The U.S. Court of Appeals for the Fifth Circuit recently decided a case that could have a substantial impact on False Claims Act (“FCA”) jurisprudence with respect to the element of “materiality.” In U.S. ex rel. Joshua Harman v. Trinity Industries, Inc., the Fifth Circuit rendered a judgment as a matter of law in favor of defendant Trinity Industries, Inc., (“Trinity”), finding that “fraud cannot stand for want of the element of materiality” in a FCA case. The judgment ended a prolonged legal battle over whether Trinity’s highway guardrails used in state and federal projects were eligible for federal reimbursement or whether the design had changed in a way that violated applicable regulatory requirements and thus the FCA. However, both the procedural path of this case and the actions of the parties and the United States led to a decision that may have a significant effect on FCA jurisprudence regarding the element of materiality.
On March 6, 2012, Joshua Harman, a whistleblower and Trinity competitor, filed suit in the U.S. District Court for the Eastern District of Texas against Trinity under the qui tam provision of the FCA. Harman alleged that Trinity had been falsely certifying that the Federal Highway Administration (“FHWA”) approved its guardrail products for reimbursement. Harmon alleged that Trinity changed the approved guardrail design but did not disclose the changes to FHWA and that the altered guardrails were unsafe and ineligible for federal reimbursement. The government declined to intervene in the suit.
In its defense, Trinity argued that it had made the required disclosures to FHWA and that the government had explicitly approved the guardrail design for which it was paid under highway contracts. Trinity contended that its certifications regarding FHWA approval were thus not false or fraudulent and that the alleged FHWA violations were not “material” for purposes of the FCA.
In June 2014, the parties were conducting discovery in preparation for trial, and both sides requested discovery from FHWA. Harman specifically requested that FHWA make its employees eligible for deposition. In response, FHWA released an official memorandum on June 17, 2014 (the “FHWA Memo”), confirming that Trinity’s products had been eligible for reimbursement since September 2, 2005, and that there was “an unbroken chain of eligibility for Federal-aid reimbursement [that] has existed since September 2, 2005, and the [guardrail system] continues to be eligible today.” That same day, the Department of Justice (“DOJ”) responded to Harman’s request for depositions by emailing a copy of the FHWA Memo with the following cover note:
Please find attached a memorandum issued by FHWA today that addresses all of the issues raised by the parties in their respective requests for information. [The Department of Transportation (“DOT”)] believes that this should obviate the need for any sworn testimony from any government employees. If the parties disagree, please let me know at your earliest convenience.
Trinity moved for summary judgment on the basis of the FHWA Memo, which the district court denied from the bench. On July 18, 2014, four days into the jury trial, the district court sua sponte ordered a mistrial. At that point, Trinity requested a writ of mandamus from the Fifth Circuit Court of Appeals on the basis of the FHWA Memo. The Fifth Circuit rejected Trinity’s request but strongly warned the district court that there was little basis for the trial to proceed:
This court is concerned that the trial court, despite numerous timely filings and motions by the defendant, has never issued a reasoned ruling rejecting the defendant’s motions for judgment as a matter of law. On its face, FHWA’s authoritative June 17, 2014 letter seems to compel the conclusion that FHWA, after due consideration of all the facts, found the defendant’s product sufficiently compliant with federal safety standards and therefore fully eligible, in the past, present and future, for federal reimbursement claims. While we are not prepared to make the findings required to compel certification for interlocutory review by mandamus, a course that seems prudent, 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 case went back to trial, and the jury returned a verdict in Harman’s favor to the tune of $175 million in October 2014. The jury found that Trinity was liable for changing the design of the guardrails without getting approval and then misrepresenting them as the earlier, approved version. After trebling the jury’s damages and adding civil penalties, U.S. District Judge Rodney Gilstrap entered a final judgment of $663.4 million against Trinity in June 2015, in addition to an award of nearly $19 million in attorneys’ fees and legal expenses.
After the district court denied Trinity’s request for a new trial, Trinity filed an appeal with the Fifth Circuit Court of Appeals. Instead of considering Trinity’s appeal on the issue of its request for a new trial, the Fifth Circuit decided that Trinity was entitled to judgment as a matter of law on the issue of materiality under the FCA. Following a hearing, the Fifth Circuit issued a 40-page ruling on September 29, 2017.
While Trinity argued that Harman failed to meet his burden on each element of an FCA violation, the Fifth Circuit put off reaching a decision on the elements of falsity and scienter and instead focused on materiality. In its discussion, the Fifth Circuit cited the Supreme Court’s Escobar decision, highlighting the Court’s comment that:
[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.
With respect to materiality, Trinity argued that Harman had not carried his burden because of the FHWA Memo, as well as the fact that FHWA continued to reimburse states for their purchase of Trinity’s guardrails. Harman responded in part that “the post-revelation actions of the government are not determinative in an FCA action, even post-Escobar, and that the standard for materiality is holistic and no single element is dispositive.” The Court commented that it agreed with its sister circuits that no single factor is determinative in the materiality discussion but noted that the “very strong evidence” of FHWA’s continued payment for Trinity’s products remained unrebutted.
The Fifth Circuit also provided a detailed discussion of the findings of other circuit courts with respect to the government’s continued payment in the FCA materiality context. For example, the Fifth Circuit emphasized language from a First Circuit case, D’Agostino v. ev3, Inc., which affirmed dismissal of the case under Federal Rule of Civil Procedure 12(b)(6) and commented that “[t]he fact that [the Centers for Medicare & Medicaid Services (“CMS”) had] not denied reimbursement for [a] device in the wake of [the relator’s] allegations casts serious doubt on the materiality of the fraudulent representations that [the relator] alleges.” The First Circuit, in its discussion of causation, emphasized that the FDA did not withdraw its approval of the device at issue in the six years following the relators’ allegations and expressed concern that allowing FCA claims to proceed “would be to turn the FCA into a tool with which a jury of six people could retroactively eliminate the value of FDA approval and effectively require that a product be withdrawn from the market even when the FDA itself sees no reason to do so.” The Fifth Circuit also highlighted the First Circuit’s caution in D’Agostino that “[t]he FCA exists to protect the government from paying fraudulent claims, not to second-guess agencies’ judgments about whether to rescind regulatory rulings.”
Following its detailed discussion of materiality-related decisions in other circuits, the Trinity court concluded 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.” The Fifth Circuit also noted that the cases it had discussed did not “fully address the gravity and clarity of the government’s decision” in this case, given that the government risked lives on our nation’s highways, not just undue expense, when choosing to continue payment for Trinity’s guardrails. The Fifth Circuit explained that “this case is not about inferring governmental approval from continued payment. Here, the government has never retracted its explicit approval, instead stating that an ‘unbroken chain of eligibility’ has existed since 2005.”
Ultimately, the Fifth Circuit in Trinity relied heavily on the government’s repeated conclusions that it had never been defrauded by Trinity:
“It so advised Harman after his repeated meetings [with the FHWA] disclosing the changes in the product he says was wreaking havoc on America’s highways, leaving him to file his own suit as was his statutory right. Following discovery, as he made his eve-of-trial [request] that the government produce officials to testify, the Department of Justice declined, once again sending the message that the government did not believe itself to be a victim of any fraud, a position from which it has not to this day retreated. … 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.”
This decision provides an important tool for defendants in FCA cases where the governmental agency at issue continues to pay for the items or services at issue notwithstanding full disclosure of the allegations and evaluation of them. It also underscores the need for discovery from federal agencies that may bear on the materiality element, especially when there are indications that the agency itself does not conclude it has been defrauded.
As of the date of this advisory, the fate of the Fifth Circuit’s decision remains to be seen. On October 30, 2017, Harman argued for a rehearing before the full court, claiming that the Fifth Circuit panel of judges who issued the previous judgment had turned the FCA into a “toothless weapon” when overturning the district court’s judgment. He also argued that the alleged misconduct can still be material even if the government continued to pay and that the panel ignored all evidence of materiality. A ruling otherwise “eviscerates” the FCA, he said. The Fifth Circuit denied the motion on November 14, 2017. Harman’s attorney commented, “Congress passed the [FCA] because it didn’t trust the government bureaucrats to either detect a fraud or do anything about it, even if they learned about it” and that “this case turns the law on its head.”
Be sure to check back for further updates.
Author Laurence Freedman was a signatory to an amici curiae brief filed by former DOJ officials in the appeal to the Fifth Circuit in this case.
1 No. 15-41172 (5th Cir. filed Sept. 29, 2017).
2 Id. at 10.
3 The elements of an FCA violation are: “(1) [W]hether there was a false statement or fraudulent course of conduct; (2) made of carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due (i.e., that involved a claim).” Id. at 12 (citations omitted).
4 Id. at 24 (citing Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003-4 (2016)).
5 Id. at 24.
6 Id. at 31.
7 Id. at 31.
8 Id. at 26 (citing D’Agostino v. ev3, Inc., 845 F.3d 1, 7 (1st Cir. 2016)).
9 D’Agostino v. ev3, Inc., 845 F.3d 1, 7 (1st Cir. 2016)).
11 Id. at 29.
12 Id. at 39-40.