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Counterclaim Survives in Qui Tam Whistleblower Action

A federal court in Pennsylvania recently ruled that counterclaims against the whistleblower filed by the target of a whistleblower action can survive. The United States District Court for the Eastern District of Pennsylvania, in United States of America ex rel. Lorraine Notorfransesco v. Surgical Monitoring Association, Inc., et al. (Tucker, C.J.) has denied a motion by the whistleblower, Lorraine Notorfransesco, to dismiss counterclaims made by her former employer, Surgical Monitoring Association (“SMA”).  While the recent ruling seems to suggest that potential whistleblowers would be dissuaded from “blowing the whistle” for fear of being retaliated, the ruling is not exactly as controversial as it seems.

The employee, Lorraine Notorfransesco, had worked for her employer, SMA, for three years before being terminated in 2008.  In 2008, she had been promoted to the position of billing manager and, at this point, signed a confidentiality agreement with the company.  Later in the year, however, SMA management learned that Notorfransesco had communicated to other employees that she was planning on disseminating confidential information to competitors. SMA eventually fired Notorfransesco, and in a separate action in the Delaware County Court of Common Pleas, won a preliminary injunction to restrict her ability to communicate with other employees, patients, businesses, or contractors.

A year after her termination in April of 2009, Notorfransesco brought a qui tam suit against SMA. In March of 2014, nearly five years later, the U.S. Government declined to intervene in the action. On April 3, 2014, Notorfransesco filed an amended complaint, and at this time, the documents included with the amended complaint became open to the public.

Upon the unsealing of this case, SMA filed counterclaims against Notorfransesco for “breach of contract, implied contract, and promissory estoppel” for the alleged sharing of confidential materials by filing the complaint, amended complaint, and by sharing information with her attorneys.

Although Notorfransesco had filed a motion to dismiss the counterclaim, as it would counteract the purpose of the False Claims Act and many of the “confidential” information were not confidential, her motion was denied. The court disagreed with her arguments, as the confidentiality agreement that Notorfransesco had signed in 2008 provided a clear and adequate explanation and description of what types of documents and information were confidential. Because the documents filed by Notorfransesco were therefore confidential, the disclosure of these materials were deemed a contractual breach.  Concurrently, the documents that been revealed were now open for competitors and third parties to damage SMA, and even seek out SMA’s customers, thereby placing SMA at a competitive disadvantage.

While the Third Circuit or higher courts have rejected other types of counterclaims in qui tam suits, the question of whether counterclaim for breach of confidentiality agreement should be barred remains open.  The SMA court, following the decision made by the Ninth Circuit in a 1993 opinion United States ex rel. Madden v. General Dynamics, determined that “counterclaims for ‘independent damages’ are permissible.” Similarly in this action, the SMA’s counterclaims were for independent damages. The court continued, citing another Ninth Circuit decision in Cafasso, U.S. ex rel. v. General Dynamics C4 Systems, Inc., that SMA’s request for injunctive relief could be improper if materials removed by Notorfransesco were “reasonably necessary” for pursuing her qui tam claim.

The court has made clearer an interpretation of how counterclaims can survive in respect to existing confidentiality agreements. What was made clearer, however, was that if documents were removed and used with the reasonable necessity to pursue a qui tam action, counterclaims for breach of confidentiality would not survive.

Thus, individuals who intend to bring a whistleblower action should be very careful and talk to her attorney about any potential counterclaim by the target for using the target’s confidential information.  Read more about the False Claims Act here.  If you believe you have a potential claim under the False Claims Act, please contact your attorney.

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