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The False Claims Act does not permit the remedy of disgorgement of profits for a disappointed bidder in the government’s auction of wireless spectrum licenses, a federal judge has ruled. Southern District of New York Judge Paul A. Crotty found that R.C. Taylor, who brought a qui tam action under the False Claims Act alleging fraud in the bidding process by more than 50 individuals and companies involved in the auctions for licenses, cannot be awarded the profits made by some of the defendants when they resold their licenses. In United States of America v. Gabelli, 03 Civ. 8762, Taylor claimed the defendants were part of a scheme to submit bids by sham entities to obtain small business discounts and spectrum licenses. Three of the four licenses were resold for a profit that the plaintiff estimated at $206 million, but the defendants claimed was only $136 million. Taylor sued as a “relator,” a person who is empowered to institute a proceeding on behalf of the government as well as himself. His suit presented an issue of first impression for the court. The defendants claimed that the text of the False Claims Act, 31 U.S.C. ��3729-812, the act’s legislative history and the case law does not allow disgorgement of resale profits. Taylor claimed damages were recoverable, Judge Crotty said, first because “such ‘damages’ are a standard remedy in fraud cases involving resale profits because they ‘approximate the return of the property in question.’” Second, the judge said, Taylor claimed the defendants had perpetrated another fraud by obtaining the permission of the Federal Communication Commission to resell the licenses. “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,” Crotty said. “Taylor further asserts that such a right has a value directly measurable by the defendants’ net proceeds from the resales.” Taylor had sought to recover, through disgorgement, treble damages the government allegedly sustained as a victim of the frauds. Section 3729(a) of the act sets out a civil penalty for liable persons of “not less than $5,000 and not more than $10,000, plus three times the amount of damages which the government sustains” because of the act of that person. But Crotty said the law of remedies “strikes a clear distinction between damages — a compensatory form of relief — and restitution — a form of relief that prevents unjust enrichment.” He added: “Moreover, the FCA expressly refers to ‘damages’ and contains no ‘restitutionary’ provision, which remedy Taylor seeks.” DAMAGES OR RESTITUTION The judge explored the distinction between damages, which are intended to make the plaintiff whole, and restitution, which is designed to prevent unjust enrichment by the defendant. And Taylor, Crotty said, tried a number of ways to characterize the disgorgement remedy as damages. Even assuming that the defendants could be found liable under the False Claims Act, “the resale profits unquestionably constitute unjust enrichment, and, arguably, such unjust gains would warrant restitution in the form of disgorgement,” he said. “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 defendant’s purportedly wrongful gains.” And Taylor, the judge said “carefully avoids the terminology of restitution and ultimately characterizes the relief sought as ‘rescissory damages.’” Crotty based his decision, in part, on the fact that Congress did not restrict or forbid the resale of licenses — nor did it contemplate that the government would share in any profits generated by resale. The government, he said, “is fully entitled to bring its own action and assert causes of action that provide for the disgorgement of unjust profits.” In the end, Crotty said, the only allowable remedy the False Claims Act grants to Taylor if he chooses to pursue his action is compensatory damages and not restitution. Taylor was represented by a number of firms, including Getnick & Getnick, Williams & Connolly and Phillips & Cohen in Washington D.C., and Jeffer, Mangels, Butler & Marmaro of Los Angeles. The defendants were represented by a number of firms, including Cadwalader, Wickersham & Taft; Covington & Burling; Latham & Watkins; Mintz, Levin, Cohn, Ferris, Glovsky and Popeo; Schertler & Onorato of Washington D.C.; Olshan Grundman Frome Rosenzweig & Wolosky, Skadden, Arps, Slate, Meagher & Flom and Bryer & David.

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