Qui Tam Update: Criminal Contempt Charges Against Qui Tam Lawyer Highlight Important Ethical, Legal, and Strategic Issues Unique to False Claims Act Cases
September 4, 2007
On August 21, 2007, a team of special prosecutors appointed by an Alabama federal judge filed criminal contempt charges against Richard Scruggs, counsel for insurance industry whistleblowers. This case provides a good illustration of the varied and overlapping roles of litigants and counsel in qui tam cases, as well as the sometimes thorny ethical issues those roles can engender. Some of the key developments in this case sprang from the use of contracted employees, a practice that is common in the healthcare industry and raises interesting strategic issues for all sides in such cases.
Brief Summary of the Underlying Facts
In April 2006, relators Cori and Kerri Rigsby filed a qui tam action under the False Claims Act in United States ex rel. Rigsby v. State Farm, et al., No. 1:06cv433 (S. D. Miss.). The realtors allege that State Farm and its co-defendants committed fraud in handling federal flood insurance claims related to Hurricane Katrina.
The relators were employed as claims adjusters for an insurance support services company, E.A. Renfroe. Following Hurricane Katrina, Renfroe contracted with State Farm to have the Rigsby sisters adjust claims on behalf of State Farm. The Rigsbys claim to have found evidence that State Farm was improperly shifting coverage costs to the federal flood insurance program. Acting on the express instructions of their attorney, they surreptitiously downloaded thousands of pages of confidential and proprietary State Farm documents. The relators provided copies of those documents to the U.S. Attorney's Office in Mississippi; the Mississippi Attorney General; and to their counsel, Mr. Scruggs.
The relators later informed State Farm that they had taken the documents, and then walked off the job. Renfroe sued the relators in Alabama federal court claiming that the relators' conduct violated employment and confidentiality agreements. U.S. District Judge Acker entered a preliminary injunction in the Alabama case requiring the relators and their agents to return the documents to Renfroe and not to further disclose, use, or misappropriate them "unless to law enforcement officials at their request."
Upon learning of the injunction, Scruggs immediately sent his copy of the State Farm documents to the Mississippi Attorney General, who was conducting a criminal investigation of State Farm.
Renfroe then instituted civil contempt proceedings against Scruggs and the relators, claiming that Scruggs sent the State Farm documents to the Attorney General to evade compliance with the injunction. Judge Acker found probable cause that Scruggs had committed criminal contempt and referred the case to the U.S. Attorney in Alabama for prosecution. The U.S. Attorney declined the case. Judge Acker then appointed a team of private attorneys to prosecute Scruggs for contempt as special prosecutors under Rule 42(a)(2) of the Federal Rules of Criminal Procedure. On August 21, 2007, they filed charges in United States v. Scruggs, CR-07-CO-0325-S. (The irony of this situation is not lost on qui tam defendants, who also find themselves facing legal actions litigated by such "private attorneys general.")
The Complex Roles of Litigants and Counsel in Qui Tam Cases
This case highlights the overlapping and contradictory roles of litigants, their attorneys, and public prosecutors in qui tam litigation.
For example, while working as claims adjusters for Renfroe and State Farm, the Rigsby sisters took on the additional roles of whistleblowers, government informants, potential private litigants, and, according to Renfroe, misappropriators. The Rigsbys have since added another layer of complexity to their status by accepting employment with Scruggs. Note that the qui tam complaint expressly alleges that the Rigsbys downloaded and printed most of the State Farm documents after they provided documents to the U.S. Attorney but before they met with government investigators. This allegation is likely a pre-emptive strike against a defense allegation that, in gathering these documents, the Rigsbys were acting as agents of the government and in that capacity violated State Farm's Fourth Amendment rights by engaging in a warrantless search and seizure of documents. Prosecutors and qui tam lawyers confront difficult legal and ethical issues whe n counseling whistleblowers who continue to have access to an FCA defendant's documents, especially when relators gather privileged material or documents that would not have come into their possession in the normal course of their duties.
Mr. Scruggs claims that when he provided the State Farm documents to the Mississippi Attorney General—for which he has been charged with criminal contempt—he was not only complying with the terms of the injunction, but also performing a public service by cooperating with law enforcement in their criminal investigation of State Farm.
Renfroe has asserted that it was the victim of relators' misappropriation of its client's confidential information. The qui tam complaint, however, alleges that the Renfroe case was filed to harass and intimidate the relators and to "avoid the criminal investigation of the state of Mississippi and the federal government."
In Judge Acker's ruling on the contempt issue, even the Mississippi Attorney General is accused of hoping to "bully" State Farm into settlement by using the purloined documents.
Strategic Considerations Regarding Renfroe's Action Against the Relators
One of the intriguing aspects of this case is that the types of claims filed by Renfroe in Alabama are sometimes difficult to pursue when litigated as FCA counterclaims. Some courts have held that allowing such counterclaims would have a chilling effect and undermine the purposes of the FCA's qui tam provisions. However, when Renfroe filed its contract-based claims in Alabama, the Mississippi qui tam case had not yet been unsealed, and Renfroe had not been named as a defendant in the original qui tam complaint. The relators later amended their complaint to name Renfroe as a defendant, accusing Renfroe not only of retaliation, under Section 3730(h) of the FCA, but also of substantive violations of the FCA based on an alleged conspiracy with State Farm. They allege that Renfroe, "knowing well that the relators had no documents [remaining in their possession], still attempted to cite them for civil and criminal contempt," thereby causing the Rig bys "to incur thousands of dollars in attorneys' fees." These allegations present the question of whether Renfroe's successful injunctive action resulted in a strategic advantage for the defense.
The relators clearly intend to portray the case as an attempt to intimidate and punish the relators for their disclosure of the alleged wrongdoing. Renfroe's offensive case, however, may have shifted the momentum in the case by causing Scruggs and the Rigsbys to devote their resources to litigating the underlying allegations as well as the contempt proceedings. And the fundamental question that remains to be resolved is whether the underlying merits of Renfroe's breach of contract claims should be judged independently of the relators' subsequent conduct in other proceedings.
We would like to thank Carolyn Kubota, Esquire (O'Melveny & Myers LLP, Los Angeles, CA) and the Enforcement Subcommittee for providing this email alert.