Not So Fast: D.C. Circuit Adopts FCA Settlement Offset Rule Capping Government’s Damages at its Actual Damages

The DC Circuit recently reversed a lower court’s ruling that would have permitted the government to recover as much as twice its actual FCA damages, merely because some parties had already settled with the government while one party chose to litigate. United States v. Honeywell Int’l Inc., No. 21-5179 (D.C. Cir. Aug. 30, 2022). As we previously reported here, the stage was set for the DC Circuit to decide to consider on interlocutory appeal the question of the appropriate measure of damages offsets where an FCA defendant chooses to litigate after other parties have settled. The court of appeals agreed to consider the issue, and adopted a pro tanto rule whereby a litigating FCA defendant’s single damages are capped at the amount of common FCA damages less the amount(s) that has already been paid by any settling parties. The court rejected the proportionate share approach advocated by the government that would allow the government to receive more than its actual damages in some cases. Under this approach, the court would determine the appropriate settlement credit the litigating defendant should receive based on all parties’ proportionate fault, meaning the litigating defendant could be responsible for its proportionate share of the common damages, regardless of prior settlements.

The case involves defendants who manufactured and sold Zylon body armor shields (Z-shields) for bulletproof vests. While some defendants settled at earlier stages of litigation, litigation continues against a non-settling defendant. This litigating defendant moved for summary judgment on the issue of damages, claiming that it should be credited for the amount the government had already received in settlements with other defendants.

Reviewing the trial court’s determination de novo, the DC Circuit first determined that the FCA does not provide a settlement rule and noted it could not find a common law principle of settlement offsets implied in the FCA. ¹

In the absence of clear guidance, the court determined it needed to decide the offset settlement rule under the FCA as a matter of federal common law by applying the test laid out in McDermott, Inc. v. AmClyde, 511 U.S. 202, 211 (1994), where the Supreme Court addressed the proper settlement credit rule for admiralty suits and chose the proportionate share rule over the pro tanto rule. Under McDermott, there are three “paramount” considerations: consistency and relevant precedent, promotion of settlement and judicial economy.

The DC Circuit focused its analysis on the first and third factors, finding that the second factor, promotion of settlement, was inconclusive because there was no way to determine which rule better promotes settlement.

The consistency and relevant precedent factor favored the pro tanto approach because, among other things, “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.” Slip op. at 18 (citing FCA provisions that prevent a relator from voluntarily dismissing a qui tam action without leave of the government, permit the government to decide whether to manage the litigation, and allow the government to unilaterally dismiss or settle the case). The court reasoned that in FCA cases, courts have applied joint and several liability without the right to contribution, so allowing the proportionate share rule would create a “mismatch” where “in cases of partial settlement, courts would have to decide relative culpability and assign damages based on fault.” The proportionate share rule would also run the risk of the government recovering more than its total damages in some cases, just because some parties settled.

By adopting the pro tanto approach, the DC Circuit put the ball squarely in the government’s court to pursue settlement or seek damages against each alleged violator consistent with the government’s assessment of that specific party’s relative fault. In rejecting the government’s argument that the proportionate share rule is more compatible with the FCA’s “punitive goals,” the court noted that its ruling leaves intact the statute’s civil penalties, which serve a punitive purpose.

Finally, the court reasoned that judicial economy also favors the pro tanto approach because, under a proportionate approach, courts would be called on, case-by-case, to apportion fault amongst settling and litigating defendants. Under the pro tanto approach, the court would need only to determine which damages are common and reduce that by settlement amounts already paid.

What This Means For You

This opinion makes clear that, at least in the DC Circuit, the government needs to be strategic in pursuing FCA settlements and litigation, lest it find itself in the situation it is in now where it is litigating against a defendant with no ability to recover damages because of prior settlements.

FCA defendants should be strategic, too: When developing a strategy for whether and when to settle or litigate an ongoing multi-party case, defendants should consider how this rule impacts the government’s ability to recover. And, if some defendants have settled, litigating FCA defendants should make sure that the government does not try to recover more in damages than that which would make the government whole.

It’s unclear whether other courts of appeals will follow the DC Circuit’s approach, but we at Qui Notes will be watching.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.