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May 10, 2011

False Claims Act Lawsuit Dismissed Where Whistleblower Violated Ethical Duty

On March 24, 2011, Judge Robert Patterson of the Southern District of New York dismissed a False Claims Act ("FCA") lawsuit against Quest Diagnostics Incorporated ("Quest") and other affiliated defendants because the whistle-blower, an attorney, disclosed his client's confidential information when he filed the action. Judge Patterson's holding in United States ex rel Fair Laboratory Practices Associates v. Quest Diagnostics Inc.1 is significant because it demonstrates that an attorney's ethical duties trump all rights under the FCA. Judge Patterson also disqualified two other plaintiffs and their counsel from the action because they had knowledge of the ethical violation and relied on the improperly disclosed confidential information in bringing the suit.

The FCA permits private individuals who have knowledge of fraud committed against the United States to sue the wrongdoers on behalf of the federal government and retain a percentage of any damages awarded. In Quest, the whistleblower was an attorney who for seven years served as General Counsel to Unilab Corporation ("Unilab"), a Quest subsidiary, and a defendant in the case. The whistleblower-attorney's complaint alleged that Quest had routinely violated the Anti-Kickback Act by charging below market rates to independent physician associations and managed care organizations as an inducement for referral of diagnostic testing business. In support of their motion to dismiss, Quest and Unilab argued that the fwhistleblower-attorney had disclosed confidential information, and, in doing so, breached his duty of loyalty to Unilab.

In his decision, Judge Patterson interpreted relevant provisions of the New York Lawyer's Code of Professional Responsibility (the "Code"). First, Judge Patterson held that the whistleblower-attorney, as an FCA plaintiff, "represents" the United States for purposes of Disciplinary Rule 5-108 of the Code. That disciplinary rule provides that a lawyer who has represented a client in a matter shall not thereafter represent another person in the same or substantially related matter without obtaining consent after fully disclosing the conflict – which the whistleblower-attorney had failed to do. In reaching this first conclusion, Judge Patterson noted that an attorney may not escape the prohibitions of Disciplinary Rule 5-108 by suing a former client as a party, when he or she could not do so as counsel of record. Second, the Court held that the information disclosed was beyond the scope of the Code's confidential information exception, which allows an attorney to reveal client information in an effort to prevent a crime, and in other limited circumstances.

Because of the clear ethical breach, the Court held that the whistleblower-attorney, his co-plaintiffs, and their counsel should be disqualified. Without disqualification of all parties involved, Judge Patterson saw no way to contain the damage caused by the whistleblower's ethical breach, because the confidential information had been shared among the group for the past seven years. In other words, there was no way to "un-ring the bell."

In-house attorneys are often in unique positions to witness or uncover evidence of misconduct by their clients. Depending on the circumstances, an attorney with knowledge of misconduct may be tempted by the possibility of a bounty under the FCA. Judge Patterson's unequivocal response to the ethical violation in Quest should serve as a warning to in-house counsel who consider blowing the whistle on their clients. The decision imposes a very sensible limitation on FCA actions that protects the interests of companies and their in-house legal staff.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.

1 2011 U.S. Dist. LEXIS 37014 (S.D.N.Y 2011).


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