Sentencing in Government Contracting Fraud Cases When There is No Actual or Intended Loss
In government contracting fraud cases with no actual or intended loss, defense attorneys should be on the lookout for prosecution attempts to invoke the “government benefits rule” to estimate “total gain” as an alternative measure of “actual loss.” That method can result in a much higher recommended sentence under § 2B1.1 of the U.S. Sentencing Guidelines (Guidelines). But the prosecution’s position may rest on an outdated version of the Guidelines (U.S.S.G. § 2F1.1 [deleted]) or caselaw decided under that version. More recent decisions suggest that government contracting fraud cases decided under § 2F1.1 are no longer persuasive.
In government contracting fraud, the Guidelines provide a base offense level for someone who is convicted of a “Basic Economic Offense[],” such as larceny, embezzlement, and offenses involving fraud and deceit.1 That base offense level can then be increased by the amount of economic loss. As set forth in the U.S.S.G. § 2B1.1(b)(1) Loss Table,2 the amount of loss can result in a significantly higher offense level.
Ordinarily, a sentencing enhancement for loss is based on “the greater of the actual loss or intended loss.”3
- “Actual loss” is “the reasonably foreseeable pecuniary harm that resulted from the offense.”4 Pecuniary harm captures only “harm that is monetary or that otherwise is readily measurable in money.” Contrary to what the average person may think, pecuniary harm “does not include emotional distress, harm to reputation, or other non-economic harm.”5
- “Intended loss” is “the pecuniary harm that the defendant purposefully sought to inflict.”6
Only when “there is a loss but it reasonably cannot be determined” can a court use a defendant’s gain as an alternative measure for calculating loss.7
In calculating loss in government contracting cases, counsel and courts have looked to three interpretive provisions of the Guidelines.
The government benefits rule. The government benefits rule is intended for cases “involving government benefits (e.g., grants, loans, entitlement program payments);” in such circumstances, “loss shall be considered to be not less than the value of the benefits obtained by unintended recipients or diverted to unintended uses, as the case may be. For example, if the defendant was the intended recipient of food stamps having a value of $100 but fraudulently received food stamps having a value of $150, loss is $50.”8
The credits against loss rule. The Guidelines provide that “[l]oss shall be reduced by . . . the fair market value of the property returned and the services rendered, by the defendant or other persons acting jointly with the defendant, to the victim before the offense was detected.”9 The credits against loss rule “means that [courts] must subtract the ‘fair market value’ of the ‘services rendered’ . . . on . . . contracts before arriving at a final loss value,” because, although a government program “cares about who performs the work, it also requires that the work be completed.”10
The rule for procurement fraud cases. The Guidelines provide that “[i]n the case of a procurement fraud, such as a fraud affecting a defense contract award, reasonably foreseeable pecuniary harm includes the reasonably foreseeable administrative costs to the government and other participants of repeating or correcting the procurement action affected, plus any increased costs to procure the product or service involved that was reasonably foreseeable.”11 If, in a government contracting case, the contract is fully performed, there may well be no actual or intended loss if, for example, there are no reasonably foreseeable administrative costs to repeat or correct the procurement action.
Many government contract fraud cases involve no actual or intended pecuniary harm. Examples could include false statement cases where the payor would have paid the same amount and received the same benefit without knowing about the false statements;12 stolen property cases where the defendant took property that had been ordered destroyed;13 contracting cases where an initial contract was obtained fraudulently by an individual or entity who was not eligible for such a contract, but the contract was then fully performed; or cases brought under a “right-to-control” theory of wire fraud that treats any deprivation of potentially valuable economic information relevant to discretionary economic decisions as fraud (as in Ciminelli v. United States, which the Supreme Court will hear this term).14 In these cases, either the rule for procurement fraud cases15 or the credits against loss rule16 should be used to calculate loss, and either rule will produce a loss of zero.
But the prosecution may argue in favor of applying the government benefits rule17 to use gain as an alternative measure for loss. The government may claim that there was a loss, but the true loss cannot be readily determined or easily calculated. The prosecution may point to, for example, a loss of public confidence in the government contracting process or the opportunity cost for others who did not get to participate in a particular economic transaction. But where there was no actual or intended pecuniary harm, the loss can be readily calculated—at zero—and thus the government benefits rule should not apply.
The government’s attempt to use the government benefits rule in such instances will likely rely on caselaw based on an outdated version of the sentencing guidelines, U.S.S.G. § 2F1.1, which was deleted by consolidation with U.S.S.G. § 2B1.1 effective November 1, 2001.18
Relying on § 2F1.1, when it was in effect or even after it was deleted, the Fourth Circuit, in United States v. Bros. Const. Co. of Ohio,19 and the Seventh Circuit, in United States v. Leahy,20 concluded that government contracts constitute government benefits and then applied the government benefits rule to calculate loss. The Eleventh Circuit, in United States v. Maxwell,21 later reached the same conclusion by relying on Bros. Const. Co. of Ohio and Leahy, instead of considering the addition of the credits against loss rule in the current Guidelines, and applied the government benefits rule in government contracting case. In a more recent decision declining to apply the government benefits rule in a government contract case, however, the Third Circuit reasoned that
the old § 2F1.1 had an application note similar to current Note 3(F)(ii) [(the government benefits rule)], which both [the Fourth and Seventh Circuits] relied on in reaching their holdings, but no application note similar to current Note 3(E)(i) [(the credits against loss rule)]. . . . Therefore, neither the Fourth [Circuit in Bros. Const. Co. of Ohio] nor Seventh Circuit[] [in Leahy] had occasion to consider whether Note 3(E)(i) required that the services rendered be credited against the loss.22
Cases from the D.C., Third, Fifth, Sixth, and Ninth Circuits, which are not based on the old § 2F1.1 and also consider the impact of § 2B1.1’s application note with the credits against loss rule, counsel in favor of calculating loss in government contracting cases by reducing the fair market value of services rendered.23 “This includes, for example, the fair market value of the materials supplied, the fair market cost of the labor necessary to assemble the materials, and the fair market value of transporting and storing the materials.24
The Sentencing Commission considered whether to include government contracts in the government benefits rule, and it declined to do so. The Guidelines offer examples of the types of benefits that this rule applies to (“grants, loans, entitlement program payments”), but do not reference government contracts. This omission from the government benefits rule is significant because elsewhere, in the procurement fraud rule, the Guidelines do specifically mention “procurement fraud, such as a case affecting a defense contract award.”25
The canon of expressio unius est exclusio alterius applies because the items “grants, loans, entitlement program payments” are “members of an associated group or series, justifying the inference that items not mentioned were excluded by deliberate choice, not inadvertence.”26 Because the Sentencing Commission specifically referenced government contracting elsewhere, if it intended to include government contracts in the government benefits rule, it presumably would have done so.27
“The mere fact that a government contract furthers some public policy objective apart from the government's procurement needs is not enough to transform the contract into a ‘government benefit’ akin to a grant or an entitlement program payment.”28 “The government does not typically issue grants or make loans because it wants a concrete deliverable in return, while it typically enters construction contracts because it wants something built.”29 In other words, just because
a government contract awarded under an affirmative action program may be, in some sense, a ‘benefit’ to the company awarded the contract, it does not share the common features of grants, loans, and entitlement program payments. Unlike the three enumerated examples, a contract award is not a unilateral transfer, but rather a bargained-for exchange for services rendered. And unlike the enumerated examples, contracts awarded under the 8(a) program do not exist primarily to benefit the awardee; rather, such contracts first and foremost serve the government's own procurement needs.30
Here, it is “fair to suppose” that the Sentencing Commission “considered the unnamed possibility,” government contracting fraud cases, “and meant to say no to it” when it drafted the government benefits rule.31
Even if it is unclear whether the Sentencing Commission intended to exclude government set-asides from the government benefits rule, because the rule impacts a defendant’s due process rights, the rule of lenity applies and should be used to invoke the interpretation of the rule that leads to the shortest sentence.32 Relying on the interpretation of the rule that allows for the shortest sentence requires not applying the government benefits rule to a government contracting fraud case where there was no pecuniary harm.
In sum, in government contracting fraud cases, where the actual or intended loss is zero, the government benefits rule should not be applied, and total gain should not be used as a substitute for loss. Instead, either the credits against loss rule or the procurement fraud rule should be used, both of which will result in a loss of zero and prevent the prosecution from using an alternative measure of loss to achieve a higher Guidelines sentence. It is important for defense attorneys to understand how to calculate loss under different circumstances to identify prosecution arguments that rest on outdated versions of the Guidelines.
1 U.S.S.G. § 2B1.1.
2 The Loss Table provides graduated increases in offense levels from 2 points for a loss of more than $6,500 to 30 points for a loss of more than $550 million.
3 U.S.S.G. § 2B1.1 cmt. N.3(A).
4 U.S.S.G. § 2B1.1 cmt. N.3(A)(i) (emphasis added).
5 U.S.S.G. § 2B1.1 cmt. N.3(A)(iii).
6 U.S.S.G. § 2B1.1 cmt. N.3(A)(ii).
7 U.S.S.G. § 2B1.1 cmt. N.3(B).
8 U.S.S.G. § 2B1.1 cmt. N.3(F)(ii).
9 U.S.S.G. § 2B1.1 cmt. N.3(E)(i).
10 United States v. Nagle, 803 F.3d 167, 182 (3d Cir. 2015).
11 U.S.S.G. § 2B1.1 cmt. N.3(A)(v)(II).
12 See, e.g., United States v. Bazantes, 978 F.3d 1227, 1250 (11th Cir. 2020) (finding no pecuniary harm to government agency where prosecution claimed that falsified payroll records “compromised the integrity of the federal contract bidding process” but agency nonetheless received the benefit it paid for, reasoning that “‘compromised integrity’ does not a pecuniary loss make.”).
13 See, e.g., United States v. Robie, 166 F.3d 444, 455 (2d Cir. 1999) (finding no pecuniary harm to federal government in case where defendant worked for a company that printed stamps for the federal government, stamps were misprinted and government ordered them destroyed, and instead of destroying stamps, defendant took them and traded them for valuable stamps).
14 Ciminelli v. United States, No. 22-1287 (U.S.).
15 U.S.S.G. § 2B1.1 cmt. N.3(A)(v)(II).
16 U.S.S.G. § 2B1.1 cmt. N.3(E)(i).
17 U.S.S.G. § 2B1.1 cmt. N.3(F)(ii).
18 https://guidelines.ussc.gov/gl/%C2%A72F1.1
19 219 F.3d 300, 317–18 (4th Cir. 2000).
20 464 F.3d 773, 789–90 (7th Cir. 2006).
21 579 F.3d 1282, 1305–07 (11th Cir. 2009).
22 Nagle, 803 F.3d at 182. See, e.g., Bros. Const. Co. of Ohio, 219 F.3d at 318 (relying on the old § 2F1.1 in using government benefits rule to calculate loss in government contracting fraud case where non-disadvantaged business received funds intended for disadvantaged business), Leahy, 464 F.3d at 790 (7th Cir. 2006) (similar).
23 United States v. Crummy, 249 F. Supp. 3d 475, 482 (D.D.C. 2017) (considering the impact of current Note 3(E)(i) to hold that the government benefits rule does not apply to procurement frauds involving contracts awarded under government set-aside programs, and that loss in such cases must be reduced by the fair market value of services rendered); United States v. Harris, 821 F.3d 589, 604 (5th Cir. 2016) (similar), United States v. Kozerski, 969 F.3d 310, 313–16 (6th Cir. 2020) (similar), and United States v. Martin, 796 F.3d 1101, 1109–10 (9th Cir. 2015) (similar).
24 Nagle, 803 F.3d at 183.
25 U.S.S.G. § 2B1.1 cmt. N.3(A)(v)(II).
26 Barnhart v. Peabody Coal Co., 537 U.S. 149, 168 (2003) (quotation marks and citation omitted).
27 See, e.g., Russello v. United States, 464 U.S. 16, 23 (1983) (“[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”) (quotation marks and citation omitted); see also Nagle, 803 F.3d at 182 (“Had the Sentencing Commission intended to preclude crediting services rendered against loss for Note 3(F)(ii) [(the government benefits rule)], it would have used similar language as it used in Note 3(F)(v).”).
28 Harris, 821 F.3d at 604.
29 Kozerski, 969 F.3d at 313.
30 Harris, 821 F.3d at 603 (emphases added).
31 Peabody Coal Co., 537 U.S. at 168; Kozerski, 969 F.3d at 314 (“The guidelines already convey an appreciation of when to vary from normal economic loss rules and when not to . . . Some crimes . . . receive an enhancement regardless of the economic harm they cause. Crimes involving damage to property in a national cemetery or veterans’ memorial . . . receive a two-level bump regardless of loss. . . . The Sentencing Commission knew how to ignore economic harm when it wished. The Commission simply did not make that choice here.”).
32 See United States v. R.L.C., 503 U.S. 291, 293 (1992) (“No ambiguity about the statute’s intended scope survives the foregoing analysis, but if any did, the construction yielding the shorter sentence would be chosen under the rule of lenity.”); Chapman v. United States, 500 U.S. 453, 463 (1991) (A statute must be ambiguous for the rule of lenity to apply.); Bifulco v. United States, 447 U.S. 381, 387 (1980) (The rule of lenity “means that the Court will not interpret a federal criminal statute so as to increase the penalty that it places on an individual when such an interpretation can be based on no more than a guess as to what Congress intended.”).
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Jade Chong-Smith
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Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.