A federal district court in California has denied a qui tam relator’s attempt to share in the proceeds of a $323 million FCA settlement, holding that he was not the “original source” of the information that led to the settlement because he learned most of it secondhand from a former co-worker.
Posted by Jonathan Cohn and Brian Morrissey
On May 12, a federal district court dismissed what the New York Times had described as an “innovative” qui tam suit against U.S. Bank, N.A., alleging that the lender had submitted over $2.3 billion in false claims for FHA insurance payments. United States v. U.S. Bank, N.A., No. 3:13-cv-704 (N.D. Oh. May 12, 2015). In an unusual step, the suit was brought by a legal aid group, Advocates for Basic Legal Equality, Inc. (“ABLE”), rather than by an individual relator.
Posted by Jonathan Cohn and Annemarie Hillman
Last week, the Eleventh Circuit reached a decision in United States ex rel. Osheroff v. Humana, Inc., No. 13-15278 (11th Cir. 2015), which provides important guidance regarding the scope of the public disclosure bar following its amendment by the Patient Protection and Affordable Care Act (PPACA).
Humana arose from an action filed by a qui tam relator against several health clinics and health insurers in Miami. The complaint alleged that these clinics and insurers either provided, or knew others were providing, a variety of free services – including limo rides and salon services – that were used to incentivize potential clients to use the clinics. According to the relator, these actions violated both the Anti-Kickback Statute and the Civil Monetary Penalties Law, as well as the False Claims Act. After the government declined to intervene, the defendants moved to dismiss the case, and the district court granted the motion on public disclosure grounds.
On review, the Eleventh Circuit affirmed the district court’s decision to dismiss, and in doing so, addressed a number of important issues about the scope of the public disclosure bar following significant amendments made to the PPACA in 2010. First, the Eleventh Circuit held that the public disclosure bar is no longer jurisdictional due to these amendments. Instead, the Court held that the amended statute presents grounds for dismissal for failure to state a claim. This decision contradicts some earlier district court decisions, though it brings the Eleventh Circuit into agreement with the Fourth Circuit in United States ex rel. May v. Purdue Pharma L.P., 737 F.3d 908, 916-917 (4th Cir. 2013), petition for cert. filed, 82 U.S.L.W. 3586 (U.S. March 25, 2014) (No. 13-1162). The Eleventh Circuit based its decision on (among other considerations) the plain language of the amended statute and Congress’s explicit removal of jurisdictional language from the public disclosure bar section of the PPACA.
While it held that the public disclosure argument appropriately was considered under Rule 12(b)(6), the Eleventh Circuit dismissed the relator’s argument that the district court should not have considered documents extrinsic to the complaint. The Court explained that “a district court may consider an extrinsic document even on Rule 12(b)(6) review if it is (1) central to the plaintiff’s claim, and (2) its authenticity is not challenged.” The Eleventh Circuit also clarified that “a district court may consider judicially noticed documents” as well. The types of documents that the Eleventh Circuit held that the district court appropriately considered included newspaper articles, newspaper advertisements, the clinics’ own websites, and the transcript and Special Master’s Report from another case.
The Eleventh Circuit found that the district court had appropriately concluded that the post-PPACA public disclosure bar required dismissal of the relator’s claims. In so holding, the Eleventh Circuit held that “publicly available websites” qualify as “news media.” In making this decision, the Court noted that the Supreme Court had previously stated that the term had a “broad sweep” and that district courts in multiple circuits had found publicly available websites to be included in the category of “news media.” Such a decision may inform later cases about whether other documents commonly cited in public disclosure motions, such as SEC filings, can qualify as public disclosures.
The Eleventh Circuit also took the opportunity to walk back language in previous cases that relators had cited to suggest that prior disclosures do not satisfy the public disclosure bar unless they specifically disclose that the defendants engaged in wrongdoing. The public disclosure bar “itself requires only disclosures of ‘allegations or transactions,” the court explained, “suggesting that allegations of wrongdoing are not required.”
A copy of the Eleventh Circuit’s opinion can be found here.
Posted by Jonathan F. Cohn and Brian P. Morrissey
A federal district court in Georgia has ordered a defendant in a False Claims Act case to produce attorney-client privileged communications to the qui tam relator. See United States ex rel. Barker v. Columbus Regional Healthcare System, Inc., No. 4:12-cv-108 (CDL), 2014 WL 4287744 (M.D. Ga. Aug. 29, 2014). The court ruled that the defendant, Columbus Regional Healthcare System, impliedly waived the privilege by pleading in its answer that it did not knowingly violate the FCA and indicating that it would offer evidence at trial that it believed its conduct was lawful.
The relator alleged that Columbus Regional violated the FCA, the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, and the Stark Law, 42 U.S.C. § 1395nn, when it purchased a cancer treatment center for more than fair market value and, separately, when it entered into remuneration agreements with another cancer treatment center that were not commercially reasonable. The relator alleged that all of these transactions were unlawfully designed to induce the treatment centers to refer patients to Columbus Regional.
In response, Columbus Regional argued that “it believed its conduct was lawful,” and that it planned to “offer evidence at trial” establishing that good faith belief. Columbus Regional, 2014 WL 4287744, *2.
Relying on the Eleventh Circuit’s decision in Cox v. Administrator U.S. Steel & Carnegie, et al., 17 F.3d 1386 (11th Cir. 1994), the district court held that Columbus Regional’s defense waived privilege over communications between Columbus Regional and its attorneys regarding the transactions, Columbus Regional, 2014 WL 4287744, *2. The court reasoned that “when a defendant affirmatively asserts a good faith belief that its conduct was lawful, it injects the issue of its knowledge of the law into the case and thereby waives the attorney-client privilege.” Id. The court reached this conclusion despite acknowledging that Columbus Regional had not asserted an “advice-of-counsel” defense—i.e., Columbus Regional did not argue that legally-privileged advice was the basis for its good-faith belief that its transactions were lawful. Id.
Notably, the district court suggested that Columbus Regional could have preserved the privilege if it had merely “denied” the allegations of wrongful intent “‘without affirmatively asserting that it believed its [conduct] was legal.'” Id. *4. But, since Columbus Regional “intend[ed] to explain fully why its conduct was not knowingly and intentionally unlawful,” the court determined that the privilege had been waived. Id.
It remains to be seen whether other courts will find the district court’s ruling persuasive. In the meantime, however, FCA defendants should be aware that specifically pleading a belief that challenged conduct was lawful may trigger a dispute over whether such a defense waives privilege. Defendants seeking to protect themselves from such an attack should note that, even under the Columbus Regional rationale, defendants who merely deny wrongful intent—without “affirmatively” asserting a good-faith belief that their conduct was lawful—do not waive the privilege.
Posted by Jonathan F. Cohn and Brian P. Morrissey
A federal magistrate judge in West Virginia has granted an FCA defendant’s request to depose relators’ counsel regarding non-privileged discussions in which relators learned of the conduct they alleged in their complaint, on the grounds that such information is central to defendants’ argument that relators’ claims are foreclosed by the public disclosure bar. United States ex rel. May v. Purdue Pharma L.P., No. 5:10-1423, 2014 WL 4960944 (S.D. W. Va. Oct. 2, 2014).
Relators allege that defendant, Purdue Pharma L.P., violated the FCA in the course of marketing the pain relief drug OxyContin, by falsely representing that the drug was twice as potent as a competing drug, and less expensive.
As the court observed, relators’ complaint “contain[ed] language taken verbatim” from a prior FCA complaint filed against Purdue Pharma, and was “obviously an adaptation” of that prior complaint. Id. Accordingly, Purdue Pharma argued that the public disclosure bar required dismissal of relators’ claims. See 31 U.S.C. § 3730(e)(4)(A) (stating that, “unless opposed by the government,” a court “shall dismiss” an FCA action if “substantially the same allegations . . . were publicly disclosed” in, inter alia, a prior federal FCA case, “unless . . . the person bringing the action is an original source of the information”).
The prior complaint was filed by Mark Radcliffe, a former Purdue Pharma sales representative, and ultimately was dismissed on the grounds that Radcliffe had signed a release of claims upon leaving the company. Radcliffe’s attorneys represented the relators in the new matter, a group that included Radcliffe’s wife. Relators argued that their claims are not barred by the public disclosure bar because they learned of the information giving rise to the claims through “private disclosure[s]” from Radcliffe, not Radcliffe’s public filings. Purdue Pharma, 2014 WL 4960944 *3. (We previously wrote about the Radcliffe case here.)
In its opinion, the court held that Purdue Pharma was entitled to depose relators’ attorneys regarding Radcliffe’s alleged private disclosures. At least some of those disclosures took place at a 2010 meeting between Radcliffe, relators, and the attorneys. Id. The court held that communications among those parties at the meeting were not privileged because Radcliffe was not represented by counsel at the time. Radcliffe’s FCA action terminated prior to the meeting. Thus, the court reasoned that the attorneys participated in the meeting only in their capacity as relators’ counsel, not Radcliffe’s. Id. at *6.
Having determined that the communications were non-privileged, the court held that, although depositions of a party’s counsel are rare, it was appropriate to allow Purdue Pharma to depose the attorneys in this case because the attorneys were “uniquely positioned” to provide information regarding what facts they and Radcliffe conveyed to relators that formed the substantive basis of relator’s complaint. Id. at *4 (relying on Shelton v. Am. Motors Corp., 805 F.2d 1323, 1327 (8th Cir. 2005), which holds that trial counsel may be deposed in the “limited” circumstances in which (1) the deposing party has “no other means” to obtain the information; (2) the information is “relevant and nonprivileged”; and (3) the information is “crucial to the preparation of the case”).
The magistrate judge’s holding may serve as a useful authority to FCA defendants seeking discovery of facts relevant to a public-disclosure defense. As the court’s opinion recognizes, communications in which an attorney or a third party provides a relator with factual information relevant to the relator’s substantive allegations are not privileged and, thus, potentially discoverable. In cases in which it is not possible to obtain information regarding those communications through other means, a deposition of relator’s counsel may be necessary and appropriate.
Posted by Jonathan Cohn and Brian Morrissey
Last week, the Solicitor General filed an amicus brief urging the Supreme Court to deny certiorari on a case that presents two questions of critical importance to FCA defendants. As previously reported gt;on this blog, the Fourth Circuit in United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), held that the Wartime Suspension of Limitations Act (WLSA), 18 U.S.C. § 3287, tolls the FCA’s statute of limitations for frauds committed against the Federal Government at any time since the Iraq conflict began in 2002 until the Government declares a formal end to that conflict. Separately, the Fourth Circuit held that the FCA’s “first-to-file” rule, 31 U.S.C. § 3730(b)(5), bars a duplicative qui tam suit only while the related, previously-filed suit remains ongoing. Once the first suit is resolved, the new suit may be re-filed, despite its overlap with the first.
Benjamin Carter, a former employee of Kellogg Brown & Root Services (KBR) filed a qui tam action against Halliburton and its subsidiaries, including KBR, alleging that the company submitted false claims for services provided to the U.S. military in Iraq during early 2005. After prior versions were dismissed without prejudice, Carter filed his operative complaint in June 2011. The district court held that Carter’s 2011 complaint was barred by the FCA’s six-year statute of limitations, 31 U.S.C. § 3731(b), and, alternatively, that the complaint was barred by the FCA’s first-to-file rule because Carter’s allegations substantially overlapped with a previously-filed qui tam suit that was pending when Carter filed his 2011 complaint, but dismissed shortly thereafter. The Fourth Circuit reversed on both grounds, concluding that the WLSA tolled the FCA’s statute of limitations on Carter’s claims, and that Carter should have been allowed to proceed on his claims once the prior action had been dismissed. The Halliburton parties now seek certiorari.
The WLSA tolls the statute of limitations for “any offense” involving “fraud” on the Federal Government while the Nation is “at war.” 18 U.S.C. § 3287. The Fourth Circuit held that (1) the Iraq conflict constitutes a “war” under the WLSA; (2) that the WLSA tolls the statute of limitations for civil FCA claims, not just criminal “offenses”; and (3) that the WLSA applies to qui tam actions, even if the Government does not intervene. The Solicitor General argues that all three conclusions are correct. Importantly, the text of the WLSA is not limited to acts of fraud committed by military contractors. Thus, under the Fourth Circuit’s and the Solicitor General’s position, the WLSA arguably tolls the statute of limitations for all FCA claims based on conduct that occurred after 2002, even if the alleged conduct is entirely unrelated to military action (e.g., healthcare or mortgage fraud). As Petitioners argue, if this expansive reading is upheld, the FCA’s “statute of limitations has not even begun to run” on any claim based on conduct occurring after the hostilities in Iraq and Afghanistan began. Pet. for Certiorari at 3.
The Fourth Circuit also held that the FCA’s first-to-file rule bars duplicative qui tam suits only during the period that a related, previously-filed suit remains “pending,” and permits the duplicative suit to go forward once the prior action has been resolved. This deepens a circuit split on this important question: the Seventh and Tenth Circuits join the Fourth; the D.C. Circuit takes the contrary position, holding that the first-to-file rule bars new suits “even if the initial action is no longer pending.” United States ex rel. Shea v. Cellco Partnership, No. 12-7133, 2014 WL 1394687 (D.C. Cir. Apr. 11, 2014). Petitioners count the First, Fifth, and Ninth Circuits as joining the D.C. Circuit, a point the Solicitor General disputes. The Solicitor General strongly endorses the Fourth Circuit’s view, which Petitioners argue will transform the first-to-file rule from a “crucial limitation” on “parasitic” FCA suits into a mere “one-case-at-a-time rule.” Pet. for Certiorari at 24-25.
Petitioners will have the opportunity to reply to the Solicitor General’s brief before the Supreme Court acts on the petition. The Chamber of Commerce and the National Defense Industrial Association previously filed amicus briefs urging the Court to grant certiorari.
Earlier this month, a federal district court in California dismissed relators’ retaliation claims because they rested on an unduly expansive interpretation of 31 U.S.C. § 3730(h). Both the plaintiff bringing the claim (a company) and defendants against whom it was asserted (several individuals) did not fall within the statute’s scope, the court held. United States v. Kiewit Pac. Co., No. 12-CV-02698-JST, 2014 WL 1997151, — F. Supp. 2d — (N.D. Cal. May 14, 2014).
The case arose out of a highway expansion project in Los Angeles jointly funded by the United States and the state of California. Kiewit was the primary contractor on the project. Relators were subcontractors—individuals and their respective companies who supplied materials for mechanically stabilized earth (“MSE”) wall panels. After several wall panels failed, investigations ensued and this case followed. Relators alleged that, among other things, Kiewit falsely certified compliance with MSE project specifications in exchange for government funds, and Kiewit and individual Kiewit employees retaliated against relator SSL, LLC (one of the subcontractors).
The court dismissed the retaliation claims with prejudice. First, the court held that relator SSL, LLC, could not bring a retaliation claim because the statute does not extend protection to non-individuals, or “entity plaintiffs.” 2014 WL 1997151, at *10-11. Relator’s argument was a simple textual one: section 3730(h) allows any “employee, contractor, or agent” to sue, and the ordinary meaning of “contractor” covers SSL. But the court held that the entirety of 3730(h) and its legislative history foreclosed SSL’s broad reading. To begin with, the types of relief available to successful plaintiffs under section 3730(h)(2), like back pay and reinstatement, were all “directed to individual plaintiffs, not entities.” Id. And the legislative history confirmed the point: in adding “contractors” and “agents” to the list of potential plaintiffs, Congress made clear that it merely intended to sweep in persons or individuals who were not technically “employees” but who had a contractual or agent relationship with an employer. Id. “Nothing suggest[ed] it was Congress’ intent also to broaden the retaliation entitlement to entity plaintiffs.” Id.
The court took a comparably narrow view of who may be sued under the statute. Prior to 2009, section 3730(h) allowed any employee subject to retaliatory conduct “by his or her employer” to sue. Id. at *11. When Congress amended the provision to include “contractor[s]” and “agent[s]” alongside “employee[s],” it simultaneously did away with the reference to conduct “by his or her employer.” Id. Relator argued that this change—and the plain meaning of the current provision—expanded the class of potential defendants to anyone engaging in retaliatory conduct and therefore authorized claims against individual Kiewit employees. Id. Again, the court disagreed. Because the predominant view before 2009 limited liability to the whistleblower’s employer, the court held that Congress would not have overruled that long line of cases and expanded the scope of False Claims Act liability without saying so. Instead, the reason for the deletion was most likely that the provision could no longer refer only to the whistleblower’s “employer” because it now applied to entities with a contractual or agency relationship with the whistleblower. Id. at *12. The court thus concluded that “the 2009 amendment did not expand liability to individuals such as the individual Defendants named here, e.g., coworkers, supervisors, or corporate officers who are not employers, or who lack a contractor or agency relationship with the plaintiff.” Id.
This decision imposes important limits on retaliation claims and may be looked to in future cases, particularly since the court found no case law addressing whether non-individuals can sue for retaliation, 2014 WL 1997151, at *10, and recognized express disagreement with its interpretation regarding putative defendants, id. at *12 n.5.
Last week, the Supreme Court of Louisiana reversed a $330 million judgment ($258 million in penalties, $70 million in attorney fees, and $3 million in costs) against Johnson & Johnson and its subsidiary, Janssen Pharmaceutical, because there was no evidence that “any defendant made or attempted to make a fraudulent claim for payment against any Louisiana medical assistance program within the scope of [the Louisiana Medical Assistance Programs Integrity Law (‘MAPIL’)]”—a state statute based on the federal False Claims Act. Caldwell ex rel. State v. Janssen Pharmaceutical, Inc., Nos. 2012-C-2447, 2012-C-2466, 2014 WL 341038, slip op. at 1-2, 19-20 (La. Jan. 28, 2014)
The case centers on a narrow set of facts related to defendants’ antipsychotic drug Risperdal. In September 2003, the FDA told all manufacturers of so-called atypical antipsychotics to amend their labels to warn about potential adverse side effects associated with the drugs, and to issue letters about the change to healthcare providers around the country. Defendants did so, but their letter also reported that Risperdal had been associated with lower risks than other atypical antipsychotics. The FDA took issue with those statements and directed defendants to issue a “corrective” letter, which they did in July 2004. Just a couple of months later, the Louisiana Attorney General brought suit, alleging that the original letter contained off-label statements misrepresenting Risperdal’s safety and efficacy and that defendants were subject to civil penalties under Louisiana law as a result. In 2010, a jury returned a verdict for the state, finding that the defendants had violated Louisiana’s MAPIL 35,146 times (based on the number of letters mailed and sales calls made) and assessed a civil penalty of $7,250 per violation. The verdict was affirmed by the intermediate appellate court.
The Louisiana Supreme Court found no evidence to support that judgment based on its reading of the state’s false-claims act. Proceeding through each of the statute’s three subsections one-by-one, the court explained the law’s scope and why the conduct at issue did not fall within it. First was subsection (A), which provides that “[n]o person shall knowingly present or cause to be presented a false or fraudulent claim.” La. Rev. Stat. § 43:438.3(A). Because the statute elsewhere defined a “false or fraudulent claim” as one that a provider submits “knowing” it to be false or misleading, the court focused the responsibility for policing falsity on the person or entity actually making the claim for payment. The AG was thus required to “show that a Louisiana doctor who prescribed Risperdal for his patient, or a healthcare provider who dispensed the drug to the patient, knew that the defendants had made misleading statements about their product, but nonetheless prescribed or dispensed the drug to the patient knowing that there may be drugs that are equally safe, and less expensive, or safer than Risperdal, and notwithstanding that knowledge, prescribed or dispensed Risperdal.” Put another way, the “doctor or healthcare provider would have had to have knowingly committed malpractice, prescribing or dispensing Risperdal despite knowing there were better, cheaper, or safer, more efficacious drugs available, for the defendants to be liable under this provision.” No evidence supported such a finding.
Next, the court turned to subsection (B), which provides that “[n]o person shall knowingly engage in misrepresentation to obtain, or attempt to obtain, payment from medical assistance programs funds.” Again requiring a tight nexus between the claim for payment and the allegations, the court found “no showing the defendants knowingly attempted to obtain payment from the medical assistance programs pursuant to a claim.” In addition, the court read the “misrepresentation” requirement to “logically place the obligation of truthful and full disclosure on the healthcare provider or any person seeking to obtain payment through a claim made against medical assistance program funds or entering into a provider agreement,” in light of the “absurd consequences” that would arise if “potentially any information required by any federal or state agency or source, which is not fully disclosed by any person who ultimately receives Medicaid funds, directly or indirectly, could, if not truthfully or fully disclosed, subject that person to civil penalties under MAPIL.”
The third subsection states that “[n]o person shall conspire to defraud, or attempt to defraud, the medical assistance programs through misrepresentation or by obtaining, or attempting to obtain, payment for a false or fraudulent claim.” La. Rev. Stat. § 43:438.3(C). Here, too, the gap between the allegedly misleading statements and the claims for payment doomed the state’s case: “Even if the defendants were attempting to gain a competitive edge over other manufacturers of atypical anti-psychotics through the use of misleading off-label statements,” and “even if the defendants’ conduct was intended to influence the prescribing decisions of doctors treating schizophrenia patients,” there could be no liability because there was “no showing the defendants failed to truthfully or fully disclose or concealed any information required on a claim for payment made against the medical assistance programs” or that any such statements “were made to the department relative to the medical assistance programs,” and there was “no causal connection” between any such conduct and “any false or fraudulent claim for payment to a healthcare provider or other person.”
The thrust of the Louisiana court’s reasoning is straightforward but powerful: a statute designed to prevent false or fraudulent claims requires a close connection between the allegedly fraudulent conduct and the claim for payment from the state, and liability will not necessarily attach to any allegation of wrongdoing that ultimately winds its way to a Medicaid claim. Because the Louisiana statute bears similarities with false claims act statutes in other jurisdictions, this is a significant ruling for manufacturers defending false marketing claims elsewhere.
Posted by Jonathan F. Cohn and Brian P. Morrissey
Earlier this month, the West Virginia House Judiciary Committee approved a State False Claims Act by a 15-9 vote, advancing the bill for consideration by the full House. If enacted, the bill would add West Virginia to the list of over 30 states that currently have False Claims Act legislation in place.
The proposed bill mirrors the federal False Claims Act in many key respects. Like the federal Act, the bill would punish any person who “knowingly presents or causes” the presentment of a “false or fraudulent claim” to an agent of the State government. W. Va. H.B. 4001 § 14-4-2(a)(1). In addition, it subjects violators to potential treble damages, as well as civil penalties and costs. Id. § 14-4-2(a). Qui tam relators may initiate suits under the proposed law, and may proceed with litigation even when the State elects not to intervene. Id. § 14-4-4. Relators would be entitled to a share of any recovery, not to exceed 25% in cases in which the State has intervened and 30% in cases the relator has pursued alone. Id. § 14-4-6(a)-(b). Also like the federal Act, the proposed bill imposes “first-to-file” and “original source” limitations on qui tam actions. Id. § 14-4-7(c), (d)(1).
Importantly, the proposed bill’s “original source” limitation may impose only a modest hurdle to prospective qui tam suits. The proposed bill states that a court “shall” dismiss a qui tam action if “substantially the same allegations were publicly disclosed” by another source. Id. § 14-4-7(d)(1). Like the federal FCA, however, the proposed bill appears to prevent the court from dismissing the case if the State opposes dismissal. Id.; see 31 U.S.C. § 3730(e)(4)(A). In addition, the proposed bill explicitly contemplates that a qui tam relator may pursue litigation and share in the recovery even if the relator’s claims are based “primarily” on a prior public disclosure from another source. W. Va. H.B. 4001 § 14-4-6. In this respect, the proposed bill appears to diverge from the federal FCA, which (after its 2009 and 2010 amendments), prohibits a qui tam relator from proceeding with a suit based on a prior public disclosure unless the relator provided the information to the Government prior to the public disclosure, or has knowledge that is “independent of and materially adds to” that public disclosure. 31 U.S.C. §3730(e)(4)(B).
Critics of the proposed legislation, including the West Virginia Chamber of Commerce, have expressed concern that the bill may adversely affect the business climate in the State and may unduly burden the West Virginia Attorney General’s Office. The Attorney General’s Office has not formally taken a position on the bill, although its General Counsel has noted that the bill would “dramatically” increase whistleblower litigation, and thereby impose “significant” challenges on the Office’s limited resources.
We will continue to monitor the bill’s progress in the West Virginia Legislature.
Posted by Jonathan F. Cohn and Brian P. Morrissey
Last week, in United States ex rel. Wildhirt v. AARS Forever, Inc., No. 09-C-1215, 2013 WL 5304092 (N.D. Ill. Sept. 19, 2013), a federal district court in Illinois issued an important decision that helps to clarify the rights of employers to bring counterclaims against employees who misappropriate confidential company information and later use that information as the basis of an FCA suit.
The Defendants, two business affiliates, were parties to contracts with the Veterans Administration (“VA”) to provide home healthcare services and equipment to patients with respiratory illnesses. Two former employees filed a qui tam action against Defendants, alleging, inter alia, that Defendants breached performance requirements under their VA contracts and, thereby, submitted false claims to the VA’s Medicare and Medicaid programs. Litigation on those FCA claims remains pending.
In the meantime, Defendants asserted counterclaims against the Relators. As Defendants’ employees, Relators signed a confidentiality agreement, in which they agreed not to disclose confidential company information to third parties and to indemnify Defendants for any losses arising from their unauthorized disclosures. Id. at *1-*2. Separately, Relators periodically signed internal-reporting agreements, in which they declared that they were responsible to report any “suspect business practices” to Defendants and were “unaware” of any such practices. Id. *3.
In their counterclaims, Defendants alleged that Relators breached the confidentiality agreement by disclosing confidential company information to the VA and the public, and breached the internal-reporting agreements by failing to report the alleged “suspect business practices” that formed the basis of their FCA complaint. Id. at *3-*4. Defendants sought indemnification for damages suffered as a result of Relators’ disclosures, including legal expenses. Id. at *4.
Relators moved to dismiss the counterclaims, arguing that the confidentiality agreement was contrary to public policy, and therefore unenforceable, because it sought to “thwart” important policy interests in the “detection and exposure of potential fraud against the United States.” Id. at *5. The court (Judge Feinerman) refused to dismiss the counterclaims outright on that basis. Joining the conclusion of another district court, the court held that “‘an FCA defendant found liable of FCA violations may not pursue a counterclaim” that has “the equivalent effect of contribution or indemnification.'” Id. at *5 (quoting United States ex rel. Miller v. Bill Harbert Int’l Constr., Inc., 505 F. Supp. 2d 20, 26 (D.D.C. 2007)). But an FCA defendant may pursue counterclaims against the qui tam relator that are “not dependent on a finding that the [FCA] defendant is liable.'” Id.
Applying this rule, the court dismissed Defendants’ counterclaims to the extent they sought indemnification for damages or penalties that may be imposed on them in the FCA suit. Id. But the court held that the counterclaims were otherwise “independent of the FCA claim.” Id. at *6. The court noted the “extremely broad scope of the documents that Relators are alleged to have retained and disclosed,” and ruled that Defendants could pursue counterclaims against Relators for violating the confidentiality agreement to the extent Relators’ “retentions and disclosures went beyond the scope of those necessary to pursue their qui tam suit.” Id. In addition, the court held that Defendants could recover legal expenses from Relators if Defendants prevail on the merits of the FCA suit and persuade the court that Relators’ FCA claims were “frivolously pursued given [Relators’] alleged lack of relevant knowledge of the VA contracts and Defendants’ performance thereunder.” Id. Finally, the court held that Defendants could pursue counterclaims for breach of the internal-reporting agreements if Defendants prevail in the FCA suit and demonstrate a “causal relationship between Relators’ failure to report and their filing of the qui tam action.” Id. at *7.
As this decision demonstrates, employers in highly-regulated industries, in which FCA exposure is an ever-present risk, can obtain at least some protection by requiring employees to sign confidentiality and internal-reporting agreements. At a minimum, these agreements serve as valuable elements of any effective FCA compliance program by emphasizing to employees the importance of properly handling confidential information and promptly reporting potentially unlawful conduct to superiors. In addition, such agreements can serve as a valuable tool in qui tam litigation initiated by former employees and, specifically, may provide a basis for a counterclaim against the relator. Although such agreements cannot insulate employers from liability for actual FCA violations, they can protect against frivolous qui tam suits and unauthorized disclosures of confidential information that are not reasonably necessary to inform the government of potential fraud.