Counterclaims Against Compliance-Officer-Turned-Relator Survive Motion to Dismiss

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.