Sunday, November 17, 2013

Court Affirms Dismissal of Qui Tam and Disqualification of Relators' Counsel Due to Relator's Violation of Attorney Ethics Rule

The Second Circuit Court of Appeals has upheld a dismissal of a qui tam suit against Quest Diagnostics that was filed by three relators, one of which was the defendant's former general counsel. Fair Lab. Practices Assocs. v. Quest Diagnostics Inc., 2d Cir., No. 11-1565-cv, 10/25/13. Joan Rodgers of the ABA/BNA Lawyer's Manual on Professional Conduct recently wrote an article about the Court's opinion: Company’s Former General Counsel Ruined Qui Tam Action by Telling Ex-Client’s Secrets. I commend it to you.

Essentially, the Court affirmed the District Court's dismissal of the qui tam based on a court's "inherent power" to manage its own affairs. Specifically, the Court ruled that the False Claims Act does not preempt state ethical rules governing the practice of law. In that instance, the Court found that the relator and defendant's former counsel had violated New York Rule 1.9(c) which prohibits a lawyer from revealing the confidences of a client or using the confidences or secrets of a client to the disadvantage of a client -- a rule similar to that found in most state bar rules. The Court found that the relator had used and revealed confidential information which he had obtained in his capacity as counsel for the defendant. As a result, the Court affirmed the District Court's remedy of not only dismissing the qui tam suit, but also disqualifying the other relators and their counsel who together with Quest's former counsel had brought the qui tam.

What is in unusual about this case is that a court, based on its "inherent powers," dismissed a case based on a relator's violation of law, i.e., a rule governing the practice of law, as opposed to a violation of the False Claims Act's procedures. The Court presents its decision as just a balancing test of "varying federal interests" in deciding on whether to apply the state bar rule and affirm the matter's dismissal. That too is unusual because defendants in qui tam cases frequently allege that the relator has violated the law in bringing a qui tam claim. Indeed, relators are commonly accused of stealing records, of participating in the fraud on which they base their qui tam, and in some instances, of even perpetrating or being the mastermind of the fraud in which they accuse a corporate defendant of engaging. Such misconduct by the relator, however, normally only serves as a basis to reduce a qui tam award. See 31 USC 3730(d)(3)("if the court finds that the action was brought by a person who planned and initiated the violation . . . upon which the action was brought, then the court may . . . reduce the share of the proceeds of the action which the person would otherwise receive"). Indeed, the False Claims Act only bars a relator from bringing a qui tam or receiving a recovery if the relator is convicted of the criminal conduct relating to the claim brought in the relator's complaint. See 31 USC 3730(d)(3); see also Order Dismissing Relator in USA ex rel Schroeder v. CH2M Hill et al, E.D. WA., No. CV-09-5038-LRS. In short, the Second Circuit does not really explain why this violation of law concerning a lawyer's duty not to disclose client confidences warrants dismissal of a qui tam when compared with other violations of law by relators.

A. Brian Albritton
November 17, 2013

Sunday, November 10, 2013

Qui Tam Relators Objecting to Government Ability to Pay Settlements in False Claims Act Cases

Relators are increasingly objecting to "ability to pay" settlements negotiated by the government with defendants in qui tam cases, and in so doing, accuse the government of treating them unfairly and of sending a message of lax False Claims Act enforcement.  In an "ability to pay" settlement, the government permits the defendant to pay less than the amount of the False Claims Act loss due to the defendant's lack of financial resources. The False Claims Act provides for treble damages and a penalty of between $5,500 to $11,000 for each false claim. In many such cases, False Claim Act damages are nothing short of ruinous and can easily bankrupt a defendant. See e.g., Crowell and Moring table listing FCA settlements for 2000 - 2013.

In the Wellcare case, for example, a relator's counsel described the $137.5 million dollar qui tam civil settlement that was based on the company's limited ability to pay as "grossly inadequate," and claimed that his call for increased damages was only intended to "deter any effort by companies such as Wellcare to take advantage of the health care system or the people who should be served by this system."

Another recent case illustrates how bitter the relationship between relators and the government can become when the government settles for less than what relators believe they deserve. In United States ex rel Stone v. Hospice of the Comforter, 6:11-Cv-1498-Orl-22DAB, M.D. Fla., the government recently settled a case on ability to pay grounds over the objection of the relator. In that case, the government settled with the defendant for $3 million payable over five years and required that the defendant be subject to a Corporate Integrity Agreement. Payments accelerated in the event the company was sold. See settlement agreement, relator's objections, the government's brief.

The relator refused to sign the settlement agreement which he described as a "travesty." In his objections, the relator complained bitterly that damages caused by the defendant exceeded $30 million, that the government was "shoving" the defendant through a "loophole," and that the defendant was attempting to "pull the wool over everyone's eyes." "The proposed settlement," the relator argued, "will result in champagne corks popping" at the defendant's "receiving a 15% slap on the wrist amortized luxuriously over 5 years."

Relators have some recourse to the court when they object to the government's settlement of a qui tam that they filed. The False Claims Act provides that the government may settle an action with the defendant over the relator's objections "if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances." 31 U.S.C. 3730(c)(2)(B). The circuit courts, however, have not passed on the standard to be applied to determine whether a settlement of a False Claims Act qui tam case is fair, adequate, and reasonable. As the District Court observed in Hospice of the Comforter, only a handful of district courts have addressed the question on the standard to be used, and they "are aligned on opposite sides of a fault line over whether the government is entitled to any deference when it intervenes in a False Claims action and reached a settlement with the defendant." The Court explained that the "majority of courts seem to afford the government little, if any, deference" because they apply the standard used in evaluating and approving class action settlements. See Federal Rule of civil Procedure 23(e).  

Contrary to the class action standard, the government in Hospice of the Comforter argued that the Court should apply a "highly deferential standard" whereby the government's settlement will be affirmed as long as it can "articulate a legitimate government purpose that is rationally related to the proposed settlement." The government contended further that "standards governing class actions  . . . are inapplicable to qui tam actions. In class action litigation, the named plaintiff represents the interests of absent class members who have independent claims against the defendant. In FCA qui tam litigation, the relators has suffered no independent harm [and] . . . . . is merely advancing a claim on behalf of the United States for harm to the United States."  

In the end, the District Court in Hospice of the Comforter did not adopt a standard, but overruled the relator's objections on the grounds that that the settlement satisfied both standards. See Court's Order Overruling Objections.

It is said that the government loves its relators, and the relationship between them becomes quite close when an investigation commences as a result of a qui tam filing and the government intervenes. Yet, when the government settles a case on the basis of the defendant's ability to pay, the relator-government relationship often sours and relators may come to accuse the government of selling out and sending defendants the "wrong signal." With a bit of editorial license, it appears that William Congreve's maxim applies here: "Heav'n hath no rage like love to hatred turn'd, Nor Hell a fury, like a [relator] scorn'd." 

November 11, 2013
A. Brian Albritton