Equitable limitations on government counterclaims for common-law fraud

In the past, when asserting a common-law fraud counterclaim in the US Court of Federal Claims, the government has argued that it was entitled to rescission of a contract “tainted” by fraud and disgorgement of all monies paid under the contract. The government’s requests did not merely seek disgorgement of profits, but, rather, sought to recover all amounts paid under the contract, while also retaining the work provided by the contractor.

A US Supreme Court decision from 2020, however, forecloses such a recovery for a common-law fraud claim. In Liu v. Securities and Exchange Commission, the Supreme Court explored the limitations on the use of disgorgement as an equitable remedy and explained that, when disgorgement is ordered as an equitable remedy, a court must deduct legitimate expenses from the amount that is to be disgorged.

Originally published in the Public Contract Law Journal, our alert looks at the key details of Liu – and how the principles articulated in the case apply equally to a common-law fraud claim in the Court of Federal Claims and, in most cases, preclude disgorgement of amounts that exceed a contractor’s profit.

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