Releases of FCA claims my only be effective in very limited circumstances, the Second Circuit Court of Appeals ruled in a decision this week. In US ex rel. Ladas v. Exelis, Inc, et al., the court ruled that a pre-filing release is unenforceable as a matter of public policy – the encouragement of qui tam suits to uncover fraud against the government – unless the government is informed of the fraud allegations prior to its signing. This is an extension of the Fourth Circuit Court of Appeals’ decision in US ex rel. Radcliffe v. Purdue Pharma L.P. and fully accepts the Ninth Circuit Court of Appeals’ decisions in US ex rel. Green v. Northrop Corp. and US ex rel. Hall v. Teledyne Wah Chang Albany.

In Ladas, the defendant was awarded a contract to provide the government with devices and component parts that met particular specifications and to notify the government of any changes that could cause deviation from those specifications. The defendant changed the way certain components were made. It did not advise the government of the changes for several years, falsely stated the changes were recent and falsely advised that the changes did not have the potential to affect any of the specifications.

After the notice went out, Ladas’ employment was terminated, and he signed a release that included “any rights or claims [he] may have under … federal … laws.” The release also stated it was to be construed “ in the broadest sense possible.”

Ladas soon filed a qui tam action against his former employer. When it was unsealed, after the government elected not to intervene, the defendants moved to dismiss the complaint based upon the release. The trial court granted the motion, finding that the notification to the government was sufficient to put it on notice of the changes that formed the basis for Ladas’ action, and therefore the release was not violative of public policy.

The trial court’s decision was based upon the decisions noted above, Radcliffe, Green and Hall. Those decisions, together, stand for the proposition that a release of qui tam claims is not contrary to public policy if, prior to the release being signed, the government is advised of the allegedly fraudulent conduct and has the opportunity to fully investigate it.

The Second Circuit Court of Appeals accepted the reasoning, but rejected the trial court’s factual findings. While it was true that the defendants had put the government on notice of the changes, it had not put the government on notice of the fraudulent conduct. Instead, it had misled the government about the timing of the changes and, most importantly, had falsely assured the government that the changes were inconsequential and had no potential to affect whether the components still complied with the contract specifications. A partial disclosure, the court ruled, was insufficient to notify the government, and therefore any subsequent release would be contrary to public policy.

While this case underscores the challenges to drafting a release of qui tam filing rights where the whistle has not already been blown, it does not preclude other kinds of releases consistent with the underlying public policies at issue. For example, if an employee has also raised other claims, such as discrimination allegations, those could be resolved in a settlement. However, such a release requires careful drafting to avoid the settlement agreement being construed as an attempt to prevent protected disclosures to the government. For example, the agreement should have a clause allowing any void provisions to be struck without compromising the enforcement of the remaining provisions and language making it clear the agreement is not intended to prohibit protected reports to the government.

Health Care Takeaway

With the high risk created by False Claims Act lawsuits, health care providers have an interest in getting broad releases from former employees. Based upon these cases, though, such releases can only be effective if they follow a complete disclosure of potential fraud allegations that might form the basis for a whistleblower action. Where there is known FCA risk concurrent with the termination or resignation of a potential whistleblower, the provider should consult with health care counsel for advice on compliance, disclosure and the drafting of the broadest possible effective release.

If you have any questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney.

Assisting with this post was Sevilla P. Rhoads (srhoads@hallrender.com or  (206) 795-6876) in our Seattle office.