On May 1, 2015, in United States ex rel. Jacobs v. Lambda Res., Inc., No. 14-3705, 2015 WL 1948247 (6th Cir. May 1, 2015), the Sixth Circuit Court of Appeals affirmed the lower court’s award of sanctions against a relator and his attorney and in doing so put aspiring relators and their counsel on notice that initiating False Claims Act (“FCA”) litigation for retaliatory purposes can end up costing them hundreds of thousands of dollars.

In Jacobs, the defendant was a research and engineering company specializing in developing processes for strengthening metal components. The relator was a former employee of the defendant who in 2002 began working for a direct competitor. While the relator was employed by the defendant, it began working with the United States Navy to create a process for strengthening the metals used in its fighter jets. In 2007, the Navy contracted with the defendant to produce a strengthened metal components for one of its fighters.

In 2009, an Ohio state court jury found that the relator had stolen trade secrets from the defendant and awarded the defendant $9.4 million in damages and attorney’s fees. Two months later, the relator initiated his FCA suit, alleging that the defendant had made material misrepresentations in its contract with the Navy. Throughout the course of the FCA litigation, the district court voiced its concerns that the FCA suit was frivolous and had been brought purely for retaliatory reasons. The district court even went so far as to warn the relator and his counsel that unless it became apparent that the claims had evidentiary support, they would both be subject to sanctions under 28 U.S.C. § 1927 and 31 U.S.C. § 3730(d)(4).

At the close of discovery, the defendant moved for summary judgment and sanctions under 28 U.S.C. § 1927 and 31 U.S.C. § 3730(d)(4), both of which were granted by the court. In awarding sanctions, the court explained that 28 U.S.C. § 1927 allows a court to sanction an attorney “who so multiplies the proceedings in any case unreasonably and vexatiously . . . .” The court also noted that the FCA contains a similar sanctions provision, providing that where the government declines intervention, “the court may award to the defendant its reasonable attorneys’ fees and expenses if the defendant prevails in the action and the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment. 31 U.S.C. § 3730(d)(4).

In holding that sanctions were warranted under both statutes, the district court concluded that the relator’s claims were clearly frivolous and brought for retaliatory reasons. The lower court reasoned that the relator had failed to depose any Government witness, his FCA theory was wholly unsupported, and the relator’s counsel had repeatedly made such blatant misrepresentations of fact and law that it could not have been inadvertent. Consequently, the district court imposed sanctions against the relator and his counsel, jointly and severally, for the defendant’s attorney’s fees and costs in defending the litigation. On appeal, the Sixth Circuit affirmed the lower court’s holding and instructed the relator’s counsel to show cause for why he should not face additional sanctions under 28 U.S.C. § 1927 and Federal Rule of Appellate Procedure 38 for filing a frivolous appeal. Currently, there is a pending fee petition at the district court level in which the defendant is seeking $511,633.58 against the relator and $194,522.89 against the relator’s counsel.

As was the case in Jacobs, claims for violations of trade secrets or confidentiality agreements have become an increasingly relied-upon tool for FCA defendants. Although the defendant’s trade secret claim in Jacobs was brought in an entirely different suit and was simply used in the FCA litigation to evidence an improper retaliatory motive, FCA defendants have had some recent success using trade secret claims aggressively in FCA litigation. See, e.g., United States ex rel. et al. v. Boston Scientific Neuromodulation Corp., No. 2:11-cv-1210 (D.N.J. Sept. 4, 2014) (surviving motion to dismiss on counterclaim for breach of contract based on relator’s alleged violation of trade secrets). Coupled with Sixth Circuit’s affirmance of sanctions under 31 U.S.C. § 3730(d)(4), Jacobs serves as a useful resource to the FCA defense bar.