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United States Ex Rel. Cieszynski V. Lifewatch Services, Inc.: Balancing the Public Policy Protecting Whistleblowers Who Use Self-help Discovery and the Privacy Interests of Companies That Have an Expectation of Protection

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  • Posted on: Aug 8 2016

The False Claims Act (“FCA” or the “Act”) prohibits businesses and individuals from defrauding the government by knowingly presenting, or causing to be presented, a false claim for payment or approval. Currently, violations of the Act can result in a judgment equal to three times the losses sustained by the government, plus civil penalties of $5,500 to $11,000 for each false claim.

The Act rewards whistleblowers (also known as “relators”) who successfully recover funds on behalf of the government. A person who brings a successful “qui tam” action can receive between 15% and 30% of the government’s recovery depending upon whether the government intervenes in the action.

To start a qui tam action, the relator must file a complaint under seal in federal court – i.e., it will be kept from public view. Copies of the complaint are served on the United States Department of Justice (“DOJ”), including the local United States Attorney, and delivered to the judge assigned to the action. The complaint is not served on any of the named defendants until ordered by the court.

The complaint must satisfy multiple pleading requirements under the Federal Rules of Civil Procedure (“Fed. R. Civ. P.”).  For example, the relator must satisfy Fed. R. Civ. P. 8(a)(2), which requires the complaint to provide “a short and plain statement of the claim showing that the pleader is entitled to relief.”  In doing so, the complaint must “possess enough heft” by demonstrating with “sufficient factual matter” that the relator has “state[ed] a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

The relator must also plead with particularity the circumstances constituting the alleged fraud on the government. Fed. R. Civ. P. 9(b).  See also U.S. ex rel. Lucas Matheny v. Medco Health Solutions, Inc., 671 F.3d 1217 (11th Cir. 2012). This requirement “demands a higher degree of notice than that required for other claims,” and “is intended to enable the defendant to respond specifically and quickly to the potentially damaging allegations.  U.S. ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 556 (8th Cir. 2006) (internal citations omitted).  “To satisfy the particularity requirement of Rule 9(b), the complaint must plead such facts as the time, place and context of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result.”  Id.  In other words, the relator must identify the “who, what, where, when and how of the alleged fraud.” Id. See also Hopper v. Solvay Pharms., Inc., 588 F.3d 1318, 1324 (11th Cir. 2009); Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004).

In addition to filing a complaint, the relator must serve a disclosure statement on the government containing substantially all the evidence in his/her possession about the alleged fraud. 31 U.S.C. § 3730(b)(2). The disclosure statement is not filed in court, and is not available to the named defendants. The primary purpose of the disclosure requirement “‘is to provide the United States with enough information on alleged fraud to be able to make a well reasoned decision on whether it should participate in the filed lawsuit or allow the relator to proceed alone.’” United States ex rel. Bagley v. T.R.W. Inc., 212 F.R.D. 554, 556 (C.D. Cal. 2003) (quoting United States ex rel. Woodward v. Country View Care Ctr., 797 F.2d 888, 892 (10th Cir. 1986)); United States ex rel. Calilung v. Ormat Indus., Ltd., No. 3:14-cv-00325-RCJ-VPC (D. Nev. Dec 23, 2015).

To many, including government attorneys, the disclosure statement is the most important document submitted at the outset of a qui tam action. As noted, Section 3430(b)(2) requires the relator to provide the government with “substantially all material evidence and information” that the relator possesses. 31 U.S.C. § 3730(b)(2). However, there are “few reported decisions constru[ing] the nature and extent of the relator’s disclosure obligation under section 3730(b)(2).” Bagley, 212 F.R.D. at 556 (citing United States ex rel. Made in the USA Found. v. Billington, 985 F. Supp. 604, 608 (D. Md. 1997)). “As such, the statute affords the drafter the discretion to include a recitation of facts that support an allegation or analysis of how the facts coalesce to support an allegation—or both—as long as it contains ‘substantially all material evidence and information the person possesses.’” Bingham v. Baycare Health Sys., Case No: 8:14-cv-73-T-23JSS (M.D. Fla. Apr. 15, 2016) (citing Bagley, 212 F.R.D. at 556).

Given the discretion afforded to a relator under Section 3430(b)(2), it is generally recommended that the relator do more than provide a basic overview of the alleged fraud. See generally Robert Salcido, The Government Declares War on Qui Tam Plaintiffs Who Lack Inside Information: The Government’s New Policy to Dismiss These Parties in False Claims Act Litigation, 13 Health Law 1, 4 (2000) (explaining the pros and cons of filing a full disclosure statement versus a sparse disclosure statement). As a practical matter, a threadbare disclosure statement will more likely be rejected by the government – that is, the government will more likely decline to intervene in the action. However, the DOJ will be more likely to intervene when the relator provides documentary evidence supporting the allegations of fraud.  Consequently, relators are “encourage[d] … to make [the disclosure statement] as complete, detailed, and thoughtful as possible.” Bagley, 212 F.R.D. at 557.

How then does a relator provide the government with the quantum of evidence needed to support his/her allegations of fraud and increase the likelihood of government intervention in the action? One method often used is self-help discovery.

Self-help discovery occurs when an employee uses his/her position to access company files for the purpose of collecting documents and information relating to his/her qui tam claims. Often, the documents and information that a whistleblower takes are confidential.  Sometimes, the documents include trade secrets, and others times attorney-client privileged information. Almost always, the self-help discovery violates company policy and/or a confidentiality agreement. Consequently, self-help discovery exposes the employee to a counterclaim for breach of contract, sanctions, or worse. Whether such claims can survive depends on the court in which the claim is brought and the facts underlying the self-help discovery.

Some courts have dismissed claims against a relator holding that in the context of a qui tam action, public policy voids confidentiality agreements and company policies. E.g., United States v. Cancer Treatment Centers of America, 350 F. Supp. 2d 765, 773 (N.D. Ill. 2004); Head v. Kane Co., 668 F. Supp. 2d 146 (D.D.C. 2009); Ruhe v Masimo Corp., 929 F Supp. 2d 1033, 1039 (C.D. Cal. 2012). Cf. X Corp. v. John Doe, 805 F. Supp. 1298, n. 24 (E.D. Va. 1992) (noting that a confidentiality agreement would be void as against public policy if, when enforced, it would prevent “disclosure of evidence of a fraud on the government”).  Other courts have held that claims against a relator who has availed himself/herself of documents and information through self-help discovery turns on the reasonableness of the relator’s conduct in relation to the need for the documents and information. E.g., Aldrich v. Rural Health Servs., 579 Fed. Appx. 335 (6th Cir. 2014); U.S. v. Boston Scientific Neuromodulation Corp., 2014 WL 4402118 (D.N.J. Sept. 4, 2014); Cafasso v General Dynamics C4 Systems, Inc., 637 F.3d 1047, 1062 (9th Cir. 2011) (recognizing “some merit” in a public policy exception, but finding that such an exception would have limits); JDS Uniphase Corp. v. Jennings, 473 F. Supp. 2d 697, 702-03 (E.D. Va. 2007); Niswander v. Cincinnati Ins. Co., 2007 WL 1189350 (N.D. Ohio Apr. 19, 2007); Laughlin v. Metropolitan Washington Airport Auth., 149 F.3d 253 (4th Cir. 1998). These courts balance the need of the relator to provide the government with substantially all the evidence in his/her possession (see 31 U.S.C. § 3730(b)(2)) against the company’s expectation that its confidential and privileged information will be protected.

Courts that engage in the balancing approach often note that there is a strong public policy that protects whistleblowers from retaliation for actions taken in connection with their qui tam complaint. But in doing so, they also note that this policy has its limits, stating that relators cannot purloin documents for reasons other than in pursuit of their qui tam action. Consequently, these courts examine whether the self-help discovery went beyond the scope of what was necessary to demonstrate qui tam liability by considering a number of factors, including, but not limited to: (1) the manner in which the employee obtained the evidence; (2) whether the evidence contained trade secrets, proprietary information or attorney-client privileged information; (3) what the employee did with the evidence; (4) whether the employee’s conduct was prohibited by a company policy or confidentiality agreement; (5) the impact on the company of the disclosure of the evidence – that is, whether disclosure of the evidence was made public or to competitors; (6) whether the evidence is relevant to the relator’s qui tam claims; (7) the effect of allowing or disallowing use of the evidence on the rights of the employee and the employer; and (8) whether there was a risk that the evidence would be destroyed if the employee did not remove or retain it.

Often, the courts using the balancing approach have found that the factors mentioned above favor the company rather than the public policy interest.  E.g., Cafasso, 637 F.3d at 1062 (public policy exception “would not cover [relator’s] conduct given her vast and indiscriminate approach of [the defendant’s] files.”); U.S. ex rel. Wildhirt v. AARS Forever, Inc., No. 1:09-cv-01215, 2013 WL 5304092 (N.D. Ill. Sept. 19, 2013) (finding that the public policy exception did not shield the relator from liability since the relator took documents with no intention of filing a qui tam action and disclosed them to the public); U.S. ex rel. Walsh v. Amerisource Bergen Corp., No. 2:11-cv-07584, 2014 WL 2738215 (E.D. Pa. June 17, 2014) (denying a relator’s motion to dismiss counterclaims and emphasizing that the relator “took ‘a large variety of [the defendants] confidential, proprietary and privileged information…’”) (citation omitted).  Sometimes, however, the factors mentioned above favor the relator.  One such case is discussed below.

Recent Use of the Balancing Approach

On May 9, 2016, the U.S. District Court for the Northern District of Illinois dismissed a counterclaim brought by a defendant company against a whistleblower for providing the government with confidential information in violation of the company’s privacy policy and a confidentiality agreement. In United States ex rel. Cieszynski v. Lifewatch Services, Inc., No. 13 CV 4052, 2016 WL 2771798 (N.D. Ill. May 13, 2016), the court balanced the public policy and company interests and found that the whistleblower had not taken any more information than necessary to report the alleged fraud to the government.

The Facts

Matthew Cieszynski (“Cieszynski”), a certified technician for the defendant LifeWatch Services, Inc. (“LifeWatch”), brought a qui tam action against LifeWatch under the Act and related state false claims statutes, alleging that LifeWatch collected reimbursements for medical services that were performed by non-U.S.-based technicians and/or non-certified technicians, in violation of Medicare and other federal and state insurance laws and regulations.

After the court denied LifeWatch’s motion to dismiss, LifeWatch answered the complaint and filed a one-count counterclaim alleging that Cieszynski breached both a confidentiality agreement and privacy policy he signed as part of his employment with LifeWatch.  According to LifeWatch, Cieszynski took and disclosed to his attorney and the government confidential information in connection with the pursuit of his qui tam action. All parties agreed that the information taken was covered by the confidentiality agreement and privacy policy.

The Court’s Decision

Breach of Contract Must Be Independent from Any FCA Investigation

After balancing the public policy that protects whistleblowers from retaliation for the actions they take to investigate and report a fraud on the government against the privacy rights of companies that claim independent damages from the theft of confidential information, the court held that LifeWatch “failed to state a claim for breach of contract.” In dismissing the counterclaim, the court found that LifeWatch failed to “create a plausible claim that plaintiff’s actions deprived him of the public policy protections afforded qui tam relators who must collect and disclose documentary evidence to support their suspicions of fraud against the government.”

At the heart of the dismissal was the court’s conclusion that LifeWatch’s claim derived from the FCA claims Cieszynski alleged against it.  LifeWatch did not contend that Cieszynski had retained or disclosed the information “for any reason other than to support his FCA claim.” Nor did LifeWatch contend that Cieszynski provided the documents to anyone “other than the government or his counsel.” In fact, LifeWatch did not allege any “damages resulting from relator’s actions other than the fees and costs associated with pursuing the counterclaim” – which the court considered to be “a self-inflicted wound.” According to the court, Cieszynski’s actions were far different than in other cases in which the plaintiffs had taken documents with no intention to file a qui tam action, made the documents public, disclosed trade secrets that could damage the business, and/or convinced other employees to take documents.

The Retention and Disclosure Did Not Go Beyond the Scope of Necessity

Next, the court rejected LifeWatch’s argument that Cieszynski “took many more documents than were necessary to support his claim.” In doing so, the court declined to impose a burden on relators to know in hindsight “precisely how much information to provide the government” in order to support their case, fearing that to do so would have a chilling effect of their “willingness to report suspected fraud.”

It is unrealistic to impose on a relator the burden of knowing precisely how much information to provide the government when reporting a claim of fraud, with the penalty for providing what in hindsight the defendant views as more than was needed to be exposed to a claim for damages.  Given the strong public policy encouraging persons to report claims of fraud on the government, more is required before subjecting relators to damages claims that could chill their willingness to report suspected fraud.

Takeaway

Cieszynski is a good decision for relators. It represents a fair and reasonable approach to evaluate self-help discovery in furtherance of a qui tam action.  It firmly recognizes the importance of protecting whistleblowers against retaliation and incentivizes them to investigate and report fraud against the government as intended by the Act. But, it also recognizes that whistleblowers cannot overreach by haphazardly and indiscriminately taking documents that are unrelated to their qui tam action, disclosing them to the public, or disclosing trade secrets, proprietary information and/or attorney-client privileged documents to competitors and/or third parties. Counsel on both sides of the case should consider this approach in their qui tam representation.

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