Trinity Industries filed its appeal brief before the U.S. Court of Appeals for the Fifth Circuit in U.S. ex rel. Harman v. Trinity Industries on March 21, 2016, appealing “the largest judgment in the 150-year history of the False Claims Act.” In its appeal brief, Trinity argues that the relator’s case failed every element of the False Claims Act (FCA), including materiality, falsity, scienter and false claim. According to Trinity, the applicable regulatory agency, the Federal Highway Administration (FHWA), expressly approved the expenditure of federal funds at issue after the submission of the claims in question. Thus, the Fifth Circuit’s decision in the case will be instructive on whether agency guidance issued after the presentment of an allegedly false claim prevents materiality or legal falsity of the claim. This question is particularly relevant to industries such as health care, where regulatory guidance often changes in light of updated evidence or changes in industry practice.
The relator in the case is a competitor of Trinity, a highway guardrails manufacturer. The federal government, through the FHWA, reimburses state transportation departments for certain highway construction expenses, including installation of safety guardrails. In order to be eligible for reimbursement, guardrails must be crash-tested and accepted by the FHWA. Defendant Trinity had obtained such acceptance for its ET Plus guardrail units in 1999. In 2005, Trinity then modified the design of the ET Plus units. The relator alleged that Trinity did not disclose these modifications to the approved guardrails. The relator thus argued that the underlying claims for reimbursement for installation of the modified guardrails were false claims because they were founded on misrepresentations that the modified guardrails complied with the underlying FHWA regulations.
However, as Trinity explains in its appeal brief, the relator informed the FHWA of this nondisclosure in 2012, before filing the FCA lawsuit in the U.S. District Court for the Eastern District of Texas in 2013. In response, the FHWA met with Trinity, met again with the relator, and conducted additional inspections of the guardrails in question. In June of 2014, the FHWA reaffirmed its approval of the modified guardrail in an official memorandum, confirming “an unbroken chain of eligibility for Federal-aid reimbursement has existed since September 2, 2005, and the ETPlus continues to be eligible today.” In other words, whether the changes to the units were disclosed in 2005 or thereafter, the FHWA determined retroactively that the modified guardrails met reimbursement standards.
Despite the FHWA’s June 2014 memorandum, trial in the matter started a month later. That trial ended in mistrial. Before the second trial, Trinity filed a mandamus petition to the Fifth Circuit, asking it to grant relief based on the FHWA’s statements confirming eligibility of the modified guardrails for federal reimbursement. Though the Fifth Circuit denied the petition, it stated in its October 2014 decision that “a strong argument can be made that the defendant’s actions were neither material nor were any false claims based on false certifications presented to the government.” The Fifth Circuit stated that the FHWA letter “seems to compel the conclusion” that FHWA found the product compliant with federal safety standards and therefore eligible for federal reimbursement claims.
The case went forward to a second trial in October of 2014, resulting in a $175 million jury verdict. Last June, the district court confirmed the verdict. Under the FCA, the jury award was automatically trebled to $525 million. In addition, the district court imposed civil penalties in the amount of $138.4 million and awarded attorney’s fees, expenses and costs to the relator in the amount of $19 million. The amount of the total judgment was $682.4 million. The result seems improbable where the relevant federal agency has expressly stated that the modified guardrails have been eligible for reimbursement since 2005. Indeed, according to Trinity’s appeal brief, the federal government continues to reimburse state departments of transportation for the modified guardrails, having conducted additional crash testing in 2015 confirming that the guardrails met the criteria imposed by FHWA regulations.
In its appeal, Trinity makes four primary arguments. First, it argues that any failure to disclose the modifications of the guardrail design was not material, as the FHWA learned of the nondisclosure but confirmed that the modified units were eligible for reimbursement. Trinity states, “In the end, all that remains of [the relator’s] allegations is a policy dispute with the FHWA…. But the FCA is about fraud on the United States, not policy disagreements—let alone policy disagreements in which the United States agrees with the defendant.”
Second, Trinity claims that the alleged false statement in the claims—that the modified guardrail was compliant with certain FHWA regulations—was actually true as a matter of law based on a correct interpretation of the FHWA regulations.
Third, Trinity argues that it could not knowingly make a false statement, because a reasonable interpretation of an ambiguous regulatory regime prevents scienter.
Finally, Trinity claims that compliance with the FHWA regulation is not a condition to federal payment, and thus cannot give rise to a false claim under the FCA.
We will report on the relator’s response to these arguments and provide further updates in this significant appellate case addressing government knowledge and materiality.