On September 29, 2017, in United States ex rel. Harman v. Trinity Indus. Inc. (“Trinity”), the Fifth Circuit Court of Appeals reversed a $663 million jury verdict in a False Claims Act (FCA) case brought against Trinity Highway Products, LLC, finding that the verdict could not stand for want of the essential element of “materiality.” Citing to Escobar, the U.S. Supreme Court’s landmark FCA decision from June 2016, the Fifth Circuit held that where the Government – the ostensive victim in an FCA suit –has prior knowledge of the alleged wrongdoing, yet continues to make payments to the defendant and “repeatedly concludes that it has not been defrauded,” the qui tam relator cannot establish that the defendant’s alleged noncompliance was “material” to the Government’s payment decision.

I. Background: Escobar and the Government’s “Actual Knowledge” of Noncompliance

In Universal Health Servs., Inc. v. United States (“Escobar”), the Supreme Court held that FCA liability for failure to disclose violations of statutory, regulatory, or contractual legal requirements does not hinge on whether those requirements were expressly designated as conditions of payment rather than conditions of participation (i.e., participation in a government program that offers cost reimbursements). Instead, such determinations turn upon whether compliance with the relevant statute, regulation, or contractual requirement was material to the Government’s decision to pay a claim. Under the FCA’s “materiality” requirement, “statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment.” Thus, the Court effectively held that, in the absence of an express certification of compliance, FCA liability may attach to an implied certification of compliance if (1) the claim submitted to the Government for reimbursement makes a specific representation about the goods or services provided, and (2) the defendant’s failure to disclose noncompliance with a material statutory, regulatory, or contractual requirement “makes those representations misleading half-truths.”

Pertinently, the Court found that materiality is a “demanding” standard and that it is insufficient for a finding of materiality “that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” The plaintiff’s complaint must demonstrate that the defendant’s noncompliance would have affected the Government’s payment decision. Thus, in establishing a broad test for determining the “materiality” of a particular false statement, the Court in Escobar adopted what has come to be known as the “natural tendency test,” writing that “the term ‘material’ means having the natural tendency to influence, or be capable of influencing, the payment or receipt of money or property,” and “look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”

 

For this reason:

 

[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.

Thus far, many post-Escobar district and circuit court decisions have cited to this excerpt for the proposition that an alleged false statement pertaining to compliance with a particular statute, regulation, or contractual requirement was immaterial to the Government’s payment decision. Expounding on the principles set forth in Escobar, these decisions (such as the McBride decision we wrote about in March) tend to rely on a retrospective review of whether the Government had knowledge of the alleged noncompliance, when the Government obtained such knowledge, and whether the Government continued to make payments despite its actual knowledge.

II. United States ex rel. Harman v. Trinity Indus. Inc.

In Trinity, the Fifth Circuit, citing numerous post-Escobar circuit court decisions, opined that “[t]he lesson we draw from these well-considered opinions is 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 plaintiff, a customer (and one-time competitor) of Trinity Highway Products, LLC (“Trinity,” a subsidiary of Trinity Industries, Inc.), accused Trinity of defrauding the Federal Highway Administration (“FHWA”) by concealing a design change it made in 2005 to its ET-Plus guardrails, which caused severe injuries in car accidents involving guardrails. The plaintiff testified at trial that he had “set out on a cross country trip looking for accidents involving guardrails,” and that, upon discovering the change in Trinity’s design, presented his findings to FHWA in January 2012 “via an extensive PowerPoint presentation that included explanations of the 2005 changes and accident scene photographs.”

Thereafter, in February 2012, FHWA met with Trinity to discuss the plaintiff’s allegations. At that meeting, Trinity explained that although the design change had been inadvertently omitted from the report sent to FHWA, the crash test conducted by FHWA in May 2005 had used an ET-Plus system that incorporated the change. Subsequently, FHWA continued to make payments, even responding to inquiries about the ET-Plus system from various state departments of transportation to confirm that Trinity’s ET-Plus was eligible for reimbursement. Finally, in June 2014, FHWA issued an official memorandum stating that it had indeed tested Trinity’s design change during its May 2005 crash test.

At trial, a jury found Trinity liable and awarded $175 million in damages, which was then trebled to $525 million under the FCA. A year later, District Judge Rodney Gilstrap added per-claim civil penalties of $8,250 per each of the 16,771 allegedly false certifications, a total of $138.4 million. Yet, on appeal, the Fifth Circuit found that, given the Government’s undisputed actual knowledge of the alleged violation, the plaintiff had failed to prove materiality. Reversing the jury’s verdict, the Court distinguished its holding from other post-Escobar decisions, such as the Ninth Circuit’s July 2017 opinion in United States ex rel. Campie v. Gilead Sciences, Inc. (“Campie”) (which we previously discussed here). There, the Ninth Circuit found that Gilead’s alleged noncompliance (purchasing an active ingredient for one of its pharmaceuticals from an unregistered facility in China, in violation of FDA regulations), if proven at trial, would be material, noting that its decision turned on “the connection between the regulatory omissions and [Gilead’s] claim for payment.” Although Gilead had argued that its violations were immaterial because the Government continued to pay for the medications even after learning of the FDA violations, the Ninth Circuit determined that the FDA may have chosen not to withdraw Gilead’s drug application for a number of reasons wholly unrelated to the payment decision. Yet, said the Fifth Circuit, none of the factors used by its sister court in Campie existed in Trinity’s case.

First, the record in this case leaves no question about “what the government knew and when.” Instead, the record demonstrates that FHWA continued to reimburse the ET-Plus units with full knowledge of [plaintiff’s] claims about the product’s purported deficiencies. Nor has [plaintiff] come forward with any evidence that FHWA’s decision was procured wrongfully—through collusion between Trinity and FHWA or some other form of corruption. Nothing in the record here supports an inference that FHWA’s approval was made to shield Trinity or FHWA itself from the consequences of past decisions. Nor has Trinity reformulated the ET-Plus to remove the 2005 changes. Rather, FHWA has not changed its position regarding the eligibility of the ET-Plus and still considers it eligible for reimbursement to this day, a weighty decision. Finally, it is plain that FHWA is no “captured agency.” The response of the Attorneys General of the several states and of the Justice Department itself make clear that the decision of the FHWA was made and adhered to with sensitivity to the interests of many levels of state and federal government.

Thus, although jury verdicts are “revered” and should not be overturned lightly, a 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.” In other words, when the Government “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.”