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Ninth Circuit Leaves Open Possibility for Claims by FCA Defendant Against Allegedly Liable Third Party


The U.S. Court of Appeals for the Ninth Circuit recently ruled that a company, which entered into a settlement with the Government and a qui tam relator to resolve False Claims Act ("FCA") allegations, may pursue claims of breach of contract and negligence against the third party, which allegedly improperly advised it on Medicare reimbursement protocol. Cell Therapeutics Inc. v. Lash Group Inc., 9th Cir., No. 08-35619, 11/18/09. Cell Therapeutics, Inc. ("CTI") entered into a settlement agreement with the Government and with the relator who initiated the FCA case, which was based on the alleged off-label promotion of the leukemia-fighting drug Trisenox (arsenic trioxide). The lawsuit alleged that CTI caused the submission of false claims to Medicare by promoting an off-label use of Trisenox to insurers and health care providers. Following the FCA settlement, CTI brought suit against a predecessor of Lash Group, Inc. ("Lash"), which CTI alleged improperly and erroneously advised it on the appropriateness of receiving Medicare reimbursement for off-label drug uses. Based on its reading of Ninth Circuit precedent, the district court concluded that CTI was precluded from maintaining suit against Lash. Considering CTI's settlement with the Government, the district court reasoned that established law prevented CTI from shifting its FCA liability to a third party through a separate lawsuit.

On appeal, CTI argued that the precedent cited by the district court was inapt, and it claimed that the allegations in its lawsuit against Lash were not aimed at shifting its liability, but were instead allegations separate and apart from its FCA case and settlement. The Ninth Circuit agreed, noting that, while its precedents demonstrate that an FCA defendant may not shift its FCA liability to a third party or to the relator, such precedent does not impede an FCA defendant from pursuing other independent claims against third parties. Although CTI sought indemnification in two of the counts in its complaint, the other three state law claims were based on an alleged breach of contract, a breach of the implied warranty of good faith and fair dealing, and alleged negligence and a breach of duty of care Lash owed to CTI as its adviser in marketing Trisenox . The Ninth Circuit found that these claims appear to have an independent basis from any FCA claims that may have been implicated by the two counts seeking indemnification.

According to the Ninth Circuit, the trial court should have looked more carefully to determine whether any of CTI's claims were independent of its alleged FCA liability and, in light of the fact that CTI's settlement did not contain any admission of liability, whether the settlement precluded any of CTI's claims against Lash. As it observed in its opinion, "[t]aken in light of the facts alleged in CTI's complaint, CTI has alleged four types of damage, 'in the form of': (1) 'investigation, litigation and settlement expenses, including attorneys' fees and costs, in an amount to be proven at trial'; (2) 'lost opportunities to pursue other means of reimbursement'; (3) 'damage to reputation'; and (4) 'increased cost of capital.'" The Court added, "[a]lthough these claims may follow from the alleged bad advice, only the first is arguably a claim for indemnification for the costs incurred in settling the qui tam action." In addition, it found that the district court also erred in concluding that the entirety of the Government's settlement reflected CTI's liability for the FCA charges since the settlement at issue resolved unjust enrichment and negligent misrepresentation claims alleged in the Government's suit and the restrictions relied upon by the district court do not extend to damages for claims other than those for fraud under the FCA. As a result, the Ninth Circuit remanded the case and ordered: "[t]he district court should reconsider whether the claims [against Lash] are independent and, for third party claims that are not independent, should assess how to proceed in light of our holding that the Settlement Agreement does not constitute a finding of liability under the FCA."

Although the Ninth Circuit's rulings in this case are fact-specific, the principles espoused are widely applicable and may pave the way for FCA defendants who have been aggrieved by the conduct of third parties to pursue relief. As seemingly established in this case, the predicate for the pursuit of such relief is either the absence of a finding of liability under the FCA (an FCA settlement without an admission of liability does not constitute such a finding) or, that the claims against the third party be independent of the alleged FCA liability.

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