Sep 122022

D.C. Circuit Holds Defendants Are Entitled To Offset Damages By Amounts Paid By Other Settling Defendants

Scott D. Stein and Meredith Greene Jalali
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The D.C. Circuit recently issued an important opinion on an issue of first impression: under what circumstances is an FCA defendant entitled to offset damages by amounts the government or relator has received in settlement from other defendants involving the same claims. The opinion is available here.

In United States v. Honeywell International, the government alleged that Honeywell International provided Armor Holdings, a manufacturer of bulletproof vests, with a faulty anti-ballistic material called “Z Shield” that degrades in high temperatures. Armor Holdings used the allegedly faulty Z Shield to manufacture bulletproof vests sold to federal and state governments. DOJ sued both Honeywell and Armor Holdings, along with a number of foreign suppliers of the Zylon fiber used to create Z Shield, for their involvement in the provision of the allegedly faulty vests to the government. The government sought damages from Honeywell comprised of the full amount paid for the vests, $11.5 million, trebled to roughly $35 million. After Armor Holdings and the foreign suppliers reached settlements with the government totaling $36 million, Honeywell moved for summary judgment, asking the court to apply pro tanto damages, i.e., offsetting the $36 million in settlements reached with other defendants from any damages that Honeywell should pay.

The government argued that “proportionate share” damages should apply, such that Honeywell would be responsible for its proportionate share of the $35 million in damages, with any credit for the other parties’ settlements to be limited to the other parties’ proportion of fault. The district court agreed. On appeal, the D.C. Circuit reversed and agreed with Honeywell that pro tanto damages apply to FCA cases.

Although the False Claims Act does not provide a settlement offset rule, the D.C. Circuit found that the pro tanto damages rule best effectuates consistency with relevant precedent, promotion of settlement, and judicial economy. The court explained that in FCA cases where multiple defendants cause the same indivisible harm to the government, courts have applied joint and several liability where the government can obtain a judgment against all defendants and enforce it against any one of them, or partly against each of them. In particular, the D.C. Circuit pointed to the Supreme Court’s decision applying joint and several liability to an FCA matter in United States v. Bornstein, 423 U.S. 303, 314 (1976). Thus, the D.C. Circuit reasoned, FCA defendants should similarly receive “credit” where other defendants reach a settlement with the government for the same indivisible harm.

The court explained that application of the proportionate share damages rule sought by the government would unjustly allow the government to “recover more than its total damages solely because some parties settled.” The D.C. Circuit recognized that application of pro tanto damages, as opposed to proportionate share damages, can result in a non-settling party such as Honeywell not paying any damages if the government has fully recovered its losses from other defendants. However, the court explained, “consistent with the FCA, the pro tanto rule leaves the government in the driver’s seat to pursue and punish false claims according to its priorities.” Additionally, each defendant remains responsible for payment of potential civil penalties, which can be more than $25,000 per claim and in Honeywell’s case could exceed $500,000.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.

Scott D. Stein

Chicago

sstein@sidley.com

Meredith Greene Jalali

Chicago

meredith.jalali@sidley.com

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