When Are False Claims Act Releases in Separation Agreements Enforced?

August 1, 2017Articles

A recent decision from the Eastern District of Kentucky doubles as a primer on the enforcement of FCA releases in settlement agreements. Courts often invalidate post-filing FCA releases—those executed after a qui tam lawsuit has already been filed—reasoning that, by statute, a relator cannot release claims that belong to the government.1 However, if the defendant establishes the government knew about the relator’s claims before they executed their release, courts frequently enforce pre-filing releases that bar relators from participation in subsequent FCA lawsuits.

In United States ex rel. Dillon, the United States District Court for the Eastern District of Kentucky examined “whether an explicit release of the right to receive monetary relief from a FCA claim at the time of separation is enforceable if the signatory later brings a qui tam FCA claim.” The court looked to and adopted the “government knowledge rule”—a widely accepted test from other circuits.2 According to the government knowledge rule, when a relator has signed a release of FCA claims, “the proper inquiry is whether the government had full knowledge of the allegations forming the substance of the FCA claim at the time the relator signed the release.”

In Dillon, the Eastern District denied without prejudice a motion to dismiss filed by St. Elizabeth Medical Center, Inc. (SEMC) with respect to enforcing a separation agreement signed by Dillon, a former employee. The separation agreement—for which Dillon received a $29,000 severance payment—“included language stating Dillon ‘waive[d] her right to receive any monetary relief from any action brought by her or on her behalf pursuant to the False Claims Act.”  Yet, just “[a] little more than a year after leaving SEMC” and signing the separation agreement, Dillon filed a qui tam action “seeking damages and a civil penalty on behalf of the Government for SEMC’s alleged [FCA] violations.” SEMC moved for dismissal.

In arguing against SEMC’s motion to dismiss, the government responded that, although it had not intervened in Dillon’s case, it still remained the real party in interest and therefore retained a stake in the outcome. The government further asserted it first learned of the upcoding and double billing allegations against SEMC when it read about those claims in Dillon’s complaint. SEMC argued, however, the government was aware of the substance of Dillon’s complaint at least a year before Dillon signed the FCA release, because 1) SEMC had already reimbursed various entities administering the Medicare and Medicaid programs for the overbilled amounts; and 2) Central Medicaid Services would have received test results and raw data “from which it could have inferred that SEMC was upcoding for medically unnecessary procedures.”

As the Dillon court recognized, “whether the government had knowledge of allegedly fraudulent actions before the filing of this qui tam action [and before Dillon signed the release] is crucial to deciding whether Dillon is barred from pursuing this FCA case.” (emphasis added). Applying the government knowledge test, the court’s analysis turned on when the government learned of the alleged fraud—at the time Dillon filed her qui tam action or prior to Dillon’s execution of the SEMC separation agreement and FCA release. Looking to the Ninth Circuit’s decisions in Green and Hall,3 the Eastern District of Kentucky found if the government learned of the alleged fraud when Dillon brought her qui tam action, then the separation agreement and release would not be enforceable, because “it would contravene the public interest furthered by the FCA of encouraging whistleblowers to come forward and report fraud.” If the government, however, had notice of the alleged fraud prior to Dillon’s execution of the release, then the release would be enforceable, because “the public interest in having information brought forward that the government could not otherwise obtain” would not apply.

The court found the record unclear as to whether the government had enough information to know the substance of Dillon’s allegations at the time she signed the separation agreement with SEMC. The court explained “[a]t this early stage, it is difficult to know exactly what the government knew, when it knew it, how important that information was, and whether that information was sufficient to alert the government to alleged double billing and upcoding.4  Instead, the court balanced the Ninth Circuit’s decisions in Green and Hall and denied SEMC’s motion to dismiss, but expressly allowed “the possibility of re-examining the issue after factual development.”


1See 31 U.S.C. § 3730(b)(1) (providing that “[t]he action shall be brought in the name of the Government. The action may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting.”)

2The government knowledge rule has been adopted by the Second, Fourth, Ninth, and Tenth Circuits, and the Eastern District of Kentucky—absent formal guidance from the Sixth Circuit—followed this “workable and clear rule” in Dillon.

3United States ex rel. Green v. Northrop Corp., 59 F.3d 953 (9th Cir. 1995) (finding that a release “without the United States’ knowledge or consent, and prior to the filing of an action based on that claim” is not enforceable); c.f. United States ex rel. Hall v. Teledyne Weh Chang Albany, 104 F.3d 230 (9th Cir. 1997) (clarifying the government knowledge rule and finding that a release is enforceable when the government is aware of the relator’s allegations prior to the execution of the release). Importantly, in Green (in contrast to Hall) the government only learned of the alleged fraud through relator’s qui tam action.

4Procedurally, the court excluded SEMC’s reimbursement letters from its “present analysis,” because SEMC did not file the letters with its Motion to Dismiss, but instead attached them to its response filing in an effort to show the government had been put on notice of the alleged fraud. The court, however, did leave the door open for “discovery on the subject” and “factual development.”