On November 18, 2009, the Ninth Circuit held that the False Claim Act's whistleblower provisions do not preclude a settling defendant from seeking recovery against a third party for its alleged violations1. According to the Ninth Circuit, regardless of FCA liability, third-party claims which are independent and unrelated to the underlying FCA fraud claims will be permitted. Third-party claims seeking indemnity or contribution related to the FCA fraud claims will also be permitted provided that there was not a finding of liability.
The government alleged that the Defendant, Cell Theraputics Inc ("CTI") violated the False Claims Act, ("FCA") when it "knowingly and willfully promoted the sale and use of [a drug] for such indications [as] had not been approved as safe and effective by the FDA" and "made false and misleading statements to treating doctors . . . causing them to present false or fraudulent claims to Medicare."
CTI settled with the government and the whistleblower. CTI then brought claims in contribution and indemnity against Lash Group, Inc. ("Lash"). Lash provided advice to CTI regarding certain off-label uses of the drug. The district court granted Lash's Motion for Judgment on the Pleadings, holding that qui tam defendants may not seek indemnification or contribution from co-participants in a scheme to defraud the government.
The Ninth Circuit recognized that the district court struggled with two prior Ninth Circuit decisions holding that there was "no right of indemnity or contribution among participants in a scheme to defraud the government in violation of the FCA" 2. Yet, the Ninth Circuit noted that "nothing in the legislative history of the FCA addresses the potential preclusive effect of a settlement among the government, a relator, and a qui tam defendant vis-a-vis a subsequent claim by the qui tam defendant against a third party."
The Ninth Circuit then affirmatively held that the FCA does not preclude third-party claims for independent claims or claims for indemnification and contribution following a settlement. Yet, if the third-party claims seek indemnification and contribution to off-set liability for fraud under the FCA, to be proper, there must have been no finding of liability.
While this is a Ninth Circuit case, the court's decision that a settling defendant in a FCA case may be able to sue in contribution or indemnity against a third-party defendant is still noteworthy. Organizations currently involved in qui tam lawsuits should consider whether they have viable claims for indemnification or contribution against a third-party (i.e., not the whistleblower). A well-structured settlement and a well-pled third-party complaint are critical to preserve these claims. In fact, the Ninth Circuit was critical of CTI's drafting of its third-party claims opining that "CTI likely could have mitigated [the] erroneous [decision of the district court] through the judicious use of semi-colons or separate sentences?" However, CTI's negotiation of the settlement agreement and its apparent demand to include language disclaiming FCA liability ultimately saved the claims.