Corporate America can breathe a sigh of relief; attorneys cannot disclose confidential client information in violation of state ethics rules to bring qui tam actions under the federal False Claims Act (“FCA”). See United States v. Quest Diagnostics Inc., --- F.3d ---, 2013 WL 5763181 (2d Cir. Oct. 25, 2013).

On October 25, 2013, the Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a qui tam action and simultaneous disqualification of the relator corporation, its three members, and the relator corporation’s counsel from bringing future qui tam actions against Defendants based on the same facts. Id. The Court’s analysis hinged on its conclusion that the FCA does not preempt state laws governing the conduct of attorneys, but rather requires courts to interpret and apply those rules in a manner that “balances the varying federal interests at stake.” Id. at *5. The Court concluded that the New York Rules of Professional Conduct (“N.Y. Rules”) implicitly strike that balance in FCA actions by providing for the disclosure of client confidences when “necessary” to prevent ongoing crime. Id. at *6. Such limited disclosure, the Court found, cannot undermine the federal objective served by the FCA—to encourage the public to report fraud being perpetrated on the government. Id. For that reason, the Court rejected the argument that the FCA requirement of full disclosure of material evidence preempted the limited disclosure provided by the N.Y. Rules. Id.

First, the easiest and best way to avoid being the target of an FCA qui tam action is to put in place mechanisms that ensure compliance with any applicable rules and regulations. Not only does this prevent actual problems from arising, but it dissuades parties from bringing frivolous actions.

Second, executives and managers can find some comfort that it is unlikely that confidential corporate information disclosed to in-house and outside counsel will later be used against the company in qui tam actions brought under the FCA. That said, this decision leaves open the possibility that protected confidences might nonetheless be used against a corporation if exemptions to state rules restricting attorney disclosure of confidential client information are satisfied (e.g., under the N.Y. Rules, it is permissible for an attorney to disclose client confidences to the extent necessary to prevent ongoing crimes).

Third, because state laws governing attorney-client privilege are likely to be enforced, corporations that are subject to a qui tam action under the FCA should actively determine whether any of the information supporting that action improperly discloses protected corporate information.

Fourth, it remains open for debate how courts are likely to treat qui tam actions brought using information obtained in violation of other state laws. The Court noted “the [FCA] permits any person ... to bring a qui tam suit, it does not authorize that person to violate state laws in the process.” Id. at *5. This case suggests that courts will likely credit state laws only to the extent those laws can be balanced with the federal interests at stake in the qui tam action. Id.

How this analytical framework might be applied by courts is still murky. Most state laws do not implicate concerns regarding the fairness of proceedings in the same way the state rules governing attorney-client privilege at issue in this case do. So a complete dismissal of a qui tam action is, perhaps, less likely to be the result in light of other state law violations. However, given that state laws are not necessarily preempted by the FCA, it may behoove corporations to minimally seek exclusion of evidence obtained in violation of state laws.

For more analysis of the opinion in Quest Diagnostics, see Fish & Richardson’s blog post here.