Supreme Court Leaves Intact Fifth Circuit’s Reversal of $660 Million Verdict in False Claims Act Materiality Case

The Court’s denial leaves intact the Fifth Circuit’s reversal of a $660 million jury verdict based on the panel’s finding that the plaintiff-relator failed to prove that defendant’s alleged misrepresentations were material to government payment decisions.

In Harman, a plaintiff-relator filed suit against Trinity Industries, Inc., a manufacturer of a widely used highway guardrail system, and its subsidiary Trinity Highway Products, LLC, under the qui tam provisions of the FCA. According to the relator, Trinity had obtained Federal Highway Administration safety approval of its guardrail system—a requirement for state reimbursement—but then sold to states a different version of the system with a false certification of compliance with the safety requirements. The relator alleged that Trinity violated the FCA by causing states to submit false claims for federal reimbursements for the non-compliant guardrail systems.

Before trial, the FHWA provided a memorandum indicating that there was an “unbroken chain of eligibility for Federal-aid reimbursement that ha[d] existed” from 2005, the year of the system’s approval, to the present. Nevertheless, following a six-day trial in 2014, the jury found in favor of the plaintiff-relator, and the district court awarded more than $660 million in treble damages and civil penalties and nearly $20 million in attorneys’ fees.

On appeal, the Fifth Circuit reversed, holding that the relator failed to prove materiality, which is a necessary element of an FCA violation. Quoting the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the panel noted that “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.” The panel held that the relator failed to overcome evidence that FHWA had knowledge of all the relator’s allegations but nevertheless had maintained the “unwavering position” that the guardrail system sold to states was eligible for reimbursement.

After the Fifth Circuit denied rehearing en banc, the plaintiff-relator sought Supreme Court review, arguing in part that the Fifth Circuit’s approach to materiality did not comport with the purpose of the FCA or the Supreme Court’s 2016 Escobar decision. This past Monday, however, the Supreme Court denied the plaintiff-relator’s petition.

The Supreme Court’s denial of the plaintiff-relator’s petition leaves intact the Fifth Circuit’s judgment and precedential opinion, which continues a trend among federal courts of adhering to Escobar’s instruction that continued government payment with full knowledge of the defendant’s conduct can be strong evidence of a lack of materiality under the FCA. In practice, these cases reinforce the importance of thoroughly documenting government approvals and knowledge of project variances. And from a litigation standpoint, they also provide a potential defense at the motion-to-dismiss or summary-judgment stage in cases where the allegedly false submission was not material to a payment decision, especially if there is evidence that the government payor was aware of all relevant facts when making payment.

We will continue to monitor cases that interpret the FCA’s materiality element in the wake of Escobar, and other important FCA trends.