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Michigan Federal Court Rules Severance Agreement Cannot Bar Qui Tam Claim

In U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., the United States District court for the Eastern District of Michigan held that a whistleblower’s severance agreement releasing all claims against the employer does not bar qui tam claims where the government was unaware of the underlying fraudulent activity when the severance agreement was signed.  Whistleblower Martin G. McNulty alleges that his former employer, Arctic Glacier, colluded with competitors since 1997 to raise the price of packaged ice by geographically dividing the market.  According to McNulty, the government spent in excess of $150 million on packaged ice during that time period.

McNulty further alleges that Arctic Glacier terminated him after he learned of and refused to participate in the anticompetitive scheme.  He later filed this qui tam claim under the False Claims Act (FCA), alleging that his employer overcharged the federal government for packaged ice.  Although the court dismissed McNulty’s claims on jurisdictional grounds and a failure to particularly plead his claim, more importantly the court also dismissed Arctic Glacier’s counterclaim alleging breach of the severance agreement – a significant victory for future whistleblowers.   The Court found the release of claims provision in the severance agreement unenforceable against qui tam claims that allege fraud that the government has not yet uncovered.  In support of its finding, the Court states:

. . . [T]hese courts have applied the balancing test set forth by the Supreme Court in Town of Newton v. Rumery, 480 U.S. 386, 392 (1987), which in the context of FCA claims, weighs “the public interest in having information brought forward that the government could not otherwise obtain [against] the public interest in encouraging parties to settle disputes.”  Nowak, 2011 WL 3208007, at *21 (internal quotation marks and citation omitted).  When considering a release of claim in the prefiling period, the court’s “focus must be on the incentive effect in achieving the FCA’s goals of detecting and deterring fraud.”

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