Losing Defendant in FCA Suit Accuses Relator’s Counsel and Relator of Conspiracy to Misappropriate Trade Secrets in Furtherance of Qui Tam Lawsuit

Posted by Jaime Jones and Catherine Starks

On February 10, 2014, following a recent jury finding that pipemaker J-M Manufacturing (“J-M”) was liable for damages in a False Claims Act suit initiated by former employee John Hendrix, J-M filed a complaint in the Superior Court of New Jersey, Middlesex County, alleging that the whistleblower and his counsel, Phillips & Cohen LLP (“P&C”), conspired to misappropriate confidential, proprietary, and trade secret information in furtherance of the qui tam lawsuit. The complaint specifically alleges that P&C repeatedly directed Hendrix to use his employee status to obtain information to support his FCA claims, in violation of his confidentiality agreement with J-M. According to the complaint, J-M did not discover the theft of the information until after the qui tam complaint was unsealed and the discovery process unfolded in 2013, more than five years after the qui tam complaint was filed. J-M alleges that P&C used the misappropriated information to develop Hendrix’s own lawsuit and to recruit additional whistleblowers. In doing so, J-M asserts that P&C exceeded its role as counsel “by actively directing and engaging in Hendrix’s illegal scheme to steal J-M’s confidential and proprietary information.” J-M alleges that this represents a “pattern of misconduct” by P&C, citing the 2012 decision in which P&C was disqualified and ordered to pay sanctions related to its acquisition of documents from IASIS Healthcare Corp., a defendant in another qui tam suit.

The issue of whistleblowers taking confidential business information and trade secrets in support of potential qui tam actions, and, increasingly, whistleblower counsel’s solicitation of such information, is one confronted by many FCA defendants. In recent years a number, like J-M, have sought damages and protections from such misappropriation. Several courts have been receptive to such claims, rejecting arguments from whistleblowers that the public policy served by the FCA justifies confidentiality and other breaches in gathering evidence of fraud. We will monitor the outcome of the J-M case, and provide an update as it is available.