In U.S. ex rel. Fair Laboratory Practices Associates v. Quest Diagnostic, Inc., the Second Circuit upheld the dismissal of a health care fraud qui tam action because of ethical violations by one of the relators, who was formerly general counsel of defendant Unilab Corporation.
The former general counsel, along with two other former employees of Unilab, formed a partnership, FLPA, to bring a False Claims Act suit as relator against Unilab and Quest, which had acquired Unilab. They alleged violations of the Anti-Kickback Act. The scheme involved allegations that Unilab accepted non-federal business from managed care organizations and physicians’ associations at rates that were unreasonably low, in exchange for referral of business reimbursable through Medicare and Medicaid. The general counsel gave the company his personal opinion that the arrangement was illegal, and he was then allegedly “frozen out” by management and subsequently replaced as general counsel.
The District Court dismissed the complaint, finding that the former general counsel’s participation violated the “side-switching rule” (N.Y. Rule of Professional Conduct 1.9(a)) and the prohibition on unnecessarily disclosing client confidences (Rule 1.9(c)). The Court also disqualified FLPA, each of the relators, and FLPA’s counsel from bringing a similar suit based on the same facts.
The Second Circuit affirmed based on Rule 1.9(c), and did not address the side-switching rule. Rule 1.9(c) prohibits a lawyer from using or revealing confidential client information except as provided under Rule 1.6, which permits disclosure to the extent the lawyer reasonably believes necessary to prevent the client from committing a crime. The Second Circuit agreed that the general counsel could have reasonably believed that a crime was being committed in 2005 when the complaint was filed, but then analyzed the requirement that the disclosures be necessary.
The Second Circuit found that the former general counsel’s disclosures went beyond what was necessary to prevent a crime at the time of the complaint. The confidences disclosed predated the complaint by more than five years, and the fraud could have been alleged without any of the confidential communications. Moreover, it was not necessary for the former general counsel to participate at all, as there were two other relators with knowledge of the alleged fraud. The Second Circuit therefore affirmed the finding of a Rule 1.9(c) violation.
The Court also found no abuse of discretion in the dismissal of the complaint and disqualification of FLPA, FLPA’s counsel, and the individual relators. “[I]n view of [the former general counsel’s] unrestricted sharing of confidential information with the other individual relators, permitting FLPA or any of its individual relators to proceed with the suit would taint the trial proceedings and prejudice defendants.” The Court noted the unique posture of the relators, because they were not the real parties in interest, but sued instead on behalf of the United States, which had declined to intervene. The Court also found disqualification of FLPA counsel appropriate in light of the confidential information likely revealed to them.
This decision arises from an unusual case, an attorney acting as an FCA relator bringing suit against his former client. Courts are likely to closely scrutinize any such suit, but relators may be able to avoid dismissal by minimizing or completely eliminating any reliance on information from former attorneys for the FCA defendants.