Cell Therapeutics, Inc. v. Lash Group, Inc.

• Citation: 586 F.3d 1204
• Decision Date: 18 November 2009
• Docket Number: No. 08-35619.,08-35619.
• Parties: CELL THERAPEUTICS, INC., Plaintiff-Appellant, v. LASH GROUP, INC.; Documedics Acquisition Co., Inc., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

586 F.3d 1204

CELL THERAPEUTICS, INC., Plaintiff-Appellant, v. LASH GROUP, INC.; Documedics Acquisition Co., Inc., Defendants-Appellees.

No. 08-35619.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted August 31, 2009.

Decided November 18, 2009.

Erik R. Lied and Walter E. Barton, Karr Tuttle Campbell, Seattle, WA, for the appellant.

Raymond A. Cardozo, Reed Smith LLP, San Francisco, CA, and Laurie M. Thornton, Corr Cronin Michelson Baumgardner & Preece LLP, Seattle, WA, for the appellee.

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.

Before: HAWKINS, M. MARGARET McKEOWN and JAY S. BYBEE, Circuit Judges.

McKEOWN, Circuit Judge:

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.

I. BACKGROUND

A. THE FALSE CLAIMS ACT

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).¹ 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, 125 S.Ct. 2444, 162 L.Ed.2d 390 (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 vis-a-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].

31 U.S.C. § 3731(e).

B. FACTUAL BACKGROUND²

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 the FCA claims, the government alleged common law fraud, negligent misrepresentation and unjust enrichment.

CTI immediately settled with Marchese and the government for $10.6 million, and the government and Marchese stipulated to dismissal of their claims with prejudice. One day later, the district court dismissed the claims without making a finding of liability. Lash settled with Marchese for an undisclosed amount in 2008.

While the qui tam suit was pending, CTI sued Lash in state court for: (1) declaratory relief that Lash was contractually obligated to indemnify CTI for damages related to the government's investigation and any resulting judgment or settlement, (2) breach of the service agreement, (3) breach of a contractual indemnification clause, (4) breach of the implied warranty of good faith and fair dealing, and (5) negligence/breach of the duty of care in providing professional services. The action was removed to federal court and is the basis of the claims now on appeal.

The district court granted Lash's motion for judgment on the pleadings on the ground that CTI's claims are barred by our holding in Mortgages, in which we directed dismissal of a qui tam defendant's counterclaims for indemnification against the relator. 934 F.2d at 210.

The district court concluded that qui tam defendants may not seek indemnification or contribution from co-participants in a scheme to defraud the government, and as a result found that CTI's claims against Lash were barred because its damages were pleaded as "incidental to and dependent upon its payments ... to settle the FCA claims in the underlying qui tam action."

II. ANALYSIS

A. CLAIMS BY QUI TAM DEFENDANTS IN THE NINTH CIRCUIT

The bounty and whistle-blower provisions of the FCA work together to not only encourage relators to come forward but also to protect them when they do. Our case law has also fashioned a remedy designed to protect qui tam relators from retaliation by defendants.

We first addressed counterclaims by qui tam defendants in Mortgages. Mortgages, Inc., a mortgage lending company, accepted allegedly fraudulent loan applications filled out by defendants who applied for low-income loans, transferred the property secured with the loans to co-defendants and then defaulted on the loans. The Department of Housing and Urban Development lost millions of dollars, and Mortgages ultimately settled with the government for nearly half a million dollars. 934 F.2d at 210.

Mortgages later brought a qui tam suit against the defendants, offering the government information it acquired about the defendants' false loan applications. The defendants, alleging that Mortgages defrauded and misled them as to the...