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Can an Employer Reduce Qui Tam Recoveries by Contractual Prohibitions?

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Gary J. McRay
Health Care Law E-News
October 15, 2013

Employers have often tried to protect themselves by having their officers and other key managers execute employment agreements which contain clauses requiring the employee to (i) not disclose confidential information, and (ii) comply with a company’s policies concerning patient information under the Health Insurance Portability and Accountability Act (“HIPAA”). But what also concerns many healthcare providers is the possibility of a disgruntled key employee leaving and making a claim under the Federal False Claims Act (“FCA”) or the Medicaid False Claims Act (“MFCA”) found at MCL 400.607 and 400.610a as a Qui Tam Relator, without first reporting the problem to management. The healthcare industry has often believed that a contractual promise by an employee not to become a Qui Tam Relator, when such is permitted under the FCA or under the MFCA, would be prohibited by public policy.

Recent Case Offers New Insight Yet Leaves Some Issues Still Unclear

However, recently, a U.S. District Court in the Northern District of Illinois issued a Memorandum Opinion and Order in United States of America ex. rel. Wildhirt et. al. v. AARS Forever, Inc. et. al., which gave some protection in a Qui Tam whistleblower action based on the terms of the employment agreement. In this matter, two Qui Tam Relators brought claims under FCA and the Illinois Whistleblower Reward and Protection Act against a home health provider and a durable medical equipment supplier. Relator employees promised, in their employment agreements, not to report confidential information, violate the companies’ HIPAA policies, nor disclose information related to “suspect practices” to any third parties. Moreover, the employees promised to report to the companies any suspect practices. In addition, both employees promised that they would not receive “any monetary reimbursement for involvement or assistance in a Qui Tam or whistleblower action against the company.” If they were awarded any such monetary reimbursement both employees contractually promised to disclose such funds and turn such over to the company immediately.

The federal court concluded that any employer found liable for a FCA violation may not pursue a counterclaim that would have the equivalent effect of contribution or indemnification from the Qui Tam Relator. However, the court did concede that the Qui Tam defendant employer may maintain a claim for independent damages against the Relator if the claim is not dependent on a finding that the Qui Tam defendant is liable. The court concluded such an independent claim may fall into two categories. The first category of allowable claims are claims based on conduct that is distinct from the conduct underlying the FCA case. The second category of permitted claims are claims where the defendant employer’s claim can only prevail if the defendant is found not liable in the FCA case. The second category of claims often involves claims of libel, defamation, malicious prosecution and abusive process (all claims that may succeed if the Relator’s claims are untrue).

The court held that the allegations in Count I and II of the Counterclaim filed against the Qui Tam Relators disclosing confidential and HIPAA protected documents fell into category number one as independent claims because the disclosures went beyond the scope of what was necessary to prove the Qui Tam case. Thus, the Counterclaims were only dismissed to the extent they sought indemnification or contribution for losses arising out of the FCA claims.

Count III of the Counterclaim was a cause of action based upon having the employer indemnified for liability arising out of the unauthorized disclosure of confidential information. This Count was dismissed if it sought reimbursement from the Relators in the event the defendant employers were found liable under FCA. However, the court held that the indemnity provision may be enforced in the event the defendants prevail on the merits and particularly if the defendants prove that the Relators’ claims were frivolously pursued.

Count IV of the Counterclaims was based upon the Relators failing to report suspect practices to management and then filing the Qui Tam lawsuit before management could investigate and remedy any issues. The court dismissed this count if Defendants are held liable but indicated that if defendants prevail on defending the Qui Tam claims and can show a causal relationship between Relators’ failure to report and their filing of the Qui Tam action, this count could proceed but only if the employers were found not liable under FCA.

Steps Employers Should Consider

If nothing more, the court has allowed employers to raise the stakes so that if Qui Tam Relators bring suits that do not recover damages under FCA, then Relators can be held liable for the resulting expense of defense and potentially other damages. The Court did not reach the issue of whether the contract provision requiring the Qui Tam Relator to return any recovery to the Company would be enforceable. We suspect that this provision will still be unenforceable because of public policy. However, this case does point out that employers may certainly require non-disclosure of confidential information and should have indemnity provisions reinforcing these promises so that at the very least, the stakes of an unsuccessful false claims act brought by a Qui Tam Relator are raised.

Obviously, Qui Tam issues can be expensive. Offensive strategies on the employers' part can potentially save money in the long run. Contact Gary McRay if you have any questions on how this may impact your organization.