To Settle or Not to Settle? DC Circuit Holds that False Claims Act Damages are Subject to Settlement Offsets
On August 30, 2022, the U.S. Court of Appeals for the DC Circuit held that the pro tanto rule is the appropriate measure of settlement offsets when calculating damages under the False Claims Act (FCA). In a matter of first impression, the court in United States v. Honeywell International Inc., No. 21-5179 (D.C. Cir. Aug. 30, 2022) concluded that prior settlements reduce the overall joint and several liability that remains to be paid by other defendants on a dollar-for-dollar basis, regardless of the defendant's proportion of fault. The decision is especially noteworthy for the government contractor industry, where FCA claims are often brought against several targets, such as contractors, subcontractors, and associated individuals. Going forward, it will be important for contractors to closely monitor the settlements of other defendants to determine if their potential liability can be reduced by such prior settlements.
In 2008, the U.S. sued Honeywell International Inc. (Honeywell) for $11.5 million in damages, trebled to $35 million, for providing the material in allegedly defective bulletproof vests sold to the government. The government alleged that Honeywell knew the material degraded in hot conditions, but nonetheless represented it was "state-of-the-art ballistics technology." At the same time, the government pursued FCA litigation and ultimately reached settlements worth $36 million with Armor Holdings, Inc., the manufacturer of the vests, and foreign suppliers of the material for their roles in manufacturing and supplying the vests to the federal government.
Honeywell moved for summary judgment, arguing any damages sought should be reduced dollar-for-dollar by the prior settlement amounts, regardless of Honeywell's relative fault (the pro tanto approach). The government, instead, maintained that Honeywell should pay its proportionate share of damages, regardless of settlement amounts (the proportionate share approach). The U.S. District Court for the District of Columbia agreed with the government, finding the pro tanto approach would allow Honeywell to "escape damages liability altogether" given the $36M settlement amounts were greater than the $35M in treble damages sought. Honeywell's request for interlocutory appeal was subsequently granted.
On appeal, the DC Circuit held that the pro tanto rule should apply in FCA cases, relying on the factors used by the Supreme Court to determine the proper settlement credit rule in an admiralty suit. See McDermott, Inc. v. AmCylde, 511 U.S. 202 (1994).
Under the first factor, consistency with relevant precedent, courts have consistently imposed joint and several liability without a right to contribution in FCA cases. Thus, a "person who violates the FCA in a joint scheme may have to pay for all the government's trebled damages, and, even if that defendant is the least responsible party, it cannot force the other violators to pay their fair share." The pro tanto rule aligns with these principles: a settling party could end up paying for all of the government's damages. Moreover, the court noted that "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." Thus, the court concluded, the first factor strongly favored the pro tanto approach.
Second, the promotion of settlement factor was found inconclusive — either approach could arguably promote settlement.
Third, the court held that the judicial economy factor clearly favored the pro tanto approach because it would not require an adjudication of comparative fault — instead courts would just need to determine which damages are common and how much has been paid by the settling parties. The proportionate share approach, on the other hand, would require an adjudication of comparative fault, which "would introduce a new element into FCA litigation" and would require "summoning already settled third parties back into litigation for complex determinations of relative fault."
The Honeywell decision provides a few key takeaways for contractors going forward:
- In part, the holding was premised on the notion that the government should not receive a windfall from FCA cases. The court pointed to the purpose of the statute — to make the government whole from losses incurred due to the false claims. Thus, even though some parties may "benefit" from the pro tanto rule (i.e., share the liability inequitably), like Honeywell may have done in this case, the government is nonetheless precluded from recovering additional damages. This seeming incongruity should give contractors pause. Does the application of the pro tanto rule in FCA cases mean it is advantageous to hold out on settling, as Honeywell did, in the hopes that any FCA liability will be offset by prior settlements with other defendants? This may be difficult to evaluate as contractors often do not know whether they are one of several defendants given that FCA cases are typically filed under seal. Or is foregoing the opportunity to settle too risky? These are new strategy questions to consider in the wake of Honeywell. Regardless, contractors should more closely monitor settlement agreements with respect to FCA cases that may implicate them.
- The application of the pro tanto in Honeywell was straightforward. Because the settlement amounts of $36M exceeded the $35M in treble damages (and the $11.5M in single damages) sought against Honeywell, the offsets reduced the damages figure to $0 regardless of which damage figure the offset was applied against. The DC Circuit left unanswered whether the pro tanto offsets should be applied to single or treble damages — a question that will likely be answered in future FCA cases.
- Finally, contractors should note that the pro tanto rule does not apply to FCA statutory penalties imposed per false claim as governed by 31 U.S.C. § 3729(a).
If you have any questions about the Honeywell decision or responding to potential FCA liability, please contact one of the Miller & Chevalier attorneys listed below:
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