Fifth Circuit Affirms Dismissal of Attorney-Relator’s Qui Tam Suit For Violation of Ethical Obligations

Last year, we wrote about a district court decision disqualifying an attorney from serving as relator in a False Claims Act (“FCA”) action that he initiated against his client’s adversary in pending litigation (see here and here).  The attorney and would-be-relator, Donald Holmes, was retained by an insurance company, Munich Re, in connection with arbitration against Northrop Grumman, who had submitted claims for damage to its shipyards allegedly resulting from Hurricane Katrina.  Holmes, on behalf of the insurance company, filed a complaint in federal court to obtain certain documents from the Navy allegedly relevant to the arbitration.  He eventually obtained the documents subject to a protective order that forbade their disclosure outside of the arbitration.  However, Holmes promptly filed an FCA complaint against Northrop, alleging Northrop improperly used government funds allocated to compensate for Hurricane Katrina damage to instead cover cost overruns that occurred before the storm, based on the documents obtained from the Navy —in clear violation of the protective order.

The government declined to intervene and Northrop moved to disqualify Holmes as relator and to dismiss the case, arguing that by violating the protective order and initiating the FCA action, Holmes had committed violations of ethical duties owed to the court and to his client.¹  Holmes argued that the protective order did not bar the disclosure of fraud to the government, and that the FCA preempted any ethical prohibitions on his actions.  The district court rejected Holmes’ arguments, finding that Holmes had violated the protective order, his duty of loyalty to his client, and his duty of candor to the court in the protective order litigation.

Holmes appealed, and the Fifth Circuit affirmed the district court’s decision dismissing Holmes (without prejudice to the Government).  It found that, first, Holmes had violated his duty of loyalty to his client: The insurance company argued in arbitration that it did not owe Northrop money because the Government had made valid payments to Northrop.  But Holmes argued in his FCA action that the Government’s payments to Northrop were invalid, having been fraudulently procured.  This created a direct conflict of interest for Holmes.  Second, Holmes violated his duty of candor to the court in the protective order litigation by knowingly making false statements concerning his intended use of the documents he sought from the Navy.  Finally, he admitted to violating the protective order.

The Fifth Circuit did not think much of Holmes’ counter-arguments.  He acknowledged that the FCA did not preempt his ethical obligations as an attorney and, in the Fifth Circuit’s words, “fail[ed] to muster a cognizable argument to bolster his position.”  The Fifth Circuit admonished him for failing to meaningfully cite legal authority or the record on appeal.  It also rejected his only discernible argument—that he was not properly afforded an evidentiary hearing on Northrop Grumman’s disqualification motion—because Holmes did not raise any evidentiary issues with the district court and because he did not provide any evidence that he had requested an evidentiary hearing.  As we have previously noted, this case serves as a reminder that relators and their attorneys are not free to use or disclose information subject to a protective order in pursuing FCA claims based on their belief that the qui tam provisions of the FCA trump court orders.

A copy of the Fifth Circuit’s opinion can be found here.


¹ Holmes, on behalf of Munich Re, argued in the arbitration that it had no further obligation to compensate Northrop for Hurricane Katrina damage since Northrop had already received government funds for those damages.  He then argued in the qui tam action that the government should not have fully compensated Northrop for its claimed losses from Hurricane Katrina.