U.S. Court of Appeals for Second Circuit Rules In-House General Counsel Cannot Blow Whistle on Client

December 6, 2013

WhistleblowerIn United States ex rel. Fair Laboratory Practices Associates vs. Quest Diagnostics Inc.,Unilab Corporation, the U.S. Court of Appeals for the Second Circuit ruled that the former general counsel of a clinical laboratory violated his ethical obligations under the New York Rules of Professional Conduct by participating in a whistleblower/qui tam lawsuit against his former client under the False Claims Act.

In April 2011, a U.S. District Court threw out the case, ruling that the in-house general counsel violated his duty to keep his client’s information confidential. On October 25, 2013, the Second Circuit affirmed the District Court’s decision.

This decision encourages companies to speak openly to their lawyers about complying with the False Claims Act.

False Claims Act Lawsuit Alleged Violation of the Anti-Kickback Statute.

The case involved Unilab Corp., a subsidiary of Quest Diagnostics Inc., and Unilab’s former general counsel, CEO and CFO. The False Claims Act lawsuit alleges that the company fraudulently undercharged doctors’ associations for testing in order to increase Medicare and Medicaid referrals. While still employed at Unilab, the former general counsel allegedly questioned whether the company’s pricing structure violated the Anti-Kickback Statute.

After leaving the company, the former general counsel brought the lawsuit against Unilab in 2005. Unilab’s former CEO and former CFO were also plaintiffs in the case.

Ruling Encourages Client Communication.

In its ruling, the Second Circuit acknowledged the dilemma between an attorney’s ethical duty of confidentiality and the federal interest in encouraging disclosure of False Claims Act violations. However, it was held that the balance tipped in favor of protecting confidentiality because there were alternative means and parties that could have exposed the scheme.

This decision encourages clients to be able to communicate freely with their counsel without the fear that their confidential communications may become the basis of a lawsuit. If the ruling had gone the other way, attorneys may have had a financial incentive to divulge their clients’ confidential information and companies may have been discouraged from seeking legal advice about False Claims Act compliance.

Whistleblower Pitfalls for Lawyers.

Attorneys are not typically whistleblowers. They are constrained by ethical rules as to what actions they can take in reporting suspected wrongdoing. Attorneys are, for the most part, required to keep their clients’ confidences unless they seek to prevent criminal activity. Even then attorneys are limited to making any “necessary” disclosures.

In this case, the general counsel was accused of violated N.Y. Rule 1.9(a), known as the “side-switching” rule. This Rule provides a lawyer who has formally represented a client in a matter cannot represent another person in the same or a related matter in which that person’s interests are adverse to the interests of the former client, unless the former client gives informed consent. Defendants in this case also asserted that the general counsel violated the N.Y. Rule 1.9(c) by using his former company’s confidential information for litigation.

Most states have adopted similar rules of professional conduct.

Most Qui Tam Claims Filed by Employees.

From our review of qui tam cases that have been unsealed by the government, it appears most of these are filed by physicians, nurses or hospital staff employees who have some knowledge of false billing or inappropriate coding taking place. Normally the government will want to see some actual documentation of the claims submitted by the hospital or other institution. Usually physicians, nurses or staff employees have access to such documentation.

To learn more on whistleblower/qui tam cases, read a two-part blog on our website. Click here for part one, and click here for part two.