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Former General Counsel and Fellow Plaintiffs Allege Anti-Kickback Statute Violations

December 3, 2013

White Collar

Former General Counsel and Fellow Plaintiffs Allege Anti-Kickback Statute Violations

December 3, 2013

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Taking a Deeper Look at the Opinion in Quest Diagnostics

Defendant Unilab Corp. (“Unilab”), a clinical laboratory company, was acquired by and became the wholly owned subsidiary of Defendant Quest Diagnostics Inc. (“Quest”), through a 2003 cash tender offer and subsequent merger.  Id. at *1.  The relator – or whistleblower – Fair Laboratory Practices Associates (“FLPA”) was a Delaware general partnership formed by three former Unilab executives, Andrew Baker, Richard Michaelson, and Mark Bibi, for the purpose of bringing a qui tam action against Quest and Unilab (together, “Defendants”) for alleged violations of the federal Anti–Kickback Statute, 42 U.S.C. § 1320a–7b.  Id. at *2.

This case turned on and was dismissed because of the fact that individual relator Bibi was Unilab’s Vice President, Executive Vice President, Secretary and, importantly, General Counsel from November 1993 to March 2000.  Id.  As Unilab’s only in-house counsel from 1993-2000, Bibi was responsible for Unilab’s legal affairs, including, but not limited to, regulatory compliance, litigation, and legal matters related to Unilab’s business contracts.  Id. 

According to the complaint, while still employed by Unilab, the individual relators began to suspect that Unilab’s pricing policies might violate the Anti-Kickback Statute, which prohibits the offering of “remuneration” to induce referral of healthcare services that will be paid under a federal healthcare program.  Id.; see also, 42 U.S.C. § 1320a-7a(i)(6), 7(b)(b)(2).  Allegedly, Unilab offered deeply discounted diagnostic services to managed care organizations (“MCOs”) and independent practice associations (“IPAs”) for non-Medicaid and non-Medicare businesses to incentivize the referral of Medicare and Medicaid business to Unilab.  Id.  Unilab would then bill the government for that referred business at substantially higher rates than it charged the MCOs and IPAs.  Id. 

Sometime before or during 1996, Bibi advised Baker, Unilab’s CEO, that Unilab’s pricing scheme might violate the Anti-Kickback Statute.  Id.  Allegedly Baker acted on Bibi’s advice.  Unilab notified its MCO and IPA customers that it would be increasing the prices for its services.  Id. at *3.  That increase dampened Unilab’s profits and Baker left the company.  Id.

In 1999, a new CEO took the helm of Unilab.  According to FLPA, the new CEO reinstituted the practice of offering deeply discounted contracts to MCOs and IPAs in an effort to spur MCOs and IPAs to facilitate referrals, including Medicare and Medicaid referrals, to Unilab.  Id. 

In early 2000, Bibi approached the new Unilab CEO with a recently published U.S. Department of Health and Human Services Office of Inspector General (“OIG”) Advisory Opinion indicating that pricing policies might violate the Anti-Kickback Statute if “the prices offered to MCOs on non-federal business were below ‘actual cost.’”  Id.  Allegedly, the new CEO told Bibi to work with outside counsel to find a “way around” the OIG Advisory Opinion.  Id.  Thereafter, Bibi obtained an opinion letter from an outside law firm but did not report his concerns to the Unilab board.  Id.  By March 2000, Bibi had been replaced as general counsel to Unilab.  Id.  According to FLPA, Unilab maintained its pricing policy in violation of the Anti-Kickback Statute well after Bibi’s departure.  Id. at *3.

At some point, Baker asked Bibi and Michaelson to join him as individual relators.  Id.  After concluding that certain exceptions to the N.Y. Rules governing attorney-client confidentiality permitted such participation, Bibi agreed.  Id.  In 2005, the three formed FPLA and, on June 7, 2005, FLPA filed a qui tam action in the Southern District of New York.  Id. at *4.

In May 2010, after FPLA filed its Second Amended Complaint (“Complaint”), the District Court granted Defendants’ request for discovery regarding whether Bibi had disclosed and FLPA used confidential Unilab information.  Id.  Following that discovery, Defendants filed a motion to dismiss FLPA’s Complaint because Bibi’s participation in the action violated N.Y. Rules prohibiting the attorneys from disclosing client confidences.  Id.

Concluding that the FCA did not preempt applicable N.Y. Rules and finding that Bibi’s participation in the qui tam action violated those rules, the District Court dismissed the Complaint and disqualified FLPA, each individual relator, and FLPA’s outside counsel from bringing any action based on the same facts.  Id.  FLPA appealed.  Id.

Counsel Cannot Use a Company’s Confidential Information Against It

The Court of Appeals for the Second Circuit found, as the District Court had, that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidences.”  Id. at *5.  Citing a tension between an attorney’s duty of confidentiality under the N.Y. Rules and the federal interest to encourage the public to report unlawful and fraudulent conduct against the government, the Court stated that it would interpret and apply the N.Y. Rules in a manner that balanced the “varying ‘federal’ interests at stake.”  Id. at *5.

FLPA admitted that the N.Y. Rules preventing disclosure of confidential client information were implicated by Bibi’s conduct, but argued that Bibi’s disclosure fell within an exception that “authorizes a lawyer to ‘reveal or use confidential information to the extent that the lawyer reasonably believes [such disclosure is] necessary … to prevent the client from committing a crime ….’”  Id. at *6 (citing N.Y. Rules 1.6(b)(2)).  The Court disagreed.

The Court found that the N.Y. Rules’ exception would apply to Bibi’s disclosures if Bibi had reasonably believed that the Defendants intended to commit a crime at the time FLPA filed the action and if his disclosures were necessary to prevent the commission of that crime.  Id.  The Court found that though Bibi might have reasonably believed that Defendants would commit continued violations of the Anti-Kickback Statute, Bibi’s disclosures nonetheless violated the N.Y. Rules because they far exceed what was reasonably necessary to prevent any alleged ongoing or future violations of the Anti-Kickback Statute.  Id.  The Court noted that any disclosures made by Bibi were likely unnecessary because the two other individual relators – former Unilab executives Baker and Michaelson – likely independently possessed sufficient information to have supported the FLPA’s qui tam action.  Id. at *8.

Having found that Bibi’s disclosures to FLPA violated the N.Y. Rules, the Court considered whether the District Court’s dismissal of the qui tam action and disqualification of FLPA, the individual relators, and FLPA’s counsel was proper.  Id. at *9.  The Court confirmed that Bibi’s ethical obligations to Unilab were transferred to Quest as the result of Quest’s acquisition of Unilab.  Id.  Therefore, the District Court did not err in concluding that dismissing Unilab would not resolve the prejudice to Defendants stemming from Bibi’s disclosures.  Id.  Given Bibi’s “unrestricted sharing of confidential information with the other relators” and the fact that dismissal did not foreclose the government or another relator from bringing a qui tam action against Defendants, the Court found no error in the dismissal of the Complaint.  Id.  The Court upheld the District Court’s disqualification of FPLA, the individual relators, and FPLA’s outside counsel from bringing future actions because all were in a position to use the Defendants’ confidential information disclosed by Bibi against Defendants.  Id. at 10.

Lessons Going Forward

First, the easiest way to avoid being the target of an FCA qui tam action is to put in place mechanisms that ensure compliance with any applicable rules and regulations.

Second, executives and managers should be reassured that it is unlikely that confidential corporate information disclosed to in-house and outside counsel will later be used against the company in qui tam actions brought under the FCA.  That said, this decision leaves open the possibility that protected confidences might nonetheless be used against a corporation if exemptions to state rules restricting attorney disclosure of confidential client information are satisfied (e.g., under the N.Y. Rules, it is permissible for an attorney to disclose client confidences to the extent necessary to prevent ongoing crimes).

Third, because state laws governing attorney-client privilege are likely to be enforced, corporations that are subject to a qui tam action under the FCA should actively learn whether any of the information supporting that action is improperly disclosed, protected corporate information.

Fourth, it remains open for debate how courts are likely to treat qui tam actions brought using information obtained in violation of other state laws.  The Court noted “the [FCA] permits any person … to bring a qui tam suit, it does not authorize that person to violate state laws in the process.”   Id. at *5.  This case suggests that courts will likely credit state laws only to the extent those laws can be balanced with the federal interests at stake in the qui tam action.  Id.

How this analytical framework might be applied by courts is unclear.  Most state laws do not implicate concerns regarding the fairness of proceedings in the same way the state rules governing attorney client privilege at issue in this case do.  So a complete dismissal of a qui tam action is, perhaps, less likely to be the result in light of other state law violations.  However, given that state laws are not necessarily preempted by the FCA, it may behoove corporations to minimally seek exclusion of evidence obtained in violation of state laws.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes and is not intended to be and should not be taken as legal advice.

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