The US Court of Appeals for the DC Circuit issued an important opinion on August 30, 2022, that reinforces the seemingly obvious principle that the government is not entitled to windfall damages recoveries in False Claims Act (FCA) cases. Rather, FCA damages are meant to make the government whole for the losses it sustained because of the wrongful conduct—and once that objective is met, the government cannot recover additional FCA damages. However, calculating FCA settlement credits under the pro tanto rule may not always be straightforward.
The US Court of Appeals decision in United States v. Honeywell International Inc., No. 21-5179, 2022 WL 3723020 (D.C. Cir. Aug. 30, 2022), ensures that the federal government’s damages recoveries in FCA cases are limited to the statutory cap by adopting a pro tanto rule in instances where multiple parties may be liable for the government’s losses. In establishing this rule, the court rejected the government’s argument that a proportionate share rule be imposed in FCA cases, reasoning—among other factors—that such a rule would in some cases enable the government to recover damages in excess of the treble damages permissible under 31 USC § 3729(a).
Application of the pro tanto rule in Honeywell was relatively straightforward. In its affirmative FCA suit against the defendant, the government claimed approximately $35 million in treble damages, and the district court found that the government already had recovered more than $35 million in “common damages” in settlements with other parties. As such, a pro tanto—or dollar-for-dollar—credit for those recovered funds would mean that the government could not recover additional damages from the defendant or any other party. While the outcome here benefits a party that was litigating liability for the underlying conduct, the DC Circuit properly attributed that result to the government’s strategic and litigation decisions in deciding how (and from whom) it chose to make itself whole.
Even so, not all fact patterns will be as “simple” as the damages construct presented in Honeywell. In other circumstances—for instance, where settling parties pay only a fraction of the government’s actual losses—the pro tanto rule may not benefit a nonsettling defendant, given that the FCA imposes joint and several liability on all defendants. In some cases, therefore, a nonsettling defendant, upon a finding of liability, may have to pay a share of damages that is disproportionately higher than its actual culpability in the underlying scheme.
The DC Circuit’s decision also leaves unanswered several questions as to how the pro tanto rule will be applied in the range of scenarios in which calculation of settlement credits may arise.
The allegations in Honeywell involved claims of misrepresentations about the performance of bullet-resistant vests sold to (or otherwise funded by) the federal government. The government alleged that the vests made from “Zylon” material degraded at a higher-than-normal rate when used or stored in high temperatures or humid conditions, rendering them unsafe for use. The defendant supplied the anti-ballistic material to the vest manufacturer that sold the vests to the government.
The government commenced an FCA suit against the defendant and sought to recover the full amount that it had paid for the vests. Thus, single damages were approximately $11.5 million, and treble damages under the FCA were approximately $35 million. In the meantime, the government also pursued FCA litigation against the vest manufacturer, material manufacturer, and other suppliers of the vest components. Those efforts led to settlements totaling $36 million in respect of the same vests that were at issue in the government’s FCA suit.
The defendant moved for summary judgment on numerous grounds, including damages, arguing that offsetting the government’s claimed $35 million in treble damages by the $36 million settlement value reduced any statutory damages under the FCA to $0. The district court denied summary judgment on this point after determining that the settlement offset should be applied based on the other parties’ proportionate share of fault. However, the district court also certified the settlement offset issue for interlocutory appeal.
On appeal, the DC Circuit rejected the proportionate share of fault rule and instead adopted the pro tanto rule for calculating and applying settlement credits under the FCA. In other words, any common damages recovered by the government through settlement will be applied as a dollar-for-dollar offset of any remaining recoverable damages, regardless of the relative fault of any remaining party the government seeks to hold responsible for the underlying conduct. The pro tanto rule applies only to FCA damages, not mandatory statutory penalties.
In deciding to apply the pro tanto rule, the DC Circuit first determined that it would have to create federal common law to resolve the dispute because the FCA itself does not specify a rule, and there is no consensus in state law between the pro tanto and proportionate share approaches. In fashioning the federal common law rule here, the court balanced (1) consistency with relevant precedent, (2) promotion of settlement, and (3) judicial economy.
On the consistency factor, the court noted that the “FCA has been consistently interpreted to impose joint and several liability without a right to contribution. Together these two rules mean that a person who violates the FCA in a joint scheme may have to pay for all the government’s trebled damages, and, even if that defendant is the least responsible party, it cannot force the other violators to pay their fair share.” A pro tanto offset rule applies the same principle in that a settling party may end up paying for all of the government’s damages. The court also noted that the US Supreme Court previously had applied a pro tanto approach without comment in the FCA context in United States v. Bornstein, 423 U.S. 303, 314 (1976), where the only issue was whether the offset credit should be applied pre- or post-trebling.
In terms of promotion of settlement, the court noted that neither rule (pro tanto or proportionate share) could be construed as promoting settlement more than the other, but certainty in a rule does promote settlement. Moreover, the pro tanto rule leaves the government free to negotiate settlement amounts based on its own assessment of relative fault.
Finally, the court found that judicial economy favors the pro tanto rule because it does not require a court to adjudicate comparative fault, which is an element that does not otherwise come into play under the FCA’s joint and several liability construct. Forcing post-settlement adjudication of comparative fault likely would disincentivize settlement, as it would mean that parties who already had settled could be brought back into court and faced with factual findings assigning liability to them—even where their settlement agreements made no admissions of liability.
The rationale underpinning this decision is that the government is not entitled to recover FCA damages in excess of its actual losses, subject to the FCA’s damages multiplier.
Accordingly, once the government is made whole (with treble damages serving as a proxy, for this purpose, to the extent of consequential damages before a multiplier enters the punitive realm), the government cannot recover additional damages from other parties. This principle, while logical, would be violated if the government could be made whole by settlement with some parties, and then pursue a second or third damages recovery for the same losses from other parties.
Application of the pro tanto rule maintains the focus where it should be: on providing a means for the government to be made whole for losses it sustained due to FCA violations. The fact that, in some instances, the government may be precluded from obtaining additional damages recoveries from other allegedly responsible parties, thereby “benefiting” those remaining parties, should be irrelevant in determining damages awards.
The pro tanto rule will not necessarily be a pro-defendant result in all cases. As the DC Circuit noted, “[I]n the cases where a party settles for less than its share of liability, the pro tanto rule will mean the non-settling defendant will be liable for more than its proportionate share of the harm.” Thus, the pro tanto rule should instead be viewed as ensuring that the government does not recover for more than the amount of its damages, with treble damages serving as the ceiling for such a recovery.
In addition, the pro tanto settlement offset rule does not affect FCA statutory penalties, which are imposed based on a per-claim basis and are not necessarily tied to the government’s monetary losses.
The DC Circuit did not need to wade into some of the still-murky questions about offsets, such as whether offsets are applied pre- or post-trebling or how to determine whether a settlement amount is for single damages, a multiplier, or statutory penalties.
Like Bornstein, Honeywell only involves credits for settlement of FCA liability and, before the district court, the defendant and the government thus agreed that the offset under either rule should be applied post-trebling. This agreement allowed the appellate court to avoid debates about the proper application of Bornstein’s post-trebling framework, including its potential application to offsets due to recoveries outside the settlement context.
In addition, because the total settlement recoveries at issue in Honeywell exceeded the government’s treble damages demand, this case did not require any assessment of whether the settlement amounts themselves were a “lump sum” or should be apportioned into single damages, multiplier, and civil penalties components and offset from each individual area of damages (with settled penalties of other defendants not considered at all). In future cases applying the pro tanto rule, these types of inquiries likely will be required, and the door is left open for structuring settlements in a manner that could lead to windfall government damages recoveries.
The DC Circuit also did not comment on the district court’s assessment of which settlement amounts were truly for “common damages,” but that, too, will be a key factual question in applying the pro tanto rule going forward.
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