cases involving resale profits because they "approximate the return of the property in question." Id. Taylor cites authority indicating that courts have flexibility in fashioning remedies under the FCA. Id. at 5-6. In particular, Taylor characterizes these damages as "rescissory damages" and relies on cases involving such remedies. Id. at 8-11.
Second, Taylor asserts that defendants perpetrated another fraud by obtaining FCC permission to resell the licenses. Id. at 5. Taylor reasons that, in such instances, courts measure the Government's damages by what the Government provided as a result of the false claim, which Taylor maintains translates into the right to sell the license. Id. Taylor further asserts that such a right has a value directly measurable by the defendants' net proceeds from the resales. Id. at 5, 15-17.
DISCUSSION I. Applicable Law A. Overview of Relevant Statutory Provision
Under the FCA, if a person is found to have engaged in one of seven statutorily defined types of fraud, that person "is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person." 31 U.S.C. § 3729(a) (emphasis added). The FCA also provides for reduced liability, "2 times the amount of damages which the Government sustains because of the act of the person," when persons fully and timely cooperate with the Government in the investigation of false claims violations. Id. This liability provision also defines a "claim" as "any request or demand . . . for money or property." Id. § 3729(c). Finally, the section carves out an exclusion for claims, records or statements made for tax purposes. Id. § 3729(e).
B. Compensatory Damages Versus Restitutionary Disgorgement
Taylor argues that the resale proceeds constitute "damages" for purposes of FCA recovery and, thus, that the FCA authorizes disgorgement of defendants' profits. As discussed below, the law of remedies, however, strikes a clear distinction between damages — a compensatory form of relief — and restitution — a form of relief that prevents unjust enrichment. Moreover, the FCA expressly refers to "damages" and contains no "restitutionary" provision, which remedy Taylor seeks.
1. Overview of Remedial Terms
Section 3729(a) provides for two forms of liability under the FCA: "civil penalt[ies] and "damages." 31 U.S.C. § 3729(a). The Court starts its analysis by noting that damages and disgorgement constitute different remedies. "[D]isgorgement of improper profits" is a restitutionary remedy, Chauffeurs, Teamsters, and Helpers, Local Number 391 v. Terry, 494 U.S. 558, 570-71 (1990), and "restitution is appropriate only where there has been a showing of unjust enrichment." Brown v. Sandimo Materials, 250 F.3d 120, 126 (2d Cir. 2001) (citing Terry, 494 U.S. at 570-71). Although restitution can be granted as a form of legal relief, it is generally considered an equitable remedy.Mertens v. Hewitt Assocs., 508 U.S. 248, 256 (1993) ("`equitable relief can also refer to those categories of relief that were typically available in equity (such as injunction, mandamus, and restitution . . .) (emphasis in original)); see also United States v. Bedford Assocs., 713 F.2d 895, 902 (2d Cir. 1983) ("Restitution is an equitable remedy resting in the sound discretion of the trial court." (citation omitted)). "Money damages are, of course, the classic form of legal relief."Mertens v. Hewitt Assocs., 508 U.S. at 255 (emphasis omitted). As a leading authority explains:
In Great-West Life Annuity Insurance Company v. Knudson, the Supreme Court stated that "`restitution is a legal remedy when ordered in a case at law and an equitable remedy . . . when ordered in an equity case,' and whether it is legal or equitable depends on `the basis for [the plaintiff's] claim' and the nature of the underlying remedies sought." 534 U.S. 204, 213 (2002) (citation omitted). The Court noted that "[a]dmittedly, our cases have not previously drawn this fine distinction between restitution at law and restitution in equity, but neither have they involved an issue to which the distinction was relevant."Id. at 214-15. This distinction between the two different types of restitution does not change this Court's analysis, which is focused on determining whether the text of the FCA permits the remedy of disgorgement of profits ( i.e., restitution). In the case at bar, neither equity nor law provide the substantive basis for the relief; rather, Taylor may only rely on a statutory basis for the remedy.
The stated goal of the damages remedy is compensation of the plaintiff for legally recognized losses. This means that the plaintiff should be fully indemnified for his loss, but that he should not recovery any windfall.
Dan B. Dobbs, Law of Remedies: Damages, Equity, Restitution § 3.1, 210 (2d ed. 1993) [hereinafter Law of Remedies].
The remedial purposes of damages and of restitution — in this case, disgorgement of unjust gains — also differ. Damages typically focus on the plaintiff and provide "make-whole," compensatory, monetary relief; restitution, by contrast, concentrates on the defendant — preventing unjust enrichment, disgorging wrongfully held gains, and restoring them to the plaintiff. Securities and Exch. Comm'n v. Commonwealth Chem. Sec., Inc., 574 F.2d 102 (2d Cir. 1978) ("[T]he primary purpose of disgorgement is not to compensate investors[;] [u]nlike damages, it is a method of forcing defendants to give up the amount by which he was unjustly enriched."); Securities and Exch. Comm'n v. Drexel Burnham Lambert, Inc., 956 F. Supp. 503, 507 (S.D.N.Y.), aff'd sub. nom. Securities and Exch. Comm'n v. Fischbach Corp., 133 F.3d. 170 (2d Cir. 1997) ("The disgorgement remedy is not intended to compensate investors; rather, it is intended to deprive the violator of unjust enrichment. . . ."). "Courts sometimes speak of `damages' measured by `restitution' or a `restitutionary measure of damages,' but such locutions ignore th[e] difference in principle between the two remedies." Dobbs, Law of Remedies, § 4.1(1), at 369 n. 28; see also id., § 1.1, 5 ("[J]udges frequently speak of `damages' when they mean restitution[;] [t]he reader of restitutionary material is always challenged by . . . loose usage to analyze cases by their content rather than their terms.").
Another source of confusion is the fact that courts also give the term "restitution" various meanings. See, e.g., Dobbs, Law of Remedies, § 4.1(2), at 371 ("some major ways of talking about restitution should be understood" "[b]ecause confusion has sometimes run very deep"). For example, restitution is sometimes asserted as a cause of action. Dubai Islamic Bank v. Citibank, 256 F. Supp. 2d 158, 168 (S.D.N.Y. 2003) (court permitting claim of restitution as separate basis for liability). Alternately, restitution can be viewed as a "theory and form of the remedy used in equity." Dobbs, Law of Remedies, § 4.1(2), at 371; see also State of New York v. SCA Servs., Inc., 761 F. Supp. 14, 15 (S.D.N.Y. 1991) (deeming restitution a remedy for unjust enrichment and not a separate basis for liability). Restitution can also refer to a "theory of relief," Dobbs, Law of Remedies, § 4.1(2), at 371, which as was noted earlier could be brought either in a suit in equity or at law.
In addition to serving distinct purposes, courts also measure damage and restitutionary remedies differently. Damages are measured by plaintiff's losses. Id. § 4.1(1), at 369; see also Pereira v. Farace, 413 F.3d 330, 341 (2d Cir. 2005) (finding that where trustee sought to recover funds attributable to corporation's loss, trustee's claim was for compensatory damages). By contrast, restitution "focus[es] on defendant's gain as a measure of recovery." Waldrop v. Southern Co. Servs., 24 F.3d 152, 159 (11th Cir. 1994) (internal quotations omitted) (citing Douglas Laycock, The Scope and Significance of Restitution, 67 Tex. L. Rev. 1277, 1279 (1979)). In fact, restitution aims to "cur unjust enrichment of the defendant absent consideration of the plaintiff's losses." Id. at 158 (citing Restatement of Restitution); see also Dobbs, Law of Remedies, § 3.1, 208 ("Damages differs from restitution in that damages is measured by the plaintiff's loss; restitution is measured by the defendant's unjust gain."); id. § 4.1(1), 369 ("[Restitution] differs in its goal or principle from damages, which measures the remedy by the plaintiff's loss and seeks to provide compensation for that loss.").
In short, "restitution is not damages; restitution is a restoration required to prevent unjust enrichment." Dobbs, Law of Remedies, § 4.1(2), 371 (emphasis in original). Restitution and damages differ elementally from one another — by definition and by function. See e.g., Merten v. Hewitt Assocs., 508 U.S. at 256 (distinguishing between restitution and compensatory damages);Local Number 391 v. Terry, 494 U.S. at 570-71 (same); Waldrop v. Southern Co. Servs. Inc., 24 F.3d at 159 (same); Securities and Exchange Comm'n v. Commonwealth Chem. Sec., Inc., 574 F.2d at 102 (same); Securities and Exchange Comm'n v. Drexel Burnham Lambert, Inc., 956 F. Supp. at 507 (same); see also Meghrig v. KFC Western, Inc., 516 U.S. 479, 484 (1996) (award of costs denominated either as "damages" or as "equitable restitution").
2. The Remedy Sought in This Case
Taylor's argument attempts in various ways to characterize the remedy sought, disgorgement of resale proceeds — as damages. These arguments are addressed in turn.
First, Taylor argues that "[w]hether measured by the harm to the Government or the benefit to the defendants, the damages are the same: defendants' resale profits." Pl.'s Opp'n Mem. Partial Summ. J. 13. In some circumstances, restitution and damages can be identical, as when the defendant's gain and plaintiff's loss correspond completely. Dobbs, Law of Remedies, § 4.1(1), at 369. This situation occurs, for example, when embezzled funds are returned to a rightful owner. In practice and principle, however, resale profits do not present a case where restitution and damages remedies match exactly because, at the point of resale, the defrauded seller (for example, in this case the Government) does not make any monetary outlay. Moreover, the wrongdoer may resell at a higher amount than the purchase price in order to make a profit.
Assuming FCA liability, in this instance, the resale profits unquestionably constitute unjust enrichment, and, arguably, such unjust gains would warrant restitution in the form of disgorgement. Such disgorgement, however, cannot be construed as compensation for "damages sustained" by the Government under the False Claims Act: the Government, while perhaps harmed by defendants' unjust enrichment, sustained no actual damages or monetary losses by virtue of the defendants' purportedly wrongful gains. Whether characterized as restitution in law on the substantive ground of quasi-contract, Dobbs, Law of Remedies, § 4.2(1)-(3), at 383-85, or restitution in equity under a claim for an accounting of profits, id. § 4.3(5), at 408-11, the remedy to purge unjust gains simply entails restitution rather than compensatory damages.
Taylor does not assert a generalized "harm to the Government" damages claim. See Pl.'s Opp'n Mem. Partial Summ. J. 18 ("While the Government certainly suffered significant consequential damages from defendants' fraud ( e.g., the reduction of competition from bona fide designated entities disheartened by the presence of Gabelli's deep-pocketed sham entities) damages associated with these harms have not been quantified and incorporated into the Relator's calculation of damages." (emphases in original)).
It is helpful to distinguish between consequential damages and consequential benefits, which is the remedy Taylor seeks:
Restitution (like damages) can also be measured by consequences. In the case of damages, courts can take the measure of consequential losses, not the value of the thing itself, but the losses to the plaintiff consequent upon not having it. In the case of restitution, courts can take the measure of consequential benefits, not the value of the thing itself but the value it produces in the hands of the defendant. Consequential benefits such as profits gained by defendant which in good conscience belong to the plaintiff, are often associated with constructive trusts or with an accounting of profits.
Dobbs, Law of Remedies, § 4.5(3), at 431 (emphases in original).
Second, Taylor carefully avoids the terminology of restitution and ultimately characterizes the relief sought as "rescissory damages." Rescissory damages, however, are inextricably tied to restitution. See, e.g., Dobbs, Law of Remedies, § 12.7(1), at 794 ("The restitutionary claim . . . can be conceived as the second of two steps consisting of rescission . . . of the contract for breach, followed by restitution."). Taylor relies extensively onJanigan v. Taylor. 344 F.2d 781 (1st Cir. 1965). The Janigan court, however, noted that "[i]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them," id. at 786, and articulated the rationale strictly in terms of restitution. The court concluded that "it is simple equity that a wrongdoer should disgorge his fraudulent enrichment." Id. (citing, among other support, Restatement of Restitution §§ 151, 202, cmts. b, c (1937)).
Rescission has been explained as follows:
A rescission is an avoidance of a transaction. Rescission will normally be accompanied by restitution on both sides. Rescission is thus less a remedy and more a matter of the conceptual apparatus that leads to the remedy: the contract is being unmade, so restoration of benefits received under the contract seems to follow. The rescission conception is not required to justify restitution, but where rescission occurs, restitution is usually the next step.
Dobbs, Law of Remedies, § 4.3(6), at 414.
While the Janigan did characterize the remedy as "damages," 344 F.2d at 786, it is clear from the content of the decision that the court was speaking in terms of restitution. See Dobbs, Law of Remedies, § 1.1, 5 (noting frequent reference by courts to "damages" when they mean "restitution"))
Third, Taylor argues that "the resale profits do represent a loss to the government." Pl.'s Opp'n Mem. Partial Summ. J. 15 (citation omitted). Taylor's argument negotiates the following path: had the government learned of the fraud, it would have revoked the licenses, then re-auctioned those licenses, and collected those same proceeds that, instead, defendants received in the resales — ergo, the net proceeds are compensable losses. Id. This logic however is unpersuasive. Taylor's articulation tries to disguise the simple fact that the remedy Taylor seeks is disgorgement of allegedly unjust riches — a "classic" restitutionary remedy inherently distinct from compensable damages.
Finally, Taylor further maintains that two separate grounds for fraud warrant the recovery he seeks: first, defendants' fraudulent bids submitted in auctions to secure licenses and, second, defendants' fraudulent applications to the FCC for permission to resell licenses. These assertions, however, relate more directly to grounds for defendants' purported liability and are not useful in determining the proper remedy. Thus, even if liability were to be found on one or both of these bases, neither ground can transform the remedy sought to one of compensatory damages. In either case, the remedy would involve preventing unjust enrichment and disgorging resale profits that is, restitution.
In sum, while some requirements applied, Congress did not restrict the resale of the licenses, nor forbid such resale. Nor was it contemplated that the Government would share in the resale proceeds. The Government, here, simply did not incur any direct damages because no money flowed from the Government when defendants resold licenses. This does not mean that the Government is without remedy, however. The Government is fully entitled to bring its own action and assert causes of action that provide for disgorgement of unjust profits. The issue here is more narrowly focused on whether such disgorgement is an available remedy under the FCA.
C. Statutory Interpretation of Section 3729(a)
The Court turns next to statutory interpretation of § 3729(a). As a preliminary matter, the Court notes that it is bound by governing precedents that restrict statutory construction to the plain language of the text when that text is unambiguous. Exxon Mobil Corp. v. Allapattah Servs., 125 S. Ct. 2611, 2626 (2005). No court had ever found the FCA's liability provision ambiguous. And, this Court is obligated to give operative effect to the statute's language. United States v. Kerley, 416 F.3d 176, 179-80 (2d Cir. 2005).
In Exxon Mobil Corporation v. Allapattah Services, the Supreme Court provides guidance on statutory interpretation. 125 S. Ct. at 2620. The Court began its analysis by examining "the statute's text in light of context, structure, and related statutory provisions." Id.; see also id. at 2625 (in interpreting statute, also considering the Court's established jurisprudence). Justice Kennedy stated:
As we have repeatedly held, the authoritative statement is the statutory text, not the legislative history or any other extrinsic material. Extrinsic materials have a role in statutory interpretation only to the extent they shed a reliable light on the enacting Legislature's understanding of otherwise ambiguous terms. Not all extrinsic materials are reliable sources of insight into legislative understandings, however, and legislative history in particular is vulnerable to . . . serious criticisms. . . . [L]egislative history is itself often murky, ambiguous, and contradictory.Id. at 2626.
The Second Circuit has explained the process for interpreting statutory language as well, noting:
[W]e begin with the text . . . to determine whether its language is clear or ambiguous. See, e.g., Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997); accord Freier v. Westinghouse Elec. Corp., 303 F.3d 176, 197 (2d Cir. 2002). "The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. at 341. If the meaning is plain, we inquire no further. Id. ("Our inquiry must cease if the statutory language is unambiguous and the statutory scheme is coherent and consistent." (quotation marks and citation omitted)); Freier v. Westinghouse Elec. Corp., 303 F.3d at 197 (and cases cited therein). Only if we discern ambiguity do we resort first to canons of statutory construction, see United States v. Dauray, 215 F.3d 257, 262 (2d Cir. 2000), and, if the meaning remains ambiguous, to legislative history. Id. at 264.Daniel v. American Bd. of Emergency Med., ___ F.3d ___, 2005 WL 2470530, at *8 (2d Cir. Oct. 7, 2005).
As a preliminary manner, the Court concludes that the Act's liability provision is not ambiguous. The statute sets out the remedies imposed upon liable persons clearly and unequivocally as: "a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person." 31 U.S.C. § 3729(a) (emphasis added). First, the Court ascribes the common meaning of "damages" in its construction of § 3729(a). Daniel, 2005 WL 2470530, at *8. "Damages" (unlike restitution, see supra n. 7) has a well understood meaning. Webster's Third New International Dictionary 571 (2002) (defining damages as "the estimated reparation in money for detriment or injury sustained" and "compensation or satisfaction imposed by law for a wrong or injury caused by a violation of a legal right"); Black's Law Dictionary 416 (8th ed. 2004) (defining "damages" as "money claimed by, or ordered to be paid to, a person as compensation for loss or injury"). "When words in a statute are not otherwise defined, it is fundamental that they be interpreted as taking their ordinary, contemporary, common meaning." Daniel, 2005 WL 2470530, at *8 (citing Morse v. Republican Party of Va., 517 U.S. 186, 254 (1996)).
Looking to the plain language of this provision and the "ordinary, contemporary, [and] common meaning" of damages, the Court finds that the only allowable remedy the FCA grants Taylor is compensatory damages and not restitution. Department of Hous. and Urban Dev. v. Rucker, 535 U.S. 125, 130 (2002) (unambiguous provision "evident from the plain language of the statute"). The statutory scheme here is coherent and consistent and no other provisions or sub-sections within the statute conflict with the statutory text at issue. To interpret the FCA as the Relator asks "would require . . . read[ing] into the statute a word — [restitution] — that is not otherwise there." United States v. Kerley, 416 F.3d at 179.
Second, Supreme Court jurisprudence directs courts to take particular care when interpreting remedial provisions. InTransamerica Mortgage Advisors, Inc. v. Lewis, the Supreme Court explained that:
[I]t is an elemental canon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it. "When a statute limits a thing to be done in a particular mode, it includes the negative an any other mode."444 U.S. 11, 19-20 (1979) (citing Botany Worsted Mills v. United States, 278 U.S. 282, 289 (1929)) (construing the Investment Advisers Act of 1940). "The presumption that a remedy was deliberately omitted from a statute is strongest when Congress has enacted a comprehensive legislative scheme including an integrated system of procedures for enforcement." Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 147 (1985) (citation omitted) (collecting cases and construing ERISA); see also Meghrig v. KFC Western, Inc., 516 U.S. at 487-88 ("[W]here Congress has provided `elaborate enforcement provisions' for remedying the violation of a federal statute, . . . `it cannot be assumed that Congress intended to authorize by implication additional judicial remedies for private citizens suing under' the statute." (citation omitted)) (construing the Resource Conservation and Recovery Act); Middlesex County Sewerage Auth. v. National Sea Clammers Assoc., 453 U.S. 1, 14-15 (1981) (same) (construing various federal environmental statutes). This Court is, thus, "especially `reluctant to tamper with [the] enforcement scheme' embodied in the statute by extending remedies not specifically authorized by its text."Great-West Life Annuity Insur. Co. v. Knudson, 534 U.S. 204, 209 (2002) (citation omitted) (construing ERISA).
Thus, well-established precedents require this Court to construe the FCA's remedial provision in a manner consistent with its text and plain meaning. This approach is especially appropriate in this case where the Government can pursue other remedies (such as administrative proceedings and common law unjust enrichment claims) if it so chooses and it is not necessary to resort to an extraordinary and unprecedented interpretation of the Act in order to protect the Government's interests. See United States v. Bornstein, 423 U.S. 303, 316, n. 11 (1976) ("[T]he only enforcement mechanism provided in the Act [is not limited to] the qui tam action[;] . . . the Act clearly envisioned that the Government could sue on its own behalf and it specifically exhorted United States attorneys to enforce the Act diligently." (citations omitted)).
D. FCA Jurisprudence Supports "Plain Language" Construction of FCA
In interpreting statutes, courts may also take into consideration governing precedents. See Exxon Mobil Corp. v. Allapattah Servs., 125 S. Ct. at 2625 (considering Supreme Court's established jurisprudence when conducting statutory interpretation). This Court has not found any published decision, nor has counsel cited any, that addressed squarely the issue at bar: i.e., whether a relator may recover disgorgement of profits under the FCA. Congress first enacted the False Claims Act in 1863. United States ex rel. Marcus v. Hess, 317 U.S. 537, 547 (1943). During its 142-year history, no court has ever interpreted the Act in the manner the plaintiff seeks. This is even more significant since Congress has periodically undertaken significant amendments intended to improve the FCA's effectiveness. Given the FCA's long history and extensive case law, this Court interprets the statute in a manner "consonant with both the case law and general rules of statutory construction." United States v. Kerley, 416 F.3d at 179-80.
A leading authority on the FCA writes: "Over time, Congress has modified the Act to respond to problems that have arisen with its implementation. In 1946, Congress amended the Act to end perceived abuses. In 1986, Congress amended the Act again to revitalize it and make it a more effective law enforcement tool." Claire M. Sylvia, The False Claims Act: Fraud Against the Government § 2:2, 34 (2004); see also 1 John T. Boese, Civil False Claims and Qui Tam Actions, ch. 1 (2d ed. 2005) (providing a historical overview of the FCA and in particular the 1943 and 1986 amendments).
The Relator asserts that it is far less common for the Government to be a defrauded seller of public property than a defrauded purchaser. Pl.'s Opp'n Mem. Partial Summ. J. 7. Prior to the 1986 amendments, courts were divided on whether litigants could recover under the FCA where a person reduced the payment owed to the Government by fraud. S. Rep. No. 345, at 5283 (1986), reprinted in 1986 U.S.C.C.A.N. 5266. To address this deficiency in the statute, Congress amended the Act in 1986 by adding § 3729(a)(7). Id. ("the bill amends section 3729 to provide that an individual who makes a material misrepresentation to avoid paying money owed the Government would be equally liable under the Act as if he had submitted a false claim to receive money"); 2 Boese, Civil False Claims and Qui Tam Actions, E-18 (House Report 660, 99th Congress, Second Session (June 26, 1986)) ("Another amendment to the current law contained in H.R. 4827 allows the Government to prosecute a false claim which has been filed for the purpose of reducing the amount the claimant owes the Government . . .[;] [t]he Government should have the ability to collect all losses suffered through fraud."). The statute now expressly provides for liability in "reverse false claims" actions. 31 U.S.C. § 3729(a)(7) (person liable who "knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government"). Regardless of whether such reverse false claims are uncommon or not, the statute specifically authorizes such actions.
The Supreme Court cases addressing remedies under the FCA provide helpful guidance. In United States v. Halper, the Court noted that "the Government is entitled to rough remedial justice, that is, it may demand compensation according to somewhat imprecise formulas, such as reasonable liquidated damages or a fixed sum plus double damages. . . ." 490 U.S. 435, 446 (1989) (emphasis added). In United States v. Bornstein, the Supreme Court considered how forfeitures resulting from a subcontractor's fraud should be calculated. 423 U.S. at 306-07. The Court looked to the "plain language of the statute," id. at 311, and concluded that such a calculation could be based on the number of false claims filed as opposed to the number of contracts involved. Id. The Bornstein Court also considered whether the then-doubling of actual damages should occur before deducting payments previously received by the wrongdoer. Id. at 314. The Court concluded that the Government's damages should be doubled before any compensatory payments are deducted in order to "most faithfully conform[] to the language and purpose of the Act." Id. The Court, focusing in particular on the "make-whole" purpose of the Act, stated:
Although there is nothing in the legislative history that specifically bears on the question of how to calculate double damages, past decisions of this Court have reflected a clear understanding that Congress intended the double-damages provision to play an important role in compensating the United States in cases where it has been defrauded. "We think the chief purpose of the (Act's civil penalties) was to provide for restitution to the government of money taken from it by fraud, and that the device of double damages plus a specific sum was chosen to make sure that the government would be made completely whole." For several different reasons, this make-whole purpose of the Act is best served by doubling the Government's damages before any compensatory payments are deducted.Id. (citing United States ex rel. Marcus v. Hess, 318 U.S. at 551-52).
More recently, the Supreme Court discussed the remedial functions of the FCA in a case which held that local governments are "persons" for purposes of FCA liability. Cook County v. United States ex rel. Chandler, 538 U.S. 119, 134 (2003). InChandler, the Court considered the local government's argument that it was not liable under the FCA because the FCA provided for punitive damages. The Court rejected this contention, explaining as follows:
Treble damages certainly do not equate with classic punitive damages, which leave the jury with open-ended discretion over the amount and so raises two concerns specific to municipal defendants. One is that a local government's taxing power makes it an easy target for an unduly generous jury. But under the FCA, the jury is open to no such temptation; if it finds liability, its instruction is to return a verdict for actual damages, for which the court alone then determines any multiplier, just as the court alone sets any separate penalty.Id. at 132 (citations omitted) (emphasis added).
The Chandler Court, like the Bornstein Court, also highlighted the compensatory purposes of the FCA,. id. at 130-32, explaining as follows.
The most obvious indication that the treble damages ceiling has a remedial place under this statute is its qui tam feature with its possibility of diverting as much as 30 percent of the Government's recovery to a private relator who began the action. . . . The treble feature thus leaves the remaining double damages to provide elements of make-whole recovery beyond mere recoupment of the fraud.Id. at 131. The Court also noted that the Act does not have a separate provision for prejudgment interest nor expressly provides for consequential damages, which "typically come with recovery for fraud." Id. (citations omitted); see also United States v. Aerodex, 469 F.2d 1003, 1011 (5th Cir. 1972) (holding "that the language of the [FCA] does not include consequential damages resulting from delivery of defective goods").
Other than cases concerned with prejudgment interest or consequential damages, this Court has found only one other case, which addresses FCA remedies, other than actual damages. The Ninth Circuit decision in Mortgages, Inc. v. United States Dist. Court for the Dist. of Nev. is instructive. 934 F.2d 209 (9th Cir. 1991). Here, the court considered whether defendants could file third-party complaints against the relator and seek contribution and indemnification where that qui tam plaintiff had participated in the wrongdoing. Id. at 211. Contribution and indemnification present restitutionary claims. Dobbs, Law of Remedies, § 4.1(1), at 366 n. 4. The Ninth Circuit followed the legal framework established in cases that considered whether plaintiffs could assert a right to contribution and indemnification. Mortgages, Inc., 934 F.2d at 212 n. 3. The court first noted that the "FCA does not speak to the right of contribution or indemnification," id. at 213, and, as well, that the Act provided for no private right of action for contribution. Id. The Ninth Circuit then explained as follows:
We cannot find anything in the legislative history of the FCA that mentions contribution or indemnification. Indeed, the framers of the Act recognized that wrongdoers might be rewarded under the Act, acknowledging the qui tam provisions are based upon the idea of "setting a rogue to catch a rogue." Moreover, the purpose of the damages provisions of the FCA is to deter future fraudulent claims, as well as recoup the government's losses due to fraud. . . .
. . .
. . . Congress may empower federal courts to make federal common law when a statute contains sweeping language and its legislative history indicates Congress's expectation that the courts will "give shape to the statute's broad mandate by drawing on common-law tradition." Where, however, Congress has enacted a comprehensive legislative scheme, including integrated procedures for enforcement, there is a strong presumption that Congress did not intend the courts to supplement the remedies enacted.
Such is the case here. The FCA includes comprehensive procedures for enforcement. . . . "[W]here a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it."Id. at 213 (citations omitted).
Applying the Ninth Circuit's analysis here leads to a similar result: it begins and ends with the fact that the text of the FCA expressly provides for damages only and makes no mention of restitution. Second, under current FCA jurisprudence, courts narrowly construe "damages" to mean some form of "actual damages" and, thus, exclude various other types of damages (such as prejudgment interest and consequential damages) — let alone restitutionary remedies such as contribution, indemnification, or disgorgement of unjust gains. Finally, as the next section shows, the legislative history further indicates that Congress intended the FCA to serve as a remedial statute and permit the Government to recoup losses occasioned as a result of fraud.
During Oral Argument, Taylor's counsel identified one case to support disgorgement of resale profits under the FCA. The Government brought the case under the Surplus Property Act ("SPA"), 40 U.S.C. § 123, and sought recovery of wrongfully obtained resale profits. United States v. Bound Brook Hosp., 251 F.2d 12, 13-14 (3d Cir. 1958). The SPA, of course, presented a different remedial regime than that of the FCA. The statute was intended to direct surplus material to "beneficial social purposes" "while at the same time keeping the supplies out of the hands of speculators." Id. (citation omitted). The FCC, by contrast, did not forbid the resale of licenses. Moreover, while the SPA did include a "double damages" provision — i.e., "two times the amount of damages sustained by the Government because of each act," 40 U.S.C. § 123(a)(1)(B) — under which provision the Government sought relief, it also included a restitutionary provision. § 123(a)(3) ("if the Government elects, [the wrongdoer] shall restore to the Government the money or property fraudulently obtained"). In considering the appropriate remedy, the Third Circuit in this 1958 decision stated as follows:
The defendant got property from the United States for about $2,000 which he resold for $34,000. . . . It seems pretty clear, therefore, that the Government has suffered a pecuniary loss of at least as much as the difference between what it got from the defendant and what the defendant got from his purchaser. Under equitable principles of restitution the amount thus obtained by wrongful act could be recovered from the wrongdoer. See Restatement of Restitution, § 151, com. f., 202, cl. a (1937). We do not think the measure of damages is any less under the terms of this statute.Bound Brook Hosp., 251 F.2d at 14. Thus, while the court recognized that restitutionary principles permitted disgorgement of unjust profits, it nevertheless concluded summarily that the resale proceeds constituted a "pecuniary loss" to the Government and that the statute permitted such disgorgement under the "double damages" provision. Id. For the many reasons set out in this memorandum decision, including and especially because of today's more stringent jurisprudence on statutory construction, the Court respectfully declines to follow Bound Brook.
The FCA cases Taylor cites in support of disgorgement of resale profits under the Act address issues of liability rather than of remedies. In United States v. Mackby, 221 F. Supp. 2d 1106, 1107 (N.D. Cal. 2002), the court, on remand from the Ninth Circuit, considered whether the imposition of $729,454 in penalties and treble damages violated the Excessive Fines Clause in a Medicare fraud case. The court held that the judgment imposed was constitutional, id. at 1115, and rejected defendant's claim that the Government suffered no harm because patients received medical services notwithstanding the false claims filed. Id. at 1111. The court explained that "the amount the Government paid in response to the false claims is an appropriate measure of damages." Id. at 1112. Thus, Mackby involved an actual outlay of funds by the Government. United States v. TDC Management Corporation, on which Taylor also relies, also involved payments by the Government to the alleged wrongdoer. 288 F.3d 421, 423 427-28 (D.C. Cir. 2002) (rejecting argument that Government incurred no loss because it "got what it paid for" notwithstanding fraudulent claims). By contrast, in the case at bar, the resale of the licenses involved no payment by or to the Government.
E. Legislative History
Where Congress's intent is clear, it controls, Guaylupo-Moya v. Gonzales, No. 04-5479, slip. op. at 5427 (2d Cir. Sept. 12, 2005), and the Court need not consult legislative history.Department of Hous. and Urban Dev. v. Rucker, 535 U.S. at 132-33;see also Exxon, 125 S. Ct. at 2626 (cautioning against resort to legislative history for statutory interpretation). This is particularly true where the plain language does not present ambiguity, Exxon, 125 S. Ct. at 2626, as is the case with the FCA. Nonetheless, the Court has reviewed the legislative history of the 1986 amendments to the Act when Congress last undertook a major overhaul of the statute. Mortgages, Inc. v. United States Dist. Court for the Dist. of Nev., 934 F.2d at 212 ("In 1986, Congress substantially amended the FCA with the intent of encouraging [FCA] actions."). This review lends further support to the conclusion that the Act's remedial purpose is limited to compensatory damages for monetary losses and does not extend to restitutionary disgorgement of unjust gains.
The legislative history is replete with references to the remedial purpose of the Act and in particular to recoupment of monetary losses. The Senate Report of the Committee on the Judiciary on legislation to amend the FCA begins by stating that the purpose of the proposed 1986 amendments "is to enhance the Government's ability to recover losses sustained as a result of fraud against the Government." S. Rep. No. 345, at 5266 (1986), reprinted in 1986 U.S.C.C.A.N. 5266; see also id. at 5272 (discussing standard of proof for false claims actions "to recover taxpayer funds lost to fraud"); id. at 5274 ("The False Claims Act is intended to reach all fraudulent attempts to cause the Governemt to pay out sums of money or to deliver property or services."); id. at 5276 ("The statute is a remedial one[;] [i]t is intended to protect the Treasury against the hungry and unscrupulous host that encompasses it on every side, and should be construed accordingly." (internal citation marks omitted) (citing United States ex rel. Marcus v. Hess, 317, U.S. at 543, n. 5); id. at 5285 ("When the Government changes its position, and commits its financial resources based upon a material false statement, it should be able to recover the resulting losses. . . ."); id. at 5296 ("Inasmuch as False Claims Act proceedings are civil and remedial in nature and are brought to recover compensatory damages, the Committee believes that the appropriate burden of proof devolving upon the United States in a civil False Claims Act suit is by the preponderance of the evidence." (citation omitted)).
In discussing "reverse false claims," where a person attempts through fraud to reduce the amount of a claim by the United States against him, the Senate Report cites with approval a Supreme Court case stating that "the False Claims Act `was intended to reach all types of fraud, without qualification, that might result in financial loss to the Government'." Id. at 5285 (citing Unites States v. Neifert-White, Co., 390 U.S. 228 (1968)). The Report added that "[t]he Committee strongly endorses this interpretation of the act. . . ." Id.
The Senate Report also includes mention of a proposal to amend the statute to expressly allow for consequential damages. Id. ("[T]he bill also amends [the Act] to permit the Government to recover any consequential damages it suffers from the submission of a false claim.").
The House Report of the Committee on the Judiciary on the proposed amendments to the Act likewise begins by stating that "[t]he purpose of [the House bill] is to amend the existing civil false claims statute in order to strengthen and clarify the government's ability to detect and prosecute civil fraud and to recoup damages suffered by government as a result of such fraud." 2 John T. Boese, Civil False Claims and Qui Tam Actions, E-15 (2d ed. 2005) (House Report 660, 99th Congress, Second Session (June 26, 1986)); see also id. at E-16 ("Although the Government may also pursue common law contract remedies, the False Claims Act is a much more powerful tool in deterring fraud and is used as the primary vehicle by the Government for recouping losses suffered through fraud[;] [t]hus, it is important that it be an effective tool for recouping these losses."); id. ("The Committee feels that active enforcement of this statute will not only result in a recovery of losses resulting from fraud, but that it will also serve as a deterrent to those who otherwise might consider defrauding the Government[;] [m]oreover, given the current budgetary situation, it is imperative that the Government recoup these fraud losses and deter future fraudulent activities which result in further losses to the Government."); id. at E-17 ("One purpose of the false claims statute is to provide the Government with a mechanism to recoup losses suffered through fraud. . . ."); id. at E-18 ("The Government should have the ability to collect all losses suffered through fraud.").
The House Report section entitled "Damages Recoverable" states that, under the provisions of the House bill, the Government would be entitled to recover "a civil penalty of not less than $5,000 and not more than $10,000 per claim; double the amount of actual damages suffered by the Government; consequential damages; and the costs of a civil action brought to recover such damages."Id. at E-18 (emphasis added). The House Report, thus, expressly specifies "actual damages" and includes an explanation for how damages will be calculated. Id.; see also id. at E-25 ("section-by-section analysis" of the proposed liability provision of the Act). The final version of the amendments dropped the provision for consequential damages. Cook County v. United States ex rel. Chandler, 538 U.S. at 131 n. 9.
While review of legislative history of the 1986 amendments is unnecessary, that history confirms that Congress, after study and analysis, did not change the scope of the remedial purpose of the Act: only compensatory damages may be recovered. The reports mention, time and again, the desire to recoup Government losses resulting from outlays of funds in the typical false claims suits and from shortfalls in payments in reverse false claims suits. This legislative history is of particular import since Congress considered and adopted extensive amendments related to FCA remedies. More specifically, Congress considered and rejected the provision of consequential damages, increased civil forfeiture penalties, and trebled (as opposed to doubled) damages. Yet, the legislative record is barren of any suggestion or consideration of disgorgement as an anticipated or expected remedy under the Act. The case before the Court is thus unanticipated and sui generis. Legislative history, like statutory interpretation and the FCA jurisprudence, leave no doubt that the FCA's remedial framework does not extends beyond "make-whole" damages to include "disgorgement of unjust enrichment" restitution.
II. Application of Law to Instant Case
For the reasons set out above, disgorgement of the resale profits differs — fundamentally, functionally, and definitionally — from actual damages. The Court must give effect to the clear and unambiguous text of the Act. This Act expressly provides for civil penalties and damages alone — and not for restitution. Moreover, governing precedents have typically construed FCA narrowly — permitting recovery when litigants sought actual damages, denying prejudgment interest, and ultimately looking with disfavor on consequential damages. No court has ever granted restitution — whether as disgorgement of profits or as contribution or indemnification — as a remedy under the Act and this Court declines to do so in this case.
The Court, once again, notes that this motion is focused on the remedies available under the Act to Taylor only. The remedies available generally to the Government present an entirely different question. In circumstances involving unjust enrichment warranting disgorgement of profits, the Government can choose from a panoply of options including pursuing administrative proceedings, 31 U.S.C. §§ 3801-12, and bringing common law unjust enrichment claims.See, e.g., United States v. Rahman, 198 F.3d 489, 493 (4th Cir. 1999) (the Government asserted claims under the FCA and, separately, for unjust enrichment); United States v. Zissler, 154 F.3d 870, 871 (8th Cir. 1998) (same); United States v. American Heart Research Found., 996 F.2d 7, 8 (1st Cir. 1993) (same);United States v. Unincorporated Village of Island Park, 791 F. Supp 354, 357 (E.D.N.Y. 1992) (among other claims, same).
Conclusion
In its elaborate remedial framework, the False Claims Act expressly provides for the trebling of actual damages sustained by the Government as a result of fraud in addition to civil penalties. The False Claims Act makes no provision whatsoever for the recovery of restitutionary remedies. Nor is any support for such relief to be found in the cases interpreting the FCA or its legislative history. Thus, the False Claims Act does not permit the Relator to disgorge defendants' profits from the resale of licenses. Should defendants be found liable under the Act, recovery will be limited to civil penalties and treble damages; in addition to these remedies, the Government may at any time opt for any number of mechanisms to disorge unjust gains.
SO ORDERED