Second Circuit Affirms Dismissal of False Claims Act Suit Brought by Clinical Laboratory Defendant’s Former General Counsel

Posted by Scott Stein and Allison Reimann

On October 25, 2013, the Second Circuit affirmed the dismissal of United States ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated (No. 11-1565-cv), in a case that confronts head-on the tension between whistleblower incentives and the professional obligations of lawyers—and concludes that an attorney’s ethical obligations trump. Peter Keisler, Richard Raskin, Scott Stein, and Allison Reimann of Sidley Austin represented the defendants in this victory.

Relator Fair Laboratory Practices Associates (“FLPA”) filed the suit in 2005 in the Southern District of New York against the clinical laboratory company Quest Diagnostics Incorporated and its subsidiary Unilab Corporation. FLPA’s claim related to the defendants’ contracting practices. FLPA is a general partnership formed by three former Unilab executives, including Mark Bibi, who was Unilab’s general counsel from 1993-2000. As general counsel, Bibi advised the company on a variety of matters, including its contracts, and handled all of the company’s litigation.

After the defendants learned that one of FLPA’s members was Unilab’s former general counsel, the district court permitted limited discovery to determine whether Bibi and FLPA had improperly used or disclosed Unilab’s confidences in bringing the lawsuit. Following discovery, the defendants moved to dismiss on grounds that Bibi had breached his ethical obligations to his former client by using and disclosing Unilab’s client confidences for his own financial benefit, thereby tainting the entire proceeding. The district court agreed and dismissed FLPA’s action. A few months later, the United States gave notice that it was declining to intervene.

In the Second Circuit, FLPA contended that the district court erred in dismissing the case, arguing that deference to state ethical rules would undermine federal policy that uses whistleblower rewards as a vehicle for rooting out fraud. FLPA also disputed that Bibi violated New York’s ethical rules, maintaining that Bibi was permitted to disclose Unilab’s confidences because he reasonably believed that the defendants were committing a crime.

A unanimous three-judge panel affirmed the district court’s decision. Writing for the court, Judge Cabranes explained that, first, the FCA does not preempt state ethical rules. He wrote that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidences.” Slip Op. at 15. Furthermore, although the FCA permits relators to bring qui tam suits, “it does not authorize that person to violate state laws in the process.” Id. (quoting United States ex rel. Doe v. X. Corp., 862 F. Supp. 1502, 1507 (E.D. Va. 1994)).

The court also agreed that Bibi violated New York’s ethical rules by disclosing confidential information beyond what was “necessary,” as required by those rules. While FLPA claimed that the disclosures were necessary because the FCA requires relators to provide a “written disclosure of substantially all material evidence and information the person possesses to the government,” 31 U.S.C. § 3730(b)(2), the court agreed that Bibi had means of exposing the alleged fraud other than using client confidences in an FCA suit against his former client.

The Second Circuit’s decision has significant implications, particularly in the health care industry where companies rely heavily on their counsel—both in-house and external—to navigate increasingly complicated fraud and abuse laws. Had FLPA’s view of the law prevailed, such candor with counsel would come at considerable risk, because counsel would be free to parlay those confidences into a FCA suit against that client, all the while standing to collect up to 30 percent of the proceeds of a successful action. See 31 U.S.C. § 3730(d). In other words, counsel’s duty to maintain client confidences would always be in potential conflict with that lawyer’s personal financial interest. A contrary ruling also would have threatened another means of reducing government losses: encouraging clients to seek legal advice on fraud and abuse requirements and then obey that advice.

The ruling, however, shows that the federal interest in identifying fraud is not limitless, but rather gives way to ethical obligations that otherwise would prevent an attorney’s participation as an FCA relator. The decision also has implications beyond the FCA context, including the Dodd-Frank Act, which provides its own whistleblower incentives for reporting corporate wrongdoing.