Oct 92017

Fifth Circuit Reverses $663M Jury Verdict Based on Government’s Insistence That It Was Not Defrauded

Scott D. Stein and Brenna E. Jenny
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If the government “repeatedly concludes that it has not been defrauded,” could fraud have nonetheless occurred?  The Fifth Circuit grappled with this question when reviewing an appeal from a $663 million jury verdict against Trinity Industries, a manufacturer of highway guardrails.  See United States ex rel. Harman v. Trinity Indus., No. 15-41172 (5th Cir. Sept. 29, 2017).  In finding the relator’s allegations of materiality wanting, the Fifth Circuit’s grant of judgment as a matter of law for Trinity Industries reiterated that the Supreme Court’s Escobar decision “heightened” the materiality standard to “adjust tensions between singular private interests and those of government and cabin the greed that fuels” False Claims Act litigation.

The dispute in this case centered around the alleged failure of Trinity Industries to disclose modifications to the guardrails it manufactures.  The federal government subsidizes state purchases of certain highway improvements, including the guardrails at issue, but only if the Federal Highway Administration (“FHWA”) approves them.  The FHWA approved the guardrails manufactured by Trinity Industries, but according to the relator, Trinity Industries then made a number of changes to the approved versions of the guardrails.  Under the relator’s theory, because the company had impliedly certified that it complied with a regulatory obligation to disclose any and all modifications to its guardrails, the resulting requests for federal subsidies were false.  In contrast, Trinity Industries argued that it need not disclose changes where engineers, exercising “their good engineering judgment,” determined that a change is not significant.  While the Fifth Circuit concluded that the regulatory ambiguity cast doubt on the jury’s findings of falsity and scienter, the court concluded that the absence of materiality was the determinative factor.

The government’s insistence that it was not defrauded was repeated and emphatic.  The FHWA released an official memorandum during the trial stating that it had validated the modified guardrails, and that there existed “an unbroken chain of eligibility for federal-aid reimbursement.”  The same day, DOJ responded to the relator’s deposition requests by releasing a statement maintaining that the FHWA’s report “should obviate the need for any sworn testimony from any government employees.”  Following the jury’s verdict for the relator, a joint task force examined over one thousand guardrails across the country and concluded that the guardrails previously crash tested by Trinity Industries were sufficiently representative of the units actually installed.  Not only did eleven states file an amicus brief in support of Trinity Industries, but of the nine states on whose behalf the relator filed a claim, only one intervened.  Pre-Escobar, courts rarely gave government intervention decisions weight.  However, since Escobar, courts have increasingly considered government intervention as indicative of materiality.

Weighing the foregoing pattern of government conduct, the Fifth Circuit emphasized that the government was aware of the allegations, investigated them, and repeatedly “disclaim[ed] victim status.”  In particular, the panel clarified that it must assess not what Trinity Industries itself disclosed, but the totality of what FHWA knew at the time it issued the memorandum confirming that the guardrails were consistently eligible for federal cost-sharing.  Where “the government, at appropriate levels, repeatedly concludes that it has not been defrauded” and continues purchasing product, plaintiffs cannot, the Fifth Circuit explained, establish materiality.

A copy of the court’s opinion can be found here.

Scott D. Stein

Chicago

sstein@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

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