The Fifth Circuit held recently that the government’s continued payment of a contracted claim—despite its knowledge of potential or actual False Claims Act violations committed by the contractor—raises the bar of proof for relators who seek to establish the material noncompliance with government specifications necessary to raise a proper FCA claim.
The decision, issued on September 29, 2017 concerned a relator who brought a false claims action against a highway guardrail manufacturer, which had a years-long working relationship with the Federal Highway Administration (FHWA) and provided guardrails for many of the nation’s highways. The relator claimed that the manufacturer violated the FCA when it failed to make certain disclosures to the FHWA about changes it made to its pre-approved equipment, thus resulting in a sale of fraudulent materials to the government. He alleged that the manufacturer defrauded the government by certifying to the FHWA that its guardrails adhered to the agency’s required standards without notifying the government about new design changes that had been made to the product. In response, the manufacturer argued that the modified guardrail system met the required standards “at all times,” and thus any certification it made was not a false statement. Highly significant to the case, the FHWA supported the manufacturer throughout the proceedings. It even issued a memorandum saying that it had “validated” the modified guardrails and determined that they possessed an “unbroken chain of eligibility for Federal-aid reimbursement.” Further, the FHWA continued to reimburse states who installed the manufacturer’s guardrails, as part of a subsidy awarded for installing highway safety equipment which meets the government’s standards.
A trial court jury found the manufacturer liable under the Act and awarded the relator and the United States approximately $525 million in statutory treble damages, and a district court judge added $138.3 million in civil penalties to the final judgment “for 16,771 false claims”— for a grand total of $663,360,750. The Fifth Circuit unanimously reversed the district court decision and awarded the manufacturer judgment as a matter of law.
Materiality under the FCA requires “proof […] that the defendant’s false statements ‘could have’ influenced […] or had the ‘potential’ to” influence the government’s pay decision. Quoting the Supreme Court’s recent landmark FCA decision in Escobar—which proclaimed that materiality “cannot be found where noncompliance is minor or insubstantial”—the Fifth Circuit found that the Government’s continued payment of the manufacturer’s claim (via state reimbursements) despite “actual knowledge” of FCA violation allegations was “very strong evidence” that the requirements plaintiff cited were “not material” conditions for payment. Although the Fifth Circuit acknowledged that the government’s continued payment of a claim, standing alone, was not dispositive of non-materiality, it held that “continued payment by the federal government after it learns of […] alleged fraud substantially increases the burden on the relator in establishing materiality.” The Court found it persuasive that the government was already aware of the manufacturer’s potential FCA violations in the present case—due to exposure to the facts of this lawsuit and presentations that the relator delivered to FHWA representatives—at the time that it decided to pay the claims and write the memorandum reinforcing the guardrails’ reimbursement eligibility. Finally, the panel wrote that “when the government […] repeatedly concludes that it has not been defrauded, it is not forgiving a found fraud—rather it is concluding that there was no fraud at all.”
The case is U.S. ex rel. Harman v. Trinity Industries, and it can be accessed here.