Fifth Circuit Ruling Shows Government’s Actions Are Key Under Escobar

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Government contractors continue to closely follow the impact of the U.S. Supreme Court’s landmark False Claims Act decision in Universal Health v. U.S. ex rel Escobar. Most recently, in U.S. ex rel Harman v. Trinity Industries, the Fifth Circuit considered the heightened standard whistleblowers must meet under Escobar to prove materiality if the government continued to pay claims despite its knowledge of misconduct allegations.

In Trinity Industries, Trinity, a manufacturing company and government contractor, appealed the denial of its motion for judgment as a matter of law. The underlying qui tam action involved a whistleblower’s allegations that Trinity knowingly and falsely certified to state governments that its guardrail end terminals had been approved for reimbursement by the Federal Highway Administration (FHWA), though it allegedly secured that approval by omitting from its application certain implemented design changes. Harman, the whistleblower, was a customer of Trinity and installed Trinity’s guardrails throughout the U.S.

Evidence presented throughout trial showed that Harman previously briefed the FHWA on Trinity’s allegedly changed design and the potential dangers of that design. After those meetings, the FHWA continued to confirm that Trinity’s guardrails were eligible for reimbursement. Additionally, on the eve of trial, the FHWA issued a memorandum affirming its approval of Trinity’s design changes and requesting that the court not proceed. Nevertheless, a jury found that Trinity had defrauded the government, and Trinity moved for judgment as a matter of law.

Soon thereafter, the FHWA conducted independent tests to determine the safety of the guardrails, and announced its continued approval of the guardrails. Trinity then renewed its sales to state government customers, and Trinity filed its appeal.

On appeal, the Fifth Circuit reversed the trial court’s order, based on a lack of materiality, citing both the “strong presumption against materiality” and the “increasing scrutiny” on the materiality element under the Supreme Court’s Escobar framework. The court analyzed materiality using the “natural tendency test,” which considers whether a defendant’s false statements had the potential to influence the government’s decision. The Fifth Circuit ruled that the FHWA’s continued affirmation of the modified guardrails’ eligibility for reimbursement, particularly after it had knowledge of Harman’s allegations, “substantially increase[d] the burden on the relator in establishing materiality.” The court found that Harman simply did not meet this burden, despite the jury’s determination that Trinity was liable for fraud.

Although the Fifth Circuit ruled that there are “boundaries to government tolerance of a supplier’s failure to abide by its rules,” Trinity Industries suggests that Escobar has made it increasingly difficult for a whistleblower to prove materiality when the government declines to intervene and/or continues to pay despite its knowledge of potential wrongdoing.