S.D.N.Y. Dismisses FCA Case Against Lab Testing Companies Because Complaint Was Based On Client Confidential Information Disclosed By Former General Counsel
In United States ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics, Inc., Unilab Corp. et al., 05-CV-5393 (S.D.N.Y. April 5, 2011), the Southern District of New York dismissed a qui tam action against laboratory testing companies Quest Diagnostics and Unilab because the qui tam complaint was based on confidential information disclosed by Unilab's former general counsel. The relator, Fair Laboratory Practices Associates (“FLPA”), is a general partnership formed by Unilab’s former general counsel, CEO, and CFO for the sole purpose of commencing a qui tam action against the lab companies. All three senior executives started working at Unilab in the early to mid 1990s and had left the company by early 2000. Unilab was acquired by a Quest Diagnostics subsidiary in 2003. The relator filed the qui tam complaint in 2005, and an amended complaint was unsealed in 2010. The government has not yet decided whether it will intervene in the action.
In the qui tam complaint, FLPA alleged that defendants violated the Federal Health Care Anti-Kickback Act, 42 U.S.C. §§ 1320a-7(b) (“AKS”) by offering medical testing services for managed care patients at a substantial discount or below cost in order to receive referrals of Medicare and Medicaid patients that defendants could bill directly. FLPA further alleged that defendants violated the AKS through their operation of an ongoing “pull through” scheme in which defendants charged independent physician associations (“IPAs”) and managed care organizations (“MCOs”) below cost rates for the performance of laboratory tests so as (1) to induce the physicians in the IPAs to refer Medicare and Medicaid-reimbursable tests to defendants and (2) to induce the MCOs to arrange or recommend that their in-network physicians send Medicare and Medicaid-reimbursable tests to defendants.
After conducting limited discovery, the defendant lab companies moved to dismiss on the ground that the relator FLPA, its general partners, and its outside counsel should be disqualified from the suit because the suit was based, in part, on confidential client information from Unilab’s former general counsel. Defendants contended that Unilab’s former general counsel disclosed Unilab’s confidential information to which he was privy as general counsel to his partners at FLPA, to FLPA’s outside counsel, and to counsel for the United States, thereby breaching his duty of loyalty to his former client, and warranting dismissal of the qui tam complaint as a sanction for the ethical violation.
FLPA did not contest the characterization of some of this information as confidential, but claimed that because Unilab’s former general counsel had knowledge of a continuing crime, his disclosure fit within an exception to his duty of confidentiality, and thus did not violate ethical rules. During his deposition, Unilab’s former general counsel testified that while he was initially hesitant about participating in the lawsuit because of his ethical obligations to Unilab, he “got confident” that he could join as a relator once he reviewed New York’s and the American Bar Association’s Rules of Professional Conduct. After that, he explained, “I intellectually concluded that I could spill my guts and disclose everything.” (Opinion, p. 12 (alterations omitted)).
The court rejected the former general counsel’s interpretation of the relevant ethical rules and held that his disclosures were too broad to fit within the continuing crime exception to the ethical rules. Specifically, the court held that the disclosure of confidential information dating back to 1996 went beyond the scope of information that Unilab’s former general counsel could have reasonably believed was necessary to prevent a crime in 2005. After ruling that the False Claims Act does not preempt state ethical rules, the court held that the appropriate remedy was to dismiss FLPA’s complaint and disqualify FLPA, its general partners, and its outside counsel from this suit and any subsequent suit based on these facts. The court observed that this remedy has no effect on the ability of the government to intervene and proceed against the defendants based on the allegations in the relator’s qui tam complaint, but noted in a footnote at the end of the opinion that factual issues with the complaint may give the government pause to proceed. This case highlights the importance for the defense of using limited discovery at the beginning of an action to test the relator’s allegations and set up a powerful dispositive motion early in the case.