No Lucky Penny for Relator in Regional Federal Reserve Bank Case

There is no "falsity" for purposes of False Claims Act liability where the government received exactly what it bargained for, so the Southern District of Ohio rejected allegations of a creative "penny swapping" scheme. According to Relator, Defendant defrauded the government by swapping out high-copper pennies deposited into their coin terminals by a Regional Federal Reserve Bank (RFRB) for lower-copper pennies. This purportedly harmed the government because the higher copper content of pennies minted pre-1982 makes them worth more than later-minted pennies—even though as currency, they all are literally worth (you guessed it) exactly one penny each. United States ex rel. Holbrook v. The Brink's Co., No. 13-CV-873, 2018 WL 3973088 (Aug. 20, 2018).

If this "in for a penny, in for a false claim" reasoning makes you scratch your head, you are not alone. Granting summary judgment, the district court explained that "the RFRB deposited a certain number of pennies, and expected to receive that number back from Brink's when needed. Those expectations were fulfilled." It found that Relator failed to satisfy the FCA's basic requirements because the bank (1) knew that Defendant commingled its coinage, (2) knew about Defendant's contract to swap pennies with a metal company, and (3) understood its own agreement with Defendant to apply to the coinage's face value, as opposed to its intrinsic or metallurgical value. And, although not citing Escobar, the court essentially invoked its materiality principle, observing "[t]hat, upon learning of the penny swaps, the RFRB did not feel aggrieved, informs this Court's analysis as to what the [contract] requires."

Although the holding may already seem like pennies from heaven for the Defendant, it gets better. Not only did the court find that Relator failed to satisfy the FCA’s falsity requirement, it also found that Defendant could not be sued at all because RFRBs are not government entities. This is a sweeping holding, only the third case ever to decide the issue, and the first in the Sixth Circuit. It provides an airtight defense against FCA claims where the allegedly defrauded entity is a RFRB.

Curious, though, is why Relator's claim did not die on the vine at the motion-to-dismiss stage, given the court's holding that RFRBs are not government entities. Unfortunately, Defendant must not have thought that the idea was worth much because their motion to dismiss relegated the idea to a single footnote. Moreover, their footnote explicitly chose not to debate whether RFRBs were government entities or not, merely stating that the question was "by no means a legal certainty." Whether having this argument front and center in a motion to dismiss would have made any difference, given the court's ultimate holding, is truly the million-dollar—or one-hundred million penny—question.

We may never know whether Defendant would have been better off pressing the governmental-status argument earlier on in the case. What is clear, however, is that Defendant was forced to lay out a pretty penny over the course of the last six years in defending against allegations that were ultimately unsustainable. This case was filed in 2011 and unsealed in September 2012—with allegations reaching as far back as 2006. In the end, Holbrook is still good news for future defendants. But, it also serves as a reminder of the potential for long-running legal sagas, even in cases where the theory of liability is not worth a cent.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.