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A recent decision in a non-intervened qui tam suit in the Northern District of Georgia provides an example of a defendant threading the needle to avoid dismissal of its counterclaims despite those counterclaims arguably implicating the conduct that the relator alleged violated the False Claims Act (FCA). It also stands as a rare instance where a company’s counterclaims against an FCA relator have survived early court scrutiny and, as such, provides FCA defendants with a potential strategy to combat opportunistic relators.

Background

In United States ex rel. Cooley v. ERMI, LLC, a relator alleged that medical device manufacturer ERMI violated the FCA through various schemes, including one involving the provision of durable medical equipment (DME) to Florida residents without a valid license from the Agency for Health Care Administration (AHCA). The relator was ERMI’s Chief Compliance Officer during the time period at issue, and she alleged that ERMI retaliated against her when she attempted to bring ERMI into compliance with applicable law.

In its answer, ERMI filed counterclaims against the relator, which the court initially dismissed. ERMI subsequently filed amended counterclaims for breach of fiduciary duty and breach of contract. The counterclaims alleged that the relator breached her duties to ERMI by (1) improperly retaining documents; (2) misleading ERMI about the AHCA renewal process; and (3) misleading ERMI such that it believed she was providing legal advice to it on various issues. The relator again moved to dismiss, arguing primarily that allowing the company’s counterclaims to proceed would deter future relators from coming forward and therefore run counter to public policy.

ERMI’s Counterclaims Survive Dismissal

The court denied the motion to dismiss, concluding that public policy does not bar a counterclaim that is based on damages independent of the FCA claims (i.e., if the counterclaim is based on conduct distinct from that underlying the FCA case, or if the counterclaim can only prevail if the defendant is not liable under the FCA). Applying this rubric to ERMI’s claims, the court found that both counterclaims could proceed, although it did not accept all of ERMI’s arguments.

Breach of Fiduciary Duty

With respect to ERMI’s counterclaim for breach of fiduciary duty, the court concluded that the document-retention theory could not proceed, as the only alleged breach involving those documents was their use in the FCA action. It also ruled that, though public policy did not preclude proceeding on the legal-advice theory, pleading deficiencies warranted that claim’s dismissal due to ERMI’s failure to allege a breach of fiduciary duty specific to the relator’s conduct. Importantly, however, the court permitted the counterclaim based on the AHCA-renewal theory to proceed because ERMI had alleged that the relator’s misrepresentations led to costly unfair-trade-practices litigation by a competitor, which was independent of the FCA claims.

Breach of Contract

As to the breach of contract claim, ERMI alleged that the relator breached her confidentiality agreement by retaining confidential information, such as financial and operations reports, and attaching confidential information to her FCA complaint. In her motion to dismiss the breach claim, the relator argued that she was legally permitted to take the confidential information based on (1) public policy and, more specifically, that ERMI could not identify any confidential information that was not related to the FCA claims; and (2) the terms of the confidentiality agreement she signed as a corporate officer. The court was not persuaded by either argument. The court explained, as it had in its previous order dismissing the initial counterclaims, that ERMI was not required to identify the specific documents allegedly taken at the pleading stage, and it was therefore too early in the litigation to conclude that all of the confidential documents were related to the FCA litigation. The court similarly reasoned that it was too early in the litigation to determine whether the confidentiality agreement provisions provided a safe harbor, because it was not yet clear how closely related the documents were to the relator’s FCA claims. Significantly for defendants, the decision also expressly provided for reasonable discovery for the counterclaim allegations and retained the possibility for ERMI to recover litigation costs under the relevant Georgia statute.

Key Takeaway: Some (Limited) Good News for FCA Defendants

While ERMI’s counterclaims may not have survived fully intact, this decision is good news for similarly situated companies, who often feel powerless when a relator improperly takes confidential information under the auspices of using it for FCA allegations and allegedly ferreting out fraud. This case demonstrates some difficulties inherent in bringing a counterclaim against a relator, but the ultimate decision provides another tool in an FCA defendant’s toolbox, particularly against opportunistic relators.

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Photo of Stephen M. Byers Stephen M. Byers

Stephen M. Byers is a partner in the firm’s White Collar & Regulatory Enforcement Group and serves on the group’s steering committee. He is also a member of the firm’s Government Contracts Group and E-Discovery & Information Management Group. Mr. Byers’s practice involves…

Stephen M. Byers is a partner in the firm’s White Collar & Regulatory Enforcement Group and serves on the group’s steering committee. He is also a member of the firm’s Government Contracts Group and E-Discovery & Information Management Group. Mr. Byers’s practice involves counseling and representation of corporate and individual clients in all phases of white collar criminal and related civil matters, including: internal corporate investigations; federal grand jury, inspector general, civil enforcement and congressional investigations; and trials and appeals.

Mr. Byers’s practice focuses on matters involving procurement fraud, health care fraud and abuse, trade secrets theft, foreign bribery, computer crimes and cybersecurity, and antitrust conspiracies. He has extensive experience with the federal False Claims Act and qui tam litigation, the Foreign Corrupt Practices Act, the Economic Espionage Act, and the Computer Fraud and Abuse Act. In addition to defense of government investigations and prosecutions, Mr. Byers has represented corporate victims of trade secrets theft, cybercrime, and other offenses. For example, he represented a Fortune 100 U.S. company in parallel civil and criminal proceedings that resulted in a $275 million criminal restitution order against a foreign competitor upon its conviction for trade secrets theft.

Photo of Agustin D. Orozco Agustin D. Orozco

Agustin D. Orozco is a partner in the Los Angeles office and is a member of the firm’s White Collar & Regulatory Enforcement and Government Contracts groups. As a former federal prosecutor, Agustin is a skilled trial lawyer focused on directing complex white…

Agustin D. Orozco is a partner in the Los Angeles office and is a member of the firm’s White Collar & Regulatory Enforcement and Government Contracts groups. As a former federal prosecutor, Agustin is a skilled trial lawyer focused on directing complex white collar cases and investigations, handling contentious and sophisticated pretrial litigation, and successfully proving highly difficult cases at trial. Agustin’s background as a federal prosecutor and government contracts attorney leaves him uniquely situated to help clients where government contracts and white collar intersect.

Agustin represents clients in criminal and civil government investigations and enforcement actions. He also represents and counsels clients on matters involving federal, state, and local government contracts. Agustin has litigated civil False Claims Act (FCA) matters and other government contracts issues, such as disputes, claims, and terminations. He is also experienced in matters involving the Foreign Corrupt Practices Act (FCPA), including conducting investigations abroad and counseling clients on compliance issues.

Photo of Lyndsay Gorton Lyndsay Gorton

Lyndsay Gorton is a Government Contracts counsel in Crowell & Moring’s Washington, D.C. office. Her practice focuses on government contracts litigation and counseling, including government investigations, fraud matters under the False Claims Act, bid protests, and federal and state regulatory compliance. In addition…

Lyndsay Gorton is a Government Contracts counsel in Crowell & Moring’s Washington, D.C. office. Her practice focuses on government contracts litigation and counseling, including government investigations, fraud matters under the False Claims Act, bid protests, and federal and state regulatory compliance. In addition to her primary government contracts practice, Lyndsay has federal court litigation experience representing a broad variety of clients in commercial litigation matters, and has led and managed teams at every stage of litigation, including discovery, dispositive motion practice, trial, and settlement. She also uses her litigation experience to assist her clients with internal investigations, risk management, and compliance.