Court Overturns $663 Million Fraud Judgment Against Guardrail Maker Trinity

Trinity Industries Inc. won’t have to pay a $663 million judgment that was awarded in a whistleblower lawsuit alleging the company defrauded the U.S. government with a faulty highway guardrail safety system.

A federal appeals court in New Orleans Friday overturned the 2015 judgment that followed a Texas jury’s finding that the company cheated the U.S. by selling its ET Plus guardrail system without disclosing changes made in 2005. Trinity shares jumped about 11 percent in after-hours trading.

The appellate judges said while it is unfortunate that guardrails “cannot protect from all collisions at all angles and all speeds by all vehicles,” the U.S. government has never declared the challenged Trinity design unsafe. In fact, the federal government has paid to install the guardrails throughout the country and refused to remove them, the panel pointed out.

“When the government, at appropriate levels, repeatedly concludes that it has not been defrauded, it is not forgiving a found fraud — rather it is concluding that there was no fraud at all,” Circuit Judge Patrick Higginbotham wrote in a unanimous 42-page decision reversing the jury’s findings.

Trinity competitor Joshua Harman and plaintiffs in other lawsuits claimed the changes made the system less safe. The jury verdict set off a flurry of states removing Trinity’s ET Plus guardrail from their qualified-products list. The U.S. Justice Department also started a criminal investigation, which has since been abandoned.

The Texas jury awarded $175 million in damages. That was tripled under federal whistleblower law. U.S. District Judge Rodney Gilstrap upheld the verdict and added $138 million in penalties. Gilstrap set Harman’s share at $199 million.

Trinity Appeal

Trinity appealed, denying any fraud and disputing the damages. The changes weren’t material and the revised guardrail wasn’t unsafe, the company argued.

“We are pleased the court overturned the verdict,” Jeff Eller, a Trinity spokesman, said in an email. “As this court has previously noted, the federal government has consistently reaffirmed the ET Plus System meets all federal safety performance standards. This ruling affirms our longstanding belief that the ET Plus System is safe and no fraud was committed. We are proud of standing strong and fighting for our beliefs.”

The whistle-blower action is one of a series of claims filed over the guardrail, including multiple lawsuits contending injuries caused by the product, class actions alleging deceptive practices, and investor suits. Harman also has filed false-claims cases on behalf of nine states.

“We believe the jury properly assessed the evidence in this case and reached the right verdict,” said Karen Dyer, an attorney for Boies Schiller Flexner LLP, which represented Harman. “We’re disappointed with the decision of the appellate court and we’re assessing the options.”

Whistleblower Crusade

Harman alleged that the Trinity’s ET Plus System, meant to turn the end of a guardrail into a de facto shock absorber, was instead locking up when hit, spearing cars and their occupants.

Safety concerns weren’t at the center of his claim, however. The heart of his whistleblower suit was the more technical allegation that Trinity knowingly made false certifications of U.S. approval of the new guardrail design to its customers and state departments of transportation and concealed modifications from the Federal Highway Administration, resulting in improper claims for federal-aid reimbursement.

Following the Texas verdict, FHWA ordered a review of the ET Plus System. The system passed all crash tests and continues to be eligible for federal-aid reimbursement, the agency said in a report.

Trinity modified the guardrail in 2005 by reducing the width of the guide channels from five inches to four inches. The modification wasn’t significant and didn’t require notification, the company said in court papers. The change had no effect on how well the rail performed, Trinity said following the U.S. crash tests.

The company’s shares may continue to rise in coming days, Matt Elkott, an analyst with Cowen, said in a note to clients following the ruling.

“The stock is up materially after the close, and we think the momentum should continue in the coming days as investors who may have been compelled by the company’s and industry’s fundamentals but shunned the shares due to the legal battle could begin taking another look at the stock,” Elkott wrote.

The case is Harman v. Trinity Industries, 15-41172, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

Copyright 2017 Bloomberg.

Source