On June 16, a federal district court in Pennsylvania denied a qui tam relator’s motion to dismiss a counterclaim asserted by the defendants that was based on the relator’s alleged breach of a written confidentiality agreement he had executed with defendants as part of his employment. U.S. ex rel. Walsh v. Amerisource Bergen Corp., Case No. 11-7584 (E.D. Pa. June 16, 2014). A copy of the decision can be found here. The court’s decision reinforces a line of federal decisions from other courts that public policy considerations do not require dismissal of a qui tam defendant’s counterclaim so long as the counterclaim’s success is not dependent upon the fact of the defendant’s FCA liability.

Relator Patrick Walsh, an internal auditor employed at Amerisource, alleged that Amerisource and two of its subsidiaries violated the federal FCA and various state FCAs. After the United States declined to intervene and Walsh served an amended complaint on the defendants, the defendants filed a counterclaim against Walsh, alleging that he had violated a confidentiality agreement by taking confidential, proprietary and privileged information from Amerisource and providing the information to his personal attorney. The defendants further alleged that some of the information Walsh took from defendants became public when the court unsealed his FCA complaint. Walsh moved to dismiss the defendants’ counterclaim on several grounds, including “the strong public policy against counterclaims in qui tam actions,” which Walsh argued was “the most compelling reason for dismissal.”

The court rejected Walsh’s motion in its entirety. It specifically held that Walsh’s public policy argument failed because the defendants’ counterclaim alleged damages that are independent of any potential FCA liability – i.e., “not based upon any potential revenues, earnings, profits, compensation, or benefits awarded to Relator as a result of this qui tam action.” In so ruling, the court distinguished cases dismissing counterclaims in FCA cases where the counterclaims, in effect, sought contribution or indemnity because the relator had participated in the alleged fraud or the defendants had been damaged by the relator disclosing the alleged fraud. Instead, the Walsh court found that the defendants’ counterclaim did not depend on – or require a finding of – FCA liability. The counterclaim did not allege that Walsh participated in the purported fraud, nor did it suggest that the damages the defendants sustained resulted from the relator’s disclosure of the alleged fraud. The court therefore held that the defendants’ counterclaim was not effectively a claim for indemnification, and it refused to bar the counterclaim on public policy grounds.

The court’s decision also highlighted a crucial consideration for FCA defendants when deciding whether to file a counterclaim against a relator. The court recognized that a qui tam defendant’s counterclaim will often be compulsory under Federal Rule of Civil Procedure 13, and a defendant that fails to raise a counterclaim might be permanently precluded from asserting that claim. Reiterating the Ninth Circuit’s reasoning in U.S. ex rel. Madden v. Gen. Dynamics Corp., 4 F.3d 827, 831 (9th Cir. 1993), the Walsh court stated that refusing to permit a qui tam defendant from raising a counterclaim independent of its FCA liability “would be a violation of the defendant’s procedural due process rights.” Given the growing body of case law recognizing the validity of an FCA defendant’s counterclaim under circumstances such as those present in Walsh, and the possibility of losing a claim against a relator if not asserted in response to a qui tam action, any defendant facing a qui tam action should consider carefully whether the facts of its case warrant filing a counterclaim against the relator.