Recently, a Georgia federal district court permitted an employer’s counterclaims against its former employee-whistleblower to proceed in a False Claims Act (“FCA”) lawsuit after determining that the employer’s amended counterclaims for breach of fiduciary duty and breach of contract were sufficiently independent from the underlying FCA claims to survive a motion to dismiss, despite significant factual overlap. The decision in U.S. ex rel. Cooley v. ERMI, LLC, et al.., a qui tam FCA action where the plaintiff, known as a “Relator,” brings the claim on behalf of the federal government, may provide new avenues of employer recourse when a whistleblowing employee’s actions create additional exposure beyond the FCA.

The employer, ERMI, manufactures and leases medical equipment that assists orthopedic patients regain range of motion. Because of the medical nature of its products, ERMI is subject to rigorous licensing requirements before supplying equipment to consumers. The former employee/Relator served as ERMI’s Chief Compliance Officer from November 2018 to October 2019, and asserted qui tam claims against ERMI for engaging in alleged unlicensed and fraudulent activity, including providing medical equipment to consumers prior to receiving a license and after its license had expired. Further, the Relator alleged that ERMI retaliated against her by preventing her from bringing ERMI into compliance with licensing requirements and forcing her out of her position when she threatened to bring a whistleblower suit.

For its part, ERMI asserted counterclaims against the Relator for breach of fiduciary duty, breach of contract, and litigation expenses, the latter of which was derivative of the former two claims. ERMI alleged that the Relator failed in her role as Chief Compliance Officer and caused ERMI to fall out of compliance with Florida licensing law, which subjected ERMI to a competitor’s lawsuit and other undetermined harm. In response, the Relator moved to dismiss ERMI’s counterclaims as prohibited by public policy that encourages whistleblowers to come forward with knowledge of illegal conduct.

In denying Relator’s motion to dismiss, the court determined that certain aspects of ERMI’s counterclaims were sufficiently independent from the FCA action. While the court acknowledged that qui tam defendants are prohibited on public policy grounds from asserting claims against a relator that amount to attempts to collect contribution or indemnification, a qui tam defendant can bring counterclaims if they are based on “independent damages.”

Here, ERMI’s breach of fiduciary duty claim is premised on the Relator allegedly misleading it into believing it complied with Florida licensing requirements. ERMI contends that the Relator, an officer and thus fiduciary of the company, breached her duty by allowing ERMI to fall out of licensing compliance, thus exposing ERMI to costly litigation with a competitor. Despite significant factual overlap between ERMI’s allegations and the FCA action, the court found that because the competitor’s lawsuit asserted a claim under the Florida Deceptive and Unfair Trade Practices Act, rather than the FCA, the claim constitutes independent damages beyond merely offsetting FCA liability and is therefore not barred by public policy.

ERMI also alleges that the Relator breached contractual obligations by retaining confidential documents in violation of her Confidentiality Agreement. The court noted that mere retention of documents, without more, was not sufficient to support a fiduciary duty claim on the same facts. The Relator claimed that all confidential information she retained is sufficiently related to her FCA claims, and thus protected by public policy. Finding that argument unpersuasive in the context of a motion to dismiss, the court reasoned that ERMI was not required to specifically name which non-FCA-related documents the Relator wrongfully retained, but rather, it could explore that question through discovery. If discovery reveals that all retained confidential documents are related to the FCA claims, ERMI’s contract claim would no longer be sufficiently independent and thus subject to dismissal on public policy grounds.

Because the court permitted ERMI to move forward with underlying claims against the Relator for breach of fiduciary duty and contract, it may also proceed with its claims against her under Georgia law for an award of litigation expenses where a defendant has acted in bad faith, been stubbornly litigious, or caused the plaintiff unnecessary trouble and expense.

The issue of whether an employer can assert counterclaims against a whistleblower – especially one who serves in a trusted position such as a legal or compliance function – is evolving and has divided the courts. Employers considering such counterclaims are encouraged to consult with counsel, because whether to proceed will often depend on the facts presented and the applicable jurisdiction. That said, this decision provides support for the premise that such counterclaims are cognizable in certain circumstances.