Kinetic Moves To Disqualify Counsel In False Claims Act Qui Tam Action For Improper Use Of Contractor’s Privileged Documents

Arguing that relators’ counsel has retained and used, without authority, more than 800 of its attorney-client privileged and work product documents, Kinetic Concepts, Inc. (“KCI”) has asked the District Court for the Central District of California to disqualify opposing counsel in United States ex rel., Steven J. Hartpence v. Kinetic Concepts, Inc., Case No. 08-01885 (C.D. Cal. Apr. 8, 2013).

Two relators, Geraldine Godecke and Steven Hartpence, have brought qui tam actions against KCI alleging that it submitted false claims to Medicare for KCI’s wound care treatment devices in violation of the federal False Claims Act (“FCA”). Both relators, who held senior-level positions with KCI, routinely interacted with in-house and outside counsel concerning the company’s legal advice, strategy and tactics. Before she was terminated, Relator Godecke spent the better part of a week downloading hundreds of communications with in-house and outside counsel with the intention of removing them before she was terminated.

KCI alleges that before the relators filed their complaints, each notified their counsel that they had collected and retained hundreds of KCI’s attorney-client communications. Rather than notify the KCI, Court or the U.S. Attorney’s Office, counsel instructed their clients to retain the documents, but not to send them to counsel. Even after the U.S. Attorney’s informed Relators’ counsel that several documents were privileged, relators’ counsel did not inform KCI that it possessed the privileged documents.

Suspecting that the relators were in possession of privileged documents, KCI demanded their return on several occasions. The relators and their counsel refused to return the documents. Thus, KCI moved for return of the documents and disqualification of counsel. In November 2012, the court concluded that the relators had taken and improperly retained 828 privileged KCI documents. The court ordered that all documents be returned within 30 days. KCI alleges, however, that Relator Godecke informed her counsel that she had retained a banker’s box worth of documents in violation of the court order. KCI further alleges that relators’ counsel filed a false statement of compliance with the order demanding return of the documents.

KCI asserts that relators’ counsel used the privileged documents to prepare relators’ qui tam complaints and to prosecute the action. KCI alleges that the documents were used to draft at least eighteen paragraphs of the complaints. According to KCI, relators’ counsel’s use of the documents has so tainted the litigation that KCI has been irreparably prejudiced. KCI alleges that relators’ counsel will be unable to separate their knowledge of the privileged information from knowledge obtained through lawful means, and KCI will be unable to defend the litigation without being confronted with their own privileged documents. The only remedy available to protect its attorney-client privilege, KCI argues, is disqualification of relators’ counsel.

Although self-help discovery is becoming increasingly common, courts generally hold that the theft of company records by former or current employees is not a protected activity. If the theft is by a current employee, an employer may be able to address such misconduct as long as it has robust policies protecting confidential information that are strictly and consistently enforced. If the theft is by a former employee, the employer may be able to establish a defense to liability, a limitation on damages, or, as the KCI case demonstrates, sanctions against a party or opposing counsel. In either situation, it is important that the employer develop robust policies, monitor compliance, and take action as soon as it discovers the theft.