A District of Nevada magistrate judge has ruled that an FCA defendant’s assertion that it complied with “all applicable legal requirements” constitutes a “good faith” defense that waives the attorney-client privilege. The opinion highlights the thin line between a mere denial of scienter (which should not waive the privilege) and an affirmative good faith defense (which may), and illustrates the difficult choices FCA defendants face when deciding how best to respond to an allegation that they knowingly attempted to commit fraud.
The case, U.S. ex rel. Calilung v. Ormat Industries, LTD., involves a pair of qui tam relators who allege that Ormat Industries and other defendants submitted false claims for federal grants for use by geothermal power plants. In its affirmative defenses, Ormat denied that it intended to defraud the government, asserting that it had “compl[ied] with all applicable legal requirements.” No. 3:14-cv-00325-RCJ-VPC, 2016 U.S. Dist. LEXIS 100292, at *5–6 (D. Nev. Aug. 1, 2016).
In response, the relators moved to compel production of Ormat’s attorney-client privileged documents, claiming that this defense put Ormat’s state of mind at issue, thereby waiving the privilege. In response, Ormat voluntarily waived privilege as to communications it might rely upon in its defense, but it opposed relators’ request for documents it did not intend to use in the case.
The court granted the relators’ motion to compel. The court acknowledged that “the mere denial of scienter is insufficient to waive privilege.” Id. at *9. But it found that Ormat’s defense went further. By asserting that it did not make “‘knowingly false’ statements,” the court determined that Ormat had “alleged a good faith belief that its conduct was lawful.” Id. at *11, *14. Therefore, Ormat put its “knowledge about the law” at issue, and “fairness require[d] that Relators be able to access otherwise-privileged communications” regarding the “legal advice Ormat sought or received.” Id. at *10–11, *14–15 (quotations and alterations omitted). Citing the oft-quoted “sword and shield” analogy, the court would not allow Ormat to assert privilege while maintaining that it did not know the alleged conduct was unlawful. Id. at *9, 17–18. The court gave Ormat the option to preserve privilege by withdrawing its good faith defense. Id. at *29.
This broad view of the “good faith” defense places FCA defendants in a difficult dilemma. Not only does the court’s position effectively shift the burden of establishing knowledge to the company, it forces the company to surrender privilege as the price for mounting a complete defense to the relators’ allegations of scienter.
A narrower approach would permit a defendant to deny scienter allegations on objective grounds—for example, on the basis that no statute or regulation put the defendant on notice that its conduct was unlawful—without placing its subjective state of mind at issue, and thereby waiving privilege.
The opinion can be found here.