Jun 162015

Court Disqualifies Attorney Relator for Ethical Violations

Scott D. Stein and Emily Van Wyck
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Posted by Scott Stein and Emily Van Wyck

Whether and under what circumstances an attorney can act as a whistleblower is one of the most controversial subjects under the False Claims Act. We wrote previously about a Second Circuit case in which the court dismissed an FCA case brought against a company by its former general counsel on the ground that the attorney had violated his ethical obligations to his former client. See “Second Circuit Affirms Dismissal of False Claims Act Suit Brought By Clinical Laboratory Defendant’s Former General Counsel”. Now another district court has disqualified an attorney whistleblower who sued his client’s adversary, holding that, in doing so, the attorney had violated duties of confidentiality and loyalty to his own client. See United States ex rel. Holmes v. Northrup Grumman Corp., No. 1:13-cv-00085-HSO-RHW (S.D. Miss. June 3, 2015).

The relator, Donald Holmes, was retained as outside counsel by an insurance company to represent it in an arbitration proceeding against Northrop Grumman (“NG”) to resolve a coverage dispute. In connection with these proceedings, Holmes filed a complaint in the U.S. District Court for the District of Columbia seeking to obtain documents from the U.S. Navy for use in the arbitration proceedings. Holmes eventually obtained the requested documents, subject to a Stipulated Protective Order entered by the court. While the arbitration proceedings and the action to obtain documents were still pending, Holmes filed an FCA complaint seeking over $2.5 billion in damages against NG alleging that it had violated the FCA by using funds earmarked for Hurricane Katrina relief as reimbursement for cost overruns on unrelated projects.

After the government declined to intervene and the qui tam was unsealed, NG moved to disqualify Holmes from serving as a relator and to dismiss the case arguing that Holmes breached his ethical duties by (a) violating the protective order by using information that was the subject of that order as the basis for his FCA claim, and (b) violating his duties of candor, loyalty, and confidentiality to his client in the arbitration, the insurance company. In response, Holmes argued that the protective order did not bar the disclosure of fraud to the government, and that the FCA preempts any ethical rules that would otherwise have prohibited his actions.

The court soundly rejected Holmes’s arguments. As did the Second Circuit, the court rejected the argument that the FCA preempts an attorney’s ethical obligations. The court also held that Holmes had violated several ethical rules. In particular, by requesting documents from the U.S. Navy in connection with arbitration proceedings and using that information as the basis for FCA claims in a separate proceeding, Holmes violated his ethical duty to act with candor and to obey court orders, in particular the Stipulated Protective Order. And even though, unlike the relator in the Second Circuit case, Holmes did not sue his former client, the court nevertheless concluded that in suing his client’s opponent, NG, Holmes had violated ethical duties owed to his client by using confidential information obtained in his representation of the insurance company in another matter. Moreover, the court held, Holmes had a clear conflict of interest because positions taken by Holmes in the qui tam action conflicted with positions he advocated on behalf of the insurance company in the arbitration.

Based on “the totality of Holmes’ ethical violations,” the court disqualified Holmes and dismissed the complaint, adding that in this situation, “the Court is not faced with the prospect of disqualifying an innocent party’s chosen counsel” but only “preclud[ing Holmes] from receiving the benefits which may otherwise be available to him personally as a relator, such that the social interests in allowing him to continue participating in the case are minimal.” This case serves as yet another strong warning to attorney whistleblowers that the FCA does not provide a free pass to violate state- or court-imposed ethical obligations owed to clients, to opponents, and to courts.

A copy of the district court’s opinion can be found here.

Scott D. Stein

Chicago

sstein@sidley.com

Emily Van Wyck

EmilyVanWyck@sidley.com

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