By Drew B. Howk

In U.S. v. Anchor Mortgage Corp., the Seventh Circuit held that treble damage calculations under the FCA must be calculated from the net losses, rather than the gross losses, suffered by the Government. For defendants in FCA litigation, this decision not only affects the potential damages for an adverse judgment but also the relative positions of the parties at the settlement table.

The Defendant was found to have presented false claims in the form of knowing misrepresentations related to 11 loan applications. The District Court calculated damages by adding the amount the Government paid the lenders, trebling that sum, subtracting amounts received by the Government from the sale of the subject properties and finally adding the statutory penalty of $5,500. For example, in the case of one loan, the Government paid $131,643.05. The District Court trebled this to $394,929.15, subtracted the $68,200 realized after the sale of the property and added the penalty for a total of $332,229.15.

The Seventh Circuit rejected this “gross trebling” approach in favor of a “net trebling approach.” Under net trebling, the amount realized from the sale of property is subtracted from the original amount paid, then that difference is trebled and the penalty added. For the same loan, the difference between the amount originally paid by the Government and the amount realized from the property sale was $63,443.05. The Circuit Court trebled this amount to $190,329.15 and added the penalty for a total of $195,829.15. The resulting difference between gross trebling and net trebling on this one loan was $136,400.

The FCA itself is silent regarding which method is appropriate. The Court pointed to similar federal statutes that use net trebling such as the Clayton Act. Additionally, net trebling has long been the “norm in civil litigation,” where “[m]itigation of damages is almost universal.” In accepting these norms as applicable to FCA cases, the Court rejected the Government’s argument that the Supreme Court’s decision in United States v. Bornstein required gross trebling.

In Bornstein, the Government sought damages for tubes used in military radio kits. There, Model Engineering (“Model”) contracted with the Government to provide tubes that met the military’s specifications. Model purchased the tubes from a third party supplier, United National Labs. In the ensuing litigation, Model was found liable for damages due to breach of contract, not the FCA. United National Labs was found liable to the Government for FCA violations. The Supreme Court held that the method for calculation under the FCA, was to first double the actual damages to the United States and then subtract the amount the Government had collected from Model.

The holding in Bornstein was that double damages (now treble damages) are properly calculated off of actual damages suffered by the Government. The Seventh Circuit noted that footnote 13 in Bornstein defined actual damages in a manner consistent with the norm in civil litigation: the difference between the market value of the received tubes and the market value of the tubes the Government believed it ordered. Using this definition in Anchor, the Court held that the actual damages suffered by the Government are equal its net loss, not its gross loss. Trebling is therefore appropriately applied to the actual net loss.

The  Seventh Circuit defended against the suggestion that the footnote was unenforceable dictum, saying “a court of appeals should not ignore pertinent statements by the Supreme Court.” The footnote, argued the Court, was an order from the Supreme Court to the appellate court on “how to do the right on remand” and not simply “as if some law clerk were off on a lark and the Justices missed the error.”

Should you have any questions, please contact:

• David B. Honig at dhonig@hallrender.com or (317) 429-1447;
• Drew B. Howk at ahowk@hallrender.com or (317) 429-3607; or
•  Your regular Hall Render attorney.