The Second Circuit recently affirmed the dismissal of a False Claims Act lawsuit brought by the former general counsel of a clinical laboratory because the counsel disclosed confidential information in violation of state ethics rules. In Fair Labor Practices Associates v. Quest Diagnostics Inc., 2013 WL 5763181 (2nd Cir. Oct. 25, 2013), the Second Circuit found that the lawyer’s ethical obligations to his former client outweighed the federal interest in encouraging whistleblowers to disclose FCA violations. The decision encourages companies to seek guidance and speak candidly with their lawyers about FCA compliance.
Background
The complaint in this case alleged that the defendant laboratory violated the FCA by overcharging Medicare and Medicaid to subsidize discounts to private insurers. Three of the defendant’s executives – its CEO, CFO, and general counsel – questioned the legality of this practice before leaving the company. They later formed a general partnership for the express purpose of filing this qui tam suit. After the former general counsel allegedly revealed confidential communications in pleadings and in deposition testimony, the defendant laboratory moved to dismiss, arguing that the lawyer had violated his ethical obligations under the New York Rules of Professional Conduct. Specifically, the defendant laboratory alleged the lawyer “us[ed] confidential information of a former client…to the disadvantage of the former client” without “reasonably believing [the use to be] necessary to prevent the client from committing a crime,” a violation of N.Y. Rules 1.9(c) and 1.6(b)(2). The district court agreed, dismissing the entire case and disqualifying all three relators and their counsel from bringing another qui tam suit on these facts.
The Second Circuit affirmed. The court held that the FCA does not preempt state law regulating attorney disclosure of client confidences. It then acknowledged the tension between an attorney’s ethical duty of confidentiality and the federal interest in encouraging disclosure of FCA violations, but held that the balance tipped in favor of protecting confidentiality because there were alternative means of exposing the scheme and alternative parties who could expose it.
Impact
The Second Circuit’s decision reaffirms the longstanding tradition of clients being able to communicate freely with their counsel without fearing that their confidential communications may become the basis of a later suit. If the court had sided with the former general counsel, lawyers may have had a financial incentive to divulge their clients’ confidential information, and companies may have been discouraged from seeking legal advice about FCA compliance.
Haynes and Boone has extensive experience defending clients in qui tam and False Claims Act investigations and lawsuits. If you have any questions or would like to discuss these issues further, please visit the False Claims Act/Qui Tam litigation page of the Haynes and Boone, LLP website or contact: