You may have heard of the False Claims Act and know that it penalizes companies and individuals in contract with the government who present false claims. The federal False Claims Act was signed into law by President Abraham Lincoln in 1863 to penalize profiteers during the Civil War who were selling the Union Army moth eaten blankets, boxes of sawdust instead of guns, and sometimes re-selling the Army calvary horses several times over. Since then, many states, including California, as well as municipalities, have enacted their own false claim statutes.
As currently written, the federal False Claims Act provides for statutory penalties against any person who:
“[K]nowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval”;
“[K]nowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim”;
“[H]as possession, custody, or control of property or money used, or to be used, by the Government an knowingly delivers, or causes to be delivered, less than all of that money or property”;
“[I]s authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true”;
“[K]nowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property”; or
“K]nowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoided or decreases an obligation to pay or transmit money or property to the Government.”
31 U.S.C. §3729(a)(1)
One interesting aspect of false claims acts are their “qui tam” and “relator” provisions. “Qui tam” which is short for the Latin phrase “qui tam pro domino rege quam pro se ipso in hasparte sequitur,” and which roughly translates into “he who brings an action for the king as well as for himself,” permits private citizens or “relators” to sue on the government’s behalf and to receive a percentage of the amount recovered by the government.
In Hendrix v. J-M Manufacturing Company, Inc., 76 F.4th 1164 (2023), the 9th Circuit Court of Appeal examined the evidence necessary to support a false claims act violation and the damages awardable for a false claims act violation under both the federal False Claims Act (31 U.S.C. §§3729 et seq.) as well as under California’s False Claims Act (Gov. Code §§12650 et seq.).
The Hendrix Case
Relator John Hendrix filed suit against J-M ManufacturingCompany, Inc. under the federal False Claims Act as well as various state false claims acts, including California’s False Claim Act, alleging that J-M violated these false claims by falsely claiming that its polyvinyl chloride pipes were compliant with industry standards between 1996 and 2006.
J-M, which bid on various federal and state water sewer projects during the times alleged, claimed in its brochures that its pipes complied with various industry standards required under the bid specifications including American Water Work Association’s (AWWA) C900 and C905 standards and Underwriters Laboratories’ (UL) 1285 standards. J-M placed a stamp with an industry standard on each of its pipes such as “C900.”
While the industry standards are quite technical, they basically require that pipes meet performance standards as to pressure, strength and longevity.
The case was bifurcated into two phases with the first phase focused on whether J-M was liable under the false claims acts and the second phase focused on the amount of liability.
At the first phase of trial, the plaintiffs, which included the federal government, several state governments, as well as several water and utility districts, argued that J-M falsely claimed that its pipes met industry standards after it changed its manufacturing process when it knew that its pipes did not meet the AWWA and UL standards. In support of its argument, they presented evidence from J-M’s research and development chief who reported in 2006 that “[I]n recent years, the [hydrostatic design basis] test success rate is below 50%” and noted, in a 2003 internal email, that the processing of the pipe “has changed dramatically” since its passed UL certification in 1992. The plaintiffs also presented evidence from J-M’s former head of quality assurance who had informed J-M’s management since 1998 that its pipe was not capable of passing the UL 1285 test. In response, he was told by J-M’s management, “don’t worry about it, and don’t tell UL.”
Following the first phase of trial, the jury returned a unanimous verdict against J-M finding that it had violated the false claims acts.
During the second phase of trial, the plaintiffs attempted to establish that they were entitled to recover either the entire contract price for the pipe or the cost replacing the pipe and, in doing so, presented expert testimony to connect the AWWA and UL standards with expected longevity of pipe. The plaintiffs’ experts opined generally that the AWWA and UL standards “bear a relationship to long-term strength and durability” but none could opine about “specific longevity in terms of years of a particular pipe,” present a mathematical correlation between the AWWA and UL tests and longevity, or estimate a failure date for the non-compliant pipe.
Following the second phase of trial, the trial court found that the plaintiffs were not entitled to recover the contract price or cost of replacing the pipe but awarded a penalty for each of the twenty-six projects at issue.
Both sides appealed.
On appeal, J-M argued that the phase one verdict was in error because the plaintiffs failed to show that any particular pipe did not comply with AWWA or UL standards. The 9th Circuit rejected this argument, adopting a broader construction of the false claims acts, noting that the evidence showed that J-M’s success rate was below 50%, and that by 2006, none of J-M’s plants were producing pipe’s that met UL standards. As such, held the 9th Circuit, “a reasonable jury could surely conclude that plaintiffs received some pipe not meeting industry standards.” Further explained the 9th Circuit:
The industry standards do not require that every stick of pipe be tested to ensure compliance, but they do require manufacturers to continue producing product with materially similar processes as those used when the pipe was first certified before claiming continued compliance. There was ample evidence not only that J-M knew that its processes had materially changed but also that its pipe could no longer pass the tests.
As to statutory penalties, the plaintiffs argued that, while California’s False Claims Act authorizes one statutory penalty per project, the federal False Claims Act as well as the state false claims acts of Nevada and Virginia impose a statutory penalty for each “act,” and that statutory penalties should have been imposed on each pipe stamped as complying with industry standards. Relying on existing cases where penalties were imposed on a project-basis rather than a per-item basis, the 9th circuit noted that “[t]he jury found only that J-M did not uniformly comply with industry standards and could have delivered some non-compliant pipes.” “Plaintiffs did not establish how much non-compliant pipe they received nor were they able to identify any specific piece of non-compliant pipe.”
As to actual damages, the plaintiffs argued that the measure of actual damages should have been “entire amount paid” because they would not have bought the pipe had they known that it did not comply with AWWA and UL standards. The 9th Circuit rejected this argument on the ground that it would “impose a strict liability standard” under which J-M would “be obligated to refund the contract price regardless of any evidence of actual damages.
The 9th Circuit also noted that while a “jury may make a just and reasonable estimate of the damage based on relevant data” and is “allowed to act on probable and inferential as well as (upon) direct and positive proof,” “the jury may not render a verdict based on speculation or guesswork.” And, here, held the 9th Circuit, the plaintiffs did not meet that burden:
Even if the testimony of their experts is credited, plaintiffs did not provide evidence from which a jury could reasonably determine the value of the pipe that they received. The district court correctly noted that the pipe clearly had value because plaintiffs have received years, if not decades, of use from it. And to establish damages based on a “risk of premature pipe failure,” plaintiffs were required to provide at least an approximation of how much non-compliant pipe was received, whether that pipe was in fact inferior in longevity to compliant pipe, and some measure of its longevity. They failed to do so.Nor do any of the plaintiffs’ contracts have a specification about longevity. The AWWA and UL standards do not contain any estimate of longevity, and the certification tests are not intended to measure long-term performance. Plaintiffs assumed that there was an industry expectation that PVC pipe will last at least 100 years, although they also presented estimates of 50 and 150 years. But J-M’s express warranty for its pipe was one year, the industry standard at the time. And PVC pipes have only been used in civic water systems since the 1950s, and industry standards were not developed until the 1960s, so no PVC pipes—compliant or not—have yet been in use for 100 years. More importantly, as the district court noted, plaintiffs’ experts “merely assume [100 years] for purposes of this litigation.”Even accepting 100 years as the expected longevity of compliant pipe, there was no evidence that noncompliance with industry standards calculably correlated to a loss of longevity. Plaintiffs’ experts conducted no experiments or studies to ascertain the relationship between the standards and longevity, nor could they point to studies or reports by others. Nor did they articulate any damages figure arising from non-compliance with the three standards at issue.
So there you have it, the 9th Circuit’s take on false claims acts. To me, the 9th Circuit took a common sense approach in the case, relying less on case law and not at all on legislative history, and instead seemed to focus on the fact that there was at least some pipe that was not compliant with industry standards and therefore a violation of the false claims acts, and that a single penalty per project was appropriate since the plaintiffs were unable to show that any particular pipe was not compliant with industry standards.