When Customers Meet Whistleblowers In A FCA Case

Portfolio Media. Inc. | 860 Broadway, 6th Floor | New York, NY 10003 | www.law360.com
Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | customerservice@law360.com

When Customers Meet Whistleblowers In A FCA Case
Law360, New York (February 24, 2015, 3:51 PM ET) --

An employee claiming that she has discovered alleged wrongdoing at her company and
then seeking compensation or claiming protection as a whistleblower is an evermore
common risk that every business must be prepared to address. But what happens when
the whistleblower employee reports fraud against the government by an important
business customer but no wrongdoing by the company? Should the company conduct its
own investigation of the claims? Should the accusation of customer fraud be reported to
authorities? What risks does it face from potential claims by the employee?
                                                                                                 Nancy E.
                                                                                                  Harris
In the past five years, numerous statutory remedies for whistleblowers have been
created and expanded. Those expansions include remedies available to whistleblowers
under the federal False Claims Act, 31 U.S.C. § 3729 et seq., one of the tools utilized by the government
to combat fraud and other alleged wrongdoing committed by individuals and companies in performing
federal contracts. Recent amendments to the FCA significantly expanded its reach, made it easier for qui
tam plaintiffs to bring false claims cases, strengthened its anti-retaliation provision and increased the
potential exposure to companies that do business with the government.[1]

While the 2009 and 2010 amendments clearly extended whistleblower protections to nonemployees,
such as contractors, the amendments do not expressly address the scenario where the claimed FCA
violations are alleged to have been committed by an entity other than the employer itself. The case law
is particularly sparse in addressing the scenario where an employee claims retaliation because of actions
taken in connection with alleged fraud against the government by an employer’s customer. The cases
that do address these “customer fraud” claims typically involved an employer who was actively
participating or acting in concert with a customer or a related entity.[2] While a handful of district courts
have held that the FCA does not require proof that the retaliation was for protected activity involving
false claims submitted by the employer,[3] until recently the appellate courts had not weighed in on the
issue. That changed with Townsend v. Bayer Corp., 774 F.3d 446 (8th Cir. 2014), in which the Eight
Circuit ruled that the FCA’s anti-retaliation provisions extend to cover conduct in furtherance of an FCA
action involving a customer, regardless of whether the employer itself engaged in the fraud or acted in
concert with the fraudulent customer.

Townsend v. Bayer Corporation

Mike Townsend worked as a pharmaceutical sales representative in Arkansas selling Mirena, a
contraceptive device manufactured and sold by Bayer. Townsend learned that one of Bayer’s customers,
Dr. Shrum, was importing a version of Mirena from Canada. The Canadian version had not been

approved by the U.S. Food and Drug Administration and could be purchased at half the cost of the
version approved for sale in the U.S.[4] Townsend also learned that Dr. Shrum was submitting Medicaid
reimbursement claims for the Canadian Mirena at the same rate as the version of the FDA-approved
Mirena, thus reaping a substantial profit.

Bayer was aware of the “gray market” for Mirena and had advised its sales force that physicians who
submitted reimbursement to Medicaid for the cheaper, imported version of the contraceptive were
committing Medicaid fraud.[5] Townsend informed his superiors at Bayer that Dr. Shrum had submitted
Medicaid claims for the price of the FDA-approved version of Mirena while actually prescribing the
cheaper, non-FDA approved version; he was told to concentrate on selling Mirena and to no be
concerned about the conduct of Dr. Shrum.[6]

In April 2009, Townsend anonymously reported Dr. Shrum’s fraud to the Arkansas Attorney General’s
Medicaid Fraud Hotline. Based on the information Townsend provided, the FDA, U.S. Attorney’s Office
and Arkansas Attorney General’s Office commenced an investigation. Townsend then informed his
manager that he had reported Dr. Shrum. Ultimately Dr. Shrum was convicted of submitting false claims
to the government, with Townsend’s cooperation and evidence forming an important part of the case
against him.[7]

More than a year later, in May 2010, Bayer terminated Townsend’s employment on the grounds that he
had failed to comply with Bayer’s credit card and expense reimbursement policies.[8] Townsend sued
Bayer claiming that his termination violated the anti-retaliation provisions of the False Claims Act.
Townsend’s FCA retaliation claim was based on testimony that Bayer “had an unwritten rule that its
sales force should not report crimes of Bayer’s physician customers to law enforcement.”[9] Other than
this “unwritten rule” there was no evidence that Bayer participated in, encouraged or profited from
Shrum’s fraudulent conduct. The jury found that “Bayer had unlawfully fired Townsend for engaging in a
protected activity by reporting Dr. Shrum’s fraud and by cooperating with the government’s
investigation and prosecution” and awarded Townsend $1.2 million in damages.[10]

On appeal, Bayer argued that the judgment should be reversed on several grounds, including that “the
FCA requires an employee to prove his employer was working in concert with a fraudulent actor to state
a retaliation claim.”[11] Townsend’s theory, on the other hand, was not based upon evidence that Bayer
had supported, encouraged or intentionally facilitated Dr. Shrum’s fraudulent Medicaid claims. Instead,
he posited a “culture of silence” claim that was based, in large part, on testimony that Bayer encouraged
its pharmaceutical sales representatives to report customer fraud to Bayer rather than to the
authorities.[12] However, despite encouraging such reporting, the company did not further report the
alleged customer fraud to authorities.

The Eight Circuit upheld the verdict and found that “[a] reasonable jury could infer Bayer had a culture
of not reporting customer fraud to the government because doing so may harm customer relations and
ultimately affect Bayer’s profits, thus giving rise to a motive to retaliate against an employee who failed
to play by Bayer’s unwritten rule.”[13] The court found that activities protected under the FCA anti-
retaliation provisions are not limited to an employee’s report of an employer’s fraud, but extend to an
employee’s report of a customer’s fraud.[14] The court observed that “[n]othing in the plain language of
the statute limits the protected “lawful acts” of an employee to stop an employer’s violations of the
FCA.”[15]

The court required no showing that Bayer participated in, encouraged or benefited from the alleged
fraud or that it acted in concert with its customer to retaliate against the employee. The court instead

theorized that the customer relationship between Bayer and Dr. Shrum provided sufficient motive for
retaliation, noting that:

For example, an employer may lose a customer’s multi-million dollar account because an employee
reports the customer’s fraudulent activities to the government. The employer clearly has motive to
retaliate against its employee under those circumstances. We therefore agree with Townsend that the
protections of the FCA’s anti-retaliation provisions should extend to such an employee, without
requiring a showing that the employer itself was acting in concert with its customer to defraud the
government, or acting in concert with the customer to orchestrate the retaliation.[16]

In order to prove an anti-retaliation claim, a plaintiff must prove that the defendant discriminated
against him in retaliation for engaging in protected activity by firing him or engaging in other adverse
actions (i.e., there must be a causal connection between the employment action and the whistleblower
activity). The rule articulated in Townsend would allow plaintiffs to demonstrate that causal element by
pointing to the assumed motive that a business desires to protect an important customer or account.
According to the Townsend court, the mere status of the customer could be sufficient demonstrate the
casual link between protected conduct and discriminatory action for liability to attach under Section
3730(h)

Takeaways

The notion that customer relationships alone, without evidence of the employer providing actual
assistance or acting in concert, can be sufficient to establish motive for retaliation raises numerous
questions for business, in managing relationships with customers as well as employees. Reports that a
customer, vendor or other business partner is defrauding the government pose thorny problems for the
employer. A business should always carefully consider the allegations, credibility of the source, quality
of the evidence and nature of the alleged fraud. However, unlike a report that the employer itself is
engaging in fraud, a report that a customer may be submitting false claims to the government does not
necessarily lend itself to a fulsome or comprehensive investigation. A typical internal investigation
would involve reviewing the relevant documents, electronic communications and other data. Interviews
will be conducted, accusations may be confirmed or debunked and the scope of the issue will be
ascertained. Yet when the report contends that a customer is submitting fraudulent claims, an "internal"
investigation will have inherent limitations. The typical steps that a company takes to investigate an
employee’s claim of misconduct may not be available to that company when the claimed misconduct is
that committed by a customer. For instance, a company is unlikely to have access to a customer’s
financial records in order to test the accuracy of the claims the customer has submitted to the
government program. Its access to email and other relevant communications may be limited. The
company may have no knowledge of, or even way to gain access to, the knowledgeable individuals.
Thus, its ability to come to a conclusion as to whether the report of fraud is credible may be severely
limited.

However, the court’s discussion in Townsend suggests that the motive evidence would have been less
persuasive if Bayer had taken some steps to report Dr. Shrum to the authorities. At a minimum, doing
nothing is rarely a viable or defensible option. If an employee brings credible claims of customer fraud
that might support an FCA claim, even there is no allegation that the employer encourage, engaged or
participated in the false claims, then strong consideration should be given to whether the business is
better positioned by conducting its own investigation and making an informed decision whether
reporting to the authorities is warranted.

—By Nancy E. Harris, Orrick Herrington & Sutcliffe LLP

Nancy Harris is counsel in Orrick Herrington & Sutcliffe's San Francisco office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.

[1] Fraud Enforcement and Recovery Act of 2009, Pub. L. 111-21 § 386, 123 Stat. 1617 (2009); Dodd-
Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 3301, 124 Stat. 1376
(2010).

[2] In Childree v. UAP/GA AG Chem Inc., 92 F.3d 1140 (11th Cir. 1996), the Eleventh Circuit found that an
employee was entitled to protection from retaliation by her employer UAP/GA AG Chem after she
testified in an U.S. Department of Agriculture administrative proceeding against one of the employer’s
primary customers. Childree’s testimony revealed that the employer UAP/GA had knowingly prepared
and submitted false paperwork in furtherance of the fraudulent scheme against the government. Her
testimony exposed the employer UAP/GA's assistance to the customer and participation in its fraudulent
scheme against the government.

[3] United States ex rel. Lang v. Northwest Univ., No. 04C3290, 2005 U.S. Dist. LEXIS 47378, at *2 (N.D.
Ill. Mar. 22, 2005) (FCA anti-retaliation claim allowed to proceed against university employer when
entity alleged to have submitted false claims was related university foundation); Nguyen v. City of
Cleveland, 121 F. Supp. 2d 643, 649 (N.D. Ohio 2000) (FCA reaches an employer who discriminates
against an employee at the express behest of a customer that seeks to retaliate against the employee
for protected conduct); Mruz v. Caring Inc., 991 F. Supp. 701, 709-10 (D. NJ 1998)(refusing to allow
conspiracy theory to be used to expand FCA anti-retaliation provision); United States ex rel. Kent v.
Aiello, 836 F. Supp. 720, 724-25 (E.D.CA 1993) (FCA anti-retaliation provisions applied both to property
owner and property owner’s management company who employed plaintiff, when property owner
caused the termination of plaintiff’s employment).

[4] Townsend v. Bayer Corp., 774 F.3d 446, 452 (8th Cir. 2014).

[5] Id.

[6] Id.

[7] Id.

[8] Id. at 453.

[9] Id. at 454.

[10] Id. (The court of appeals reduced the emotional distress damages by $268,000 and offered plaintiff
a choice of a new total award of money reduced the total award to $942,746 or ordered a new trial on
the emotional distress damages.)

[11] Id. at 459.

[12] Id. at 455.

[13] Id. at 459.

[14] Id. at 460.

[15] Id. at 459.

[16] Id.

All Content © 2003-2015, Portfolio Media, Inc.