Common sense would suggest that a relator’s False Claims Act (FCA) case should fail if the federal government explicitly analyzes a relator’s evidence of supposed misstatements about a product and affirmatively concludes that the government properly approved and paid for the product—and that it would continue to do so.  The Fifth Circuit agreed with that common sense approach to the FCA and its materiality requirement in reversing a $663 million FCA judgment against guard rail manufacturer, Trinity Industries. Making a number of notable observations along the way, the Fifth Circuit ordered that judgment be entered against the United States as a matter of law because the relator, once a competitor of the Defendant, failed to establish that the allegedly false statements were material to the government’s decision to pay for the highway guard rails at issue. This decision zeroed out not only the record setting award to the government and relator, but also an attorneys’ fee award to the relator of over $19 million. See United States ex rel. Harman v. Trinity Indus. Inc., 15-41172, 2017 WL 4325279  (5th Cir. Sept. 29, 2017).

 

The court’s decision endorsed the important role the FCA’s materiality requirement plays in situations where the interests of the government—the supposedly aggrieved party—and the private interests of the relator—a competitor in the guard rail industry—utterly diverge.  Resolving that divergence in favor of the government, the court explained, is critical to ensuring the FCA is a vehicle for vindicating fraud on the federal government and not a means for private citizens motivated by the generous bounty provisions of the statute to second guess reasoned decisions by government officials concluding that no fraud occurred.

 

The relator alleged that Trinity had made changes to its guard rail design and failed to disclose these changes to the Federal Highway Administration (FHWA). Importantly, the relator, Harman, presented his concerns about the undisclosed design changes to the FHWA in 2012 before filing his sealed FCA suit. The government declined to intervene. When Harman later sought to depose FHWA employees, the FHWA issued a June 17, 2014 memorandum, which explained that the challenged guard rail design, the ET-Plus, had been tested in May 2005 and that there was “an unbroken chain of eligibility for Federal-aid reimbursement [that] has existed since September 2, 2005, and the ET-Plus continues to be eligible today.” Id. at *3. 

Trinity’s motion for summary judgment, which relied on the June 17, 2014 memo, was denied. The case went to trial and the jury returned a verdict in favor of the relator.  The district court denied a motion for judgment as a matter of law and entered a judgment for $663,360,750.  After Trinity’s motion for a new trial was also denied, Trinity appealed to the Fifth Circuit.

The Fifth Circuit declined to reach the question of whether a new trial was warranted but reversed the district court’s decision denying Trinity’s motion for judgment as a matter of law.  The court expressed doubt about the sufficiency of the relator’s evidence of falsity and scienter but based its decision on materiality.

On appeal, Trinity argued that, given the FHWA’s express rejection of Harman’s claim and continued reimbursement to state agencies for purchases of the ET-Plus guardrails, Harman failed to carry his burden on materiality. Id. at *11. The Fifth Circuit agreed.

 

The court noted that decisions from other federal courts counseled that “though not dispositive, continued payment by the federal government after it learns of the alleged fraud substantially increases the burden on the relator in establishing materiality.”  Id. at *13. Finding that the relator had not rebutted the “very strong evidence” of FHWA’s continued payment, the court reversed and granted judgment as a matter of law.

The Fifth Circuit also commented on the power of a jury to overturn a government agency’s informed decision:  

"It is charged that the accused product remains along nigh every highway in America, killing and maiming, but the government will not remove it. We can assume that this and contrary views are debatable, but we must accept that the choice among them lies beyond the reach of seven citizens of Marshall, Texas, able though they may be. As revered as is the jury in its resolution of historical fact, its determination of materiality cannot defy the contrary decision of the government, here said to be the victim, absent some reason to doubt the government’s decision as genuine. For the demands of materiality adjust tensions between singular private interests and those of government and cabin the greed that fuels it. As the interests of the government and relator diverge, this congressionally created enlistment of private enforcement is increasingly ill served. When the government, at appropriate levels, 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."  Id. at *18.

 

The decision also included some strong language about the proper measure of the government’s damages in an FCA action. The court noted that at trial, Harman’s damages expert assumed the value of the ET-Plus units with the challenged 2005 design changes was the scrap value of those units. The court explained that nothing in the record supports this valuation. Rather, the fact that the FHWA continues to approve reimbursement for the ET-Plus units at the same amount it reimbursed units without the design changes strongly suggests that the government valued those units equally. If the government got units of equivalent value to those contracted for, “then the proper measure of actual damages should be zero.” Id. at *6 (noting that if the relator had proven FCA liability with no damages, penalties could still apply).