Back in 1995, the United States Postal Service (USPS) sponsored the cycling team headed by Lance Armstrong, its top rider. In 2000 Lance Armstrong won the Tour de France and the USPS renewed its sponsorship of the team so long as Armstrong remained part of it. The USPS paid about $32 million to the team from 2000 to 2004. Problems arose however after it was revealed that the riders used performance-enhancing drugs (PEDs) which was contrary to the contract with the USPS which required the riders to comply with the rules of professional cycling and be drug free.
In 2010, Armstrong’s former USPS teammate Floyd Landis filed a False Claims Act lawsuit against Armstrong[i] and others accusing them of violating the False Claims Act because of their PED use and their failure to disclose it.
In 2013, Armstrong admitted to his use of PEDs. The United States is now seeking almost $100 million in damages.
The District Court issued an opinion after both the government and the defendants moved for summary judgment concerning specific issues. [The Armstrong case can be found here.]
In the Armstrong case, the government claims that three sections of the FCA were violated by Armstrong and the other defendants. (1) Presenting a false claim, also known as a direct false claim, (2) making or using a false record or statement to get a false claim paid or approved, and (3) conspiring to violate the FCA. The government further claims that FCA liability attaches under a fraud in the inducement theory, an express false certification, and an implied false certification.
Fraud in the inducement is essentially when a party obtains a contract by fraud, even if the work was properly done and the claims submitted are not false. Here the government is required to prove that Armstrong made representations or omissions which the USPS relied on when it entered into the sponsorship contract, [and Armstrong knew they were false or misleading and that they were material to the government’s decision].
The second theory is an express false certification. It is a false claim to falsely certify compliance with a statute, regulation, or contract provision where compliance is a prerequisite for payments. Here the court found that Armstrong did not expressly certify compliance on any claims and therefore granted Armstrong’s motion for summary judgment.
The third theory that the court addressed was the implied false certification theory. Under this theory which the Supreme Court addressed in Universal Health Service v. Escobar, the Supreme Court stated that liability can attach when a defendant makes a specific representation about the goods or services provided and knowingly fails to disclose its non-compliance with a statutory, regulatory, or contractual requirement, and that failure to disclosure makes those representations misleading. Here, the government alleged that Armstrong’s failure to disclose his PED use is an implied false certification that he was in compliance with the contract’s anti-doping provision. The court importantly pointed out that the claim itself does not have to specify contractual language if the contractor withheld information that contractor was not in compliance with a material requirement of the contract.
The Armstrong opinion also discussed damages. In Armstrong, the government claims that actual damages are the entire amount paid for the sponsorship agreement, $32.3 million, trebled under the FCA, while Armstrong claims that damages are zero because the USPS got more value from the sponsorship than what it paid for. The court rejected both damages theories and held that a benefit of the bargain approach should be used, which seems to favor and actually be closely aligned to Armstrong’s theory. The “benefit-of-the-bargain” approach is often used where the market value of goods or services is difficult to determine. The court stated that the government’s actual damages are the difference between the market value of the product it received and the market value of the product, the sponsorship, if Armstrong was in compliance.
The court found that damages should seek to put the government in the same position as if the claims had not been false. The court explained that damages should be based on what the amount the government paid, less the value of what it received, or what were the services actually worth to the government. The court stated that the government would not be entitled to a return of all $32.3 million because it never would have sponsored the team if it knew of the PED violations.
The Armstrong case will be set for trial and it will be interesting to see how the jury determines damages.
Mike Rosenblat is an experienced attorney handling False Claims Act cases. For more information about Mike click here.
[i] I am using Armstrong to refer to all defendants. Specific court holdings which are summarized here may however not apply to all defendants.