Seventh Circuit Adopts the “Net Loss” Method of Calculating Damages in False Claims Act Cases

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On March 21st, the Seventh Circuit Court of Appeals held in a matter of the first impression that a defendant found liable under the False Claims Act (FCA), 31 U.S.C. § 3729, must pay three times the amount of the Government’s “net loss,” calculated by applying offsets before trebling. United States v. Anchor Mortgage Corp., No. 10-3122, 2013 WL 1150213, at *2-3 (7th Cir. Mar. 21, 2013). Writing for the Court, Chief Judge Easterbrook rejected the approach taken by the District Court in the case, and advocated by the United States Department of Justice, of trebling the “gross loss” to the Government and then deducting offsets, an approach that would have produced a much higher damages award for the Government. Id. at *3.

In a bench trial, defendants Anchor Mortgage and its former president were found to have violated the FCA by supplying false information in support of loan applications for home mortgages insured by the Federal Housing Authority (FHA). The borrowers defaulted, and FHA paid out the guarantees to lenders. However, the FHA also recouped some of its losses on the failed mortgages by selling the properties that secured the loans. Id. at *2. The Seventh Circuit affirmed the judgment of FCA liability but “reversed to the extent it adopts the gross trebling approach” to calculating damages, and it remanded the case with instructions to recalculate the award under the “net trebling approach.” Id. at *5.

To illustrate the distinction, if the FHA paid $100,000 to a lender to satisfy the guaranty on a defaulted mortgage, the gross loss would be $100,000. If the FHA recovered $60,000 by selling the underlying property, the net loss would be $40,000. Trebling the gross loss to $300,000 would produce a substantially higher recovery for the Government in this example than would trebling the net loss to $120,000.

While the FCA does not explicitly adopt either method, Judge Easterbrook concluded, “[b]asing damages on net loss is the norm in civil litigation,” including actions under the ClaytonAct, 15 U.S.C. § 15, “which created the first treble-damages action in federal law.” Id. at *3. The Department of Justice relied on the Supreme Court’s Bornstein decision to advocate for gross trebling, but Judge Easterbrook reasoned that footnote 13 in that decision “unambiguously uses the contract measure of loss, supporting a net trebling approach.” Id. at *4 (analyzing United States v. Bornstein, 423 U.S. 303, n.13 (1976)).

The Seventh Circuit also observed that appellate decisions generally have favored the net trebling approach, citing cases in the Second, Sixth, D.C., and Federal Circuits. Moreover, Judge Easterbrook’s opinion rejects a contrary holding by the Ninth Circuit because that Court adopted a gross trebling approach without mentioning the key footnote in Bornstein.