standard meat, which Grunstein falsely certified he had delivered in compliance with the contract, and the value of the substandard meat, which the Grunsteins had in fact delivered. This is obviously not the out-of-pocket rule, as claimed by defendants. On the contrary, it would seem to be the benefit-of-the-bargain rule.
In Faulk v. United States, 5 Cir., 1952, 198 F.2d 169, the issue was as to the damages suffered by the United States under the False Claims Act due to the contractor's delivery of reconstituted milk in lieu of fresh milk agreed to be furnished. The Court there upheld the application of a measure of damages based upon the percentage of the milk not consumed by the troops, rather than a measure based upon either the benefit-of-the-bargain or the out-of-pocket rules. This indicates the flexibility of the present measure of damages to be applied under False Claims Act proceedings. The only other cases under the False Claims Act, which defense claims bear on the measure of damages are United States v. Collyer Insulated Wire Co., D.C.R.I.1950, 94 F.Supp. 493, and United States v. Beaty Chevrolet Co., D.C.Tenn.1953, 116 F.Supp. 810, 811. A careful reading of these cases, however, will show they do not pass at all on the measure of damages, but find either that damages are not provable, or do not lie at all.
Nor would this Court go so far as to say that no case could arise under the False Claims Act, where the so-called out-of-pocket rule could be applied. The true principle would seem to be that the fraud doer should repay the person defrauded 'such damages as naturally and proximately resulted from the fraud.' (132 U.S. 125, 10 S. Ct. 40.) Such indeed are the very words used by the United States Supreme Court in Smith v. Bolles, supra, note 2, in turn relied on by Sigafus v. Porter, supra, note 2, neither of which, however, were False Claims Act proceedings, both being decided subsequent to the enactment of such statute in 1863, but long prior to Marcus. In Smith, where our highest court does not speak in terms of the 'out-of-pocket' rule, it finds that because plaintiff could not credibly establish the 'fruits of an unrealized speculation', in the form of the value of the speculative mining stock there involved, that plaintiff cannot therefore credibly establish the value of the property which he would have received but for the fraud. Not being able to establish this factor, essential under the benefit-of-the-bargain rule, the Court has recourse, as the provable damages 'naturally and proximately result(ing) from the fraud', to the factors in the so-called out-of-pocket rule, which are provable in such a situation. Similar is the underlying rationale of Sigafus, where the facts involved a speculative gold mine, which case expressly relies upon Smith, and naturally reaches the same result.
Indeed, if we look through the long line of cases, both Federal and State, dealing with damages in common-law fraud actions, so often alluded to as conflicting, we find such conflict to be more apparent than real. Every one of them, in essence, attempts to give the person defrauded such damages as he can prove 'naturally and proximately resulted from the fraud', be it Marcus, or Smith, or Sigafus, or otherwise. In cases where the person defrauded can credibly and reasonably establish that which he would have received but for the fraud, it is that which the Court gives him, less what he has already received from the fraud doer.
In other cases where the evidence, as to what the person defrauded has lost due to the fraud, has been but speculative, so that he cannot credibly establish such value, then such person is remitted to what he can credibly establish he has lost, i.e., the contract price, less again the value of what he has already received. In still other cases, where the person defrauded, as a reasonable man, could not expect to receive what the words of the contract called for -- as where a gold mine of fabulous wealth has been purchased for a contract price of a relative pittance -- there, since the person defrauded cannot reasonably have expected to receive that which the contract called for, he cannot justly claim that he has been defrauded of that which the contract called for. There again he is remitted to proof of the contract price, less again the value of what he has already received from the fraud doer.
Finally, there are relatively a few cases in which the courts have applied the so-called out-of-pocket rule solely in reliance on the above authorities, which have properly applied such rule to speculative situations or those of unreasonable expectation, and quite regardless of the fact that the situations in these latter cases were neither speculative nor involved unreasonable expectations.
All but the last above group are at once seen to be quite in accord with the general principle that the person defrauded is always entitled to recover such damages as he can prove 'naturally and proximately resulted from the fraud.' All but such last group are fully in accord with Marcus, in its refusal under the facts there existing to apply the so-called out-of-pocket rule, and in its application of the so-called benefit-of-the-bargain rule. As for the last group of cases, suffice it to say that they are not only opposed to the fundamental principle above stated, and to the principles governing the decision of our highest court in Marcus, but they are opposed to the great weight of authority throughout the entire country. Selman v. Shirley, 161 Or. 582, 85 P.2d 384, 91 P.2d 312, 124 A.L.R. 1, 16, with its exhaustive note starting on page 37; 24 A.J., Fraud & Deceit, pages 54, 55, 60, Sec. 226, 227, 228; Sedgwick, Damages (9th Ed.) Sec. 1027; Sutherland, Damages (4th Ed.) Sec. 1172; Williston, Damages (Rev.Ed.) Sec. 1392.
Not only so, but practically all such Federal cases were decided before Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188. Hence, if such cases were now decided, such courts would apply, not the rule they then did, but the rule of the appropriate State courts. The result would be, because of the above weight of authority, that such courts would now apply to such cases the ordinary benefit-of-the-bargain rule.
Indeed, reviewing the exhaustive collection of common-law fraud cases in 124 A.L.R. 1, supra, at page 52 et seq., we find that generally such cases of common-law fraud decided prior to the enactment of the False Claims Act in 1863 applied the benefit-of-the-bargain, not the out-of-pocket rule. Thus, since the Congressional debate anent the enactment of the Act does not deal with the measure of damages applicable thereunder, the Congress, if it had this damage question in mind at all, must have had in mind the benefit-of-the-bargain rule. For the only Federal fraud case then decided was the nisi prius decision in Sherwood v. Sutton, C.C.N.H.1827, Fed.Cas.No.12,781, the damage rule there not being clearly the one or the other.
Doubtless the major reason why so many courts in the normal business transaction, as distinguished from the speculative transaction, have veered away from the out-of-pocket rule in favor of the benefit-of-the-bargain rule, is because: First, the out-of-pocket rule does not in fact do justice to the person defrauded. Second, it treats the wilful fraud doer more leniently than the law treats one who honestly breaches his contract. In fact, it places the defrauder in a position in which he cannot lose. As to the injustice to the person defrauded, when he can prove he expected to receive, by contract, goods, of a certain kind, and he in fact has been furnished goods of another kind, can a court in justice overlook the fact that he has suffered a loss which 'naturally and proximately results from the fraud,' due to his not receiving what he did want, and his being delivered what he did not want? As to the defrauder, how can he lose under the out-of-pocket rule? If his fraud is not discovered, he pockets his dishonest profit. But even if his fraud is discovered, he need only pay his actual money profit, to the extent of the difference between the contract price he has received and the value of the unwanted goods he has delivered. He need repay the person defrauded not a penny, due to his delivery of the unwanted goods in place of the wanted goods. But if, instead of being a wilful fraud doer who violates his contract, he is an honest man who violates such contract, the honest man must repay this very difference between the value of the wanted goods and the value of the unwanted goods delivered.
Largely because of the above many courts which previously, for good or bad reason, as above indicated, have applied the out-of-pocket rule in fraud cases, have, as in New Jersey, now determined that 'as to some cases what is called the 'out-of-pocket' rule may furnish just and adequate compensation; in others the so-called 'benefit-of-the-bargain' rule may be the more just and accurate. The just method of determining damages necessarily varies with the facts of the particular case * * *.' Zeliff v. Sabatino, 1954, 15 N.J. 70, 74, 104 A.2d 54, 56.
So we turn to the final question -- whether the facts of this case, in justice, require this court to apply the so-called benefit-of-the-bargain rule or the so-called out-of-pocket rule -- and this, even admitting the fact that our highest court, in the only case before it, under the False Claims Act, which deals with the measure of damages, has refused to apply the out-of-pocket rule and has applied instead the benefit-of-the-bargain rule. Here the evidence so far is plenary, not to say overwhelming, that over a period of some two years defendants continually and calculatedly defrauded the Government in their meat contracts with it, by circumventing in all conceivable ways the Government's system of meat inspection, including even bribery. Clearly, such being the facts, justice calls strongly for the return to the Government, not of lost profits, but of that of which the Government has been credibly proven to have been defrauded. This proof is not speculatively, but clearly, set forth in the written specifications of the meat to be furnished, expressly referred to in writing in every Government purchase order. In turn, the values of such specified meat are established by the National Provisioner, in evidence. All these 400-odd transactions are analyzed and summarized, together with the other transactions of the defendants during the same period in the proposed Government schedules above alluded to. Under such circumstances, the normal business rule is applicable, as applied in Marcus, that the 'damages which the United States may have sustained' (as called for by the False Claims Act) are measured by the value of the property which the United States would have received by the contract but for the fraud, less the value of the property which the United States has in fact received from the fraud doer.
In conclusion it would therefore appear (1) that in the only case in which the United States Supreme Court has considered the measure of damages in False Claims Act proceedings, it has applied not the so-called out-of-pocket rule, but the benefit-of-the-bargain rule; (2) that while the benefit-of-the-bargain rule is not necessarily the only rule that can be applied to such cases, it has been applied in most such cases which have considered the matter, as well as in most common-law fraud cases throughout the courts of the entire country, because of the inherent equity of such rule in the normal business transaction; that (3) all courts agree that the fraud doer should repay the party defrauded the damages which have 'naturally and proximately resulted from the fraud.' But (4) this general rule must be applied in accordance with the facts of the particular case. Thus (5) since the evidence in the case at bar clearly establishes the value of the meat, which defendant was under contract to deliver, that value, less the value of the meat in fact delivered, is the just measure of the actual damages which plaintiff has sustained, according to the present evidence. For this recovery should go under such facts, if, and when, liability is established.