Second Circuit Holds In-House Lawyer Precluded from Blowing Whistle on Former Employer

by Holland & Knight LLP
Contact

The Second Circuit issued an opinion tackling the interplay between an attorney's ethical obligation to maintain client confidences and the ability to act as a "whistleblower" to report unlawful conduct to the government. The court's opinion was issued on Oct. 25, 2013, and the case is Fair Laboratory Practices Assocs. v. Quest Diagnostics, et al., 2013 WL 5763181, No. 11-1565-cv (2d Cir. Oct. 25, 2013).

Plaintiffs Alleged Defendants' Pricing Scheme Violated the Anti-Kickback Statute

In 2005, plaintiff Fair Laboratory Practices Associates (FLPA) filed a qui tam action pursuant to the False Claims Act against defendants Quest Diagnostics Incorporated and Unilab Corporation alleging violations of the Anti-Kickback Statute. FLPA was formed for the sole purpose of bringing this qui tam lawsuit against Quest and Unilab. One of the general partners in FLPA, Mark Bibi, previously served as general counsel to Unilab, with the two other partners being former Unilab executives as well. In his role as general counsel, Bibi served as the sole lawyer for Unilab, advising the company on its contracts with managed care organizations (MCOs), managing the company's litigation, and advising the company on compliance with healthcare fraud and abuse laws.

Quest provides diagnostic medical testing services for MCOs and independent practice associations (IPAs). Quest acquired Unilab, a clinical laboratory company, in 2003. The plaintiffs alleged in their federal lawsuit that the defendants violated the Anti-Kickback Statute by operating a "pull through" scheme, whereby defendants charged IPAs and MCOs below cost rates for laboratory tests to improperly induce physicians in the IPAs to refer Medicare and Medicaid-reimbursable patients to the defendants and to induce the MCOs to arrange for their in-network physicians to send Medicare and Medicaid-reimbursable tests to the defendants. The plaintiffs alleged that such a scheme violated the Anti-Kickback Statute, which prohibits offering "remuneration" to induce another person to make referrals for services for which payments may be made under a federal healthcare program. 42 U.S.C. §1320a-7b(b)(2). The statute defines "remuneration" as including "transfers of items or services for free or for other than fair market value." 42 U.S.C. §1320a-7a(i)(6).

Court Found the False Claims Act Does Not Trump Attorney's Duty of Confidentiality

While the federal government clearly has a significant interest in encouraging people to come forward to report fraud and abuse without fear of retaliation, the Second Circuit held that such an interest does not trump the government's strong intent to preserve the attorney-client privilege. Both the Second Circuit and the Southern District judge discussed striking a balance between those interests, which were squarely at odds in this case. In conducting that analysis, both courts rejected the plaintiffs' arguments that the False Claims Act pre-empted the rules of New York state that govern the disclosure of client confidences. Writing for the Second Circuit, Judge Cabranes said, "Nothing 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." Fair Laboratory Practices Assocs., 2013 WL 5763181 at *5.

The proper inquiry then was whether Bibi violated New York's ethics rules by disclosing confidential information about Unilab for use in the lawsuit and whether such a violation warranted dismissal of the underlying complaint and disqualification of the individual relators and their counsel. The court held that New York ethics rules preclude an attorney from disclosing confidential information of a former client, with limited exceptions. N.Y. Rule 1.9(c). One such exception permits disclosure should the lawyer reasonably believe disclosure is necessary to prevent the client from committing a crime. N.Y. Rule 1.6(b)(2). While Bibi may have reasonably believed the defendants were committing crimes by violating the Anti-Kickback Statute, the Second Circuit held that the confidential information revealed by Bibi exceeded what was reasonably necessary to prevent the alleged fraudulent scheme. The Second Circuit acknowledged that the other partners in FLPA possessed sufficient information to bring the action, but Bibi made the conscious decision to participate in the action and to divulge protected client confidences.

Not only did the Second Circuit uphold the district court's finding that Bibi violated the ethics rules, the court also upheld the decision to dismiss the complaint and to disqualify the plaintiffs, and their counsel, from pursuing the action. Because Bibi engaged in "unrestricted sharing of confidential information with the other relators," the Second Circuit held that there was no way to avoid prejudice to the defendants. Fair Laboratory Practices Assocs., 2013 WL 5763181 at *9. The disqualification of FLSA's counsel was similarly found to be within the province of the trial court's discretion.

Implications for Companies in Regulated Industries

This case presented the Second Circuit with a question that has the potential to keep corporate executives up at night: can an in-house attorney use confidential communications to blow the whistle on a former client? To the reassurance of many, the Second Circuit answered in the negative. The opposite result could have struck fear in the hearts of executives in highly regulated industries, such as healthcare, who routinely turn to their in-house colleagues and outside attorneys for advice on the fraud and abuse laws. Since the False Claims Act can bring significant financial payouts to relators, allowing attorneys to divulge client confidences to obtain such payouts would expose them to an inherent conflict of interest. Despite the incentives to whistleblowers in federal statutes, such as the False Claims Act and Dodd-Frank Act, the Second Circuit upheld an ethical check on an attorney's ability to participate as a relator against a former client. It seems that this same principle would apply even more strongly to lawyers and their current clients.

In recent years, Congress has expanded the scope of the False Claims Act and other whistleblower "bounty" provisions as part of healthcare and financial reform. Congress enacted amendments to make it easier for both whistleblowers and the government to pursue actions under both the False Claims Act and the Anti-Kickback Statute. Notably, the Southern District found that the plaintiffs' disqualification did not foreclose the government, the real party in interest in False Claims Act cases, from intervening — a finding not disturbed on appeal. While the federal government opted not to intervene in this particular case, the federal government's declination in these cases is hardly a sure thing. As a result, companies operating in highly regulated industries should ensure they have in place effective compliance programs. While not a complete defense, strong compliance programs give companies potentially powerful arguments against corporate liability.   

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Holland & Knight LLP | Attorney Advertising

Written by:

Holland & Knight LLP
Contact
more
less

Holland & Knight LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.