In United States ex rel. Feldman v. van Gorp , decided last week, the Second Circuit ruled on an issue of first impression concerning False Claims Act (“FCA”) damages in the context of a federal grant for medical research funding, and also addressed the FCA’s materiality standard.

In Feldman, Cornell University and a psychiatry professor applied for a federally funded grant for a fellowship program entitled “Neuropsychology of HIV/AIDS Fellowship.”  Testimony at trial indicated that “key personnel” from the grant application did not contribute substantially to the program, the curriculum in the application was never implemented, and the research and clinical training described in the application differed significantly from the actual training.  Moreover, few of the fellows had clinical cases with HIV-positive patients.  At trial, the jury found that defendants had made false claims in three of the grant renewal applications, and the trial court awarded damages based on the full amount of the grant from the time of the false statements.

Liability for Damages Based On Full Amount of Grant

The Second Circuit noted that in this case, while the government paid for the program, the program benefits went to third parties.  The Second Circuit had not previously addressed the issue of how to measure FCA damages when the contract does not produce a tangible benefit to the government.  The Court held that a “benefit of the bargain” calculation, the difference between the value that the government received and the amount it paid, was not appropriate because the government did not receive any benefit from the award of the grant.  Instead, because of defendants’ false statements, the government entirely lost the opportunity to award the grant money to a recipient who would have used the money as the government intended, and it was paying for a program that was not at all as specified.  The Court held that defendants were liable for damages equal to the full amount of the grants awarded based on the false statements.

With respect to materiality, the Court held that the test is objective, determining whether the proven falsehoods have a natural tendency to influence the payment or receipt of money or property.  Thus, even if a program officer does not subjectively consider a false statement to be material, it can be found to be material under the FCA from an objective standpoint because it is capable of influencing the program officer.  The Court held that the trial evidence was more than sufficient for a jury to conclude that the true facts would have had a natural tendency to influence the decision on the grant renewal.

False Statements in Applications May Lead to Treble Damages

The Feldman decision will be of great interest to parties receiving federal grant funding, as false statements in grant applications or renewals may lead to treble damages based on the full amount of the grant awarded.  The Court’s materiality decision will also be important for FCA cases generally because it will preclude defendants from asserting that the materiality of a false claim depends on whether a government official subjectively believes the false statement would have made a difference to the payment decision.  The government, qui tam relators and defendants will find much in Feldman to apply and distinguish in arguing FCA cases.