Influential Appeals Court Rejects Attempt by Former In-House Counsel to Use Privileged Information Against Company in Whistleblower Lawsuit

The pool of potential qui tam relators may have just shrunk a little, based on a recent decision by the 2nd Circuit Court of Appeals that has put the ability of in-house lawyers to become qui tam relators into serious question. At least according to the 2nd Circuit, whose decisions are binding in New York, Connecticut, and Vermont and influential elsewhere, lawyers cannot use privileged information to blow the whistle on their current or former clients. In Fair Laboratory Practices Associates v. Quest Diagnostics, the 2nd Circuit dismissed a federal False Claims Act case brought by the former general counsel of a clinical laboratory company, finding that the use of privileged material barred the former general counsel from suing his former company (and client) as a qui tam whistleblower. While most circuits have yet to rule on this issue, the Fair Laboratory Practices Associates case makes it decidedly more difficult and risky for a lawyer to become a qui tam relator. The case does not address whether there might be any limitations on the ability of compliance officers and other company employees from acting as qui tam relators.

Mark Bibi served as general counsel to a clinical laboratory company called Unilab, with operations throughout California. Three years after Bibi left Unilab, it was purchased by Quest Diagnostics, a national laboratory testing company. Both Quest Diagnostics and Unilab performed diagnostic medical testing services for numerous managed care organizations (“MCOs”) and independent practice associations (“IPAs”). After leaving Unilab, Bibi joined forces with two other former Unilab executives, the former CEO and CFO, to form Fair Laboratory Practices Association (“FLPA”) for the purpose of bringing the qui tam lawsuit against Unilab and Quest Diagnostics. The lawsuit alleged that Unilab and its successor, Quest Diagnostics, violated the federal Anti-Kickback statute (“AKS”), 42 U.S.C. §1320a-7b(b)(2), by offering discounted capitated rates to MCOs and IPAs for their commercial patients to induce them to refer Medicare and Medicaid (Medi-Cal) patients. This alleged AKS violation is described in the complaint as a “pull through” scheme. Violations of the AKS can be the basis for a claim under the False Claims Act, thus implicating the qui tam statute. See 42 U.S.C. § 1320a-7b(g).

Quest Diagnostics moved to dismiss the qui tam lawsuit on the ground that the factual basis for FLPA’s lawsuit was derived from attorney-client privileged information that Bibi obtained from Unilab in his capacity as general counsel. FLPA did not dispute that it used privileged information, but argued that Bibi was entitled to use such information as the basis for a qui tam claim because: (1) the federal interest behind the qui tam statute (31 U.S.C. §§ 3730, et. seq.) is to encourage whistleblowers to come forward; (2) section 3730(b)(2) requires qui tam plaintiffs to disclose all material evidence and information to the government; and (3) although the New York Rules of Professional Conduct (“NY Rules”) generally prohibit lawyers from revealing privileged or confidential information, NY Rules 1.9(c) and 1.6(b)(2) permit disclosure “to the extent the lawyer reasonably believes necessary. . . to prevent the client from committing a crime. . .” FLPA asserted that Quest Diagnostics was involved in ongoing violations of the AKS when FLPA’s complaint was filed.

The 2nd Circuit rejected FLPA’s arguments, and affirmed the district court’s dismissal of the lawsuit and decision to disqualify FLPA and its counsel. The court reasoned that the federal False Claims Act does not permit would-be whistleblowers to violate applicable state law or rules, such the NY Rules. The court also found that Bibi disclosed far more than was necessary to prevent Quest Diagnostics from committing a crime, thus violating NY Rule 1.6(b)(2), and that this improper disclosure tainted the former CEO and CFO, and FLPA’s law firm, as well. The former CEO and CFO had sufficient information on their own to bring a qui tam case, but the court found that the intermingling of the privileged information contributed by Bibi also disqualified them and FLPA’s counsel. Although the government had declined to intervene in the qui tam case during the district court proceedings, the court stated that the dismissal did not affect the government’s right to pursue a case against Quest Diagnostics. The court also stated that the dismissal did not preclude other qui tam plaintiffs from bringing a case, if they qualified as proper qui tam plaintiffs. The court did not address whether the government’s ability to bring a case would be affected by its receipt of information improperly disclosed by Bibi, perhaps because the government’s previous declination made this academic. This question, however, could be important in other contexts, such as when an in-house lawyer provides information to the government without bringing a whistleblower lawsuit.

The 2nd Circuit’s opinion should make any in-house lawyer (or perhaps even outside counsel) think long and hard before trying to turn on a former client as a qui tam whistleblower. The opinion still leaves open the possibility that an in-house lawyer could properly use privileged information as the basis for a qui tam lawsuit if the lawyer does not disclose more than what is reasonably necessary to prevent the client from committing a crime. Of course, the lawyer would be taking the risk that a court or bar ethics panel might later take a different view of what was “reasonably necessary” to disclose compared to the lawyer’s actual disclosures. Although not specifically mentioned by the court, it is likely that an underlying principle of its decision is that lawyers are expected to advise corporate clients on compliance with the law, not to look for ways to profit personally from the company’s alleged wrongdoing. In this regard, the 2nd Circuit specifically noted that Unilab’s former general counsel never reported his concerns to the company’s board, which might be required under NY Rule 1.13.

The 2nd Circuit’s decision focuses on the unique role and obligations of lawyers to their clients. The ruling does not address whether compliance officers and others might be subject to any limitations on their ability to be qui tam relators given the nature of their job and their duties to the company. It should be noted that other courts have found that compliance officers and compliance personnel are entitled to use the information gathered in the course of their duties to bring a qui tam whistleblower claim, although compliance personnel who are also attorneys might face the same hurdles to the extent they seek to rely upon privileged information. See Kathleen M. Boozang, “The New Relators: In-House Counsel and Compliance Officers,” 6 J. of Health & Life Sciences Law 16 (2012).