Background on the False Claims Act
The FCA punishes any person who knowingly submits false claims to the government, including statements that fraudulently induce the government into a contract or misrepresent the specifications of the items sold to the government.1 Damages in FCA cases can be significant, as each false claim triggers treble damages in addition to civil penalty.2 Many FCA cases involve multiple parties, to which courts apply joint and several liability without a right to contribution.3
Since the passage of the Bipartisan Budget Act in 2015, civil monetary penalties have increased significantly to account for annual inflation. In fiscal year 2021, the DOJ obtained more than USD 5.6 billion in settlements and judgments from FCA civil cases. Settlement and judgments since 1986, when Congress substantially strengthened the FCA, now total more than USD 70 billion.4
In Depth: The Honeywell Decision
Honeywell International, Inc. (“Honeywell”) was a provider of Z Shield, a Zylon fiber material used in bulletproof vests sold to federal agencies and state and local governments. The government alleged that the vests were faulty and the materials would degrade in hot and humid conditions. It alleged that multiple defendants were jointly and severally liable for fraud in selling faulty bulletproof vests. In addition to Honeywell, the other defendants were Armor Holdings Inc., manufacturer of the allegedly faulty vests, and the foreign Zylon suppliers.
The government brought the FCA suit against Honeywell in 2008, claiming damages for the full amount paid for the vests, approximately USD 11.5 million, trebled to roughly USD 35 million. While the suit was pending, the government settled with the other defendants, Armor Holdings and foreign Zylon suppliers, with settlement damages totaling USD 36 million.
Honeywell moved for summary judgment, seeking a pro tanto damages offset for those previous settlements, which would mean it need not pay any damages. The government opposed the motion and argued that Honeywell was liable for its proportionate share (to be determined at trial) of the USD 35 million treble damages amount. It argued that it is equitable that each defendant pay at least its proportionate share of the damages in a joint-and-several liability case and that there is no rigid rule against overcompensation.5 The district court denied Honeywell’s motion for summary judgment and adopted the proportional share rule over the pro tanto rule.6 It relied mainly on the 1974 case of McDermott Inc. v. AmClyde, where the Supreme Court applied the proportionate approach as the proper settlement credit rule for admiralty suits. In reaching the conclusion, the court balanced four considerations from McDermott, "consistency with prior decisions, promotion of settlement, judicial economy, and equity," and emphasized that applying the pro tanto rule would be inequitable since it would permit Honeywell to escape damages altogether.7
The DC Circuit reversed the district court ruling and said that a pro tanto rule applies in FCA cases. Though the FCA itself has no statutory settlement offset rule, the court ruled that a proportional approach would conflict with the Supreme Court's 1976 U.S. v. Bornstein decision applying joint and several liability in the FCA context.8 It would also conflict with the long-held common law principle that "settlement with, or successful litigation against, one party reduces the damages owed by other parties who are jointly liable."9 Therefore, one of the four McDermott factors, "consistency with precedents," would highly favor a pro tanto rule.
The proportional approach also would force courts to decide relative fault and assign damages in such a case of partial settlement, which is contrary to the long-established rule of joint-and-several liability without contribution in FCA cases. As for the factor of "promotion of settlement," Judge Rao said it is inconclusive in the FCA context and it is too uncertain to decide which rule better serves the goal. Overall, she concluded that the pro tanto approach is a "better fit with the [FCA] and the liability rules that have been partnered with it."10
Recognizing that non-settling parties could be immune from paying any damages under the pro tanto rule in such cases, the court emphasized that the government still gets the upper hand in pursuing and punishing false claims according to its priorities.11 The holding also did not affect the government’s ability to seek civil penalties—which the court observed could be significantly higher than the government’s damages—against non-settling defendants. In the Honeywell case, for instance, the civil penalty could be well over USD 500,000.12
The Honeywell case could be considered as a welcomed pushback against the increasingly high amount of FCA settlement and judgement damages. Going forward, however, it remains to be seen whether other circuits will follow suit and how the adoption of the pro tanto rule would impact how defendants in multi-defendant cases approach settlement.
In reality, companies often do not know if they are one of several defendants since relator actions cases are filed under seal. Even after the seal is lifted, communication with other defendants regarding settlement may be limited or non-existent.
Another predictable corollary from the case is that companies will be incentivized, to the extent they have control over litigation pace, to slow down litigation in multi-defendant FCA cases with the hope that the other defendants will settle first. This strategy, however, is risky. As the court emphasized, the government can still choose to focus on particular defendants it deems most responsible and the civil penalty can be especially high.
The D.C. Circuit was also the first one to address settlement offset rules in FCA cases and other circuits or the Supreme Court may well reject the rule. Congress may also adopt a solution to ultimately clarify or limit the rule. This would not be unusual. There are currently efforts in Congress to amend the FCA in response to the Supreme Court’s decision in United Health Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016). Click here to read prior client alert addressing these issues: All eyes on the False Claims Act - Executive and potential legislative changes to the FCA enforcement landscape.
1. See 31 U.S.C. § 3729(a)(1)(A)-(B).
2. Id. § 3729(a)(1).
3. See, e.g., United States v. TDC Mgmt. Corp., Inc., 288 F.3d 421, 429, 351 U.S. App. D.C. 168 (D.C. Cir. 2002).
4. Department of Justice, "Justice Department’s False Claims Act Settlements and Judgments Exceed $5.6 Billion in Fiscal Year 2021," 1 February 2022.
5. United States v. Honeywell Int'l Inc., 2019 U.S. Dist. Ct. Motions. LEXIS 12115, at 68.
7. Id. at 485.
8. United States v. Honeywell Int'l Inc., No. 21-5179, 2022 U.S. App. LEXIS 24369, at 19 (D.C. Cir. Aug. 30, 2022).
10. Id. at 19.
11. Id. at 21.
12. Id. at 23.