In United States v. Anchor Mortgage Corp., 711 F.3d 745 (7th Cir. 2013), the U.S. Court of Appeals for the Seventh Circuit clarified that when calculating the actual damages that may be trebled under the False Claims Act (FCA), courts should look to the government’s “net loss” from paying out false claims, and not the gross amount paid on the false claims.1 Although the Seventh Circuit interpreted the FCA’s “treble damages” provision in the context of housing fraud, its analysis has significant implications for FCA claims of healthcare fraud involving unlawful kickbacks.

Writing for the Seventh Circuit in Anchor Mortgage, Chief Judge Easterbrook observed that although 31 U.S.C. § 3729(a) “calls for trebling ‘the amount of damages which the government sustains,’” it does not specify whether “treble damages” should be calculated by (1) trebling the full amount paid by the government on the false claim, or (2) trebling the amount the government paid, after first subtracting any offset, such as any gains that the government realized or any amount of damages that were successfully mitigated.2 The Seventh Circuit favored the latter approach, which it called “net trebling.”3 Under the net trebling method, a court calculating the actual damages baseline should “immediately subtract” any offsets before trebling the “net loss.”4

The government had alleged that Anchor Mortgage Corporation (Anchor) and its CEO had “knowingly providing false information to the Department of Housing and Urban Development . . . in connection with applications for home mortgage loans to be insured by the Federal Housing Administration.”5 Specifically, the defendants were alleged to have submitted false certifications that (1) borrowers would be able to repay the loans, and (2) Anchor had not paid anyone for referring clients to it.6 After a bench trial, the district court agreed, finding that the defendants violated the FCA as to eleven loans.7 The trial court calculated the treble damages owed to the government by adopting the formula advocated by the Department of Justice: it first trebled the total amount paid by the United States under the tainted guarantees and then subtracted sums realized from the sale of those properties.8

The Seventh Circuit affirmed the liability judgment but took issue with what it called the district court’s “gross trebling” method: “The False Claims Act does not specify either a gross or a net trebling approach. Neither does it signal a departure from the norm — and the norm is net trebling.”9 As Chief Judge Easterbrook explained:

Basing damages on net loss is the norm in civil litigation. If goods delivered under a contract are not as promised, damages are the difference between the contract price and the value of what arrives. If the buyer has no use for them, they must be sold in the market in order to establish that value. If instead the seller fails to deliver, the buyer must cover in the market; damages are the difference between the contract price and the price of cover.10

Moreover, the Seventh Circuit observed, although the Ninth Circuit uses a gross trebling method,11 net trebling is consistent with the approach adopted by the Second, Sixth, D.C., and Federal Circuits.12 Accordingly, the Seventh Circuit required that the district court recalculate treble damages, based not on the government’s total payments on false loan guaranties, but rather based on the total payments less any amounts that government later recovered on the sale of the mortgaged property, or the value of the government’s yet-to-be sold collateral.13

If extended to FCA awards in the healthcare context, Anchor Mortgage has the potential to substantially constrain the government’s ability to collect actual damages in kickback cases. The defendants in Anchor Mortgage had improperly paid for client referrals and then falsely certified that they made no such payments. Similarly, FCA suits alleging healthcare fraud often claim that providers have sought government payment after falsely certifying compliance with the provisions of the Anti-Kickback Statute and Stark Law that prohibit paying for patient referrals. If applied to kickback cases, the Seventh Circuit’s “net trebling” approach would require that courts consider the government’s “net loss” in paying out healthcare claims for improperly induced referrals. Where the only claim is that medical services were “tainted” by unlawful kickbacks, and medical necessity is not disputed, then Anchor Mortgage — like the other circuit cases it cites favorably — raises a substantial question as to whether the government actually suffers any “loss” at all on a kickback-induced claim. Just as Anchor Mortgage observed when discussing civil litigation over the delivery of goods, actual damages for services should be “the difference between the contract price and the value of what arrives.”14 Thus, where the provider has not “fail[ed] to deliver,” as is the case when medically necessary services are actually provided, there is arguably no actual monetary loss to government for those services. Such an approach would sharply reduce the damages available, although it would not affect the government’s ability to recover civil penalties or other statutory damages. Anchor Mortgage left these questions unanswered, presenting numerous questions for lively debate in the months and years to come.