Fair Laboratory Practices Assocs. v. Quest Diagnostics, Inc.

11-1565-cv
Fair Laboratory Practices Assocs. v. Quest Diagnostics, Inc.
In the
United States Courts of Appeals
For the Second Circuit
________
AUGUST TERM 2012
No. 11-1565-cv
UNITED STATES OF AMERICA,
Plaintiff,
FAIR LABORATORY PRACTICES ASSOCIATES,
Plaintiff-Appellant,
v.
QUEST DIAGNOSTICS INCORPORATED, UNILAB CORPORATION,
D/B/A QUEST DIAGNOSTICS, AND XYZ CORPORATIONS 1-100,
Defendant-Appellant,
________
Appeal from the United States District Court
for the Southern District of New York.
No. 11-1565-cv―Robert P. Patterson, Judge.
________
ARGUED: AUGUST 23, 2012
DECIDED: OCTOBER 25, 2013
________
2 No. 11-1565-cv
Before: CABRANES, STRAUB, and HALL, Circuit Judges.
________
This appeal reflects the tension between an attorney’s ethical
duty of confidentiality and the federal interest in encouraging
“whistleblowers” to disclose unlawful conduct harmful to the
government. We consider two questions: (1) whether the United
States District Court for the Southern District of New York (Robert
P. Patterson, Judge) correctly held that a former general counsel to
defendant violated his ethical obligations under the New York Rules
of Professional Conduct (“N.Y. Rules”) by participating in this qui
tam action; and, if so, (2) whether the District Court erred in
dismissing the complaint and disqualifying plaintiff, all of its
general partners including the former general counsel, and its
outside counsel from bringing any subsequent qui tam action based
on similar facts.
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,” N.Y. Rule 1.9(c), except “to the
extent that the lawyer reasonably believes necessary . . . to prevent
the client from committing a crime,” id. 1.6(b)(2).
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.
Affirmed.
3 No. 11-1565-cv
________
ANDREW H. SCHAPIRO, Quinn Emanuel Urquhart
& Sullivan, LLP, New York, NY, (Charles P.
Greenman, Karen F. Lederer, Elliot Cohen,
George A. Somerville, Christina H. Bost Seaton,
Troutman Sanders LLP, New York, NY; Philip R.
Michael, Michael Law Group, P.C., New York,
NY, on the brief), for Plaintiff-Appellant.
PETER D. KEISLER, Sidley Austin LLP,
Washington, DC (Richard D. Raskin, Scott D.
Stein, Allison W. Reimann, Sidley Austin LLP,
Chicago, IL; Kevin McGinty, Mintz Levin Cohn
Ferris Glovsky and Popeo, P.C., Boston, MA, on
the brief), for Defendants-Appellees.
________
JOSÉ A. CABRANES, Circuit Judge:
Plaintiff appeals from the July 12, 2011 judgment of the United
States District Court for the Southern District of New York (Robert
P. Patterson, Judge) dismissing this qui tam action and disqualifying
plaintiff, its individual members―including a former general
counsel to defendant―and its outside counsel from bringing a
subsequent qui tam action on the basis that the suit was brought in
violation of the general counsel’s ethical obligations under the New
York Rules of Professional Conduct (the “N.Y. Rules”).1 The issues
1The current version of the New York Rules of Professional Conduct took
effect on April 1, 2009, and is reprinted with amendments in N.Y. Jud. Law App.
(McKinney 2013). The District Court evaluated this claim under a version of the
New York Code of Professional Responsibility which has since been replaced by
4 No. 11-1565-cv
on appeal arise out of the tension between an attorney’s ethical duty
of confidentiality and the federal interest in encouraging
“whistleblowers” to disclose unlawful conduct harmful to the
government.
We consider here two questions: (1) whether the District
Court correctly held that the former general counsel to defendant
violated his ethical obligations under the N.Y. Rules by participating
in this qui tam action; and, if so, (2) whether the District Court erred
in dismissing the complaint and disqualifying plaintiff, all of its
general partners including the former general counsel, and its
outside counsel from bringing any subsequent qui tam action based
on similar facts.
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,” N.Y. Rule 1.9(c), except “to the extent that the lawyer
reasonably believes necessary . . . to prevent the client from
committing a crime,” id. 1.6(b)(2).
In addition, we hold that the District Court did not err by
dismissing the complaint as to all defendants, and disqualifying
plaintiff, its individual relators, and its outside counsel on the basis
that such measures were necessary to avoid prejudicing defendants
in any subsequent litigation on these facts.
the current N.Y. Rules cited in this opinion, and relied upon by the parties in
their briefs. The rules are substantively unchanged, but the language of the
earlier version applied by the District Court is noted for reference throughout the
opinion.
5 No. 11-1565-cv
Accordingly, we affirm the July 12, 2011 judgment of the
District Court.
BACKGROUND
Plaintiff-appellant Fair Laboratory Practices Associates
(“FLPA” or “plaintiff”) brought this qui tam action2 pursuant to the
federal False Claims Act (“FCA”)3, 31 U.S.C. §§ 3729-3733, against
defendants-appellees Quest Diagnostics Incorporated (“Quest”) and
Unilab Corporation (“Unilab”)4 for alleged violations of the federal
Anti-Kickback Statute, 42 U.S.C. § 1320a-7b (“AKS”).5 One of FLPA’s
2 “Qui tam is short for ‘qui tam pro domino rege quam pro se ipso in hac parte
sequitur,’ which means ‘who pursues this action on our Lord the King’s behalf as
well as his own.’” Rockwell Int’l Corp. v. United States, 549 U.S. 457, 463 n.2 (2007).
The False Claims Act’s qui tam provision allows “a private plaintiff, known as a
relator, [to] bring[ ] suit on behalf of the [g]overnment to recover a remedy for a
harm done to the [g]overnment.” Woods v. Empire Health Choice, Inc., 574 F.3d 92,
97 (2d Cir. 2009); see 31 U.S.C. § 3730(b). As the “real party in interest” in a qui
tam action, United States ex rel. Eisenstein v. City of New York, New York, 556 U.S.
928, 930 (2009) the government may intervene and take over prosecution of the
lawsuit, 31 U.S.C. § 3730(b)(2), (4). In such cases, however, the relator is still
entitled to a share of any recovery. 31 U.S.C. § 3730(d).
3The FCA creates a cause of action against one who “knowingly presents, or
causes to be presented , a false or fraudulent claim for payment or approval.” 31
U.S.C. § 3729(a)(1). Plaintiff also brought claims under the false claims statutes
of several states.
4FLPA also sued XYZ Corporations 1-100, which are unnamed entities
allegedly controlled by Quest.
5 Title 42 U.S.C. § 1320a-7b(b)(2) provides that
whoever knowingly and willfully offers or pays any remuneration
(including any kickback, bribe, or rebate) directly or indirectly,
overtly or covertly, in cash or in kind to any person to induce such
person―(A) to refer an individual to a person for the furnishing or
6 No. 11-1565-cv
general partners, Mark Bibi, was formerly General Counsel to
defendant Unilab. The facts set forth below are drawn from the
record on appeal, including the account of facts found by the District
Court.
A. The Parties
Quest is a Delaware corporation founded in 1996 and
headquartered in New Jersey that provides diagnostic medical
testing services for managed care organizations (“MCOs”)6 and
independent practice associations (“IPAs”)7 nationwide. In 2003,
Quest acquired Unilab―a clinical laboratory company
headquartered in California―through a “cash tender offer.” Unilab
became a wholly-owned subsidiary of Quest through a subsequent
merger.
arranging for the furnishing of any item or service for which payment
may be made in whole or in part under a Federal health care
program, or (B) to purchase, lease, order, or arrange for or
recommend purchasing, leasing, or ordering any good, facility,
service, or item for which payment may be made in whole or in part
under a Federal health care program, shall be guilty of a felony and
upon conviction thereof, shall be fined not more than $25,000 or
imprisoned for not more than five years, or both.
6 MCOs “are entities that, for agreed upon fees, terms, and conditions,
undertake to pay the health care costs of its enrollees. Such plans are an
alternative to traditional indemnity health insurance plans.” Joint App’x 209.
7The Second Amended Complaint (“Complaint”) describes the relationship
between IPAs and MCOs as follows: “In some cases, rather than contracting with
individual physicians . . . , an MCO contracts with [IPAs], and the [IPA], in turn,
contracts with hospital providers and independent clinical laboratory providers
such as the Defendants. In other cases, a large [IPA] operates as a full-fledged
MCO.” Joint App’x 210.
7 No. 11-1565-cv
FLPA, the “relator” in this qui tam action, is a Delaware
general partnership formed in 2005 by three former Unilab
executives, Andrew Baker (“Baker”), Richard Michaelson
(“Michaelson”), and Mark Bibi (“Bibi” and jointly, the “individual
relators”) for the purpose of bringing this qui tam action. The
individual relators worked for Unilab prior to its acquisition by
Quest in 2003. Baker was Unilab’s Chairman and Chief Executive
Officer from 1993 to about December 1996. Michaelson was Unilab’s
Chief Financial Officer from 1993 to January 1998, and was a director
of and consultant to Unilab from January 1998 to November 1999.
Bibi was Unilab’s Vice President, Executive Vice President,
Secretary, and General Counsel from November 1993 to March 2000,
and then served only as an Executive Vice President through June
2000, after which he was retained as a consultant by Unilab until
December 2000.
Bibi’s role as Unilab’s General Counsel is central to the issues
presented on appeal. Bibi, who has been practicing law in New York
since 1985, was Unilab’s sole “in-house” lawyer from 1993-2000. In
that capacity, he was responsible for all of Unilab’s legal and
compliance affairs, such as advising Unilab on matters relating to its
MCO contracts and managing all litigation against the company.
B. The Alleged Scheme
FLPA alleges that “[f]rom at least 1996 through at least 2005,
Unilab and Quest violated the AKS8 by operating a ‘pull-through’
scheme by which they charged MCOs and IPAs commercially
unreasonable discounted prices [on non-federal business] to induce
referrals of Medicare and Medicaid business and then billed the
Medicare and Medicaid business to the Government at dramatically
8 For the text of the Anti-Kickback Statute, see Note 5, ante.
8 No. 11-1565-cv
higher prices than those charged to the MCOs and IPAs [on the non-
federal business].” Appellant’s Br. 6 (citing Complaint ¶¶43-52).
Specifically, FLPA argues that the “commercially unreasonable
discounted prices” constituted “kickback[s], bribe[s] or rebate[s]”
insofar as they were designed to induce referrals of Medicare and
Medicaid business. Appellant’s Br. 6 (internal quotation marks
omitted).
Between 1993 and 1996, the individual relators began to
question whether Unilab’s pricing structure violated the AKS. For
example, as Chief Financial Officer, Michaelson allegedly knew that
Unilab often charged its MCO clients prices that were sometimes
less than 50% of Unilab’s actual testing costs. And Bibi allegedly
advised Baker that Unilab’s pricing structure, as it was then
formulated, potentially facilitated “kickbacks.”
In response to these concerns about Unilab’s pricing structure,
“Unilab, under its then-CEO [Baker], established a new pricing
policy . . . that included negotiated increases to the rates under its
existing contracts.” Joint App’x 213. Specifically, in 1996 Unilab
delivered a letter to its MCO and physician-association customers
“stating that it was reserving its contractual right to terminate its
contract with that customer and would, in thirty days, cease
providing laboratory services to any customer that did not agree to a
price increase.” Id. Following Unilab’s notice that it was raising its
prices, some of Unilab’s “customers began to slowly slip away to
[its] competitors.” Id. at 214.
FLPA asserts that Baker’s tenure as CEO ended in 1997 as a
result of the falling profits caused by this increase in Unilab’s prices.
When Baker left, Unilab’s shares were selling for less than $3 per
share. In 1999, Kelso & Co. completed a leveraged buy-out of Unilab
for $5.85 per share and installed a new management team, including
9 No. 11-1565-cv
Robert Whalen as CEO. Whalen reversed course from Baker’s
pricing policy, informing other executives that “Baker’s increased
pricing had been a mistake, and that Unilab needed to (i) accept
commercially unreasonable contracts with MCOs and physician
associations and (ii) implement a strategy that required physicians
to refer, and the MCOs to arrange for or recommend that physicians
refer, fee-for-service business, including Medicare and Medicaid-
reimbursable business, to Unilab.” Id. at 215-16.
In December 1999, the U.S. Department of Health and Human
Services Office of Inspector General (“OIG”) published Advisory
Opinion (“AO”) 99-13, which addressed the pricing practices of
clinical pathologists. In particular, AO 99-13 indicated that if the
prices offered to MCOs on non-federal business were below “actual
cost,” such an arrangement “might” violate the AKS because the
OIG would infer that such discounts were offered for the purpose of
inducing physicians to refer their Medicare and Medicaid business.
The month after AO 99-13 was published, Bibi had a meeting
with Whalen during which Bibi stated his “personal opinion,” that
AO 99-13 created an inference of illegality with respect to Unilab’s
existing pricing structure. Whalen allegedly instructed Bibi to work
with outside counsel to “find a way around” AO 99-13. In response
Bibi obtained an opinion letter from an outside law firm, Winston &
Strawn, on this issue.9 Bibi never reported his concerns to the Unilab
Board.
9The District Court reviewed in camera the Winston & Strawn opinion letter,
which was never produced to FLPA’s counsel, and referred to the letter in its
Opinion and Order. FLPA contends that this was error. It argues that “[w]hen
one side, seeking to block consideration of relevant matter, asserts an evidentiary
privilege, the court may inspect the evidence in camera . . . for the limited purpose
of determining whether the asserted privilege is genuinely applicable. . . . [I]f the
10 No. 11-1565-cv
FLPA alleges that Bibi was subsequently “frozen out” by
Unilab’s management as a result of his concerns related to Unilab’s
pricing structure and was no longer asked for advice on compliance
matters. By March 2000, Bibi had been replaced as General Counsel.
After the individual relators left Unilab, the company
allegedly “continued its illegal pull-through strategy and as a result
significantly improved its profitability.” Id. at 216. In 2003, Quest
acquired Unilab at a price of $26.50 per share. According to Bibi,
Baker―who had sold his remaining Unilab shares for $5.85 per
share three years earlier― felt “shortchanged.” Baker contacted
Jeffrey Lanzolatta, a longtime Unilab executive, who allegedly told
Baker that Unilab “had become very profitable engaging in the pull-
through practice.” Id. at 918. Baker relayed this information to Bibi,
stating that he was in a tax dispute with Unilab/Quest and “wanted
to go after them . . . . [t]hrough a qui tam lawsuit.” Id.
court’s finding is that the privilege does apply, then the court may not rely upon
the information in reaching its judgment.” Abourezk v. Reagan, 785 F.2d 1043, 1061
(D.C. Cir. 1986) (citations omitted). Here, however, the pertinent inquiry was not
the effect of the letter on the merits of FLPA’s case, but whether the information
was subject to the attorney-client privilege so as to trigger Bibi’s ethical
obligations under the N.Y. Rules. See id. (“Only in the most extraordinary
circumstances does our precedent countenance court reliance upon ex parte
evidence to decide the merits of a dispute.” (emphasis supplied)). Under the
circumstances here, in camera review is appropriate and the documents in
question need not be disclosed to the parties. Cf. In re The City of New York, 607
F.3d 923, 948-49 (2d Cir. 2010) (explaining that a proper procedure for
determining whether certain materials are privileged is to “require that the party
possessing the documents appear ex parte in chambers to submit the documents
for in camera review by the judge, after which the materials can be returned to the
custody of that party”).
11 No. 11-1565-cv
C. Procedural History
Baker initiated the filing of this qui tam action and invited
Michaelson and Bibi to join him as individual relators; in particular,
he believed Bibi’s status as a lawyer “would improve our credibility
with the government.” Id. at 920. Recognizing the potential ethical
implications of a former general counsel bringing a qui tam lawsuit
against his former company and client, Bibi consulted the N.Y. Rules
and the American Bar Association’s Model Rules of Professional
Conduct to determine whether he could participate. Bibi concluded
that certain exceptions to the attorney-client confidentiality rules
permitted his participation, and “did not feel it was necessary” to
verify his understanding with the New York state bar. Id. at 932.
On January 1, 2005, FLPA was formed for the purpose of
acting as a relator in one or more qui tam actions against defendants
for alleged violations of the AKS. Pursuant to the FLPA partnership
agreement, Bibi stands to collect 29% of any qui tam recovery, while
Baker and Michaelson would receive 57% and 14%, respectively. On
June 7, 2005, FLPA filed this qui tam action in the Southern District of
New York. After FLPA filed the operative Second Amended
Complaint (“Complaint”) on May 18, 2010,10 the District Court
permitted defendants to take discovery regarding whether Bibi and
FLPA had improperly used or disclosed Unilab’s confidences in this
lawsuit. Following the completion of this discovery, defendants filed
a motion to dismiss the Complaint, arguing that Bibi’s participation
in this qui tam action violated two provisions of the N.Y. Rules.
First, defendants argued that Bibi violated N.Y. Rule 1.9(a),
known as the “side-switching” rule, which provides that
The complaint was filed under seal in accordance with procedures
10
governing the FCA. See 31 U.S.C. § 3730(b)(2).
12 No. 11-1565-cv
[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.
N.Y. Rule 1.9(a).11 Defendants asserted that, by acting as an
individual relator in this qui tam action, Bibi essentially “switched
sides” and represented the government against Unilab, his former
client.
Second, defendants argued that Bibi violated the N.Y. Rules
by making use of Unilab’s confidential information for this
litigation. Pursuant to N.Y. Rule 1.9(c),12
[a] lawyer who has formerly represented a client in a
matter or whose present or former firm has formerly
represented a client in a matter shall not thereafter . . .
(1) use confidential information13 of the former client
The District Court applied the earlier version of Rule 1.9(a), DR 5-108,
11
reprinted in N.Y. JUD. LAW APP. (McKinney 1992), which stated, in relevant part,
“a lawyer who has represented a client in a matter shall not, without the consent
of the former client after full disclosure . . . [t]hereafter 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.”
The District Court applied the earlier version of Rule 1.9(c), DR 4-101,
12
which stated in relevant part, “Except when permitted . . . , a lawyer shall not
knowingly: (1) [r]eveal a confidence or secret of a client [or] (2) [u]se a
confidence or secret of a client to the disadvantage of the client [or] (3) [u]se a
confidence or secret of a client for the disadvantage of the lawyer or of a third
person, unless the client consents after full disclosure.”
13 N.Y. Rule 1.6(a) defines “confidential information” as follows:
13 No. 11-1565-cv
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.
FLPA, in turn, relied upon the exception in N.Y. Rule 1.6(b), which
permits a 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).14
On March 24, 2011, the District Court granted defendants’
motion to dismiss, presumably pursuant to the “inherent power. . .
necessarily vested in courts to manage their own affairs,” Chambers
v. NASCO, Inc., 501 U.S. 32, 49 (1991) (discussing authority to
dismiss sua sponte for failure to prosecute). See United States ex rel.
Fair Lab. Practices Assocs. v. Quest Diagnostics Inc., No. 05 Civ. 5393
“Confidential information” consists of information gained during or
relating to the representation of a client, whatever its source, that is (a)
protected by the attorney-client privilege, (b) likely to be
embarrassing or detrimental to the client if disclosed, or (c)
information that the client has requested be kept confidential.
“Confidential information” does not ordinarily include (i) a lawyer’s
legal knowledge or legal research or (ii) information that is generally
known in the local community or in the trade, field or profession to
which the information relates.
The District Court applied the earlier version of Rule 1.6(b)(2), DR 4-
14
101(c)(3), which allowed a lawyer to reveal “[t]he intention of a client to commit
a crime and the information necessary to prevent the crime . . . .”
14 No. 11-1565-cv
(RPP), 2011 WL 1330542, at *11 (S.D.N.Y. Apr. 5, 2011).15 The District
Court concluded that the FCA did not preempt applicable state
ethical rules, and that Bibi’s participation in this action violated Rule
1.9(a)―the “side-switching rule”―and Rule 1.9(c)’s prohibition on
disclosing client confidences beyond what was “necessary,” within
the meaning of Rule 1.6(b), to prevent the commission of a crime. Id.
at *6-11.
In light of these conclusions, the District Court held that the
appropriate remedy was to (1) dismiss the Complaint as to all
defendants, and (2) disqualify FLPA, each of the individual relators,
and FLPA’s counsel from bringing this suit or any subsequent suit
based on the same facts. Id. at *11-13. The District Court reasoned
that these measures were “necessary to protect Defendants from the
use of their confidential information against them.” Id. at *13. The
District Court clarified that the dismissal in no way affected the right
of the United States to intervene and bring an action against
defendants. Id. at *14. On July 5, 2011, however, the United States
gave notice that it was declining to intervene. Judgment was entered
on July 12, 2011.
This appeal followed.
DISCUSSION
On appeal, FLPA argues principally that (1) the District Court
erred in holding that Bibi violated his ethical duties under the N.Y.
Rules; and (2) the District Court erred in granting an overly broad
The District Court noted that “[c]ourts in this District have not hesitated to
15
dismiss claims brought by lawyers [in violation of their ethical obligations].”
Quest Diagnostics, 2011 WL 1330542, at *11.
15 No. 11-1565-cv
remedy in favor of the defendants. We consider each argument in
turn.
A. Bibi Violated N.Y. Rule 1.9(c) by Disclosing Unilab’s
Confidential Information
We review a district court’s grant of a motion to dismiss a qui
tam action de novo. United States ex rel. Mergent Servs. v. Flaherty, 540
F.3d 89, 91 (2d Cir. 2008) (reviewing a district court’s order
dismissing a qui tam action on the ground that a non-lawyer cannot
bring a qui tam action pro se).
1. The FCA Does Not Preempt State Ethical Rules
As a general matter, the “salutary provisions [of New York’s
ethical rules] have consistently been relied upon by the courts of this
district and circuit in evaluating the ethical conduct of attorneys.”
Hull v. Celanese Corp., 513 F.2d 568, 571 n.12 (2d Cir. 1975). Nothing
in the False Claims Act evinces a clear legislative intent to preempt
state statutes and rules that regulate an attorney’s disclosure of
client confidences. See See Bates v. Dow Agrosiences LLC, 544 U.S. 431,
449 (2005) (“In areas of traditional state regulation, we assume that a
federal statute has not supplanted state law unless Congress has
made such an intention clear and manifest.” (internal quotation
marks omitted)). See also Cipollone v. Liggett Grp., Inc., 505 U.S. 504,
516 (1992) (same). As one court recognized, “[w]hile the [FCA]
permits any person . . . to bring a qui tam suit, it does not authorize
that person to violate state laws in the process.” United States ex rel.
Doe v. X. Corp., 862 F. Supp. 1502, 1507 (E.D. Va. 1994) (emphasis
supplied).
At the same time, we are mindful that the central purpose of
the N.Y. Rules―to protect client confidences―can be “inconsistent
with or antithetical to federal interests,” Grievance Comm. for
16 No. 11-1565-cv
S.D.N.Y. v. Simels, 48 F.3d 640, 646 (2d Cir. 1995), which under the
FCA, are to “‘encourage private individuals who are aware of fraud
being perpetrated against the [g]overnment to bring such
information forward,’” U.S. ex rel. Dick v. Long Island Lighting Co.,
912 F.2d 13, 18 (2d Cir. 1990) (quoting H.R. Rep. No. 660, 99th Cong.,
2d Sess. 22 (1986)). In such instances courts must interpret and apply
the N.Y. Rules in a manner that “balances the varying federal
interests at stake.” Simels, 48 F.3d at 646. We conduct the following
analysis with these principles in mind.
2. Bibi Violated Rule 1.9(c) by Disclosing Confidential
Information Beyond What Was “Necessary” Within the Meaning
of N.Y. Rule 1.6(b).
FLPA concedes that N.Y. Rule 1.9(c) governs Bibi’s conduct in
this case. See Appellant’s Br. 18. As noted above, N.Y. Rule 1.9(c)
provides that
[a] lawyer who has formerly represented a client in a
matter . . . shall not thereafter:
(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.
N.Y. Rule 1.6(b)(2), in turn, authorizes a lawyer to “reveal or use
confidential information to the extent that the lawyer reasonably
17 No. 11-1565-cv
believes necessary: . . . (2) to prevent the client from committing a
crime . . . .”
Accordingly, review of the District Court’s determination that
Bibi’s participation in the qui tam action violated Rule 1.9(c) requires
us to decide whether Bibi reasonably believed that (1) the
defendants intended to commit a crime when FLPA filed this action
in 2005, and (2) the disclosures were necessary to prevent the
defendants from committing a crime.
a.
We agree with the District Court that “Bibi could have
reasonably believed in 2005 that [d]efendants had the intention to
commit a crime.” Quest Diagnostics, 2011 WL 1330542, at *9
(emphasis omitted); see also id. at *10 (“[I]t is reasonable to infer that
Bibi believed Quest intended to violate the AKS in 2005. . . .”). The
District Court made specific factual findings as to what Bibi knew
about defendants’ alleged violations of the AKS. See Quest
Diagnostics, 2011 WL 1330542, at *9-10. Defendants do not argue that
any finding made by the District Court in this regard was erroneous.
Finding no error based on the record before us, we affirm the
judgment of the District Court insofar as it rests on its conclusion
that Bibi reasonably could have maintained such a belief.
b.
The second question is whether Bibi reasonably believed that
his disclosures were necessary to prevent defendants from
committing a crime. FLPA asserts that it was “necessary”―within
the meaning of N.Y. Rule 1.6(b)―for Bibi to reveal the confidential
information disclosed in this lawsuit because the terms of the FCA
required Bibi to make “‘written disclosure of substantially all
material evidence and information the person possesses’” to the
18 No. 11-1565-cv
government. Appellant’s Br. 33 (quoting 31 U.S.C. § 3730(b)(2)).
Thus, FLPA argues, “[u]nder elementary principles of the
supremacy of federal law, the FCA preempts application of Rule 1.6
. . . .” Appellant’s Br. 33-34. We disagree, in light of the balancing
principles set forth in Part A.1, ante.
Rule 1.6(b)(2) implicitly accounts for the federal interests at
stake in the FCA by permitting disclosure of information
“necessary” to prevent the ongoing commission of a crime. As
illustrated by this very case, Rule 1.6’s prohibition on Bibi’s
disclosures could not have undermined the qui tam action in light of
the alternative means, discussed below, of exposing the alleged
kickback scheme. Because Rule 1.6 itself balances the interests at
stake, it need not give way to section 3730(b)(2)’s requirement of full
disclosure of material evidence.
Alternatively, FLPA contends that even if Rule 1.6(b) does not
give way to section 3730, Bibi complied with its requirements by
“tempering his disclosures” until his deposition, when he finally
testified as to the details of his conversations with Whalen and
revealed the existence of the Winston & Strawn opinion letter upon
solicitation by Unilab. Appellant’s Br. 34. FLPA argues further that
the ongoing nature of the alleged crime necessitated the broad
disclosures. Id. at 35.
The District Court concluded that “[e]vidence of the
continuing crime in 2005 could be shown by evidence of Quest’s
pricing agreements with MCOs and IPAs in effect in 2005 and not,
for example, through Bibi’s disclosures [confidential information].”
Quest Diagnostics, 2011 WL 1330542, at *10. Thus, the Court
reasoned, the confidential information divulged by Bibi, dating back
to 1996, went beyond what was reasonably necessary to prevent any
alleged ongoing crime in 2005, when the suit was filed. See id.(“Further, FLPA has not articulated a persuasive reason why
19 No. 11-1565-cv
disclosure of confidences from the 1990s to March 2000 would be
necessary to prevent the commission or continuation of a crime in
2005.”).
We agree with the District Court that the confidential
information Bibi revealed was greater than reasonably necessary to
prevent any alleged ongoing fraudulent scheme in 2005. By FLPA’s
own admission, it was unnecessary for Bibi to participate in this qui
tam action at all, much less to broadly disclose Unilab’s confidential
information. See Appellant’s Br. 43 (“Baker and Michaelson each has
ample relevant information to bring this case”).16 FLPA could have
brought the qui tam action based on the information that Baker and
Michaelson possessed as former executives of Unilab, or, if necessary,
Bibi could have made limited disclosures.17 Instead, Bibi chose to
participate in the action and disclose protected client confidences, see
App’x 900, in violation of N.Y. Rule 1.9(c).
Because we affirm the judgment of the District Court on the
grounds that Bibi violated N.Y. Rule 1.9(c), we need not consider
whether Bibi also violated N.Y. Rule 1.9(a)―the “side-switching”
rule―by participating in this qui tam action.18
We note that the presence of at least two willing relators with ample
16
information to bring the suit further confirms that, under these circumstances,
application of Rule 1.9(c) would not affect, much less undermine, the federal
interests embodied in the FCA qui tam provision.
Cf. New York County Lawyers’ Ass’n, Committee on Professional Ethics
17
Formal Opinion 746 (Oct. 7, 2013) (“As a general principle, there are few
circumstances, if any, in which, in the Committee’s view, it would be reasonably
necessary within the meaning of [Rule] 1.6(b) for a lawyer to pursue the steps
necessary to collect a bounty as a reward for revealing confidential material.”).
We note that the District Court gave no indication that the finding with
18
respect to Rule 1.9(a) affected its decision on remedies.
20 No. 11-1565-cv
B. The District Court Did Not Err or “Abuse Its Discretion” in
Dismissing the Complaint and Disqualifying FLPA and Its
Counsel
Having affirmed the judgment of the District Court insofar as
it concluded that Bibi violated N.Y. Rule 1.9(c), we must decide
whether the District Court’s remedy―dismissing the complaint and
disqualifying FLPA, FLPA’s counsel, and the individual relators
from bringing this action or any subsequent action based on the
same facts―was proper.
We review a district court’s decision on remedies for ethical
violations for “abuse of discretion.” See W. T. Grant Co. v. Haines, 531
F.2d 671, 676 (2d Cir. 1976) (remedy of disqualification will only be
upset upon a showing of “abuse”). A district court has abused its
discretion if it “(1) based its ruling on an erroneous view of the law,
(2) made a clearly erroneous assessment of the evidence, or (3)
rendered a decision that cannot be located within the range of
permissible decisions.” NML Capital, Ltd. v. Republic of Argentina, 680
F.3d 254, 257 (2d Cir. 2012) (internal quotation marks omitted).
We have long recognized “the power of trial judges to
disqualify [attorneys] where necessary to preserve the integrity of
the adversary process . . .”―most commonly “where the attorney is
at least potentially in a position to use privileged information
concerning the other side through prior representation . . . . ” Bd. of
Ed. of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979) (internal
quotation marks omitted). Dismissal of a complaint prepared in
reliance on privileged information may also be an appropriate
remedy. See, e.g., Ackerman v. Nat'l Prop. Analysts, Inc., 887 F. Supp.
510, 519 (S.D.N.Y. 1993), aff’d without opinion, 60 F.3d 810 (2d Cir.
1995) (disqualifying counsel and dismissing complaint prepared in
reliance on improper disclosures by the opposing party’s former
21 No. 11-1565-cv
counsel); Doe v. A Corp., 330 F. Supp. 1352, 1353 (S.D.N.Y. 1971), aff'd
sub nom. Hall v. A. Corp., 453 F.2d 1375 (2d Cir. 1972) (dismissing
complaint in a derivative action brought by a lawyer against a
former client on the basis of confidential information obtained while
representing that client, and disqualifying lawyer).
We are conscious that, notwithstanding any salutary effect on
attorney ethics or the appearance of fairness, dismissal or
disqualification for violations of ethical rules may impede the
pursuit of meritorious litigation to the detriment of the justice
system. See, e.g., Fund of Funds, Ltd. v. Arthur Andersen & Co., 567
F.2d 225, 236 (2d Cir. 1977) (affirming a district court’s refusal to
dismiss a complaint due to ethical violations on the ground that “we
are loathe to countenance a remedy which will affect the rights of a
plaintiff embarked on serious litigation”). Accordingly, courts must
balance these competing concerns by limiting remedies for ethical
violations to those necessary to avoid “taint[ing] the underlying
trial.” Nyquist, 590 F.2d at 1246; see also Fund of Funds, 567 F.2d at
236-37 (“[W]e have sought to strike a delicate balance between the
[litigant’s] interest in representation by counsel of its choice and the
need to maintain high ethical standards within the profession of
law.”); cf. Hull, 513 F.2d at 572 (“[A party’s] right to counsel of her
choice . . . . must yield . . . to considerations of ethics which run to
the very integrity of our judicial process.”).
We have repeatedly cautioned that, “[w]hen dealing with
ethical principles, we cannot paint with broad strokes.” Fund of
Funds, 567 F.2d at 227 (internal quotation marks, citations and
alteration omitted). In evaluating the remedies ordered here, we
note FLPA’s unusual posture in this litigation by virtue of its status
as relator. While FLPA stands to benefit from any recovery in this
case, it brings this suit on behalf of the United States government. As
such, it acts neither as the real party in interest nor in a
22 No. 11-1565-cv
representative capacity. In addition, we recognize the particularly
strong federal interest underpinning qui tam litigation pursuant to
the FCA.
1. Dismissal of the Complaint and Disqualification of FLPA
We first address the District Court’s decision to dismiss the
Complaint as to all defendants and disqualify FLPA and its
individual relators. In ordering remedies for Bibi’s violation of the
N.Y. Rules, the District Court correctly recognized that “[n]ot all
violations of the legal code of ethics require dismissal or
disqualification of counsel,” and that the relevant inquiry was the
“possibility of prejudice at trial.” Quest Diagnostics, 2011 WL
1330542, at *11 (internal quotation marks omitted). After considering
lesser alternatives, the District Court concluded that because FLPA
“pursued this litigation on the basis that Bibi could ‘spill his guts’
and freely disclose Unilab’s confidential information,” it would be
“virtually impossible to identify and distinguish each improper
disclosure.” Id. at *12. Furthermore, given the concessions by Baker
and Michaelson that Bibi had revealed information about
confidential communications with Whalen, id. at *5, “[a]llowing
Baker and Michaelson to proceed with the suit would allow that
taint to proceed into trial,” id. at *12.
We do not conclude that the District Court erred or “abused
its discretion” in finding that, in view of 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.
Moreover, FLPA is not the real party in interest here, and, as the
District Court emphasized, its decision did not foreclose the
23 No. 11-1565-cv
government (or, for that matter, a different relator)19 from bringing
suit. Accordingly, dismissal of the Complaint and disqualification of
FLPA does not significantly impair the federal interests embodied in
the FCA.
Alternatively, FLPA argues that it should be permitted to
proceed against Quest, if not Unilab, because Bibi never owed any
duty to Quest. Appellant’s Br. 46. This argument ignores the fact
that “when control of a corporation passes to new management [as a
result of, inter alia, a merger], the authority to assert and waive the
corporation’s attorney-client privilege passes as well.” Commodity
Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 349 (1985). The
District Court thus correctly held that “any obligation Bibi had to
Unilab was transferred to Quest upon its purchase.” 20 Quest
Diagnostics, 2011 WL 1330542, at *13. We hold that it was not error
for the District Court to conclude that “simply dismissing Unilab
from this action would not fully purge the taint associated with
Bibi’s unethical disclosures of Unilab confidences[,]” id.
2. Dismissal of FLPA’s Counsel
We next consider whether the District Court abused its
discretion by sua sponte disqualifying FLPA’s counsel, Troutman
Sanders and the Michael Law Group, on the basis that such
19Although not expressly stated, we understand the District Court’s Order to
dismiss the Complaint without prejudice to suit being brought by different
relators who otherwise meet the statutory requirements of the FCA on similar
facts (without improper disclosures).
In addition, the District Court held that “[a] financial judgment against
20
Quest would . . . undoubtedly have effects on Quest’s wholly-owned subsidiary,
Unilab.” Quest Diagnostics, 2011 WL 1330542, at *13 (citing Gillers Decl. ¶ 62,
Joint App’x 396).
24 No. 11-1565-cv
dismissal was “necessary to protect [d]efendants from the use of
their confidential information against them.” Id.We note at the outset that the ethical violations at issue here
were committed by Bibi, a general partner of the client, FLPA, and
not by counsel in this case. As such, the circumstances of this
disqualification do not lend themselves to the “precise application of
precedent.” Fund of Funds, 567 F.2d at 227 (internal quotation marks
omitted). We have, however, previously found it necessary to
dismiss counsel who had themselves committed no ethical violation,
on the basis that “confidences . . . could have been revealed [to
them]” that would prejudice a party in litigation. Id. at 233(dismissing co-counsel of a firm that was disqualified due to ethical
conflicts because the conflicted firm had shared confidences with its
co-counsel).
Here, the District Court concluded that, by virtue of the
confidential information likely revealed to them, counsel for FLPA
“are in a position to use [defendants’ confidential information] to
give present or subsequent clients an unfair, and unethical,
advantage.” Quest Diagnostics, 2011 WL 1330542, at *13; see also
Nyquist, 590 F.2d at 1246 (holding that disqualification may be
warranted where the attorney is “potentially in a position to use
privileged information concerning the other side”). Moreover,
FLPA’s disqualification, by virtue of the intimate collaboration with
Bibi in the ethics violations, alleviates the concern that “[t]he sins of
counsel should not be visited upon his client so as to vitiate the
25 No. 11-1565-cv
latter's cause of action.”21 W.T. Grant, 531 F.2d at 677. In sum, the
District Court’s decision to disqualify FLPA’s counsel was not based
on any error of law or fact, and is “located within the range of
permissible decisions.” NML Capital, 680 F.3d at 257 (citations
omitted).
CONCLUSION
To summarize:
(1) The False Claims Act does not preempt state ethical rules
governing the disclosure of client confidences; therefore
N.Y. Rule 1.9(c), which generally prohibits disclosure of
confidential information of a former client, governs a New
York attorney’s conduct as relator in a qui tam action under
the False Claims Act.
(2) N.Y. Rule 1.6(b)(2), which permits a lawyer to reveal or use
confidential information to the extent that the lawyer
reasonably believes necessary to prevent the client from
committing a crime, does not justify Bibi’s disclosures in
this case: Bibi reasonably could have believed in 2005 that
defendants intended to commit a crime. His disclosure of
Unilab’s confidential information, however, went well
The suggestion that disqualification of FLPA’s counsel is improper because
21
those attorneys did not commit the violation misses the mark. Disqualification is
not a sanction but a remedy that seeks to avoid prejudice to the party whose
confidences have been revealed and, in so doing, promote the integrity of our
justice system. Cf. Fund of Funds, 567 F.2d at 227 (noting that “[c]ompliance or
noncompliance with Canons of Ethics frequently do not involve morality or
venality, but differences of opinions among honest men over the ethical
propriety of conduct,” but nonetheless dismissing counsel who violated those
ethics and co-counsel who did not).
26 No. 11-1565-cv
beyond what was “necessary” within the meaning of N.Y.
Rule 1.6(b)(2) to prevent Unilab from committing a crime
inasmuch as there was ample non-confidential information
on which to bring an FCA action. Therefore, Bibi’s conduct
in this qui tam action violated his ethical obligations under
N.Y. Rule 1.9(c).
(3) The District Court did not err or “abuse its discretion” in
dismissing the Complaint and disqualifying FLPA, all of its
general partners, and its outside counsel from bringing any
subsequent related qui tam action, on the basis that such
measures were necessary to prevent the use of Bibi’s
unethical disclosures against defendants.
Accordingly, the judgment of the District Court is
AFFIRMED.