On August 30, 2022, the D.C. Circuit Court of Appeals brought renewed attention to the conundrum of False Claims Act (“FCA”) damages by applying a pro tanto allocation rule to a partially settled case. In United States v. Honeywell International Inc., No. 21-5179, 2022 WL 3723020 (D.C. Cir. Aug. 30, 2022), the court reasoned that, because the government had already recovered its full alleged damages through co-defendants’ settlements, it could not seek additional damages from the remaining defendant, regardless of that defendant’s alleged misconduct.

The FCA’s Treble Damages Provision

Under the FCA, 31 USC § 3729-3733, “any person” found to have violated the statute:

is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted … plus 3 times the amount of damages which the Government sustains because of the act of that person.

In United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), the Supreme Court described “damages which the Government sustains because of the act of that person” as the amount the government would have paid for the fraudulent goods or services had it known the relevant facts. The Court further rationalized that allowing damages to be multiplied per the statute was consistent with the common law tradition of civil punitive damages. In the 80 years since Marcus, courts have continued to grapple with the nature and calculation of FCA damages: whether they are punitive or compensatory; whether they are sufficiently predictable to encourage settlement; and whether they serve as a sufficient deterrent for wrongful conduct.

Multiple Actors Can Be Liable for FCA Damages

Joint and Several Liability

Multiple actors complicate the assessment of FCA damages. The courts have established that defendants are jointly and severally liable for the entirety of an FCA judgment or award. See, e.g., United States v. TDC Mgmt. Corp., Inc.,288 F.3d 421, 429 (D.C. Cir. 2002). Joint and several liability ensures that the government is able to fully recover the amounts to which it is entitled, regardless of the source.

FCA allegations, however, often are resolved through individual settlements reached before a lawsuit is filed or while a qui tam action remains under seal. In multiple-defendant actions, it can be difficult for the remaining defendants to ascertain how the government is calculating its damages and the extent to which it has already recouped its losses. When the government has received a partial recovery, the question arises as to how to credit the recovery and allocate damages among the remaining defendants. The two allocation methods typically considered are: proportionate share and pro tanto.

Proportionate Set-Off Contributions

The proportionate share approach reasons that, where multiple actors are involved in an FCA scheme and some actors settle, the non-settling defendants continue to be liable based on their relative fault. In a rare ruling on this issue, the district court in United States ex rel. Lutz v. BlueWave Healthcare Consultants, Inc., No. 9:11-CV-1593-RMG, 2018 WL 11282049, at *4 (D.S.C. May 23, 2018), aff’d sub nom. United States v. Mallory, 988 F.3d 730 (4th Cir. 2021) used a comparative liability calculation to determine that defendants were “entitled to a set-off of 12% of the amount the United States has already received” from a defendant that had previously settled. This approach is similar to the Supreme Court’s analysis in McDermott v. AmClyde, 511 U.S. 202 (1994), an admiralty case that, like the FCA, applied joint and several liability to multiple defendants. The Court adopted a proportionate share approach, reasoning that the risk of non-recovery does not arise where a settlement had already assured at least a partial recovery. The Court chose this method after considering its impacts on consistent outcomes, promotion of settlement, judicial economy, and the interests of fairness and equity.

In the Honeywell case, the government pressed for a McDermott-style comparative allocation approach, which the district court adopted. The Court of Appeals, however, rejected that argument and determined that a pro tanto rule best fits the purpose and intent of the FCA.

Pro Tanto Allocation

Pro tanto, meaning “to that extent,” credits any remaining defendants fully for each dollar that has been recovered by the United States. The defendants can only be liable for the government’s remaining (treble) damages under the statute, regardless of their relative fault in the alleged violations.

This rule has been applied by multiple district courts to allocate to a remaining defendant only the unpaid portion of the FCA’s treble damages assessment. See, e.g., United States v. Zan Mach. Co., 803 F. Supp. 620, 624 (E.D.N.Y. 1992); Miller v. Holzmann, 563 F. Supp. 2d 54 (D.D.C. 2008); U.S. ex rel. Bunk v. Birkart Globistics GmbH & Co., Civil Action No. 02-1168, 2011 WL 5005313, at *16 (E.D. Va. Oct. 19, 2011).

In Honeywell, the court followed the compensatory theory of FCA damages discussed in Marcus: FCA damages are to “make whole” the wronged party, not to impose a proportionate punishment on each defendant. As applied in Honeywell, the pro tanto approach had the effect of eliminating all damages liability for the remaining defendant, because the government’s recoveries through settlement had (slightly) exceeded its damages demand. The D.C. Circuit noted that this outcome might be dissatisfying to the government in that particular case, but doubted that its ruling would allow future defendants to avoid all liability: “[T]he pro tanto rule leaves the government in the driver’s seat to pursue and punish false claims according to its priorities.” Honeywell, 2022 WL 3723020 at *6. In other words, the pro tanto rule permits the government to prioritize settlement discussions with defendants it views as more culpable, seek larger settlements with them, and to limit settlements with more minor defendants to allow for a more proportionate outcome.

While it remains to be seen whether comparative or pro tanto damage allocation will ultimately dominate among FCA partial settlement rulings, the Honeywell approach has a solid foundation in existing federal caselaw. The decision is most remarkable for the outcome on the facts of that particular case, which eradicated any potential damages liability from the last-standing defendant after many years of investigation and litigation. Going forward, the D.C. Circuit’s ruling will shape the way both the government and defendants approach settlement strategy and discussions.