Honeywell this week won a federal appeals court ruling allowing it to offset the $35 million in trebled damages sought by the US, with the $36 million other defendants had already paid in settlements, under the dollar-for-dollar offset approach known as pro tanto.
Justice Department lawyers had warned the US Court of Appeals for the District of Columbia Circuit to no avail that pro tanto would unfairly let Honeywell off the hook, and encourage larger defendants to drag their feet and wait for others to settle in the hope there would be no more remaining damages for the government to recover.
Writing for the unanimous three-member panel, Judge Neomi Rao said, “the pro tanto rule is not just compatible with the FCA; it is a better fit with the statute and the liability rules that have been partnered with it.”
“The FCA has been consistently interpreted to impose joint and several liability without a right to contribution,” Rao said.
But attorneys for contractors and other large potential FCA targets said there could be challenges and downsides to trying to emulate Honeywell’s successful strategy.
The “potential perverse consequences of the decision highlighted in the government’s brief are overstated, as most defendants will not delay and forgo a sensible settlement in hopes that another defendant will eventually pay down the joint and several liability amount,” said Michael F. Dearington of ArentFox Schiff LLP in Washington.
This is especially true if the government threatens to file an FCA suit or intervene in a whistleblower suit if a defendant doesn’t promptly settle, he said.
‘Trickier to Apply’
Pro tanto only becomes an issue where there are multiple defendants, and that approach is easier to apply when all defendants are responsible for the same set of government damages, said Jennifer A. Short of Blank Rome LLP, Washington.
“It’s trickier to apply when the multiple defendants are responsible for overlapping, but different sets of government damages,” she said.
The damages calculation in Honeywell—where the government sued for all amounts it paid for defective bullet-proof vests—seems to be fairly straightforward, Short said. And it could be a “risky strategy to let others settle out first, in the hopes that the government will recover its full damages before it gets to you.”
“If most companies want to resolve things quickly, then the one who waits could be left with a disproportionately large share of the calculated damages amount, not to mention the burdens and costs of living with and potentially litigating a drawn-out FCA investigation and lawsuit,” she said.
The fact that the government rarely recovers the full amount of treble damages allowed by the FCA is another reason Honeywell is unlikely to significantly change defendants’ FCA strategy, said Caleb Hayes-Deats of MoloLamken in Washington.
Little Chance to Invoke
Most defendants will have little chance of invoking pro tanto to avoid damages entirely, Hayes-Deats said.
While pro tanto “might give defendants an incentive to fight longer and attempt to benefit from co-defendants’ settlements, they will also have to consider other incentives, such as the potential for cooperation credit in an early settlement,” he said.
Attorneys for whistleblowers, that bring FCA suits in the government’s name, aren’t anticipating significant changes either.
The ruling will have little impact on litigation because it is based on a unique set of circumstances, said H. Vincent McKnight Jr., who represents FCA whistleblowers at Sanford Heisler Sharp LLP in Washington.
“I have been doing this since 1995, and I can’t name one case where the government collected treble damages in a pre-trial FCA settlement,” McKnight said. “I wish we did live in a world where the DOJ aggressively pursued settlements that reflect the full damages available under the FCA, but we do not,” he said.
The government usually settles cases in a way that leaves “millions of dollars on the table,” he said.
Each defendant in an FCA case remains responsible for the entire amount of the liability after this ruling, said Claire M. Sylvia, who represents whistleblowers with Phillips & Cohen LLP in San Francisco.
Therefore, the “the incentives to pursue all parties responsible for a particular FCA violation remain unchanged,” she said.
The Department of Justice sued Honeywell in 2008 asserting that the company hid information about bulletproof vest material Z Shield and how it degraded in high heat and humidity. The vests were provided to law enforcement agencies between 2000 and 2005.
After a district court denied Honeywell summary judgment, Honeywell obtained an interlocutory appeal to the D.C. Circuit on the damages issue.
The pro tanto approach applies because the FCA has consistently been interpreted to impose joint and several liability without a right to contribution, the court concluded.
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