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Contract to Share Qui Tam Awards is Enforceable

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In Fair Lab. Practices Assocs., et al., v. Riedel, et al., the United States District Court for the District of New Jersey ruled that a contract providing that two parties share potential qui tam awards is enforceable.

Plaintiffs Fair Laboratory Practices Associates (FLPA) and NPT Associates are both Delaware partnerships formed for the purpose of prosecuting qui tam actions. Defendant Hunter Laboratories, LLC is a California limited liability company in the commercial reference laboratory business; and Defendant Chris Riedel is Hunter’s sole managing member.

In 2005, Plaintiffs FLPA and NPT filed a qui tam action against Quest Diagnostics, Inc. and Unilab Corporation in the Southern District of New York (New York action). Shortly thereafter, Defendants Hunter and Riedel filed a qui tam (false claims) action against Quest, Unilab, and others in California state court (the California action).

In 2009, FLPA and NPT met with Hunter and Riedel, representatives from the State of California, and an Assistant United States Attorney to discuss the New York lawsuit filed by FLPA and NPT. Around this time, FLPA and NPT told Hunter and Riedel that FLPA CEO Mark Bibi was formerly Unilab’s General Counsel. In May 2010, the parties (FLPA, NPT, Hunter, and Riedel) entered into a “Qui Tam Relator Sharing Agreement and Assignment” (the Agreement). The Agreement provided that the parties would share 15% of any qui tam award that they recovered in their respective qui tam actions in New York and California. The primary purpose of the Agreement was to spread the risk that either qui tam action may fail.

FLPA and NPT’s qui tam action was unsuccessful. Judge Robert P. Patterson, Jr. granted a motion to dismiss in the New York action, finding that Bibi had violated the New York Code of Professional Responsibility by sharing confidential information he obtained as Unilab’s General Counsel. One month after this dismissal, Hunter and Riedel reached a $241 million settlement agreement in their California action, of which Hunter and Riedel received $6.29 million.

In July 2011, Hunter and Riedel refused to pay FLPA and NPT 15% of the proceeds they had received in the California action, as required under the Agreement. FLPA and NPT filed a complaint in the District of New Jersey alleging breach of contract, conversion, and unjust enrichment. Hunter and Riedel filed a motion for judgment on the pleadings and FLPA and NPT filed a cross-motion for judgment on the pleadings. Hunter and Riedel challenged the enforceability of the Agreement on four grounds – illegality, frustrated purpose, unjust enrichment, and unclean hands.

First, Hunter and Riedel claimed that Judge Patterson’s Order in the New York action made payment under the Agreement illegal because the Order disqualifies “FLPA, its general partners, and its counsel from this suit and any subsequent suit based on these facts.” In rejecting that argument, the U.S. District Court for the District of New Jersey noted that the California action was not a “subsequent suit” because it was brought before Judge Patterson’s Order, and that Judge Patterson’s Order prevented information sharing agreements, not profit sharing agreements. Further, even if the Agreement could be construed to require information sharing, the Court found that Hunter and Riedel did not rely on or use any confidential information provided by Bibi in prosecuting the California action, and thus the Agreement did not apply to that action.

Second, Hunter and Riedel argued that the purpose of the agreement was frustrated. The New Jersey Court, however, noted that the doctrine of frustrated purpose “will not excuse performance where the frustration is not sufficiently substantial to be regarded outside the risk the parties assumed under the contract.” The New Jersey Court found that Judge Patterson’s dismissal of FLPA and NPT’s New York action was a risk assumed in the Agreement by both parties. Further, the Court held that Hunter and Riedel knew of Bibi’s former General Counsel role at Unilab, and were sophisticated enough to assess any potential risk before entering into the Agreement.

Lastly, Hunter and Riedel argued the affirmative defenses of unjust enrichment and unclean hands. The New Jersey Court relied on the same reasoning as above in dismissing these arguments. In regards to unclean hands, the Court pointed out that Hunter and Riedel did not make any showing that FLPA and NPT concealed information or acted improperly.

For all of these reasons, the Court denied Hunter and Riedel’s motion for judgment on the pleadings and granted FLPA and NPT’s motion for summary judgment.

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