Should whistleblowers be permitted to recover hundreds of millions of dollars when the Government steadfastly insists that the factual underpinnings of a False Claims Act relator’s allegations are flatly incorrect? Although a federal district court in Texas awarded more than $660 million in damages to a relator based on purportedly inadequate disclosures to a federal agency, the post-Escobar materiality standard served as an important guardrail for the U.S. Fifth Circuit Court of Appeals. The appeals court reversed and put an end to the abusive FCA lawsuit. Among other things, the court recognized that the federal agency’s repeated, “authoritative” findings that the design and product at issue was compliant with federal safety standards and eligible for federal reimbursement were fundamentally at odds with the notion that the disclosures at issue were material to the government’s decision to pay the claim.

On September 29, 2016, a Fifth Circuit panel unanimously reversed one of the most astonishing FCA awards in recent years. In U.S. ex rel. Harman v. Trinity Industries, relator Joshua Harman brought a false claims action against Trinity Industries Inc. (Trinity), which manufactures highway guardrails. Trinity’s guardrails have been installed on state highway projects throughout the United States with the consistent approval and funding of the Federal Highway Administration (FHWA).

The relator’s False Claims Act allegation was based on the notion that Trinity failed to disclose to FHWA small changes made to its guardrail design after its product had been initially approved by FHWA. The relator asserted that an FHWA policy requires that all changes to technical specifications, even minor ones, be disclosed to FHWA. Because Trinity purportedly failed to disclose several small changes to the technical specifications of its product, the relator contended that the approvals of Trinity’s guardrails had been based on falsely certified submissions by the contractor—and that all post-design-change invoices submitted by Trinity were impliedly false.

When the case first went to trial (in 2014), the district court ordered a mistrial because of “gamesmanship and inappropriate conduct by both parties.” Before the re-trial began, Trinity filed a writ of mandamus and asked the appeals court to intervene and dismiss the action because a crucial memorandum from the FHWA completely undercut the relator’s claim. The appeals court did not grant mandamus relief but strongly questioned the premise of the relator’s claims based on the FHWA’s memorandum. The court noted that “the FHWA’s authoritative” memorandum seems to compel the conclusion that FHWA, after due consideration of all the facts, found the defendant’s products sufficiently compliant with federal safety standards and therefore fully eligible, in the past, present, and future, for federal reimbursement claims.” In short, the FHWA made clear that it had carefully considered the design changes to with Trinity’s guardrail design and approved of the design and payment of Government funds based on installation of those guardrails. Although the appeals court recognized that “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,” it returned the case to the district court for further proceedings.

The retrial began the Monday after the appeals court denied mandamus relief. At the end of the  August 2014 trial, a jury found Trinity liable under the FCA. The district court entered a final judgment of more than $660 million against the company (consisting of “trebled damages and . . . civil penalties”) plus $19 million in attorneys fees.

What was most bizarre about the trial court’s more than $660 million damages award was that, before the first trial and throughout the proceedings, the government agency with the most knowledge about the underlying issue—whether Trinity’s bills validly sought payment for an approved product—consistently supported Trinity. The relator, Harman, filed nine qui tam lawsuits in 2002. The Government reviewed all of those complaints and declined to intervene. More importantly, the FHWA was aware of Trinity’s changes to its guardrail design—and continued to approve and subsidize the installation of the guardrails throughout the country. And, as explained above, in June 2014 (just before the first trial), FHWA’s memorandum declared that it had “validated” the safety of Trinity’s guardrails—and that “an unbroken chain of eligibility for Federal-aid reimbursement has existed since September 2, 2005, and [defendant’s product] continues to be eligible today.” Finally, in August 2016, the Department of Justice announced that it had closed the investigation of Trinity’s product (and conduct) that had begun after the jury verdict and that no enforcement action would be taken.

In last week’s opinion, the Fifth Circuit’s ruling focused on the issue of materiality. Quoting the Supreme Court’s Escobar decision from last year (which we discussed here) and numerous appellate opinions that followed it, the Fifth Circuit emphasized that Government acquiescence and payment “despite its actual knowledge” of the alleged FCA violations is “very strong evidence” that the purported requirements cited by plaintiff are not material conditions for payment. The court noted that the Government’s acquiescence is especially significant in this case:

This system was installed throughout the United States, and the government’s rejection of Harman’s assertions, if in error, risked the lives on our nation’s highways, not just undue expense. Where violations . . . involve potential for horrific loss of life and limb, the government has strong incentives to reject nonconforming products, and Escobar’s cautions have particular bite.

The Fifth Circuit’s conclusion emphasized the importance of the materiality requirement in understanding FCA allegations. In Harman v. Trinity Industries, the relator was arguing that an “accused product remains along nigh every highway in America, killing and maiming, but the government will not remove it.” The appeals court recognized that the FHWA repeatedly examined the guardrails and approved of them every time—and held that the jury’s “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.”

The court further explained that the FCA’s materiality requirement “adjusts tensions between singular private interests [of contractors] and those of government . . ., and as the interests of the government and the relator diverge, this congressionally created enlistment of private enforcement [i.e., the qui tam action by a relator] is increasingly ill-served.”  So true. To the extent private enforcement plays a role in protecting the Government, relators should not be allowed to intrude on an agency’s regulatory function and contradict agency’s decisions. By repeatedly “turning back [the relator’s] views and proofs, [the Government] balances the federal fisc, motorist safety, and other factors across the spectrum of myriad presentations to disclaim victim status. Such decision making is policy making, not the task of a seven-person jury.”