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Oct. 28 --Disclosures by a company's former general counsel in a qui tam suit against it under the False Claims Act violated the lawyer's duty of confidentiality to the former client and justified dismissal of the action, the U.S. Court of Appeals for the Second Circuit decided Oct. 25 (Fair Lab. Practices Assocs. v. Quest Diagnostics Inc., 2013 BL 295703, 2d Cir., No. 11-1565-cv, 10/25/13).
Speaking through Judge José A. Cabranes, the court held that the lawyer acted unethically in sharing the former client's secrets in the qui tam suit because ample nonconfidential information was available to support the action. The district court did not go wrong in throwing out the lawsuit and disqualifying the lawyer, his fellow plaintiffs, and their outside counsel from instituting similar litigation based on the underlying facts, the court concluded.
From 1993 through the spring of 2000, Mark Bibi served as general counsel for Unilab Corp., which is now owned by Quest Diagnostics Inc. As sole in-house counsel for Unilab in its business of providing medical testing services, Bibi advised the company on compliance with health care fraud laws and its contracts with managed care organizations.
After leaving the company, Bibi joined up with two other ex-Unilab executives and formed a general partnership, Fair Laboratory Practices Associates, for the purpose of prosecuting a qui tam action against Quest under the False Claims Act.
In the complaint, FLPA alleged that starting in 1996 Unilab and Quest violated a federal anti-kickback statute in offering medical testing services for managed care patients at a substantial discount or below cost so as to receive referrals of Medicare and Medicaid patients.
In the district court proceedings the opponents presented conflicting opinions from ethics experts. Relying on an opinion from professor Andrew M. Perlman of Suffolk University law school, Bibi contended that his involvement in the lawsuit did not amount to “representing” an adverse party, and that he had the right to “spill his guts” about Unilab because he believed its ongoing practices were criminal under the anti-kickback statute.
But the defendants -- supported by professor Stephen Gillers of New York University law school -- asserted that Bibi's role in the litigation adverse to Unilab and his extensive disclosures of its confidences were improper and tainted the suit.
Siding with the defendants, the district court dismissed the action and disqualified FLPA, its partners, and its outside counsel from bringing any subsequent qui tam action based on the same facts. The court of appeals affirmed.
As an initial matter, the court ruled that a lawyer's disclosure of client confidences in such actions must comport with state ethics rules. “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,” Cabranes wrote.
The FCA permits individuals who know of fraud against the government to bring a qui tam suit but does not authorize them to violate state laws in the process, the court said.
The opinion applies the New York Rules of Professional Conduct rather than the state's former Code of Professional Responsibility, which was in effect at the time of Bibi's disclosures. The new rules are substantively unchanged, Cabranes said.
The issues in this case, Cabranes said, arise out of the tension between a lawyer's ethical duty of confidentiality and the federal interest in encouraging whistle-blowers to disclose unlawful conduct harmful to the government. The ethics rules must be interpreted and applied with awareness of the federal interest in encouraging private individuals to bring forward information about fraud being perpetrated against the government, he noted.
With these principles in mind, the court assessed Bibi's conduct under Rule 1.9(c), which forbids disclosure or adverse use of a former client's confidential information unless permitted by an exception.
The court concluded that Bibi's disclosures were not allowed under the exception in Rule 1.6(b)(2), which authorizes a lawyer to reveal or use confidential information to the extent the lawyer reasonably believes necessary to prevent the client from committing a crime.
Although Bibi could reasonably have believed at the time of filing in 2005 that Quest intended to violated the anti-kickback statute, it was not necessary for him to reveal the confidential information he disclosed in the complaint, the court ruled.
FLPA emphasized that the False Claims Act requires those who bring a qui tam suit to make written disclosure to the government of all material information they possess. The court was not persuaded, however, that the FCA preempts Rule 1.6 in this regard.
“Rule 1.6(b)(2) implicitly accounts for the federal interests at stake in the FCA by permitting disclosure of information 'necessary' to prevent the ongoing commission of a crime,” Cabranes explained.
Alternatively, FLPA argued that Bibi complied with Rule 1.6(b) by tempering his disclosures until his deposition, when he finally testified about a key conversation with a Unilab executive and revealed the existence of an opinion letter that Unilab had obtained from outside counsel.
The court agreed with the district court that the confidential information Bibi revealed was greater than reasonably necessary to prevent any alleged ongoing fraudulent scheme in 2005. “By FLPA's own admission, it was unnecessary for Bibi to participate in this qui tam action at all, much less to broadly disclose Unilab's confidential information,” Cabranes stated.
The other two former Unilab executives who were Bibi's partners in FLPA could have brought the qui tam action based on their own knowledge, or if necessary, Bibi could have made limited disclosures, the court said. In a footnote, it mentioned the recently issued New York County Ethics Op. 746 (2013), which advised that Rule 1.6 generally does not allow corporate lawyers to reveal client confidences to collect a whistle-blower bounty under the Dodd-Frank Act.
The court did not consider whether, as the district court ruled, Bibi also violated Rule 1.9(a) on former-client conflicts through his involvement in the qui tam action. It was unnecessary to reach this issue, Cabranes said.
The court concluded that the district court's broad grant of relief was not an abuse of discretion in light of Bibi's unrestricted sharing of Unilab's confidences in the qui tam action. It would taint the trial and prejudice the defendants to permit FLPA or its partners to go forward with the suit, the court reasoned.
Merely dismissing Unilab as a defendant and leaving the suit in place against Quest would not adequately purge the taint, the court added, noting that Bibi's duty of confidentiality to Unilab was transferred to Quest upon its purchase of Unilab.
The court also approved the district court's decision to disqualify the two law firms that have been representing FLPA. Although those firms did not commit the ethics violations at issue, they were in a position to use the information Bibi divulged to give present or future clients an unfair advantage, Cabranes reasoned.
Andrew H. Schapiro of Quinn Emanuel Urquhart & Sullivan, LLP, New York, appeared for FLPA, with Charles P. Greenman, Karen F. Lederer, Elliot Cohen, Bennet J. Moskowitz, George A. Somerville and Christina H. Bost Seaton of Troutman Sanders LLP, New York, and Philip R. Michael of Michael Law Group, New York, on the brief.
Peter D. Keisler, Sidley Austin LLP, Washington, D.C., appeared for Quest and Unilab, with Richard D. Raskin, Scott D. Stein and Allison W. Reimann, Sidley Austin LLP, Chicago, and Kevin McGinty of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, on the brief.
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