The False Claims Act (FCA) allows a private individual with knowledge of past or present fraud on the federal government to bring a lawsuit against the defrauder. The statute allows for compensation to private whistleblowers—known as “relators”—when they bring a successful claim against a defendant on the government’s behalf.
If used properly, the FCA can be an important tool for uncovering fraud and abuse against taxpayer-funded programs. If abused, however, the law can destroy businesses and create perverse incentives that harm the market, innovation, and broader public policy.
In United States ex rel. Harman v. Trinity Industries, relator Josh Harman happens to be a competitor of Trinity Industries, which designs guardrails to protect vehicles when they crash on highways. In 2000, Trinity designed a guardrail safety device known as the “ET-Plus,” which was approved by the Federal Highway Administration (FHWA). In 2005, Trinity modified the ET-Plus without fully informing the FHWA of the changes it had made. Harman alleges that by not informing the FHWA of the design change, Trinity defrauded the government and should be held liable for damages under the FCA.
Trinity contends—and the alleged federal-agency victim agrees!—that the re-designed device, which passed all diagnostic tests, met all the safety criteria required by the FHWA, and therefore that the omission of the redesign failed to qualify as the sort of “false statement” required for liability under the FCA. Despite a warning from the U.S. Court of Appeals for the Fifth Circuit regarding the weakness of the FCA claims, a trial court in the eastern district of Texas—known for being a “judicial hellhole”—moved the case forward, to an eventual jury verdict for Harman.
The jury found Trinity liable for more than $680 million in damages, which is the largest damage award in FCA history. Out of the millions in damages and penalties, the court awarded Harman a 30% share of the recovery, plus almost $19 million in attorneys’ fees and expenses.
Trinity has now appealed the case back to the Fifth Circuit, arguing that Harman didn’t meet the FCA-required burden of proof. Even if the appellate court were to somehow find that burden to be met, the damage award was improper.
We agree. Cato has filed a brief arguing that the jury’s finding of liability and damages were unsustainable under the law. If upheld, this erroneous precedent would lead businesses to withhold innovative products from the marketplace, either by not improving existing products or by not entering the market at all. Others may merely increase the price of their products to reflect the additional risk, increasing the amount of federal reimbursement that must be paid.
Although legal liability plays an important role in the functioning of the free market—and a properly structured tort regime is generally better than command-and-control regulation—excessive liability distorts the market and harms the public welfare.