The Seventh Circuit’s “net trebling” ruling in Anchor Mortgage Co. may offer practitioners a valuable negotiating tool when attempting to resolve FCA claims in all highly regulated industries, including health care, by blunting the threat of enormous, gross trebling damages.
The Seventh Circuit recently ruled that under the False Claims Act (“FCA”) treble damages should be calculated by the net amount of loss suffered by the government (after appropriate setoffs or credits are deducted) rather than the gross amount. This ruling lowers the damages ceiling for claims subject to trebling in FCA cases, and undercuts implicit government threats during settlement negotiations to seek gross treble damages if the government wins at trial.
In U.S. v. Anchor Mortgage Co., a mortgage brokerage corporation and its former president proceeded to trial and lost on claims under the FCA that they had obtained federal guaranties of mortgage loans based on misrepresentations. As part of the judgment, the District Court trebled the amount of the federal mortgage guarantees, and then subtracted amounts recovered by the government from the sale of the properties which secured the mortgages. This “gross trebling” resulted in $2.7 million in damages.
On appeal, the Seventh Circuit found that the FCA, while not specifying a trebling method, also did not represent a departure from the norm, which was “net trebling.” Thus the statute instead requires courts to ascertain the amount which the federal government had paid and then to subtract any amount recovered before trebling. This method (determining the net loss before trebling) will always result in a smaller damage award. This is also true for damages doubled under the FCA, rather than tripled, in cases where the person acting fraudulently offers information and cooperation to the government as described by the statute.
Judge Easterbrook, writing for the Court, analogized the FCA’s trebling to that of the Clayton Act, which requires net trebling in anti-trust cases. He also noted that damages are normally based on net loss in civil litigation, and pointed to the Second, Sixth, D.C., and Federal Circuits which apply a net trebling approach in FCA cases – though noting a Ninth Circuit opinion that applied gross trebling.
Anchor Mortgage Co. may provide useful precedent during settlement negotiations outside of the context of mortgage lending fraud, including health-care investigations, which represent the largest source of government recoveries. The U.S. Department of Health and Human Services Office of the Inspector General announced a record-breaking $4.2 billion in health-care fraud recoveries in 2012 – $3 billion of which came from FCA actions. (See this link for details: http://www.hhs. gov/news/press/2013pres/02/20130211a.html.) The government wields extraordinary leverage during these negotiations by dint of the “death penalty” exclusion provisions in 42 U.S.C. § 1320a-7. Government attorneys often open settlement negotiations with the twin threat of exclusion and gross treble damages if the defendant loses at trial. The Court of Appeals in Anchor Mortgage Co. may have evened that playing field a bit by injecting uncertainty in the government’s bargaining position. The decision provides grounds for defense counsel to assert that goods and services actually provided, even if part of a larger fraudulent scheme, should be netted from the loss figure before trebling, and that the net figure places a ceiling on the settlement amount the government can recover.