November 18, 2009; see amended opinion filed January 6, 2010
Appeal from the United States District Court for the Western District of Washington, James L. Robart, District Judge, Presiding, D.C. No. 2:07-cv-00310-JLR.
The opinion of the court was delivered by: McKEOWN, Circuit Judge
Argued and Submitted August 31, 2009 -- Seattle, Washington
Before: Michael Daly Hawkins, M. Margaret McKeown and Jay S. Bybee, Circuit Judges.
The False Claims Act ("FCA") was designed to encourage reporting of false or fraudulent claims that are submitted to the federal government for approval or payment. Typically a relator-a whistle-blowing employee, a business partner or competitor-brings suit "for the benefit of the United States." Mortgages, Inc. v. U.S. Dist. Ct., 934 F.2d 209, 210 (9th Cir. 1991) (per curiam). The government has discretion to intervene in the suit as a plaintiff. But what happens when a target defendant settles with the government and the relator and then seeks recovery against a third party for contractual indemnity and independent claims? We have not previously had occasion to address this question. We conclude that the FCA does not preclude such claims.
A brief review of the Act's structure is useful in putting the third party claim issue in context. The purpose of the FCA is "to discourage fraud against the government." Robertson v. Bell Helicopter Textron, Inc., 32 F.3d 948, 951 (5th Cir. 1994). The FCA imposes civil liability on any person who knowingly uses a "false record or statement to get a false or fraudulent claim paid or approved by the Government," 31 U.S.C. § 3729(a)(2) (1984), and any person who "conspires to defraud the Government by getting a false or fraudulent claim allowed or paid." Id. § 3729(a)(3).*fn1 To encourage the disclosure of potential fraud, under the qui tam provisions of the FCA, relators may "bring a civil action for a violation of [§ ] 3729 for the person and for the United States Government." Id. § 3730(b)(1); United States ex rel. Hall v. Teledyne Wah Chang Albany, 104 F.3d 230, 233 (9th Cir. 1997). If the government does not intervene in the suit, the relator may proceed with the FCA litigation. 31 U.S.C. § 3730(c)(3). If the government elects to intervene, the relator remains part of the suit as a qui tam plaintiff, id. § 3730(b)(2), but the government may dismiss or settle the action over the relator's objection. Id. § 3730(c)(2)(A)-(B).
The FCA provides two important incentives for relators: a significant bounty and whistle-blower protection. A relator is entitled to 15-25% of the proceeds of the action or settlement of a claim in which the government intervenes, id. § 3730(d)(1), and as much as 25-30% if the government does not intervene. Id. § 3730(d)(2).
In crafting whistle-blower protections, Congress aimed "to make employees feel more secure in reporting fraud to the United States." Neal v. Honeywell Inc., 33 F.3d 860, 863 (7th Cir. 1994), abrogated on other grounds by Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409, 416-17 (2005). Employees who investigate and supply information concerning the fraudulent practices of an employer are protected from retaliation, whether the employee or the government brings suit against the employer.
31 U.S.C. § 3730(h); Neal, 33 F.3d at 863-65.
Nothing in the text or the legislative history of the FCA addresses the potential preclusive effect of a settlement among the government, a relator, and a qui tam defendant visa-vis a subsequent claim by the qui tam defendant against a third party. As one treatise notes, "[t]he legislative history of the 1986 amendments [to the False Claims Act] does not discuss the availability of indemnity or contribution, but does emphasize the strong public policy of encouraging whistle-blowers to come forward." 1 John T. Boese, Civil False Claims and Qui Tam Actions § 4.10[B] at 4-258.1 (3d ed. 2006). Congress did contemplate, however, that disputes would be resolved through settlement. See, e.g., 31 U.S.C. § 3730(d)(1), (3) (specifying the proportion of the proceeds of an "action or settlement" a relator is entitled to receive). Congress also specifically contemplated the potential preclusive effects those final judgments rendered in other proceedings would have on qui tam actions. Section 3731(e) of the current version of the Act provides that a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730 [of the FCA].
B. FACTUAL BACKGROUND*fn2
Cell Therapeutics, Inc. ("CTI") developed a cancer drug called Trisonex, which the Food and Drug Administration ("FDA") approved in September 2000 for the treatment of a particularly virulent form of leukemia. This was the first time CTI, a small and relatively young biotechnology company, had received FDA approval, so it turned to Documedics Acquisition Co., Inc. ("Documedics") to handle Medicare reimbursement and serve as a reimbursement consultant.
Documedics billed itself as an expert in reimbursement protocol for oncology drugs, but made a serious error in advising CTI. In addition to the approved use for Trisonex, oncologists prescribed several "off-label" uses to treat other cancers- uses for which the FDA had not approved the drug-and Documedics mistakenly advised CTI, and in turn Medicare carriers and medical providers, that the off-label uses were reimbursable by Medicare. Because of these assurances, the carriers and providers submitted reimbursement claims to Medicare. Once CTI understood that Trisonex was already eligible for reimbursement for these off-label uses, CTI stopped pursuing further research and publications that would have supported Medicare reimbursement. CTI also alleges that it elected not to divest Trisonex and made other business decisions based on Documedics' ill-informed advice, which resulted in losses for CTI.
The government began investigating CTI and the Lash Group ("Lash"), Documedics' successor in interest, in the fall of 2004. Two years later, in 2006, James Marchese, a CTI employee, filed a qui tam action against CTI and Lash.
In 2007, the government intervened in the suit as to CTI but not as to Lash. Specifically, the government alleged CTI "knowingly and willfully promoted the sale and use of Trisonex... 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." In addition to ...