29 April 2013
The Seventh Circuit Court of Appeals’ decision in United States v. Anchor Mortgage Corp., 2013 WL 1150213 (7th Cir. Mar. 21, 2013), provides additional guidance on the appropriate measure of damages under the False Claims Act (FCA). In a setback for the US Department of Justice (DOJ), the Seventh Circuit rejected the government’s “gross trebling” method for calculating damages, instead adopting the “net trebling” approach advocated by the defendants. Anchor Mortgage follows decisions from other circuits that have rejected the government’s expansive “gross trebling” damages theory in FCA cases.1
In Anchor, the district court found that the defendants, a mortgage company and its former president, “lied when applying for federal guarantees of 11 loans” in violation of the FCA. Specifically, the district court found that defendants had made two categories of false statements: first, defendants provided bogus certificates that down payments had been made in connection with the loans; and second, defendants falsely represented that they had not paid referral fees in connection with the loans. The district court imposed a penalty of $5,500 per loan, plus treble damages of approximately $2.7 million.
The Seventh Circuit considered two issues regarding damages. First, the Seventh Circuit addressed what disclosures were necessary to obtain the benefit of 31 U.S.C. § 3729(a)(2), which limits damages to double damages instead of treble damages when the defendant has voluntarily disclosed the violation within 30 days. The defendants argued that, because they had provided all information known to them for some potential false claims, they should be entitled to a limitation of damages on all false claims at issue. The Seventh Circuit rejected this argument and held that “[c]oming clean 29 days after submitting one false claim does not mitigate the penalty for other false claims that had been submitted months earlier.”
Second, and more importantly, the Seventh Circuit addressed how treble damages should be calculated under the FCA. The Seventh Circuit illustrated the differing approaches advocated by the DOJ and defendants—known as “gross trebling” and “net trebling,” respectively—by using one of the loans in question as an example:
[T]he Treasury paid $131,643.05 on its guaranty of a particular loan. Three times that is $394,929.15. The real estate mortgaged as security for that loan sold for $68,200. The [district court] subtracted the sale price from the trebled guaranty; the result of $326,729.15 represented treble damages. To this the judge added the $5,500 penalty, for a total of $332,229.15….
Defendants propose a different approach. Like the district judge, they start with $131,643.05, but they immediately subtract the $68,200 that the United States realized from the collateral. The net loss is $63,443.05. Treble that, and the result is $190,329.15. Add $5,500 for a total of $195,829.15.
The Seventh Circuit sided with defendants and embraced the net trebling approach, noting that it was consistent with the norm under federal law. In support of its conclusion, the court pointed to the Clayton Act, “which created the first treble-damages action in federal law” and “has long been understood to use net trebling.”
The court also pointed to the Supreme Court’s decision in United States v. Bornstein, 423 U.S. 303 (1976), which noted in footnote 13 that, in an FCA context, “[t]he Government’s actual damages are equal to the difference between the market value of the [products] it received and retained and the market value that the [products] would have had if they had been of the specified quality.” The Seventh Circuit defended its reliance on a footnote as appropriate because the note “uses the common law’s established approach to determining damages; it is not as if some law clerk were off on a lark and the Justices missed the error.” The court also noted that the majority of appellate decisions addressing this issue supported the net trebling approach, including decisions of the Second, Sixth, District of Columbia and Federal Circuits. The only outlier is a decision from the Ninth Circuit, which does not cite footnote 13 of Bornstein, which every other circuit that has decided the issue has found dispositive.
The Anchor Mortgage decision—consistent with the decisions of other circuits—addresses the appropriate methodology for calculating maximum damages and significantly reduces those potential damages under the FCA. Using the numbers the Seventh Circuit cited, the net trebling approach resulted in an amount that was approximately 60 percent of the amount calculated by DOJ using its gross trebling theory. Thus, this decision provides additional leverage to defendants at the bargaining table when advocating for a reduced settlement with the government.
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1 See, e.g., United States ex rel. Feldman v. Gorp, 697 F.3d 78, 87–88 (2d Cir.2012); United States v. United Technologies Corp., 626 F.3d 313, 321–22 (6th Cir.2010); United States v. Science Applications International Corp., 626 F.3d 1257, 1279 (D.C.Cir.2010); Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1372 (Fed.Cir.1998).