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Courts Holds, as a Matter of Public Policy, Pre-Filing Release of Claims Does Not Bar Suit Under the False Claims Act

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  • Posted on: Oct 24 2018

In today’s business environment, it is not uncommon for departing employees to sign a separation or severance agreement that includes a bar from bringing “any and all” claims related to their employment. The enforceability of such pre-filing releases has frequently been the basis for motions to dismiss by defendant companies in actions arising under the False Claims Act (“FCA”). The FCA is silent on the issue.

Last month, a district court judge sitting in the United States District Court for the Eastern District of Pennsylvania addressed the issue, holding that pre-filing releases are unenforceable, as a matter of public policy, where “the Government did not have sufficient knowledge of the Relators’ allegations prior to the signing of Relators’ releases.” United States ex rel. Susan Class et al., v. Bayada Home Health Care Inc., No. 2:16-cv-00680 (E.D. Pa. Sept. 24, 2018).

The Relators, former employees of Bayada Home Health Care Inc. (“Bayada”), a home healthcare service provider, alleged that Bayada falsely billed Medicare for home health services provided to patients that it knew were not “homebound” in violation of Medicare’s home healthcare reimbursement policy.

The Relators filed their original complaint under seal on February 11, 2016. After numerous extensions, the Government declined to intervene. The Relators filed an amended complaint almost five (5) months later, claiming violations 31 U.S.C. § 3729(a)(1).

Bayada moved to dismiss the action, claiming, among other things, that the Relators lacked standing to bring their FCA claims because they signed valid and enforceable separation agreements that prohibited them from bringing “any and all” claims related to their employment against Bayada (“Separation Agreements”). Bayada argued that because the Relators lacked standing to bring the claims, the Court lacked subject matter jurisdiction to consider the matter.

The Relators opposed the motion, arguing that they had standing to bring their claims because: (1) the Separation Agreements did not contemplate FCA claims; and (2) public policy prohibited the enforcement of the Separation Agreements.

The Court denied the motion, holding that although the Separation Agreements contemplated barring FCA claims, public policy did “not favor enforcement of the agreements.”

The Court noted that “[a]lthough the Third Circuit has not opined on the enforceability of pre-filing releases that bar subsequent qui tam claims,” there was an “emerging agreement” among the courts in other circuits (e.g., the First, Fourth, Ninth, and Tenth Circuits), “that such releases bar FCA claims only if: “(1) the release can fairly be interpreted to encompass qui tam claims and (2) public policy does not otherwise outweigh enforcement of that release.”

On the first prong, the Court concluded that the pre-filing release language was “expansive enough to include FCA claims.”  In reaching this conclusion, the Court noted that “the Third Circuit has found that explicit mention of a statute is not a prerequisite to enforceability of a release and that broad release language is adequate.” This authority was in-line with the courts in other circuits that had found release language similar to the Separation Agreements “to incorporate FCA claims.”

On the second prong, the Court concluded that public policy outweighed enforcement of the pre-filing release. The Court explained that “the public policy recognized in FCA qui tam cases is to ‘set up incentives to supplement government enforcement’ of the Act by ‘encourag[ing] insiders privy to fraud on the government to blow the whistle on the crime.’” (Citation omitted.) However, “[i]f the release will be enforced, a party will have no right or reason to file a qui tam claim.”  (Citation and internal quotation marks omitted). Agreeing with the Fourth, Ninth, and Tenth Circuits, the Court concluded that “where the government has knowledge of the claims before the relator files the qui tam lawsuit, public policy weighs in favor of enforcing a pre-filing release of claims.” (Orig’l emphasis.) However, where the government lacks knowledge of the relator’s claims before he/she files suit, a pre-filing release is unenforceable.

Applying the second prong to the facts of the case, the Court held that the pre-filing release included in the Separation Agreements was unenforceable because the government did not have knowledge of the claims prior to the filing of the lawsuit. The Court rejected Bayada’s argument that the government knew of the qui tam allegations because the initial complaint alleged that “[p]rior to filing this Complaint, Relators voluntarily disclosed to the Government the information upon which this action is based.” In doing so, the Court reasoned that “receiving a draft complaint ‘shortly before’ the filing of the Complaint is starkly different from the situations [in pre-filing release cases], where the Government conducted significant internal investigations or audits in advance of any litigation.” The Court went to say that because the government’s knowledge arose as a consequence “of the filing of the qui tam complaint,” the case was different from those where the government “conducted its investigation” in advance “of the filing of the qui tam complaint.” In fact, observed the Court, “the Government appears to have initiated and performed its investigation only while the case has been pending before me, evidenced by the multiple extension requests that have extended the seal for approximately one year.”

The Court distinguished the case before it from other cases “because the Government did not learn of Relators’ fraud claims until after they signed their Separation Agreements and released their claims.” This fact noted the Court, “places this case in contrast” to the cases “where the relators notified the Government of alleged fraud before signing the releases.” Thus, “[u]nlike those cases, the Government here learned of the claims when it was provided with the draft complaint, which was after the releases had been signed.” Quoting a decision from the Eastern District of Michigan, the Court said: “[w]hile [defendant] asserts that the government need only be made aware of the allegations prior to the filing of the qui tam complaint, it is clear that the policy interests . . . would not be served if the government’s knowledge did not precede the execution of the release.” (Quoting United States ex rel. McNulty v. Reddy Ice Holdings, Inc., 835 F. Supp. 2d 341, 360 (E.D. Mich. 2011).) Thus, concluded the Court, “[w]here the Government does not have knowledge of the claims that form the basis for the qui tam complaint before the relators signed the release, enforcement of the release ‘interferes with and frustrates the FCA’s goals of incentivizing individuals to reveal fraudulent conduct to the government.’” Id.

A copy of the court’s opinion can be found here.

Takeaway

The enforceability of employment agreements containing a pre-filing release of claims in qui tam litigation has been the subject of a growing number of judicial decisions. As the Bayada court noted, there is an “emerging agreement” among a number of circuits to dispense with the automatic rejection of qui tam claims where the government has declined to intervene and the former employee, who signed a pre-filing release, decides to continue litigating the case.

In rejecting the reflexive dismissal, these courts, including the Bayada court, apply a balancing test to determine whether the government has sufficient knowledge of the qui tam allegations prior to the filing of the action. These courts reason that when the government does not know of the alleged qui tam claims, public policy encourages the use of whistleblower lawsuits to supplement federal enforcement. In that circumstance, public policy favors non-enforcement of the pre-filing release. However, where the government is aware of the claims prior to the filing of the qui tam action, such that it has been conducting its own investigation, there is little to no public interest in the lawsuit, and thus public policy supports the enforcement of employment agreements and settlements with a pre-filing release.

As the Bayada court observed (quoting with approval the decision of the Ninth Circuit in United States ex rel. Green v. Northrop Corp., 59 F.3d 953 (9th Cir. 1995)), enforcement of a pre-filing release when the government is without knowledge of the qui tam allegations “would dilute significantly the incentives that Congress attempted to augment in amending the [FCA].” Such a result would “impair significantly the operation of the FCA.…” Since Congress intended to incentivize individuals to come forward with information about a potential fraud on the government, enforcing a pre-filing release “when the government has neither been informed of, nor consented to, the release would undermine this incentive, and therefore, frustrate one of the central objectives of the [FCA].”

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