The U.S. Court of Appeals for the Fifth Circuit vacated a $663 million judgment, concluding that the Supreme Court’s opinion in Escobar doomed the plaintiff’s FCA claims on the issue of materiality.

FCA Allegations: Highway Guardrail Systems Had Unapproved Design Modifications

Trinity Industries, a manufacturer of highway guardrail systems, faced FCA allegations brought by a former competitor based on the theory that federally subsidized purchases of Trinity’s guardrail systems resulted in false claims as a result of unapproved design modifications. Prior to the filing of the relator’s qui tam lawsuit, the relator met extensively with Federal Highway Administration (FHWA) officials during which he presented his allegations regarding the design modifications and his assertions that those modifications rendered Trinity’s guardrail systems ineligible for federal reimbursement. FHWA met separately with Trinity to discuss the relator’s allegations. Following those meetings, FHWA confirmed that state purchases of the Trinity guardrail system were eligible for federal reimbursement notwithstanding the design modifications.

The relator filed his qui tam lawsuit and the government declined to intervene. After discovery commenced, the relator submitted a Touhy request seeking testimony from FHWA employees. The government rejected that request, and instead, sent the relator a copy of an official memorandum released by FHWA that stated, among other things, that there was “an unbroken chain of eligibility for Federal-aid reimbursement” for the modified guardrails. The government attached a cover note that read, “DOT believes this should obviate the need for any sworn testimony from any government employees.”

Final Judgment in Favor of Relator, Motion for New Trial Denied

Despite FHWA’s statement that the guardrails always had been and continued to be eligible for reimbursement, the district court denied Trinity’s motion for summary judgment, and the Fifth Circuit denied Trinity’s motion for a writ of mandamus. After the first trial resulted in a mistrial, a jury returned a verdict for the relator and entered the $663 million judgment. Trinity then renewed its motion for judgment as a matter of law.

In light of the jury verdict, the federal government conducted independent testing of the modified guardrails that had been installed across the country. In March 2015, FHWA issued a press release again confirming that the government’s approval of the guardrails remained in place. Despite the results of the post-trial testing, the district court denied Trinity’s renewed motion and entered a final judgment for the relator. Trinity moved for a new trial, and the district court again denied the motion.

Fifth Circuit Quotes Escobar When Ruling that Lower Courts’ Decision Could Not Stand

On appeal, the Fifth Circuit granted Trinity judgment as a matter of law, holding that “the jury’s findings of liability [could not] stand for want of materiality.” Quoting Escobar, the Fifth Circuit emphasized the demanding nature of the FCA’s materiality standard: “If 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.”

The Fifth Circuit’s holding is not surprising, given that FHWA affirmatively declared that Trinity’s design changes did not affect its decision to pay for the guardrails; such a statement would undermine virtually any FCA claim for a failure to meet the FCA’s materiality requirement. After collecting rulings from other circuits, the Fifth Circuit highlighted the importance of continued payment as evidence of non-materiality, noting that this “substantially increases the burden on the relator in establishing materiality.”

While the trial focused on Trinity’s omissions and alleged misrepresentations to FHWA, the Fifth Circuit explained that the relevant inquiry was not what Trinity had disclosed, but rather what FHWA knew, regardless of the source. FHWA had the benefit of the relator’s presentation, took measurements and photos of the guardrails that the relator presented, had access to the relator’s allegations in his complaint and the Touhy request, and later even conducted further independent testing of the guardrails. Despite all this information, the government made it clear that it still considered the guardrails eligible for reimbursement. Quoting the D.C. Circuit in U.S. ex rel. McBride v. Halliburton Co., 848 F.3d 1027 (D.C. Cir. 2017), the Fifth Circuit explained that, “we have the benefit of hindsight and should not ignore what actually occurred.”

Though the Fifth Circuit acknowledged that continued payment is not dispositive, at least facially embracing Escobar’s holistic, multi-factor approach, it is evident that the Fifth Circuit focused heavily on the government’s actual conduct in the face of the relator’s information and allegations: “[G]iven FHWA’s unwavering position that [the guardrail system] was and remains eligible for federal reimbursement, Trinity’s alleged misstatements were not material to its payment decision.” Despite the Supreme Court’s instruction in Escobar that the question of materiality is to be evaluated holistically, continued government payment despite knowledge of omissions or misstatements very well may come to be the prevailing factor for courts to consider. While the FHWA was very outspoken about its payment decision in this case, courts will likely have a harder time applying this type of retrospective analysis where the government is less forthcoming about its payment decisions.

For more information about issues arising under the False Claims Act, contact a member of Bass, Berry & Sims’ Healthcare Fraud Task Force.