9th Circuit permits third-party claim by qui tam defendant

by bvernia | November 21st, 2009

On November 18th, the Ninth Circuit issued an opinion reversing and remanding a WD Washington decision that had precluded a biotechnology company from seeking recovery against a third party for contractual indemnity claims relating to a qui tam action.

The qui tam defendant, Cell Therapeutics, Inc. (CTI), had hired the Lash Group to provide Medicare reimbursement consulting services. CTI alleged that Lash Group had advised it that off-label uses of CTI’s cancer drug were reimbursable by Medicare. CTI settled the qui tam with the Government, and filed an action against Lash Group for:

  • Declaratory relief that Lash Group was contractually obligated to indemnify CTI for damages related to the government’s investigation;
  • Breach of a service agreement and contractual indemnification clause;
  • Breach of warranty; and
  • Negligence and breach of the duty of care.

The district court had granted Lash Group’s motion for judgment on the pleadings, stating that CTI’s claims were barred by case law that prevented qui tam defendants from bringing counterclaims alleging damages that, if granted, would have the effect of offsetting liability under the False Claims Act.

The Ninth Circuit disagreed, stating that although CTI’s claims arose from the same facts as the qui tam litigation, CTI’s claims were considered “independent claims” that were distinguishable from claims for damages that would only result in offsetting CTI’s liability in the qui tam litigation. The government had brought multiple claims against CTI, including fraud, unjust enrichment, and negligent misrepresentation. The claims for unjust enrichment and negligent misrepresentation, however, were not brought as part of the qui tam action and were therefore independent of fraud claims under the FCA. According to past precedent, only indemnification claims for fraud or conspiracy to commit fraud under the FCA were barred.

Next, the Ninth Circuit addressed the issue of whether there was a finding of liability for CTI that would preclude the indemnification claims against Lash Group. The court found that:

  1. Lash Group was not a party to the settlement agreements between CTI, the whistleblower, and the government;
  2. None of CTI’s indemnification claims were addressed in the qui tam litigation or settlement agreements; and
  3. There was no final judgment on the merits of the case.

Consequently, the settlement agreement did not constitute a finding of liability and therefore could not be used to preclude claims against third parties.

While the Ninth Circuit stated that it did not view past case law as instituting an absolute ban on qui tam defendants bringing third party claims, it was careful to limit the reach of its opinion by stating that “qui tam defendants may bring third party claims under the circumstances outlined in this opinion.” This suggests that situations where qui tam defendants can successfully bring claims against third parties may be limited.

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