A recent decision by a federal district court affirmed the ability of defendants in False Claims Act actions brought by qui tam relators to assert counterclaims against relators. The court’s opinion highlights the opportunity for defendants to hold relators accountable for a range of misconduct, including unauthorized retention and disclosure of confidential corporate documents, and emphasizes that such claims are fair game in False Claims Act litigation under the right circumstances.

In the decision of United States ex rel. Cooley v. ERMI, LLC et al. (N.D. Ga) (Cooley), District Judge Thomas Thrash Jr. denied in large part a False Claims Act (FCA) relator’s motion to dismiss the defendants’ counterclaims for breach of fiduciary duty and breach of contract. [1] The relator, defendants’ former Chief Compliance Officer, had filed a qui tam complaint against the defendants for allegedly fraudulent actions that occurred while she was an officer of the company.

The defendants filed counterclaims alleging that the relator, in her role as CCO and an officer, owed a fiduciary duty to defendants and breached that duty, including by retaining defendants’ property after her employment ended. The defendants separately counterclaimed that the relator breached the confidentiality agreement in the employment agreement between the parties by retaining defendants’ confidential information unrelated to the facts at issue in the FCA action. Defendants also counterclaimed for litigation expenses. [2]

The relator argued that the counterclaim for breach of fiduciary duty should be dismissed because it was contrary to public policy, precluded by the claim of breach of a contractual duty, and barred by the economic loss rule. The relator also argued that the counterclaim for breach of her confidentiality agreement with defendants should be dismissed as against public policy.

The court found for the defendants on each of the arguments. Most important for FCA defendants, the court concluded that public policy did not bar the counterclaims based on the relator’s improper retention and disclosure of confidential information.

CONTRIBUTION AND INDEMNIFICATION BARRED, BUT COUNTERCLAIMS FOR INDEPENDENT DAMAGES PERMITTED

Relators frequently argue that counterclaims brought by FCA defendants against qui tam relators are barred as a matter of public policy because they would amount to indemnification or contribution for alleged fraudulent conduct barred by the FCA. The court in this action addressed this common argument by noting that “[t]he unavailability of contribution and indemnification for a defendant under the FCA now seems beyond peradventure.” [3] Courts have frequently held that at least some counterclaims are barred by the FCA as a matter of public policy because they would amount to indemnification or contribution. [4]

However, this limitation does not preclude all counterclaims brought by qui tam defendants. Permitted counterclaims include those based on “independent damages.” [5] Courts have recognized that there are two types of counterclaims that are based on independent damages: “(1) counterclaims in which the conduct at issue is distinct from the conduct underlying the FCA case and (2) counterclaims in which the defendant’s claim, though bound up in the facts of the FCA case, can only prevail if the defendant is found not liable in the FCA case.” [6]

The court in Cooley analyzed the relator’s motion to dismiss based on public policy as the first type of counterclaim and assessed whether “none of the elements of the counterclaim’s cause of action implicate Defendants[’] liability under the FCA.” [7]

PUBLIC POLICY DID NOT PREVENT OR BAR THE COUNTERCLAIMS FROM PROCEEDING

The court addressed the claims in turn, finding that they were not barred by public policy because they involved documents and information potentially unrelated to the underlying FCA claims.

Most significantly, the court addressed defendants’ counterclaims alleging that the relator’s retention, disclosure, and failure to return defendants’ confidential information amounted to breach of fiduciary duty and breach of contract. The court found that, under Georgia law, one can only breach a fiduciary duty by using the confidential information against the other party. Because the only alleged use of the information against defendants was the FCA action, the counterclaim for breach of fiduciary duty due to the relator’s retention of confidential information was barred as a matter of public policy. [8]

However, the court held that the breach of contract counterclaim for retention of confidential information was not barred by public policy because the allegations were “not explicitly limited to [relator’s] preparation for and pursuit of her FCA claims” and that defendants did not have to identify specific documents that were unrelated to relator’s FCA claims to survive the motion to dismiss. [9] In so holding, the court relied on a line of cases including United States ex rel. Walsh v. AmerisourceBergen, in which independent counterclaims were asserted against the relator that were permitted to proceed.*

The court also addressed defendants’ breach of fiduciary duty claims, finding that the allegation that the relator (a nonlawyer) breached her fiduciary duty by misleading defendants to believe they were receiving legal advice was not barred by public policy because the legal advice “involved subject matter that is entirely unrelated to the underlying FCA claims.” [10]

The court also addressed defendants’ allegation that the relator breached her fiduciary duty and damaged defendants by misleading them about the status of the medical license application process that was at the heart of the FCA claim.

The court found that the counterclaim was not barred despite the similar underlying substantive facts since the relator’s alleged mishandling of the application process was “truly independent of the FCA claims because it does not require as an essential element that the FCA defendant was liable—or not liable—in the FCA case” when defendants’ counterclaim alleged that the relator’s actions subjected them to litigation brought by one of their competitors under the Florida Deceptive and Unfair Trade Practices Act. [11]

KEY TAKEAWAYS

• Relator Misconduct Can Give Rise to Independent Counterclaims. Judge Thrash’s decision underscores that where a relator’s conduct violates contractual or common law duties, counterclaims against such relator alleging damages due to their conduct can survive even if the underlying facts at issue are the same as those in the FCA matter so long as it is an independent cause of action.
• Relator Ability to Retain and Use Confidential Information Is Not Unlimited. Relators frequently obtain and retain large amounts of data from FCA defendants and try to use that information in support of their claims. The court’s holding that a counterclaim alleging that a former employee relator’s retention, disclosure, and failure to return confidential information violated a confidentiality provision was not barred by public policy, and therefore could survive a motion to dismiss, is significant in imposing a check on FCA relators that may attempt to retain and use a company’s confidential information for an unauthorized purpose.

NEXT STEPS

Cooley follows a growing line of cases that identify independent causes of action that can survive a motion to dismiss. Defendants should evaluate a potential counterclaim when relators’ independent actions have caused harm beyond the FCA context and when relators have violated their fiduciary duties and/or terms of their employment agreements.

* Morgan Lewis represented AmerisourceBergen in this matter.

[1] See United States ex rel. Cooley v. ERMI, LLC et al., No. 1:20-CV-4181-TWT, 2024 WL 815514 (N.D. Ga. Feb. 27, 2024).

[2] The court had previously denied in part and granted in part the relator’s Motion to Dismiss Defendants’ Counterclaims, granting the motion to dismiss the breach of fiduciary duty and negligence per se counterclaims with leave to amend and denying the motion to dismiss the breach of contract claims based on the parties’ confidentiality agreement. See United States ex rel. Cooley v. ERMI, LLC et al., 2023 WL 7224174 (N.D. Ga. Nov. 2, 2023). The defendants then filed First Amended Counterclaims. Before the court was the relator’s Motion to Dismiss Defendants’ First Amended Counterclaims.

[3] United States ex rel. Cooley v. ERMI, LLC et al., 2024 WL 815514, at *2 (citing United States ex rel. Miller v. Bill Harbert Intern. Const. Inc., 505 F. Supp. 2d 20, 26 (D.D.C. 2007)).

[4] Id. at *2.

[5] Id. (citations omitted).

[6] Id. (citations and quotations omitted).

[7] Id. (citations and quotations omitted).

[8] Id. at *5.

[9] Id. at *6-8.

[10] Id. at *3. This claim was ultimately dismissed on other grounds.

[11] Id.

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