District Court Invalidates Relators’ Pre-Filing Releases on Public Policy Grounds

We have previously discussed (here and here) the enforceability of a relator’s pre-filing release of FCA claims—an issue on which the FCA is silent. Recently, in United States ex rel. Susan Class et al., v. Bayada Home Health Care Inc., No. 2:16-cv-00680 (E.D. Pa. Sep. 24, 2018), a district judge in the Eastern District of Pennsylvania weighed in on the enforceability of pre-filing releases and held that, as a matter of public policy, these releases are unenforceable where “the Government did not have sufficient knowledge of the Relators’ allegations prior to the signing of Relators’ releases.”

The relators, former employees of Bayada, a home healthcare service provider, alleged that Bayada falsely billed Medicare for home healthcare services for patients that it knew were not “homebound,” in violation of the Medicare’s home healthcare reimbursement policy.  Bayada moved to dismiss the Relators’ suit on the ground that each had signed a Separation Agreement releasing Bayada from “any and all claims” prior to filing the FCA lawsuit.

With no binding Third Circuit precedent, the District Court looked for guidance in an “emerging agreement” among other circuits, including the Fourth, Ninth and Tenth Circuits, that pre-filing releases can bar FCA claims if “‘(1) the release can fairly be interpreted to encompass qui tam claims and (2) public policy does not otherwise outweigh enforcement of that release.’”  On the first point, the District Court had little trouble concluding that the pre-filing release language was “expansive enough to include FCA claims.”  In reaching this conclusion, the court noted that “the Third Circuit has found that explicit mention of a statute is not a prerequisite to enforceability of a release and that broad release language is adequate.”

However, the District Court concluded that public policy outweighed enforcement of the pre-filing release in this case. The Court explained that the public policy recognized by the FCA “is to ‘set up incentives to supplement government enforcement’ of the Act by ‘encourag[ing] insiders privy to fraud on the government to blow the whistle on the crime;” but a pre-filing release can frustrate these incentives because “‘[i]f the release will be enforced, a party will have no right or reason to file a qui tam claim.’”   Agreeing with the Fourth, Ninth, and Tenth Circuits, the District Court concluded that “‘where the government has knowledge of the claims before the relator files the qui tam lawsuit, public policy weighs in favor of enforcing a pre-filing release of claims,’” as the public policy justification (i.e., incentivizing relators) has dissipated. Conversely, where the government lacks knowledge of the relator’s claims before she files suit, a pre-filing release is unenforceable because the FCA’s need to incentivize insiders to blow the whistle remains real.

The District Court held that the pre-filing release signed by Relators was unenforceable because the government did not have sufficient knowledge of their claims prior to the filing of their lawsuit. Bayada pointed out that Relators had alleged that “‘[s]hortly before filing their original Complaint, [they] disclosed a draft copy of” it to the government. Dismissing that argument, the court reasoned that “the Government receiving a draft complaint ‘shortly before’ the filing of the Complaint is starkly different from the situations [in valid pre-filing release cases], where the Government conducted significant internal investigations or audits in advance of any litigation.” Moreover, where, as here, “the Government does not have knowledge of the claims that form the basis for the qui tam complaint before the relators signed the release, enforcement of the release ‘interferes with and frustrates the FCA’s goals of incentivizing individuals to reveal fraudulent conduct to the government.’” (emphasis added)

Bayada’s alternative argument that the government’s decision not to intervene favored enforcement of the release also failed to persuade the District Court. The court noted that the government can choose not to intervene in a qui tam action for a number of reasons, “many of which can be unrelated to the merits of the case.” And “because a potential relator could be unaware of whether the Government will intervene in an action,” accepting Bayada’s argument “could result in fewer relators coming forward to expose fraud, which undermines the FCA’s central purpose.”