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

Wake Up Call for Those Asserting Broad Privilege Claims: U.S. ex rel Kalid-Kunz v. Halifax Hospital

The Court in the False Claims Act/Qui Tam case of US ex rel Kalid-Kunz v. Halifax Hospital Medical Center, et al., 2012 WL 5415108 (M.D. Fla., November 6, 2012) recently rejected a number of privilege claims made by the defendant in that hotly contested litigation. See previous blog post. The Court’s opinion evaluating Halifax Hospital’s privilege claims is a wake up call both for litigators and in-house counsel, and serves as a refresher on where and when the attorney-client privilege and work product doctrine applies. Though it did not really apply new law as some commentators have claimed, the Court examined Halifax’s privilege claims in a manner and at a level of detail not usually seen in discovery orders. In doing so, the Court emphasized that the attorney-client privilege applies to communications made by or to counsel in the course of obtaining or receiving legal advice and it rejected privilege claims for any email, document, or record that did not exhibit such a clear purpose, regardless of whether a lawyer was copied on the document. The Court’s rulings are quite instructive.  For example: 

·                  The Court rejected the hospital’s attempts to shield as privileged hospital compliance communications that only tangentially involved legal counsel;

·                  In lieu of examining every single document for which defendant claimed a privilege, the Court required that the parties file a “representative samples” for in camera review and based its rulings on review of those samples;

·           Communications by in-house counsel were not entitled to a “presumption” of being privileged, given the mixed role of in-house counsel and their involvement in business decisions; 

·                  Just because a document is labeled “attorney-client privilege” and “funneled through an attorney” does not “automatically encase the document in the privilege.” It has to be related to providing or receiving legal assistance;  

·                  Emails on which both a lawyer and non-lawyer are copied or sent are not considered to have the “primary purpose” of seeking legal advice and thus did not qualify for the privilege; 

·                  You can send “privileged” emails to non-lawyers if you are “apprising “them of the legal advice that was sought and received” -- essentially passing along advice of a lawyer;

·           “A draft of a document is protected by the attorney-client privilege if it was prepared with the assistance of any attorney for the purpose of obtaining legal advice or, after an attorney’s advice, contained information a client considered but decided not to include in the final,” and

·           Each email of an email string must be listed separately in a privilege log and the privilege evaluated for each email in an email string. Email string may not be listed as one message.

Additionally, the Court rejected the Hospital’s privilege claim over its “compliance referral log.” In the face of Hospital’s claim that it was a “factual record about compliance issues that may need to be investigated" and that the log was prepared in anticipation of litigation, the Court found the log was kept in normal course, often just recorded facts, incorporated emails that were not privileged, and did not reflect review by counsel.

The Court rejected privilege log descriptions such as “facilitates the provision of compliance advice”, “facilitates the rendering of compliance advice”, and “reflecting request for compliance advice” on the grounds that you “cannot tell from the descriptions whether privilege is properly asserted.”

The Court rejected the Hospital’s privilege claims for “audit reviews” conducted by the management department, compliance department, and finance department. Again, these audits were not conducted primarily for the purpose of obtaining or receiving legal advice.

Overall, the Court refused to recognize privilege claims that were simply based on the fact that the lawyer may be a recipient of the document or information or on the fact that the subject matter of the report or document (e.g., audits or compliance log) might be of interest to counsel or report matters that might raise a legal concern.  

A. Brian Albritton

December 20, 2012

Court Rejects Halifax Health's Preliminary Injunction Against Relator's Alleged Violation of Its Attorney Client Privilege

How do courts react when faced with a defendant’s allegations that a qui tam relator has misappropriated its attorney-client information, disclosed it to the government and relator’s counsel, and used it to bring a qui tam? Last week, I highlighted the case of U.S. ex rel Frazier v. IASIS Healthcare where the Court sanctioned the relator’s counsel for failing both to notify the defendant, IASIS, of the relator’s possession of IASIS’s attorney client privileged documents and to timely seek the court’s direction as to what should be done with the documents. The sanctions were limited, however, and granted only at the end of the case. The Court required that relator’s counsel pay IASIS the fees and costs it incurred in attempting to get its documents back, though it also disqualified relator’s counsel from representing the relator or any other party adverse to IASIS.

We find another instructive example of a qui tam defendant seeking sanctions against a relator and her counsel for allegedly taking and using defendant’s attorney client documents in the case of U.S. ex rel Elin Baklid-Kunz v. Halifax Hospital Medical Center d/b/a Halifax Health, M.D. Florida Case No. 6-09-cv-1002. In Halifax, the Court gave short shrift to the defendant’s motion for preliminary injunction against the realtor, and it did not demonstrate any alarm at the defendant’s claims of prejudice and irreparable harm.

In that case, the defendant, Halifax, alleged that relator and her counsel had engaged in the “deliberate, unauthorized collection, retention and use of Halifax’s privileged documents” which had caused it “irreparable harm.” As a result of the alleged breach of its privilege by the disclosure of 31 allegedly privileged documents, Halifax sought a preliminary injunction wherein it asked the Court, among other things, to dismiss the relator’s claims with prejudice, disqualify the relator’s counsel, and exclude any evidence derived from relator’s counsel’s use of the allegedly privileged documents. Copies of Halifax’s Motion for Preliminary Injunction and Memorandum in Support are linked here.

In its Opposition, the relator disputed Halifax’s claim that its documents were privileged, and claimed further that even if the documents were privileged at some point, Halifax had waived its privilege.

In a two and half page Order, the Court found that “at least some the documents may have been subject to attorney-client privilege or the work-product doctrine.” The Court, however, found that the Halifax “made no showing whatsoever that they face a substantial threat of irreparable injury if the case is not dismissed with prejudice or opposing counsel are not disqualified and so forth.” Again, the Court faulted Halifax for failing to show how the realtor utilized the purportedly privileged documents “in the preparation of the instant case against them” or whether any of the “damaging information” was set forth in the complaint.” In the end, the Court found that even if Halifax “ had demonstrated that some actual harm had occurred, a “showing of past harm would not satisfy the requirement of a substantial threat of irreparable injury” in the future necessary to obtain a preliminary injunction.

These cases show that courts are cautious of defendants who attempt to use sanctions motions offensively to punish relators and dismiss their qui tam actions. To entertain such punitive sanctions, these cases demonstrate that courts require clear evidence of bad faith by the relator and their counsel and the relator’s use –and not just their possession-- of a defendant’s privileged information.