Posted by Kristin Graham Koehler, Monica Groat, and Morgan Branch (Summer Associate)
On May 29, 2014, the United States District Court for the Southern District of Illinois ordered K-Mart Corporation to produce documents to a relator pursuant to a motion to compel in a case brought under the False Claims Act. See United States ex rel. Garbe v. Kmart Corp., 2014 WL 2218758 (S.D. Ill. May 29, 2014). The court found that, despite the existence of a confidentiality agreement between K-Mart and the government, potentially privileged documents produced by K-Mart in cooperation with a separate government investigation were discoverable by the relator by virtue of prior disclosure.
In 2009, the Office of Inspector General (OIG) for the Department of Health and Human Services began an investigation into possible improper Medicare claims submitted by K-Mart. In response to a subpoena, K-Mart and outside counsel produced 8,400 documents to OIG, including a subset of Medicare transactional data. This data was produced in an easier-to-understand format in order to foster cooperation with OIG. Prior to production, K-Mart and OIG agreed that “confidential proprietary” business information – information typically protected pursuant to a protective order under Federal Rule of Civil Procedure 26(c)(G) – would be protected from disclosure.
In a separate False Claims Act case, which was filed under seal during the OIG investigation, Relator Garbe requested all documents that K-Mart had produced to OIG. K-Mart complied, with two exceptions: (1) the transactional data described above, and (2) documents shared with a U.S. Attorney’s Office during settlement negotiations. Garbe moved to compel the production of both the data and the settlement documents. With respect to the data, K-Mart argued that the doctrine of selective waiver should apply and that the data should remain protected as attorney work product.
The court was not convinced and ordered K-Mart to produce the transactional data. Magistrate Judge Frazier found that K-Mart forfeited protection of the data under the attorney work product privilege when it was produced to OIG, reasoning that knowing disclosure to a third party “almost invariably surrenders the privilege.” The court stated that K-Mart should not be permitted to “pick and choose” the circumstances in which it waived work product protection and, despite the confidentiality agreement with OIG, found that K-Mart did not take sufficient steps to preserve the privilege and qualify for selective waiver. Reviewing the agreement, Judge Frazier noted that the confidentiality agreement did not contain the words “attorney,” “work product,” or “privilege,” and was targeted at protecting sensitive business information, not attorney work product. With respect to the settlement documents, the court found that these documents need not be produced in accordance with Federal Rule of Evidence 408.
This decision is a reminder to companies and their outside counsel to proceed with caution when disclosing potentially privileged material in an attempt to cooperate with government entities like HHS OIG. The advantages of cooperation should be weighed against the possibility that any information disclosed may be subsequently disclosed to other enforcement agencies or an FCA relator. When the advantages of cooperation outweigh the potential downsides, counsel should secure a confidentiality agreement with the relevant agencies (to the extent possible), expressly stating that the attorney-client and attorney work product privileges have not been waived with respect to third parties. However, even with such a confidentiality agreement, counsel should recognize that, under the prevailing weight of legal authority regarding selective waiver, subsequent disclosure is likely to be required.
Posted by Jaime Jones and Catherine Kim
In a June 23, 2014 opinion, the Fourth Circuit affirmed the dismissal of qui tam claims against suppliers of the National Center for Employment of the Disabled (“NCED”) and the National Industries for the Severely Handicapped (“NISH”) under the FCA’s public disclosure bar, as well as the relator’s failure to satisfy the relevant pleading requirements.
The relator initially filed this qui tam suit on June 20, 2006, alleging that NCED engaged in various schemes to defraud the government, primarily by receiving payments under the Javits-Wagner-O’Day Act (“JWOD”) program despite failing to comply with JWOD regulations. Prior to the filing, however, various newspapers published articles discussing NCED’s lack of compliance with JWOD program requirements. A criminal investigation followed and in 2010, a jury convicted NCED’s former CEO of making false statements and conspiracy to defraud the government.
In light of such events, NISH and the supplier defendants filed motions to dismiss, asserting that the district court lacked subject matter jurisdiction pursuant to the public disclosure bar and that the relator’s first amended complaint suffered from various pleading defects. The district court granted the defendants’ motions, and the relator appealed.
In reviewing the district court’s decision, the Fourth Circuit adopted an interpretation of the FCA’s public disclosure provision that “stands in contrast to the broader tests applied by our sister circuits[.]” Specifically, while other circuits generally assess whether the allegations are “supported by” or “substantially similar” to fraud that has already been publicly disclosed, the Fourth Circuit asked whether the relator’s allegations were “actually derived from the public disclosure itself.”
With respect to the claims against NISH and three supplier defendants, the court held that the district court lacked subject matter jurisdiction over such claims because the relator had apparently relied on and even cited to information appearing in public disclosures and had not demonstrated “direct and independent knowledge” of the alleged fraud. Although the court concluded that the relator was an original source with respect to the claims against Weyerhaeuser Co., it nonetheless dismissed such claims as well due to various pleading defects.
The Fourth Circuit’s narrower reading of the public disclosure provision could present challenges to FCA defendants, depending on how lower courts ultimately apply the “derived from” standard adopted in this case. While it is unclear which interpretation of the public disclosure bar will ultimately prevail among the circuit courts, we will continue to monitor this issue and provide updates on any new developments.