Attorneys as Qui Tam Relators?: False Claims Act Doesn’t Preempt Ethics Laws and Canons

ethicsGuest Commentary

by Tara Parker, a 2015 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

A federal district judge in the Southern District of Mississippi recently reaffirmed something that should be intuitively obvious to most attorneys:  the federal False Claims Act (FCA) does not relieve a lawyer who brings a qui tam action under the law of his ethical obligations. The court in United States ex rel. Holmes v. Northrop Grumman Corporation disqualified the attorney from serving as a relator because he had violated his duties of loyalty, candor, and confidentiality, as well as the duty to obey court orders. The case stands as not only a monument to unethical attorney behavior, but it also provides yet another example of how laws that delegate enforcement authority to individuals inspire abuses with the lure of financial profit.

The attorney in question, Donald Holmes, represented Munich Re (Munich), an insurance company, in arbitration proceedings with Northrop Grumman Corporation (Northrop), the insured, in April 2010. Northrop had contracted with the United States Navy to construct ships, some of which were damaged as a result of Hurricane Katrina in August 2005. Holmes, along with a co-counsel, sought to obtain documents from the Navy professedly for use in the arbitration. Holmes and his co-counsel turned around and used the information to file an FCA suit against Northrop.

The Department of Justice declined to intervene, and in 2012, Holmes’ co-counsel withdrew from serving as a relator. In his amended complaint, Holmes contended that Northrop, motivated by the need to make up lost profits, defrauded the federal government of at least $853 million by filing insurance claims to seek reimbursement for costs unrelated to Hurricane Katrina.

The court first addressed Holmes’ argument that the FCA preempted his ethical responsibilities under state laws and ethical rules. Any person can act as a qui tam relator, the court reasoned, even attorneys, but the FCA does not empower relators to violate state laws. With regards to attorneys specifically, the court looked to a 2013 U.S. Court of Appeals for the Second Circuit decision, United States v. Quest Diagnostics Inc. for guidance. That court focused on the fact that attorneys may act as relators pro se (i.e. represent themselves), but non-attorneys are not allowed to do so.  That distinction exists because “lawyers are bound to ethical constraints to which non-lawyers may have no knowledge and obligation, and violation of these fundamental canons may result in serious consequences to the errant attorney.” In other words, lawyers should know better where the line between legality and illegality lies.

After determining that the FCA did not let Holmes off the hook for his ethical lapses, the court then went on to determine whether Holmes should be disqualified as a qui tam relator.  The court found that Holmes travelled considerably over the line between legal and illegal on his quest for FCA riches.

First, Holmes violated his duty of candor. Model Rule of Professional Conduct 8.4(c) states, “It is professional misconduct for a lawyer to… engage in conduct involving dishonest, fraud, deceit or misrepresentation.” The court determined that Holmes constructed his qui tam action out of “documents [obtained] from the Navy… without disclosing his intent to use the documents to support his claims in this qui tam case.”

Holmes also violated his duty of loyalty to Munich because he created concurrent conflict of interest. A concurrent conflict of interest exists when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities… to a third person or by a personal interest of the lawyer.” MRPC 1.7(a). In the arbitration in which Holmes represented Munich, he argued that Munich need not pay Northrop because the Navy had already compensated the company for its losses. At the same time in Holmes’ qui tam action, however, Holmes alleged that Northrop deceived the Navy into making fraudulent payments to them. Holmes could not prove that he obtained informed consent from Munich to file the qui tam action, and thus breached his duty of loyalty to his client “in order to bolster his position in this case.”

The court next addressed Holmes’ violation of his duty of confidentiality. The court found that Holmes both revealed and sought to utilize information he obtained for purposes of the arbitration. The court concluded Holmes did not obtain Munich’s informed consent before revealing his client’s confidential information.

Finally, Holmes breached his duty to obey court orders. The court found this breach to be “the most serious of the ethical violations committed by Holmes…” Holmes had entered into a Stipulated Protective Order, which clearly stated that the documents given to Munich by the Navy “shall not be used in any other proceeding or for any other purpose without further order of this Court.” Holmes agreed that he should have obtained the court’s release from that order, but he argued that the order did not rise to the level of a formal court order the violation of which was unlawful. The court was unpersuaded.

The court disqualified Holmes from acting as a pro se relator in the case, and, because allowing the lawsuit to proceed with a new counsel utilizing “the fruits of Holmes’ unethical conduct,” it also dismissed the qui tam action with prejudice.

So to sum up: an insurance company’s outside counsel, in the course of that representation, obtained confidential documents from the Navy that were subject to a protective order, and then used those documents to file a lawsuit on behalf of the government against the company his (original) client insured. He did so without the knowledge or consent of his client, and his actions directly conflicted with his duties to the insurance company. That, as we said above, is a true monument to unethical lawyering.

The lengths to which Holmes went in pursuit of a big government-endorsed payday also stand as an indictment of laws, like the FCA, that delegate enforcement authority to individuals. The FCA has survived constitutional challenges because the federal government nominally retains control over the private action. But here, the Justice Department not only declined to take over the case, but it also failed to shut it down, which it can do under the statute. Didn’t Holmes’ standing as Munich Re’s counsel raise some questions at DOJ that merited further investigation? We like to think this failure was an aberration, but regretfully, we are not overly convinced of that.

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