When the Best Defense May Be a Good Offense: False Claims Act Counterclaims

A recent opinion from the Northern District of Georgia reminds False Claims Act defendants about a potentially powerful tool at their disposal—counterclaims. In United States ex rel. Cooley v. ERMI, LLC, the court permitted several counterclaims to proceed over the relator’s argument that they were against public policy, demonstrating how defendants can go on offense to hold relators accountable for their own misconduct.

In Cooley, a former chief compliance officer sued ERMI. As is typical for an FCA relator, she alleged that the company engaged in fraudulent billing practices and unlicensed activity and that ERMI retaliated against her for reporting it. In addition to denying relator’s allegations, ERMI brought counterclaims for, among others, (1) breach of fiduciary duty for misleading the company about her legal qualifications and the status of its license renewal and (2) breach of a confidentiality agreement in retaining and disclosing confidential information belonging to ERMI.

Cooley moved to dismiss, arguing that, among other things, the counterclaims were barred by public policy because they discourage whistleblowers from bringing qui tam actions. The court rejected that argument. Instead, the court held that counterclaims are viable when they are based on “independent damages” and do not depend on a company’s liability (or not) under the FCA.

Several of ERMI’s counterclaims met that standard here. As for breach of fiduciary duty, one claim alleged mishandling of a license renewal process that led to a lawsuit by a competitor under a different statute. That was enough. As for breach of contract, ERMI did not limit its allegations to documents retained specially for the preparation and pursuit of her FCA claims. That was also enough: the confidentiality agreement did not permit her to retain information that she did not provide to the government and was unrelated to her FCA claims. At this stage, ERMI did not need to identify any specific documents that Cooley wrongfully retained or disclosed.

Cooley serves as a good reminder to defendants that the claims in FCA cases need not be unidirectional. When defendants have a sufficient basis for allegations, counterclaims that do not overlap completely with the FCA claims can—and probably should—be asserted against former employee whistleblowers.

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