Trial Magazine

Employees who blow the whistle on private corruption and fraud by suing their employers under the False Claims Act (FCA)¹ are increasingly facing retaliatory tactics meant to deter whistleblowers. Here are the typical retaliatory claims that defendants bring, ways to protect and advise your whistleblower clients, and tactics for responding when those claims are filed.

The FCA prohibits any person from knowingly filing a false claim or using a fraudulent statement to obtain payment from the government.² It also allows any person who has information about such conduct to file a qui tam suit on the government’s behalf.³ Known as “relators,” these whistleblowers—who are typically employees of the defendant company—must file the cases under seal and serve the government with the complaint and any relevant information related to the alleged fraud.⁴ After the government decides whether to intervene, the case is unsealed.

If the government decides not to intervene,⁵ the relator may continue the suit, although the relator may also and often does dismiss the case.⁶ In cases that are pursued, defendants are increasingly filing cross-claims and separate suits alleging breach of contract or breach of fiduciary duty against relators and sometimes even their counsel. These claims are intended to punish whistleblowers and chill other would-be relators and their counsel from filing in the first place.

Breach of Contract

The FCA requires the relator to provide the government with substantially all “material evidence and information.”⁷ However, defendants have brought retaliatory breach of contract claims against relator employees who have taken or copied documents from their workplaces to substantiate their allegations.

In United States ex rel. Cafasso v. General Dynamics C4 Systems, Inc., for example, the relator sued under the FCA, claiming that her employer had defrauded the government.⁸ The government declined to intervene, and when the relator elected to pursue the case, the defendant moved to dismiss and filed a counterclaim for appropriation and breach of a confidentiality agreement that the relator had signed as part of her employment.⁹ The relator testified that she “grabbed” whole folders without reviewing individual documents, which the district court concluded was the “unselective taking of documents” that warranted granting summary judgment for the defendant on its counterclaim.¹⁰ The Ninth Circuit affirmed.

In other cases in which the relator has been more selective about copying or taking documents to provide to the government, courts have dismissed breach of contract claims on the ground that they violate public policy. For example, one court found that “enforcing a private agreement that requires a qui tam plaintiff to turn over his or her copy of a document, which is likely to be needed as evidence at trial, to the defendant who is under investigation would unduly frustrate the purpose” of the FCA.¹¹

Further complicating the issue is the Defend Trade Secrets Act (DTSA): Passed in May 2016, it provides criminal and civil immunity for people who disclose a trade secret in confidence to a federal, state, or local government official or to an attorney when reporting or investigating a suspected violation of law or include the trade secret in a complaint filed under seal.¹² Currently, it is unclear whether this law will be interpreted to include state breach of contract claims.

---

To prepare for possible breach of contract claims, ask your client whether they have signed a confidentiality agreement as part of their employment. If available, review it.

---

To prepare for possible breach of contract claims, ask your clients whether they have signed a confidentiality agreement as part of their employment. If available, review it. If the client does not recall signing one, assume that he or she has, particularly if the client is in the military contracting or health care industries.

Advise your clients that even if they carefully select documents to produce to the government, they still may be subject to counterclaims for breach of contract if they signed a confidentiality agreement. Defendants can survive a motion to dismiss this counterclaim simply by alleging that the relator took documents unrelated to the FCA case, so these claims may have to be litigated through discovery and summary judgment.¹³

The DTSA may provide your client immunity, but since its scope is unclear, warn clients of these risks, and keep them in mind when evaluating whether to take the case.

Acquiring documents. If your clients still work at the company and wonder what documents to copy, emphasize that they should only copy documents that they would encounter in their normal and ordinary course of business and that are specifically related to the FCA allegations. You may need to explain what kinds of documents are needed, such as claims data or communications specifically related to the alleged fraud, to guide the client’s selective collection.

Another option is to tell your client to copy the relevant documents—again, selectively—and to place hard copies or a USB drive containing the documents in a secure place on the employer’s property. He or she can then notify the government of the documents’ location, and the government can retrieve them through a civil investigative demand. Although this option is not optimal as the relator will not be considered to have produced the documents to the government, this mechanism can provide some protection from counterclaims if your client is concerned about legal exposure.

If your client has already left the company with documents, it is your responsibility to sort through them and produce only those documents that are related to the client’s claims. It is also prudent to have an attorney at the firm who will not be involved in the case—or one you contract with specifically for this task—review documents for attorney-client privilege.

Any documents that appear to be privileged should be placed in a separate, sealed file that should not be reviewed by counsel working on the case. Provide this file to the government with the explicit proviso that the documents may be privileged.

If the government declines to intervene and the relator pursues litigation, the attorney-client privileged documents should be returned to the company. Failure to separate out and protect attorney-client privileged documents may subject the relator to counterclaims and counsel to sanctions.¹⁴

Breach of Fiduciary Duty

Defendants also may claim that the relator breached a duty to the company by not reporting the fraud internally. Courts overwhelmingly have dismissed these claims because the defendant cannot prove that the relator’s alleged failure is the cause of the defendant’s damages—namely, its litigation expenses.

As one court explained, for example, a relator can internally report violations and also file a qui tam claim—the actions are not mutually exclusive. Thus, the defendant cannot prove that but for the relator’s failure to internally report, it would not have suffered damages.¹⁵

More important, courts have held that these claims are void as a matter of public policy when they rely on a determination that the defendant is liable. Courts have found that this essentially makes them claims for contribution or indemnification from the relator and “frustrate[s] the FCA’s purpose of encouraging whistleblowing.”¹⁶

When defendants bring breach of fiduciary claims, courts generally examine whether the defendant’s theory is independent from its FCA liability. If it is dependent on it—meaning that the counterclaim’s success depends on finding that the defendant is liable—then the claim will be dismissed.¹⁷

For example, in United States ex rel. Nehls v. Omnicare, Inc., the court found that the defendant’s counterclaim that the relator breached a fiduciary duty by failing to internally report an FCA violation was impermissible. It held that the counterclaim would be viable only if it could be proved that the defendant violated the FCA—otherwise the relator would have nothing to report.¹⁸

Courts, however, will allow independent counterclaims with “a clear distinction between the facts supporting the counterclaim and the facts supporting the defendant’s FCA liability.”¹⁹ Counsel your client not to take any actions—such as speaking to the press—that could give rise to an independent breach of fiduciary duty claim.²⁰

Take Initiative

In addition to counseling your clients and taking prudent measures to protect them from breach of contract, breach of fiduciary duty, and other retaliatory claims,²¹ more proactive measures can be taken on your clients’ behalf.

Anti-SLAPP suits. One such measure is to allege that retaliatory claims against whistleblowers are meant to chill free speech and the right to petition the government and thus are SLAPP suits—“strategic lawsuits against public participation.” Challenge these suits under state anti-SLAPP provisions.

To determine whether a suit is a SLAPP suit and should be dismissed, a court first considers whether the suit arises from acts in furtherance of the rights described above and whether these rights were exercised to further a public interest.²² If the court answers these questions in the affirmative, then the burden of proof shifts to the employer to show that it can prevail.²³ If the counterclaims are based on statements the whistleblower made in a judicial or quasi-judicial proceeding, the employer cannot meet its burden of proof as these statements will be covered by a “litigation privilege.”²⁴

Recently, a California court dismissed a company’s case against a relator’s attorney for conversion and other claims after the relator moved to strike based on the state’s anti-SLAPP provision.²⁵ The court held that the company’s claims violated the law because the underlying FCA case involved taxpayer funds and an issue of public interest, and the relator was exercising his right to free speech and to petition the government.²⁶ Moreover, it found that the company’s claims were not likely to succeed on the merits because the attorney had a valid litigation privilege since he received the documents at issue in connection with the qui tam action.²⁷

The California court’s reasoning is applicable to most qui tam actions. FCA cases involve public, taxpayer money, and the relator’s actions in bringing such suits can be properly characterized as petitioning the government for redress. Moreover, most breach of contract and conversion counterclaims involve documents or information the relator produced in the context of litigation, so that evidence is therefore covered by a litigation privilege. Thus, if your client lives in a jurisdiction with an anti-SLAPP statute and is facing retaliatory claims, explore the possibility of bringing an anti-SLAPP suit or motion to strike.

Anti-retaliation claims. Even if your client lives in a jurisdiction without an anti-SLAPP statute, the FCA’s anti-retaliation provision may provide some protection. The FCA provides that an employee “shall be entitled to all relief necessary to make that employee . . . whole, if that employee is discharged, . . . harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee” in furtherance of the FCA.₂₈

Under this provision, a relator may be able to file a counterclaim or separate suit for retaliation if the defendant sues for breach of contract or fiduciary duty based on the relator filing a qui tam suit. Be aware, however, that if your client is a former employee, this claim may not be available—some courts have read the FCA’s anti-retaliation provision to apply only to current employees.²⁹

In Fair Labor Standards Act and Title VII cases, courts have held that an employer’s claims against an employee can constitute “harassment” in violation of those statutes’ anti-retaliation provisions.₃₀ These cases support a cause of action based on retaliation for filing harassing counterclaims, and their reasoning should be equally persuasive in FCA cases.³¹

To succeed on a retaliation claim, the relator must show the defendant’s suit has a retaliatory motive and lacks a reasonable basis in fact or law. One way to demonstrate this is to show that the defendant did not incur any damages from the alleged breach of contract or fiduciary duty.³²

When evaluating whether to bring a qui tam case, be aware that the defendant may file retaliatory claims. But you can take steps to help protect your client and manage many of the risks associated with these claims.

---

Loren Jacobson is an assistant professor at UNT-Dallas College of Law and counsel at Waters Kraus & Paul in Dallas. She can be reached at loren.jacobson@untdallas.edu.

---

Notes

1. 31 U.S.C. §§3729 et seq. (2009).
2. Id. at §§3729(a)(1)(A), (B)
3. Id. at §3730(b).
4. Id. at §3730(b)(2). See §§3730(b)(2), (b)(3), (b)(4), and (c)(1) for more information about these lawsuits.
5. The government declines intervention for many reasons: lack of merit, difficulty in proving the allegations, hesitance to pursue a novel legal theory, and—more often than not—lack of resources. See, e.g., United States ex rel. Atkins v. McInteer, 470 F.3d 1350, 1360 n.17 (11th Cir. 2006) (“We do not assume that in each instance in which the government declines intervention in an FCA case, it does so because it considers the evidence of wrong doing insufficient or the qui tam relator’s allegations for fraud to be without merit. In any given case, the government may have a host of reasons for not pursuing a claim.”).
6. See 31 U.S.C. §3730(c)(3). These cases often involve complex schemes, enormous amounts of data, and expert input, which means that a relator pursuing qui tam claims runs the risk of incurring substantial costs.
7. Id. at §3730(b)(2). Under the FCA, relators who “contribute to the prosecution of the action” by furnishing evidence of the fraud can get between 15 and 25 percent of the recovery. See §3730(d)(1).
8. 637 F.3d 1047 (9th Cir. 2011).
9. Id. at 1061.
10. Id.; see also Walsh v. Amerisource Bergen Corp., 2014 WL 2738215 (E.D. Pa. June 17, 2014).
11. United States ex rel. Head v. Kane Co., 668 F. Supp. 2d 146, 152 (D.D.C. 2009); United States ex rel. Grandeau v. Cancer Treatment Ctrs. of Am., 350 F. Supp. 2d 765 (N.D. Ill. 2004); see also Shmushkovich v. Home Bound Healthcare, Inc., 2015 WL 3896947, at *3 (N.D. Ill. June 23, 2015) (refusing to sanction relator or require return of confidential documents due to public policy exception); Erhart v. BofI Holding, Inc., 2017 WL 588390 (S.D. Cal. Feb. 14, 2017) (refusing to dismiss whistleblower affirmative defense that breach of confidentiality agreement was warranted pursuant to public policy exception).
12. 18 U.S.C. §1833(b) (2016).
13. See, e.g., United States ex rel. Ruscher v. Omnicare, Inc., 2015 WL 4389589, at *4–5 (S.D. Tex. July 15, 2015); United States ex rel. Notorfransesco v. Surgical Monitoring Assoc., Inc., 2014 WL 7008561, at *4–5 (E.D. Pa. Dec. 12, 2014); Siebert v. Gene Sec. Network, Inc., 2013 WL 5645309, at *8 (N.D. Cal. Oct. 16, 2013).
14. See, e.g., United States ex rel. Frazier v. IASIS Healthcare Corp., 2012 WL 130332 (D. Ariz. Jan. 10, 2012).
15. United States ex rel. Nehls v. Omnicare, Inc., 2013 WL 3819671, at *18 (N.D. Ill. July 23, 2013).
16. Id. at *20 (internal citations omitted); see also United States ex rel. Miller v. Bill Harbert Int’l Constr., Inc., 505 F. Supp. 2d 20, 28 (D.D.C. 2007).
17. Federal courts have applied this theory and dismissed state law counterclaims brought in the federal FCA action. State courts have also applied this theory and dismissed state law cases brought separately from the FCA case. See J-M Mfg. Co. v. Phillips & Cohen LLP, 129 A.3d 342 (N.J. Super. Ct. App. 2015).
18. 2013 WL 3819671, at *21.
19. Id.
20. United States ex rel. Grandeau, 350 F. Supp. 2d at 772–73.
21. The FCA allows a court to award the defendant its reasonable attorney fees and expenses if it prevails and the court finds that the claim was clearly frivolous or intended to harass. See 29 U.S.C. §3730(d)(4), 28 U.S.C. §2412 (2011); see also United States ex rel. Long v. GSDMidea City LLC, 807 F.3d 125 (5th Cir. 2015). Defendants bring claims under this provision, but they are rarely successful because the burden of showing that claims are frivolous is extraordinarily high. See United States ex rel. McGrath v. Microsemi Corp., 2017 WL 6626194, at *2–3 (D. Ariz. Feb. 2, 2017); see also United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 2015 WL 12839127, at *1–2 (W.D. Mo. July 23, 2015).
22. MMM Holdings, Inc. v. Reich, 230 Cal. Rptr. 3d 198, 206 (Colo. Ct. App. 2018).
23. Id. at 210.
24. Id.
25. Id. at 202.
26. Id. at 210.
27. Id. at 211–14.
28. 31 U.S.C. §3730(h)(1). The provision also protects their “contractors” and “agents.”
29. See, e.g., Potts v. Ctr. for Excellence in Higher Ed., Inc., 244 F. Supp. 3d 1138 (D. Colo. 2017).
    See Darveau v. Detecon, Inc., 515 F.3d 334 (4th Cir. 2008); Spencer v. Int’l Shoppes, Inc., 902 F. Supp. 2d 287, 299 (E.D.N.Y. 2012); Torres v. Gristede’s Operating Corp., 628 F. Supp. 2d 447, 472 (S.D.N.Y. 2008); Rosania v. Taco Bell of Am., Inc., 303 F. Supp. 2d 878 (N.D. Ohio 2004); Gliatta v. Tectum Inc., 211 F. Supp. 2d 992, 1009 (S.D. Ohio 1992).
30. See, e.g., United States ex rel. Herman v. Coloplast Corp., 295 F. Supp. 3d 37, 44–45 (D. Mass. 2018).
31. Id.