Quirky Question # 175: In-House Counsel Barred From Qui Tam Action Against Former Employer
I know you have written in the past about former in-house counsel suing their former employers in connection with their terminations. We have a slightly different twist on that situation. Our former in-house counsel has filed a qui tam lawsuit against our firm based on information he learned while employed and his supposition about what occurred after his employment ended. He apparently does not think this violates any Rules of Professional Conduct. His conduct, however, seems questionable to us, since he learned the underlying facts during the period he was employed. Can you provide any guidance?
As you note, in past articles, we have written about the limitations that courts have imposed on former in-house counsel suing their former employers for various alleged wrongs. Some states’ courts ban these suits altogether because of the sanctity of the attorney-client privilege. Other states’ courts restrict the rights of attorneys to initiate lawsuits when the subject matter of the suits falls squarely within the attorney’s former job responsibilities. Other courts have examined whether the language of the states’ Whistleblower statutes impose any restrictions on in-house counsel asserting a Whistleblower claim and have considered whether such a claim would be consistent with the confidentiality obligations set forth in the Rules of Professional Responsibility.
The question you ask is whether a former in-house counsel can bring suit against his former employer when his role is that of plaintiff in a qui tam action. As you may know, in essence, under the federal False Claims Act (“FCA”), a private party may bring a claim that another individual or entity has submitted false claims to the U.S. Government. (There also are parallel state statutes.) The parties initiating the lawsuit, called “relators” are basically filing suit on behalf of the U.S. Government. The FCA is structured so that the relator’s Complaint is filed under seal for a period of sixty (60) days, during which time it is not served on the defendant(s), to allow the U.S. Government the opportunity to evaluate whether it wishes to intervene in the lawsuit.
Here, you point out that your former in-house has concluded that his actions do not violate any rules of professional conduct. Although, as discussed below, one might disagree with his conclusion, at least he is starting his analysis in the right spot.
More than one court has examined the issue of whether the FCA somehow vitiates state law, particularly the Rules of Professional Conduct. For example, in U.S. ex rel. Doe v. X. Corp., 862 F. Supp. 1502, 1507 (E.D. Va. 1994), the court concluded that “nothing in the False Claims Act preempts state statutes and rules that regulate an attorney’s disclosure of client confidences.” The court further emphasized, “where an attorney’s disclosure of client confidences is prohibited by state law in a given circumstance, that attorney risks subjecting himself to corresponding state disciplinary proceedings should he attempt to make the disclosure in a qui tam suit.”
The next question, therefore, would be whether your state’s Rules of Professional Responsibility would bar your former attorney from making the disclosures contemplated by the litigation. A corollary inquiry would be whether your former in-house counsel would be able to rely upon any exceptions to the rules governing the disclosure of otherwise privileged information, specifically, the “crime-fraud exception.” More on these issues below.
Given that the FCA does NOT preempt state statutes and disciplinary rules, your former in-house counsel is taking the risk of disciplinary action by pursuing the claim against your firm. But, perhaps a disciplinary remedy would be inadequate to protect your company’s interests. It could be that you would prefer to see the lawsuit dismissed and your former in-house attorney barred from pursuing the claim.
This is the situation the defendant company experienced in the recent case of United States of America ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Inc., et al., Civil File No. 05 Civ. 5393 (S.D.N.Y. March 24, 2011). In the Quest Diagnostics case, three former senior executives – the CEO, CFO, and General Counsel (“GC”) – filed a qui tam action against their former employer. These three individuals based their qui tam action on the contention that their former employer had violated, and was continuing to violate, the federal Health Care Anti-Kickback Act (“AKA”). The former CEO and CFO persuaded the former GC to participate in the lawsuit because they felt that his participation would enhance their “credibility” with the government. But, his decision to join was complicated by the fact that during his tenure he was the “sole lawyer employed by the company and was responsible for all of the company’s legal affairs,” including advising the company on its managed care contracts and its compliance with health care fraud and abuse laws, the very issues implicated by the qui tam lawsuit.
These three former executives formed a Delaware general partnership, Fair Laboratory Practices Associates (“FLPA”), for the sole purpose of prosecuting the qui tam action. As reflected in the court’s opinion, the former GC examined the New York Rules of Professional Conduct and concluded that because he felt the defendants were “continuing” to defraud the government, he could rely on the exceptions to the ethical rules regarding a lawyer’s obligation to maintain client confidences. Thereafter, as the former GC testified, he concluded he could “spill his guts . . . and disclose everything” to his former fellow execs.
The GC advanced the position that he was not “representing” another person when he sued as a relator. He argued, therefore, that his actions did not fall within the disciplinary rules that prohibit a lawyer from representing another party in the same or substantially related matter, in which the new party’s interests are materially adverse to the interests of the former client.
Unfortunately for the former in-house counsel, the court disagreed with his analysis. First, the court found that in his capacity as a relator, bringing a qui tam action, the GC was “representing” another party, the U.S. Government. See, FCA, 31 U.S.C. § 3730(b) (essentially stating that a qui tam relator may bring an action for the person and for the U.S. Government and that the action “shall be brought in the name of the government.”) Consequently, the court found that the GC fell within the proscriptions of the disciplinary rules, insofar as he was “representing” another party.
Second, the court pointed to the maxim that a lawyer cannot do indirectly that which he is prohibited from doing directly. The court found that a lawyer pursuing a qui tam action as a relator is basically doing indirectly what the Rules of Professional Conduct prohibit him from doing directly. Because the GC could not have represented FLPA as outside counsel, he could not represent FLPA as a member of the partnership that he formed for the sole purpose of pursuing the litigation. The court noted that allowing the former GC to participate in the litigation as a party would undermine the attorney-client privilege, the “oldest of the privileges for confidential communications known to the common law.” The court observed that accepting the GC’s position would “stand squarely in conflict with the spirit of the [disciplinary] rule and the great federal interest in preserving the sanctity of the attorney-client relationship.”
Third, the court examined the former in-house counsel’s argument that he was entitled to breach the confidences imposed by the attorney-client privilege because of the “crime-fraud” exception, the doctrine that, in general, permits a lawyer to reveal the intention of a client to commit a crime and the information necessary to prevent the crime. The court rejected the GC’s reliance on the crime-fraud exception because it concluded his disclosures went beyond those necessary to comply with this limited exception. As the court pointed out, a disclosure adverse to a client’s interest “should be no greater than the lawyer reasonably believes necessary to the purpose.” (Internal citations omitted.) In Quest Diagnostics, the GC revealed information dating back to 1996, ostensibly to “prevent” a crime occurring in 2005. The undercurrent of the court’s analysis was that the former in-house counsel was attempting to parlay his knowledge of his former employer’s illegal activities and the revelation of those activities into personal financial gain.
Finally, having concluded that the former GC could not participate in the qui tam action as a member of the FLPA partnership, the court had to fashion an appropriate remedy. In the Quest Diagnostics case, the court felt that the appropriate remedy was disqualification not only of the former GC but also of the other two executives and the FLPA partnership, all of whom had been tainted by the GC’s disclosure of confidential information. Further, the court found that FLPA’s outside counsel also had been tainted by the disclosure of the privileged data and disqualified FLPA’s law firm as well. In reaching these determinations, the court noted that the U.S. Government still had the right to intervene in the action and continue independently the suit against the same defendants based on the same alleged conduct.
As the Quest Diagnostics decision illustrates, courts continue to treat the attorney-client privilege with reverence and repudiate conduct that undermines the privilege. In the Quest Diagnostics decision, this also meant that a former in-house counsel, and all those associated with him, were barred from pursuing a qui tam action against his former employer. This case is consistent with the growing body of case law that either completely prohibits, or imposes significant restrictions, on a former in-house lawyer’s right to sue his former employer.