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Second Circuit Affirms Dismissal of Qui Tam Action Because Attorney Violated Rule 1.9

A qui tam case is a case in which a plaintiff, usually a former insider, sues his former employer on behalf of the United States and alleges that the United States was defrauded. The plaintiff is referred to as a “relator.” The relevant statute is the False Claims Act, 31 U.S.C. Section 3729, which allows qui tam actions on behalf of the United States to allow the United States to recover where the government was defrauded. In many cases, the United States takes the case over and proceeds to judgment. The individual relator is then awarded a fee for bringing the fraud to the attention of the United States.

This is an unusual qui tam action, United States of America, Fair Laboratory Practices Associates v. Quest Diagnostics, Unilab Corp., Second Circuit, 11-1565-cv, in which the Second Circuit upheld the disqualification of the defendant’s former general counsel from acting as a plaintiff against his former employer. The attorney, Mark Bibi, for several years was the general counsel for a corporation that was later purchased by the Defendant.

The Bottom Line:

The court’s holding is:

“First, we agree that the attorney in question, through his conduct in this qui tam action, violated N.Y.Rule 1.9(c) which, in relevant part, prohibits lawyers from ‘us[ing] confidential information of [a] former client protected by Rule 1.6 to the disadvantage of the former client,’ … except “to the extent that the lawyer reasonably believes necessary . . . to prevent the client from committing a crime.’

Second, we hold that the District Court did not err by dismissing the complaint as to all defendants, and disqualifying plaintiff, its general partners, and its outside counsel on the basis that such measures were necessary to avoid prejudicing defendants in any subsequent litigation on these facts.”

The Facts:

The defendant Quest provides diagnostic medical testing for managed care organizations. The defendant Unilab was an independent company that was purchased by Quest through a cash tender offer.

The plaintiff, FLPA, is a Delaware general partnership formed by three former Unilab executives, Andrew Baker, Richard Michaelson and Mark Bibi for the purpose of brining this qui tam action. Each one of the partners worked for Unilab before the takeover. Most significantly, Bib was Unilab’s Vice President, Executive Vice President, Secretary and General Counsel from November 1993 to March 2000. He then served as Executive Vice President through June 2000, after which he was retained as a consultant by Unilab until December 2000. Baker and Michaelson also served as executives of Unilab before it was taken over by Quest.

The plaintiff alleged that the defendants violated the federal anti-kickback statute by charging managed care organizations discounted prices to induce those organizations to refer Medicare and Medicaid business to the defendants. Allegedly, the defendants then overcharged the government for the testing services.

Even after Baker, Michaelson and Bibi left Quest, they claim that Quest continued to overcharge medicare and medicaid.

Baker filed the case and invited Michaelson and Bibi to join him as relators.

Defendants moved to dismiss the entire case on the ground that Bibi had violated two of New York’s ethical rules, Rule 1.9(a) and Rule 1.9(c). Rule 1.9(a) provides that “[a] lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.”

Rule 1.9(c) provides “[a] lawyer who had formerly represented a client in a matter….shall not therafter…(1) use confidential information of the former client protected by Rule 1.6 to the disadvantage of the former client, except as these Rules would permit or require with respect to a current client or when the information has become generally known; or (2) reveal confidential information of the former client protected by Rule 1.6 except as these rules would permit or require with respect to a current client.”

The plaintiff argued that Rule 1.6(b)(2) permitted the lawyer to “reveal or use confidential information to the extent that the lawyer reasonably believes necessary … to prevent the client from committing a crime….” N.Y. Rule 1.6(b)(2).

The district court held that the False Claims Act did not preempt state ethical rules and that Bibi had violated Rule 1.9(a) by switching sides and Rule 1.9(c) by disclosing client confidences “beyond what was necessary” to prevent the commission of a crime. The District Court noted that Bibi disclosed confidential information going back to 1995, far beyond what was necessary to prevent a crime in 2005 when the suit was filed.

The Second Circuit did not address the Rule 1.9(a) violation, but held that Bibi violated Rule 1.9(c) by disclosing confidential information. The Second Circuit then affirmed the district court’s decision to dismiss the entire case as a sanction for the violation of the ethical rules. The Second Circuit relied upon principles used in the disqualification of attorneys to hold that Bibi’s “unrestricted sharing of confidential information with the other individual relators, permitting FLPA or any of its individual relators to proceed with the suit would taint the trial proceedings and prejudice defendants.”

Comment: Bibi’s decision to participate in the case was unwise. By participating, he put the entire case at risk. By sharing confidential information with the other individual relators, Bibi allowed the defendant to move to disqualify them as well as the law firm representing them. In all, one poorly thought decision ruined an apparently valid False Claims Act case. By switching sides, Bibi allowed the defendants to paint him as someone with a grudge against the company. Anyone can have a grudge against a former employer, but lawyers are not allowed to act on those grudges.

Edward X. Clinton, Jr.

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