Seventh Circuit Reins In Justice Department’s Overreaching False Claims Act Damages Theory

For several years, the Justice Department has been advocating for and employing a harsh and aggressive False Claims Act ("FCA") damages methodology that distorts the government's actual damages and leads to unwarranted FCA recoveries. In particular, the Justice Department's preferred methodology calculates FCA damages by first trebling the (false) claim amount and only then deducting the value of the goods or services provided. This "gross trebling" approach leads to phantom damages since it severely diminishes the value of any benefit obtained by the government. The proper approach - one that takes into account the actual damages sustained due to the FCA violation - is a "net trebling" methodology, which accounts for the benefit prior to trebling.

On March 21, 2013, the Seventh Circuit decisively rejected the Justice Department's methodology, making clear that FCA damages are calculated based on the government's trebled net loss, not its trebled gross loss. See United States v. Anchor Mortgage Corp., No. 10-3122, 2013 WL 1150213 (7th Cir. 2013). The Seventh Circuit ruled that the Justice Department's position is not supported by statutory language or policy and is based on a misreading of United States v. Bornstein, 423 U.S. 303 (1976), setting up a clearer circuit split on this issue, given the Ninth Circuit's decision in United States v. Eghbal, 548 F.3d 1281 (9th Cir. 2008).

The Seventh Circuit's outright rejection of the Justice Department's gross trebling approach, and its careful reading and well-reasoned reaffirmation of Bornstein, are sound. The net trebling approach adopted by the Seventh Circuit should be applied in FCA cases where the government has received some benefit from the defendant, whether that benefit comes from the inherent value of property transferred to the government, goods or services provided, or other offset, recovery, and/or mitigation.

The Seventh Circuit's Careful and Correct Reading of Bornstein

The scenario in Anchor Mortgage is straightforward. Having found Anchor Mortgage Corporation and its CEO liable under the FCA for making false statements to HUD/FHA relating to federally guaranteed mortgage loans, the district court had to assess FCA damages. The FCA provides for both a statutory penalty "plus 3 times the amount of damages which the Government sustains because of" the violation. 31 U.S.C. § 3729(a)(1). The district court calculated damages by trebling the amounts paid by the government on the...