The civil False Claims Act (FCA) prohibits entities from fraudulently inducing the Government to contract, take or refrain from taking action, or make payment. Under the FCA, contractors that falsely certify their compliance with contract specifications can be assessed a civil penalty for each false claim in addition to treble damages. In USA v. Honeywell International Inc., the Court of Appeals for the District of Columbia Circuit was asked to determine the appropriate measure of damages arising from allegedly false claims made about the ballistic performance of Z Shield material made from Zylon fiber purchased from third parties and sold by Honeywell to Armor Holdings for the production of bullet proof vests, which were then sold to the federal Government and federally-funded state and local government entities. In the case, the Government sought approximately $35 million in damages for the full amount paid for the vests, trebled. During the proceedings, the Government recovered $36 million in settlements with Armor Holdings and the Zylon providers for their role in the manufacturing and supply of the vests. Honeywell, which had not settled, moved for summary judgment to apply a pro tanto approach to the calculation of damages that would be owed in light of these settlements. Specifically, Honeywell argued that since the Government only sought $35 million in damages, its recovery of $36 million in settlements should preclude the Government from recovering any damages from Honeywell even if the facts alleged in the case were true. The Government sought to recover a proportionate share of damages from Honeywell under its proposed offset standard, which would allow for the Government to recover more than the $35 million sought in the case.
The District Court applied the Government’s proposed proportionate share approach. Honeywell pursued an interlocutory appeal of that approach, seeking the de novo review of the legal issue of which settlement offset measure to apply and the application of the pro tanto standard of offset. The Government sought to limit the appellate court’s review to whether there was an abuse of discretion and maintain its ability to recover more than it originally sought under the proportionate standard of offset.
On appeal, the DC Circuit agreed with Honeywell both as to the application of a de novo standard of review of the issue – the standard of review to be accorded to the lower court’s fashioning of a common law rule – and as to the selection of the pro tanto offset standard.
While the case has been reversed and remanded to the District Court for further proceedings consistent with this new common law rule, this is a case of first impression. Other courts may disagree both as to the standard of review and the offset standard to be applied. Stay tuned for further developments in this case and other FCA cases that need to grapple with multi-party litigation. There is room to see things differently in a different court and under different proceedings so this may not be the end of the story.
If you have questions about the FCA, government contracts or investigations, contact the author of this advisory or your Stinson counsel.