Court Permits Counterclaim Against Relator for Breach of Employment Agreement

A recent federal court decision from the District of New Jersey confirms that while the FCA protects employees’ right to blow the whistle, it does not give them carte blanche to ignore confidentiality obligations or employment agreements. Two former employees of a medical device manufacturer sued their former employer for allegedly promoting a medical device for off-label and medically unnecessary uses. After its motion to dismiss was denied, the manufacturer answered and filed a counterclaim against the former employees for breach of their employment agreements. The relators then moved to dismiss the counterclaims.

Denying the motion, the court noted that employer had alleged that “[b]oth Relators signed employment agreements, at the beginning of their employment [ ] requiring them to refrain from disclosing or retaining certain [employer] confidential or proprietary information,” and that the relators “‘took, disclosed, and then published’ confidential patient claims data and proprietary business information related to the [device] and customer lists in their First Amended Complaint, thereby breaching their employment contracts.” Notably, the Court rejected the relators’ argument that the claim should be dismissed because “the agreements, essentially restricting the disclosure of documents evidencing false claims against the government, would frustrate the underlying policy considerations of the FCA,” noting that accepting the manufacturer’s allegations as true (as the Court was required to do on defendants’ motion), the counterclaims were not obviously barred.

This is the latest in a series of decisions from various district courts confirming that the ability to file an FCA case is not a license for former employees to violate their confidentiality obligations without consequence. Accordingly, it emphasizes the desirability of requiring employees to sign confidentiality agreements. Although such agreements cannot insulate employers from liability for actual FCA violations, they can discourage employees from filing frivolous qui tam suits, or from making unauthorized disclosures of confidential information that are not reasonably necessary to inform the government of potential fraud.

A copy of the district court’s decision in U.S. ex rel. Bahnsen v. Boston Scientific Neuromodulation Corporation (D.N.J.) can be found here.

Ex-Employee’s Threat to Bring Qui Tam Is Extortion, According to California Appeals Court

Posted by Jaime Jones and Nicole Brown

Recently, the California Court of Appeals held that an individual who threatens a whistleblower action in an attempt to drive a settlement of unrelated employment claims may be held liable for extortion. Stenehjem v. Sareen, No. H038324 (Cal. Ct. App. Jun. 13, 2014). The matter resolved a counterclaim against Jerry Stenehjem, who had sued his former employer, Akon, Inc., and Surya Sareen, Akon’s CEO, for defamation and wrongful termination. Prior to trial of those claims, Stenehjem and his attorney made several unsuccessful attempts to initiate settlement discussions with Akon and Sareen. The last of these attempts was an e-mail from Stenehjem to Sareen’s attorney, extending “one last opportunity to settle,” which Stenehjem suggested would trigger “the Qui Tam option,” if rejected.

In response to Stenehjem’s e-mail, which included several other inflammatory statements and accusations of fraudulent business practices, Sareen countersued Stenehjem for extortion. Stenehjem moved to strike Sareen’s counterclaim under California’s anti-SLAPP statute, a law permitting dismissal of lawsuits that seek to chill or punish a party’s constitutional free speech. The trial court granted Stenehjem’s motion to strike, and Sareen appealed, claiming that Stenehjem’s e-mail was not protected by the anti-SLAPP statute because it was extortion.

The Court of Appeals agreed that Stenehjem’s threat to alert federal authorities to the alleged fraud and FCA exposure met the legal definition of extortion. Notably, the court held that the veracity of the allegations in Stenehjem’s e-mail was irrelevant to deciding this question. More importantly, the court held that Stenehjem’s statements could not be considered pre-litigation communications, protected under the anti-SLAPP statute, because the “qui tam action was entirely unrelated to any alleged injury suffered by Stenehjem as alleged in his demotion and wrongful termination claims.” Thus, the court signaled that in the future similar statements may be treated differently if there is an established nexus between the pending litigation and threatened FCA suit. Nonetheless, FCA defendants will be sure to focus on the outcome in this case and consider such counterclaims where appropriate.

Court Allows Defendant to Pursue Counterclaim Against Relator for Violation of Confidentiality Agreement

Posted by Robert J. Conlan and Matt M. Fogelberg

On June 16, a federal district court in Pennsylvania denied a qui tam relator’s motion to dismiss a counterclaim asserted by the defendants that was based on the relator’s alleged breach of a written confidentiality agreement he had executed with defendants as part of his employment. U.S. ex rel. Walsh v. Amerisource Bergen Corp., Case No. 11-7584 (E.D. Pa. June 16, 2014). A copy of the decision can be found here. The court’s decision reinforces a line of federal decisions from other courts that public policy considerations do not require dismissal of a qui tam defendant’s counterclaim so long as the counterclaim’s success is not dependent upon the fact of the defendant’s FCA liability.

Relator Patrick Walsh, an internal auditor employed at Amerisource, alleged that Amerisource and two of its subsidiaries violated the federal FCA and various state FCAs. After the United States declined to intervene and Walsh served an amended complaint on the defendants, the defendants filed a counterclaim against Walsh, alleging that he had violated a confidentiality agreement by taking confidential, proprietary and privileged information from Amerisource and providing the information to his personal attorney. The defendants further alleged that some of the information Walsh took from defendants became public when the court unsealed his FCA complaint. Walsh moved to dismiss the defendants’ counterclaim on several grounds, including “the strong public policy against counterclaims in qui tam actions,” which Walsh argued was “the most compelling reason for dismissal.”

The court rejected Walsh’s motion in its entirety. It specifically held that Walsh’s public policy argument failed because the defendants’ counterclaim alleged damages that are independent of any potential FCA liability – i.e., “not based upon any potential revenues, earnings, profits, compensation, or benefits awarded to Relator as a result of this qui tam action.” In so ruling, the court distinguished cases dismissing counterclaims in FCA cases where the counterclaims, in effect, sought contribution or indemnity because the relator had participated in the alleged fraud or the defendants had been damaged by the relator disclosing the alleged fraud. Instead, the Walsh court found that the defendants’ counterclaim did not depend on – or require a finding of – FCA liability. The counterclaim did not allege that Walsh participated in the purported fraud, nor did it suggest that the damages the defendants sustained resulted from the relator’s disclosure of the alleged fraud. The court therefore held that the defendants’ counterclaim was not effectively a claim for indemnification, and it refused to bar the counterclaim on public policy grounds.

The court’s decision also highlighted a crucial consideration for FCA defendants when deciding whether to file a counterclaim against a relator. The court recognized that a qui tam defendant’s counterclaim will often be compulsory under Federal Rule of Civil Procedure 13, and a defendant that fails to raise a counterclaim might be permanently precluded from asserting that claim. Reiterating the Ninth Circuit’s reasoning in U.S. ex rel. Madden v. Gen. Dynamics Corp., 4 F.3d 827, 831 (9th Cir. 1993), the Walsh court stated that refusing to permit a qui tam defendant from raising a counterclaim independent of its FCA liability “would be a violation of the defendant’s procedural due process rights.” Given the growing body of case law recognizing the validity of an FCA defendant’s counterclaim under circumstances such as those present in Walsh, and the possibility of losing a claim against a relator if not asserted in response to a qui tam action, any defendant facing a qui tam action should consider carefully whether the facts of its case warrant filing a counterclaim against the relator.

District Court Clarifies Protections Available to Employers Whose Employees Misappropriate Confidential Information for Use in FCA Suits

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.