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Relators

14 July 2015

Court Declares No HIPAA Violation for Relators Who Retained Protected Health Information

Posted by Scott Stein, Meenakshi Datta, and Catherine Kim

A recent opinion examines the interplay between the Health Insurance Portability and Accountability Act (“HIPAA”) and the False Claims Act (“FCA”). Relators Pam Howard and Eben Howard filed a wrongful termination action against Arkansas Children’s Hospital – a covered entity under HIPAA – alleging that they were terminated after expressing concern about the hospital’s billing practices in violation of the FCA and several other statutes. The relators allege that they were terminated from their positions after raising concerns regarding the manner in which the hospital billed the federal government. The Howards shared with an attorney protected health information (“PHI”) that they had retained in anticipation of their lawsuit.

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16 June 2015

Court Disqualifies Attorney Relator for Ethical Violations

Posted by Scott Stein and Emily Van Wyck

Whether and under what circumstances an attorney can act as a whistleblower is one of the most controversial subjects under the False Claims Act. We wrote previously about a Second Circuit case in which the court dismissed an FCA case brought against a company by its former general counsel on the ground that the attorney had violated his ethical obligations to his former client. See “Second Circuit Affirms Dismissal of False Claims Act Suit Brought By Clinical Laboratory Defendant’s Former General Counsel”. Now another district court has disqualified an attorney whistleblower who sued his client’s adversary, holding that, in doing so, the attorney had violated duties of confidentiality and loyalty to his own client. See United States ex rel. Holmes v. Northrup Grumman Corp., No. 1:13-cv-00085-HSO-RHW (S.D. Miss. June 3, 2015).

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03 April 2015

SEC Takes First Enforcement Action Involving Employee Agreement Restricting Disclosures to Government

Posted by Scott SteinSarah Konsky and Natalie Chan

The Securities and Exchange Commission made good on its promise to crack down on employment-related agreements that it believes improperly restrict protected whistleblowing. The agency broke new ground yesterday, when it issued a cease-and-desist order against a company for using confidentiality agreements with allegedly “improperly restrictive language” that could potentially stifle the whistleblower process. This is a first-of-its-kind enforcement action by the SEC, as it was based solely on the language of the confidentiality agreement. In fact, the SEC specifically stated in its order that it was unaware of any instance in which the agreement had prevented any employee from communicating with the SEC, or in which the company had enforced the agreement against any employee.

According to the order, KBR, Inc., a Houston-based global technology and engineering firm, used the confidentiality agreement in connection with internal investigations. When KBR received a complaint or allegation from an employee about potentially illegal or unethical conduct by KBR or its employees, KBR required employees interviewed as part of its internal investigation of the complaint or allegation (including the employee or employees who originally lodged the complaint or allegation) to sign the confidentiality agreement. The confidentiality agreement provided that:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC charged KBR with violating Rule 21F-17, a whistleblower protection rule enacted under the Dodd-Frank Act, by requiring employees to sign the confidentiality agreement in internal investigations. That rule prohibits a company from “tak[ing] any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

Without admitting or denying the charges, KBR consented to entry of the cease-and-desist order. The order states that KBR has amended its confidentiality agreement to say that it does not prohibit employees from reporting possible violations of federal law or regulation to any governmental agency or entity, without prior authorization. KBR also agreed to pay a civil money penalty of $130,000 to the SEC.

This is a significant action by the SEC, further signaling its intent to crack down on agreements that could be construed as restricting whistleblowing behavior. This crackdown comes on the heels of actions by the EEOC and NLRB challenging confidentiality and non-disparagement provisions in severance agreements that, according to the government entities, improperly prohibit employees from engaging in protected activities.

In light of these actions, entities should review their agreements with employees that contain confidentiality and non-disparagement provisions. Government entities are making clear that they intend to crack down on provisions that they deem to restrict or prohibited protected activity – including whistleblowing and certain other communications or cooperation with government agencies. As a result, entities should ensure that the confidentiality and non-disparagement provisions in their agreements with employees contain appropriate carve-outs for protected activity.

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11 February 2015

Court Rejects Argument That The FCA Imposes A Higher Standard for Award of Costs Against Unsuccessful Relators

Posted by Scott Stein and Emily Van Wyck

Last week, a district court judge rejected a relator’s argument that the FCA restricts the award of costs against unsuccessful relators to only those cases where the suit was found to be frivolous, vexatious, or harassment, a bar significantly higher than that imposed on all other unsuccessful litigants under Federal Rule of Civil Procedure 54. See United States ex rel. Assocs. Against Outlier Fraud v. Huron Consulting Grp., Inc., No. 09-cv-01800-JSR (S.D.N.Y. Feb. 2, 2015). This decision confirms that relators are liable for costs on the same terms as any other unsuccessful litigant.

After summary judgment was granted against the relator, the clerk of the court awarded over $13,000 in costs to the defendants. Relator appealed the award. At issue was the FCA’s distinction between fees, expenses, and costs. Federal Rule of Civil Procedure 54(d)(1) states that “costs” should be awarded to the prevailing party “[u]nless a federal statute . . . provides otherwise.” The relator argued that the FCA “provides otherwise” because it includes a provision that requires a showing that the relator’s claims were “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment” before awarding “reasonable attorneys’ fees and expenses.” 31 U.S.C. § 3730(d)(4). Relator argued that the term “fees and expenses” under the FCA is synonymous with “costs” under FRCP 54, and therefore a court must first find that the lawsuit was frivolous, vexatious, or harassment. Given that defendants did not assert that the claims were frivolous, relator argued, the court erred in awarding costs.

The district court disagreed, finding that the language of the FCA “foreclose[d]” this argument. In doing so, the court noted that the FCA treats fees, expenses, and costs as distinct categories. For example, if a relator prevails in a case where the United States declined to intervene, the FCA provides that the defendant must pay the relator “for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys’ fees and costs.” 31 U.S.C. § 3730(d)(2). The court upheld the award of costs concluding that any dicta “loosely suggesting” that these terms are interchangeable “cannot overcome the FCA’s conscious distinction between ‘costs’ and ‘expenses.'”

A copy of the district court’s order can be found here.

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29 January 2015

Court Enters Protective Order Limiting Relator’s Access to Competitively Sensitive Information

Posted by Scott Stein and Jessica Rothenberg

A recurring problem in qui tam cases, particularly when the relator is or works for a competitor of the defendant, is the issue of relators’ access to confidential and other competitively-sensitive information produced or created during a government investigation preceding unsealing or once a case is being actively litigated. Recently in one such case, a federal district court in the Northern District of Ohio entered an order limiting the relators’ access to the defendant’s competitively-sensitive information. The relators – the former Director of Contract Services and the then-current Director of Business Development and Technology for defendant Cellular Technology, Ltd. (“CTL”), a laboratory services company, allege that CTL defrauded the U.S. government by inflating direct labor costs under its contracts to provide research services to the National Institutes of Health. Specifically, the relators allege that CTL, in its proposals, to NIH over-inflated the total staff hours it would take to complete various projects and identified its highest paid personnel to perform work, as well as additional employees and individuals who were never employed by CTL, without any expectation of those individuals performing the work being represented. According to the relators’ complaint, CTL’s alleged fraud resulted in at least $3.25 million in excess costs being billed to and paid by the U.S. Government. The U.S. Department of Justice intervened in September 2011, also alleging that CTL represented to NIH that certain employees would work on contracts, knowing that some would never perform any work on the projects, over-inflated the total number of hours it would take to complete the projects, and later billed NIH for far more hours than its employees actually spent on NIH projects.

In an effort to resolve the suit, the United States and CTL jointly agreed to engage an auditor to conduct an audit of the work performed by CTL for NIH under the contracts at issue. In connection with the audit, the United States, CTL, and the auditor signed a confidentiality agreement governing the disclosure of documents and information to the auditor necessary to perform the audit and prepare any reports. In addition, on January 23, the court entered an order limiting the circumstances under which the materials provided to and created by the auditor could be shared with the relators. Under the court’s order, prior to the relators gaining access to any of the audit materials, they must disclose to the U.S. Attorney’s Office their current employer. That disclosure will be forwarded immediately to CTL. Additionally, if at any time either of the relators obtains new or additional employment, a supplemental notice must be filed within five days of beginning the new or additional employment. If either of the relators is deemed to be, or is employed by, a CTL competitor (as defined by the order), neither of the relators will be permitted access to the materials provided to and created by the auditor until the employment or activity that renders the relator a competitor ends. Any materials to which the relators already had been permitted access prior to becoming a competitor, including any notes taken by the relators concerning those materials, must be returned immediately. The order also prohibits relators from making copies of any of the materials provided to the auditor and requires that all materials provided to and prepared by the auditor, and any notes taken by relators in their review of those materials, must be returned to the U.S. Attorney’s Office at the conclusion of the litigation.

This order provides a useful model for other cases in which relators seek access to competitively-sensitive information. A copy of the Order Concerning Materials Produced in Connection with Audit in United States v. Cellular Tech., Ltd., No. 1:09CV01008 (N.D. Ohio 2015) can be found here.

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01 December 2014

DOJ Announces Nearly $6 Billion in Fraud Recoveries During 2014

Posted by Kristin Graham Koehler and Monica Groat

On November 20, Acting Associate Attorney General Stuart F. Delery and Acting Assistant Attorney General Joyce R. Branda announced that the Department of Justice recovered a record $5.69 billion in settlements and judgments from civil cases involving alleged fraud against the Government in fiscal year 2014. This figure represents the highest annual total recovery and an increase of nearly $2 billion over the Government’s recovery in fiscal year 2013.

Recoveries from the financial industry accounted for the most significant proportion of fraud-related recoveries, representing $3.1 billion of the total $5.69 billion. This amount was more than double the previous record for recoveries from banks and other financial institutions, which paid $1.4 billion in fiscal year 2012. Healthcare fraud represented the second largest area of recovery; DOJ recovered $2.3 billion from pharmaceutical and device manufacturers, hospitals, and other healthcare providers. Fiscal year 2014 was the fifth straight year during which the Government has recovered more than $2 billion in cases involving false claims against federal healthcare programs, including Medicare and Medicaid.

Of the $5.69 billion recovered this year, nearly $3 billion related to lawsuits filed under the FCA’s qui tam provisions, and relators recovered $435 million. The number of FCA qui tam suits filed in 2014 decreased slightly: 713 suits were filed in 2014, compared with 754 in 2013. These numbers indicate that both DOJ and private relators are continuing to bring FCA cases; although the volume of cases did not increase, recoveries by both the Government and relators increased. The announcement also confirms that DOJ is continuing to aggressively pursue fraud cases, with a continuing interest in healthcare fraud and an increasing focus on the financial industry.

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10 October 2014

Court Allows Deposition Of Relator’s Counsel On Facts Relevant To Public Disclosure Bar

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.

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12 September 2014

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.

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24 July 2014

United States Protects Right to Pursue FCA Claims Raised in Non-Intervened, Dismissed Suit

Posted by Gordon Todd and Paul Sampson

In U.S. ex rel. Prince v. Virginia Resources Authority, No. 5:13CV00045, 2014 WL 3405657 (W.D. Va. July 10, 2014), the Western District of Virginia recently held that dismissal of a relator’s suit on procedural grounds does not prejudice the United States’ ability to subsequently to pursue identical FCA claims, despite having declined to intervene in the dismissed action.

Relator Mark Prince filed suit against the Virginia Resources Authority (the “VRA”) and others, alleging FCA violations relating to federal subsidies and tax exempt status for certain bonds through the Build America Bonds program. The VRA moved to dismiss on the basis of collateral estoppel due to Prince’s involvement in prior litigation against the VRA. On April 15, 2014, the District Court granted the motion, dismissing Prince’s claims with prejudice.

The United States had neither intervened in the suit, nor had it been party to Prince’s prior litigation against the VRA. On May 12, 2014, it filed a “Motion to Clarify” the dismissal. Acknowledging that it had “declined to intervene and is therefore not a party to this action,” the Government nevertheless insisted that it “remains the real party in interest, entitled to share in any recovery that may be obtained in the qui tam action.” Accordingly, it asked the Court to amend the order of dismissal “to clarify that the dismissal with prejudice extends only to Relator, and that the dismissal is without prejudice to the United States.”

On July 10, 2014, the district court granted the government’s motion, holding that “dismissals for reasons unrelated to the merits of a FCA claim are appropriately entered without prejudice to the United States.” Prince, 2014 WL 3405657, at *3. The decision not to intervene, the Court observed, does not necessarily suggest that the Government doubts the viability of an FCA claim, but rather may result from “a cost-benefit analysis.” Id. (internal quotation marks omitted). “Accordingly,” it reasoned, “it would be inappropriate to dismiss with prejudice as to the United States … on whose behalf relator brought this claim.” Id. (internal quotation marks omitted). Because the dismissal of Prince’s claims resulted from his procedural failures and not those of the United States, the district court held that “it is proper for the dismissal of these claims to be without prejudice as to the United States.” Id.

The Prince case reminds qui tam defendants that non-intervention is not necessarily the end of the United States’ interest in a matter, and that the Government continues to monitor FCA actions brought on its behalf to maximize its returns.

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27 June 2014

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.

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