The Seventh Circuit Court of Appeals issued a decision last week that should assist defendants seeking to reduce their treble damages exposure under the FCA. In U.S. v. Anchor Mortgage, Nos. 10–3122, 10–3342, 10–3423 (7th Cir. Mar. 21, 2013), the Court rejected the “gross trebling” approach to calculating damages advocated by DOJ, in favor of the “net trebling” approach advocated by defendants, which recognizes the value received by the government and excludes that value from the damages calculation.

In the trial court, DOJ prevailed on FCA claims against mortgage lender Anchor Mortgage and its CEO premised on false statements to the U.S. Department of Housing and Urban Development to secure federal guarantees on 11 residential mortgage loans. The lower court calculated single damages by totaling the guarantees the government paid on the 11 loans. The court then trebled that number and added penalties. From the total treble damages amount, the court then subtracted the amount the government already had recovered by selling the properties that secured the loans.

On appeal, the Seventh Circuit dubbed the district court’s approach to calculating FCA damages a “gross trebling” calculation. The DOJ argued that this “gross trebling” approach – its standard approach to calculating FCA damages – is supported by the Supreme Court’s 1976 opinion in U.S. v. Bornstein, 423 U.S. 303, in which the defendant was found liable for violating its government contract by supplying inferior radio kit tubes. DOJ relied on the holding in Bornstein that “the Government's actual damages are to be doubled before any subtractions are made for compensatory payments previously received by the Government from any source” to support a “gross trebling” damages calculation under the FCA. The Seventh Circuit rejected this reading of Bornstein, holding the quoted language only addressed the question whether third party payments for the tubes should be subtracted before damages were multiplied, not whether the appropriate calculation of single damages was the difference between the price paid and the fair market value of the tubes. On that question, the Seventh Circuit pointed to a footnote in Bornstein directing that “The Government's actual damages are equal to the difference between the market value of the tubes it received and retained and the market value that the tubes would have had if they had been of the specified quality.”

Thus, citing Bornstein as support, the Seventh Circuit concluded a “net trebling” approach to calculating FCA damages, in which single damages first are calculated based on the difference between the price paid by the government and the value of what the government received. The court noted that this approach has been adopted by the Second, Sixth, D.C., and Federal Circuits, though rejected by the Ninth, and reflects the “norm in civil litigation.” Accordingly, the court reversed the district court’s decision on damages and remanded the case with the instruction to calculate damages using a “net trebling” approach.

The resulting potential reduction in damages to the defendant – illustrated by an example in the court’s opinion – reinforces the importance of this decision to defendants and companies under investigation for FCA violations. For 1 of the 11 loans at issue, the government paid $131,643 on its guarantee, and later sold the property for $68,200. Under the “gross trebling” approach, damages related to this loan were $326,729 (($131,643 x 3) - $68,200). Under the “net trebling” approach, damages would be only $190,329 (($131,643 - $68,200) x 3), a difference of $136,400 and a 40% decrease in damages related to that loan. Thus, it is clear that this decision should have a significant impact on damages in FCA cases and negotiated resolutions.