October 2, 2017 / 6:59 PM / a year ago

5th Circuit: Trust government, not juries, to decide if feds have been defrauded

(Reuters) - It’s becoming increasingly clear that unless the federal government backs whistleblowers who bring False Claims Act suits, the cases are doomed to fail.

On Friday, the 5th U.S. Circuit Court came down on the same side as many of its fellow federal appellate courts, holding that if the federal government continues to pay claims by alleged fraudsters despite whistleblower accusations of misconduct, that’s powerful evidence that the supposed fraud is not material. Citing the U.S. Supreme Court’s 2016 ruling in Universal Health v. U.S. ex rel. Escobar (136 S.Ct. 1989), the 5th Circuit, in U.S. ex rel. Harman v. Trinity Industries (2017 WL 4325279), overturned a crushing $663 million judgment against the guard rail manufacturer Trinity Industries and entered judgment for Trinity.

The 5th Circuit panel, Judges Patrick Higginbotham, Grady Jolly and James Graves, concluded the Federal Highway Administration was fully apprised of whistleblower Joshua Harman’s allegations that Trinity changed a critical guardrail feature without informing the government. Harman, who accused Trinity of altering guardrail specs to increase its profits, claimed Trinity cheated the federal government out of funds the agency paid to reimburse states that installed the altered guardrails.

The 5th Circuit said Trinity’s lawyers at Gibson Dunn & Crutcher offered “compelling” evidence that rebutted Harman’s fraud allegations, but that wasn’t the basis of the court’s judgment for Trinity. The case turned instead on the Federal Highway Administration’s unwavering approval of the new guardrails. The government never reconsidered paying Trinity for the guardrails – not when officials met with Harman before he filed a False Claims Act complaint in federal court in Marshall, Texas, not when the Justice Department reviewed Harman’s allegations and declined to intervene in the suit, and not when Harman’s case went to trial. Despite Harman’s claims, the 5th Circuit said, the government explicitly continued to assure states that they were eligible for reimbursement if they installed the Trinity guardrails.

The government’s unflagging insistence that it was not a victim of Trinity’s alleged misconduct did not, by itself, spell the end of Harman’s case, the appeals court said. The Supreme Court’s Escobar decision said the government’s payment of allegedly fraudulent claims is “strong evidence” that the claims are not material, the 5th Circuit said, and since Escobar, the 1st, 3rd, 7th, 9th and District of Columbia Circuits have all tossed False Claims Act cases based on the government’s continued payment of supposedly fraudulent claims. But the 5th Circuit also cited a 9th Circuit decision, U.S. ex rel. Campie v. Gilead (862 F.3d 890), that held government payment does not automatically defeat whistleblower claims of fraud.

“There are and must be boundaries to government tolerance of a supplier’s failure to abide by its rules,” Judge Higginbotham wrote. But the undisputed evidence in the Trinity case, the 5th Circuit said, is that the federal highway agency was fully aware of Trinity’s altered specs when it decided to continue reimbursing states for installing the guardrails.

What makes the 5th Circuit ruling especially consequential in FCA litigation is that a federal judge and jury looked at the same evidence as the 5th Circuit and reached the opposite conclusion about Trinity defrauding the government. All of the other post-Escobar appellate decisions the 5th Circuit discussed in its Harman decision addressed dismissal or summary judgment rulings. None came after trials in which the whistleblower prevailed.

The 5th Circuit was troubled by the idea that seven jurors in Marshall, Texas, can second-guess the federal government on a product intended to protect millions of drivers on highways all over the country. The False Claims Act is not intended to provoke government policy decisions, the appeals court said, yet that’s what happened to Trinity after jurors found it liable. Even though government regulators consistently said the guardrails were safe, despite Harman’s allegations, states were spooked after the jury verdict.

That’s not the right way to make public policy, the Fifth Circuit said. “As revered as is the jury in its resolution of historical fact, its determination of materiality cannot defy the contrary decision of the government, here said to be the victim, absent some reason to doubt the government’s decision as genuine,” Judge Higginbotham wrote. “When the government, at appropriate levels, repeatedly concludes that it has not been defrauded, it is not forgiving a found fraud — rather it is concluding that there was no fraud at all.”

Harman counsel Nicholas Gravante of Boies Schiller & Flexner told me the 5th Circuit’s repudiation of the jury verdict and post-trial rulings by U.S. District Judge Rodney Gilstrap effectively means whistleblowers can’t win unless the government intervenes in their False Claims Act cases. Regulators, he said, have an interest in protecting their own reputations and may be inclined to minimize fraud after it’s uncovered by whistleblowers. The public, he said, can’t assume that after-the-fact regulatory reassurances mean no fraud occurred.

“They want to avoid embarrassment, save their jobs, look like they were not asleep at the switch,” Gravante said. “How is a whistleblower going to prevail in an FCA case when regulators are so close to those they regulate?”

Gravante said Harman is considering his appellate options.

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