CAMERON McGOWAN CURRIE, District Judge.
Through this qui tam action, Plaintiffs Andrew Battiata, M.D. ("Battiata") and Jenny Raybon ("Raybon") (collectively "Plaintiffs") seek recovery on behalf of the United States for alleged violations of the False Claims Act, 31 U.S.C. § 3729 et seq. ("FCA"). The matter is before the court on Plaintiffs' motion to dismiss the seven counterclaims asserted by Defendants Robert Puchalski, M.D. ("Puchalski") and South Carolina ENT, Allergy, and Sleep Medicine, P.A. ("SC ENT") (collectively "Defendants"). For the reasons set forth below, Plaintiffs' motion is granted in full.
In order to place the counterclaims in context, the court begins with a brief description of the complaint. Plaintiffs are former employees of Defendant SC ENT. They allege that, during their employment, Defendants improperly obtained payment from one or more federal programs by intentionally submitting bills with incorrect codes, most critically, by using codes which suggested services were provided by or under the supervision of a physician when they were not.
Defendants deny the allegations of the complaint. In addition, they assert numerous affirmative defenses and seven counterclaims. The present motion is directed to the counterclaims.
As to Raybon, who was an employee for approximately five years, Defendants allege that "[d]uring a significant portion of her employment ..., instead of performing her duties, Relator Raybon downloaded thousands of confidential patient records, took confidential documents, falsified her timesheet, and prepared to bring this qui tam lawsuit." Id. ¶ 12. There are no allegations of misuse of confidential information or resulting harm other than the use in and harm which may result from pursuit of this action.
Based on these allegations, Defendants assert seven counterclaims. These counterclaims are summarized below.
This claim does not suggest any communications or actions beyond those involved in pursuit of this action. Neither does it specify any resulting injury beyond the generic claim of injury to business relationships.
Without specifying what information is at issue, Defendants assert that the Plaintiffs "have committed willful acts of the submission of false information in the regular conduct of litigation." Id. ¶ 29. Defendants allege that they "have suffered damages, loss and harm, including but not limited to their reputation. The damage, loss and harm [are] the proximate and legal result of ... such abuse of legal process."
Defendants do not specify in this counterclaim how Plaintiffs are "seeking to earn substantial compensation" through the breach of fiduciary duty or identify the "actions" which might result in proceeds subject to a constructive trust. This leaves only the inference that the "compensation" and "proceeds" at issue are those which might be obtained as the relators' share of recovery in this action.
Because of their similarities, the court begins with consideration of the fourth through seventh counterclaims for breach of fiduciary duty, indemnity or contribution, unjust enrichment, and payment under mistake of fact. All but the counterclaim for breach of fiduciary duty are expressly dependent on a finding of liability under the Complaint as each seeks to shift some or all of the liability back to one or both Plaintiffs "if the United States sustained damages as indicated in the Complaint." Dkt. No. 39 ¶¶ 40, 44, 49 (emphasis added). While the claim for breach of fiduciary duty does not contain identical language, in context, it too seeks to recover from Plaintiffs if they obtain any benefit from this action. Thus, these state-law counterclaims are all dependent on a finding that Defendants are liable to the United States for violation of the FCA and seek recovery in the nature of a claim for contribution or indemnity.
In Mortgages, the Ninth Circuit Court of Appeals granted mandamus directing the district court to dismiss a variety of claims asserted by defendants against the qui tam relators. The claims at issue, though essentially counterclaims, were asserted by third-party complaint and included claims for breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, fraud, negligence, negligent misrepresentation, and conspiracy. Mortgages, 934 F.2d at 211; see also id. at 211-12 (characterizing claims as "counterclaims"). Despite the varied legal theories, all "sought as relief full indemnification and/or contribution from [relators] against any recovery or judgment in favor of the United States in the FCA action." Id. at 211. The Court of Appeals held that the district court's denial of the relators' motion to dismiss was clearly erroneous because "there is no right of indemnity or contribution among participants in a scheme to defraud the government in violation of the FCA." Id. at 212. This conclusion was supported, in part, by the following discussion:
Id. at 212 (citing United States Supreme Court cases finding no right of contribution under antitrust laws, Title VII, or the Equal Pay Act).
Applying the same analysis as the Supreme Court in Texas Industries, Inc. v. Radcliff Materials, 451 U.S. 630, 101 S.Ct. 2061, 68 L.Ed.2d 500 (1981), the Court of Appeals examined the legislative history of the FCA, noting both the absence of any mention of contribution or indemnification as well as recognition that the qui tam provisions of the FCA might reward wrongdoers because the qui tam provisions of the FCA were "based upon the idea of `setting a rogue to catch a rogue.'" Id. at 213. With respect to congressional intent, the court concluded as follows: "The FCA is in no way intended to ameliorate the liability of wrongdoers by providing defendants with a remedy against a qui tam plaintiff with `unclean hands.' Congress did not intend to create a right of action for contribution or indemnification under the FCA." Id. at 213.
The court then turned to a consideration of whether such a right should be recognized under federal common law. Noting, first, that creation of rights under federal common law was proper where "necessary to protect [a] uniquely federal interest[,]" the court held that recovery by one wrongdoer against another did not implicate any such interest. Id. at 213. The court next considered whether the language and legislative
Several years later, in United States ex rel. Madden v. General Dynamics Corp., 4 F.3d 827 (9th Cir.1993), a different panel of the same court reversed dismissal of all counterclaims brought by a qui tam defendant against employee-relators. The critical distinction between the counterclaims in Madden and those in Mortgages was not the theories of relief, which were similar, but the nature of the damages sought. As the court explained, "[c]ounterclaims for indemnification or contribution by definition only have the effect of offsetting liability. Counterclaims for independent damages are distinguishable, however, because they are not dependant on a qui tam defendant's liability." Id. at 830-31. After considering both defendant's interest in procedural due process, and the remedies available to it under the FCA, which the court found inadequate to fully protect a non-liable defendant's interests, the court concluded that "qui tam defendants can bring counterclaims for independent damages." Id. at 831 (but not defining what constitute "independent damages").
Recognizing the challenges presented by its decision in light of Mortgages, the court provided the following additional guidance:
Id. (also noting that "some mechanism must be permitted to insure that relators do not engage in wrongful conduct in order to create the circumstances for qui tam suits and to discourage relators from bringing frivolous actions. Counterclaims for independent damages serve these purposes.").
The Ninth Circuit Court of Appeals again addressed the availability of claims for contribution and indemnity in Cell Therapeutics, Inc. v. Lash Group, Inc., 586 F.3d 1204 (9th Cir.2009) ("Lash"). There, the claims in the underlying federal complaint (against Cell Therapeutic, Inc. ("CTI")) included both claims under the FCA and common law claims for fraud, negligent misrepresentation and unjust enrichment. Id. at 1207. CTI initiated a third-party action in state court against Lash, an entity which had provided advice and professional services to CTI. CTI alleged that Lash was responsible for the errors at issue in the federal action and that CTI had been injured in various ways including but not limited to the amounts
The qui tam suit against CTI was settled shortly after it was filed and the third-party action against Lash was removed to federal court. Relying on Mortgages, the district court dismissed the third-party claims. The Court of Appeals reversed in a decision that explained that Madden had circumscribed Mortgages in two respects. Id. at 1208-09. First, Madden distinguished claims for independent damages from claims for dependent damages. Id. at 1208. Second, Madden held that "even dependent counterclaims should not be foreclosed until the qui tam defendant's liability is established" because to do so could offend procedural due process. Id. (suggesting conflict with Mortgages would be avoided by dismissing counterclaims if the qui tam defendant is held liable "on the ground that they will have the effect of providing for indemnification or contribution"). While this court would not read Madden to preclude dismissal of clearly dependent counterclaims until after a decision on the qui tam defendant's liability under the FCA, it recognizes that the Ninth Circuit is free to interpret and modify its own opinions.
Ultimately, the Lash court held "that qui tam defendants may bring third party claims under the circumstances outlined in this opinion." Id. at 1213 (noting, inter alia, that "[t]he reasons for restricting the ability of a qui tam defendant to seek recovery against a relator are not in play here."). The "circumstances" of the opinion were however, unique in various respects including that the claims at issue in the underlying case (United States v. CTI) were not limited to claims under the FCA (id. at 1210), the settlement agreement in that action disclaimed any preclusive effect regarding liability under the FCA (id. at 1211), the damages sought against the third party were not limited to recovery of amounts paid to the United States, and the defendant in the third-party action had contractual obligations to CTI which, allegedly,
For purposes of the present motion, the most critical holdings in Mortgages, Madden, and Lash relate to the distinction between dependent and independent claims.
The counterclaim at issue in Miller was for breach of fiduciary duty and sought to shift responsibility for some or all of any damages awarded in favor of the United States to the qui tam relator. In dismissing this counterclaim after a jury verdict on the FCA claim, the district court noted that "[t]he unavailability of contribution and indemnification for a defendant under the False Claims Act now seems beyond peradventure." Id. at 26.
Id. at 26-29.
Having fully considered the Ninth Circuit decisions, the only circuit court authority directly addressing counterclaims against qui tam relators, Miller, and other cases cited by the parties, this court concludes, for reasons addressed in Mortgages, that a qui tam defendant may not assert any counterclaim for dependent damages against a relator. As explained in Miller, dependent damages are damages which arise from a finding of liability under the FCA against the qui tam defendant. The court further concludes, for reasons addressed in Madden and Miller, that a qui tam defendant may assert claims for independent damages, meaning damages that would exist regardless of defendant's liability on the qui tam action unless those damages have the effect of indemnification or contribution the issue of effect being one which normally cannot be resolved until after the conclusion of the qui tam litigation.
This court declines to follow Madden and Lash to the extent either would preclude dismissal of claims for dependent damages until after resolution of the qui tam claims. Instead, the court finds that dismissal should be denied only if a reasonable inference can be drawn that damages sought are independent.
The cases cited by Defendants do not support a contrary rule. All are distinguishable for reasons argued by Plaintiffs. See Dkt. No. 60 at 2-5. For example, in Zahodnick v. International Business Machines Corp., 135 F.3d 911 (4th Cir.1997), the Fourth Circuit allowed recovery on a counterclaim in a case filed under the FCA's anti-retaliation provisions. Such an action is necessarily pursued in the plaintiff's individual capacity, not as relator on behalf of the United States. Thus, allowing a counterclaim in such an action
The other Fourth Circuit cases cited by Defendants are distinguishable from the present action for two reasons. First, like Zahodnick, they were pursued in the plaintiffs' individual capacities, not as qui tam plaintiffs seeking recovery on behalf of the government. Second, both involved different statutory schemes (the Federal Employers' Liability Act and the Jones Act). Cavanaugh v. W. Md. Ry. Co., 729 F.2d 289, 294 (4th Cir.1984) (allowing counterclaim for property damage in action brought under FELA); Dise v. Express Marine, Inc., 476 Fed.Appx. 514 (4th Cir.2011) (allowing counterclaim for property damage in action brought under the Jones Act).
In light of the above authority, the court dismisses Defendants' fourth through seventh counterclaims. The fifth through seventh counterclaims (all but the fourth counterclaim for breach of fiduciary duty) are dismissed with prejudice as each clearly seeks nothing other than dependent damages in the nature of contribution or indemnity. While no facts supporting such a claim have been suggested in Defendants' submissions, the court will not foreclose the possibility that Defendants might assert a breach of fiduciary duty counterclaim seeking independent damages subject to the repleading requirements below. See Discussion § III.
Defendants' three remaining counterclaims arguably seek "independent damages." That is, each of these counterclaims seeks damages which do not depend on a finding that Defendants are liable for fraudulent claims under the FCA. It follows that these claims are not necessarily barred under the cases discussed above. However, as explained below each of the claims has other defects which require dismissal without prejudice, subject to the repleading requirements discussed below. See Discussion § III.
One of the required elements of a claim for malicious prosecution is that the challenged proceeding has terminated in the claimants' favor. See, e.g. Parrott v. Plowden Motor Co., 246 S.C. 318, 143 S.E.2d 607, 608 (1965). It follows that a claim for malicious prosecution cannot be pursued as a counterclaim to the challenged litigation.
The second counterclaim for tortious interference with economic relations and third counterclaim for abuse of process are not pleaded with sufficient particularity to satisfy the relevant pleading standards. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (requiring pleading of factual allegations sufficient "to raise a right to relief above the speculative level"). Taken together, the factual allegations in the "Facts Common to all Counterclaims" and allegations of these counterclaims, at most, suggest that Plaintiffs initiated this action with some ulterior motive to harm Defendants and that Defendants may suffer unwarranted harm, including harm to their reputations, as a result (at least presuming successful defense of the FCA claim).
There are no factual allegations which suggest that Defendants have, in fact, suffered any interference with economic relations. Neither are there any factual allegations which would support an inference that any harm to economic relations was the result of something other than the litigation itself or otherwise resulted from nonprivileged actions. Thus, the factual allegations do not raise a right to relief above the speculative level.
Similarly, as to the abuse of process counterclaim, there are no factual allegations which would support an inference that Plaintiffs have undertaken "a willful act in the use of the process not proper in the conduct of the proceeding." See, e.g., Argoe v. Three Rivers Behavioral Ctr. & Psychiatric Solutions, 388 S.C. 394, 697 S.E.2d 551, 556 (2010) (reciting elements and noting that the abuse of process cause of action "provides a remedy to one damaged by another's perversion of a legal procedure for a purpose not intended by the procedure"). At most, Defendants' allegations support an inference that the action was filed with an ulterior purpose of harming Defendants. This is not enough as improper purpose is only one of the elements of a claim for abuse of process.
Defendants seek leave to amend if the court finds the pleadings insufficient. See Dkt. No. 58 at 9 n. 1. Despite this, and despite Plaintiffs having pointed to all of the deficiencies noted herein, Defendants do not suggest any facts or changes which might cure the various deficiencies.
If Defendants elect to assert amended counterclaims, as of right or through motion to amend, they shall set forth their counterclaims with sufficient particularity to support inferences satisfying the elements of the causes of action, the independent nature of the damages, and the absence of privilege.
Plaintiffs' motion to dismiss the counterclaims is granted for the reasons set forth above. Dismissal of the fifth through seventh counterclaims is with prejudice. Dismissal of the first through fourth counterclaims is without prejudice subject to the caveats above regarding amendment.
IT IS SO ORDERED.
Lash also construes Madden to save all claims for independent damages even if the qui tam defendant is held liable for FCA violations. See Lash, 586 F.3d at 1209 ("Madden directly addresses two key questions that underlie our analysis in this case: First, are any of CTI's claims appropriately considered `independent claims'? Second, has there been a finding of liability that would preclude dependent claims that might in effect give CTI an indemnity?"); id. ("Under Madden, CTI may advance independent claims without regard to an eventual finding of liability under the FCA.... It is incumbent on the district court to separate those claims for damages which `only have the effect of offsetting liability' from those that are not dependent on a qui tam defendant's liability under the FCA."). While this conclusion may be correct, it seems contrary to language in Madden which appears to suggest that even independent claims might be dismissed if they had the effect of indemnification or contribution.
