D.C. Circuit’s Honeywell Decision Adopts Pro Tanto Rule for Settlement Credit Under False Claims Act

D.C. Circuit’s Honeywell Decision Adopts Pro Tanto Rule for Settlement Credit Under False Claims Act

September 26, 2022, Covington Alert

On August 30, 2022, the D.C. Circuit answered the question whether the proportionate share rule or pro tanto rule is the appropriate rule for offsetting settlement damages under the False Claims Act (“FCA”).  United States v. Honeywell Int’l Inc., --- F.4th ---, No. 21-5179, 2022 WL 3723020 (D.C. Cir. Aug.  30, 2022) (“Opinion”).  In doing so, the D.C. Circuit overturned the district court’s decision and established a federal common law rule that the pro tanto rule is the appropriate approach for calculating settlement credit under the FCA.  Opinion at 1.

Honeywell concerned allegedly fraudulent claims for bulletproof vests made from an anti-ballistic material called “Z Shield,” which is made from the material “Zylon.”

The government brought an FCA suit against Honeywell alleging that Honeywell knew about Zylon’s problems but hid them from the government by fraudulently misrepresenting that Z Shield was “state-of-the-art.”  Opinion at 2.  The government asserted treble damages of $35 million against Honeywell.  While the suit was ongoing, the government settled with Armor Holdings, Inc. and certain foreign Zylon providers for a total of $36 million.  Opinion at 2.  Since the government had secured a settlement amount greater than the damages it alleged against Honeywell, Honeywell moved for summary judgment on the question of damages.  The district court denied summary judgment, but certified for interlocutory appeal the question regarding the impact of the $36 million in settlements on the Honeywell litigation.

The question presented to the D.C. Circuit was whether courts should apply the proportionate share rule or pro tanto rule when offsetting damages by prior settlements in the FCA context.  Under the proportionate share rule, Honeywell would be liable for the portion of the damages for which a court deems it is responsible, regardless of other settlements.  Opinion at 2.  If that approach were adopted, the government asserted that Honeywell could have theoretically been liable for $35 million, after treble damages, despite the earlier settlements.  Under the pro tanto rule, on the other hand, any damages Honeywell owed would be reduced by the amount of the settlements.  Applying that approach, Honeywell would pay no damages because the government had already obtained settlements exceeding its alleged damages.  Opinion at 2.

The D.C. Circuit first determined whether the FCA provides a settlement offset rule, and determined that it did not.  Opinion at 4-5.  The court explained that “the FCA makes no mention of either settlement credits or joint liability,” and says “nothing at all about how to address indivisible harms or whether joint and several liability is appropriate.”  Opinion at 4.  Instead, the FCA merely says that “a person who makes a false claim to the government ‘is liable’ to the United States for ‘3 times the amount of damages which the Government sustains because of the act of that person.’”  Opinion at 4 (quoting 31 U.S.C. § 3729(a)(1)).  Thus, the court held that the text of the FCA did not provide a settlement offset rule.  The court also looked to the common law background at the time the FCA was established, as well as existing case law, and determined that no rule had been established.  Opinion at 6.

The D.C. Circuit next held that it had the authority to create a federal common law rule governing settlement offsets in the FCA context.  The court held that creating a federal common law rule “is necessary to carry out the federal interests Congress protected in the FCA,” explaining that variable settlement rules would make it difficult for the government to negotiate settlements in cases with multiple defendants. Opinion at 7.

Finally, and most notably, the D.C. Circuit held that the pro tanto rule should govern settlement offsets under the FCA.  The D.C. Circuit looked to the Supreme Court’s opinion in McDermott, Inc. v. AmClyde, 511 U.S. 202 (1994), and assessed the following three factors in determining which rule should govern: (1) consistency with relevant precedent; (2) promotion of settlement; and (3) judicial economy.  Opinion at 7.

The court held that the first factor weighs strongly in favor of the pro tanto approach.  The court explained that the FCA “has been consistently interpreted to impose joint and several liability without a right to contribution.”  Opinion at 8.  The court determined that adopting the proportionate share rule would be “anomalous for the FCA,” including because the proportionate share rule would allow the government to recover more than its total damages solely because some parties settled.  The court rejected the government’s argument that the proportionate share rule was more appropriate due to the FCA’s “punitive goals,” and noted that the pro tanto rule allowed the government “flexibility to pursue its enforcement priorities” by seeking “settlement and/or damages against each violator in line with its assessment of relative fault.”  Opinion at 8.  The court also noted that the Supreme Court had applied the pro tanto rule in an FCA case without comment in United States v. Bornstein, 423 U.S. 303 (1976).

The court next held that the factor regarding promotion of settlement was “too inconclusive to provide guidance.”  Opinion at 9.  Finally, the court held that the third factor of judicial economy “clearly favors the pro tanto approach” because the pro tanto rule “does not require an adjudication of comparative fault,” unlike the proportionate share rule.  Opinion at 9.  The court reasoned that the proportionate share rule was not economical because it “would often require summoning already settled third parties back into the litigation for complex determinations of relative fault.”  Opinion at 9 (citing U.S. Chamber of Commerce’s amicus brief).[1]

The D.C. Circuit’s opinion has broad implications in FCA cases with multiple defendants.  On the one hand, as was the case in Honeywell, the pro tanto rule could benefit a defendant who does not settle if the government secures settlements from the other defendants in excess of the alleged damages.  On the other hand, as the D.C. Circuit noted in a footnote, in instances where the settling parties settle for less than the alleged damages, the pro tanto rule could mean that the non-settling defendant (if held liable) would be required to pay more than its proportionate share of damages.  See Opinion at 8 n.8.