Cell Therapeutics Inc v. The Lash Group Inc et al, No. 2:2007cv00310 - Document 150 (W.D. Wash. 2010)
Court Description: ORDER granting 145 Plaintiff's Motion to strike and Denies as Moot 144 Defendant The Lash Group, Inc.'s Motion to Bifurcate, by Judge James L. Robart.(MD)
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Cell Therapeutics Inc v. The Lash Group Inc et al Doc. 150 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 8 9 10 CELL THERAPEUTICS, INC., CASE NO. C07-0310JLR Plaintiff, 11 ORDER GRANTING MOTION TO STRIKE v. 12 AND 13 THE LASH GROUP, INC., et al., Defendants. 14 ORDER DENYING MOTION TO BIFURCATE 15 I. INTRODUCTION 16 Before the court are two motions: Plaintiff Cell Therapeutics, Inc.’s (“CTI”) 17 motion to strike (Dkt. # 145) and Defendant The Lash Group, Inc.’s (“Lash”) motion to 18 bifurcate (Dkt. # 144). Both motions address the same basic question: how should this 19 court proceed on remand from the Ninth Circuit with respect to Lash’s affirmative 20 defense that CTI cannot recover against it for claims that only have the effect of 21 offsetting CTI’s alleged liability under the False Claims Act (“FCA”)? Having reviewed 22 ORDER- 1 Dockets.Justia.com 1 the motions, all submissions filed in support and opposition, and the Ninth Circuit’s 2 decision in Cell Therapeutics Inc. v. Lash Group Inc., 586 F.3d 1204 (9th Cir. 2009), as 3 amended on denial of reh’g and reh’g en banc, (Jan. 6, 2010), and deeming oral 4 argument unnecessary, the court GRANTS CTI’s motion to strike (Dkt. # 145) and 5 DENIES as MOOT Lash’s motion to bifurcate (Dkt. # 144). 6 II. BACKGROUND 7 A. Qui Tam Action 8 The parties are familiar with the factual background of this case, and the court 9 will not repeat it here in full. In 2001, CTI hired Lash’s predecessor, Defendant 1 10 Documedics Acquisition Company, Inc. (“Documedics”) , to handle Medicare 11 reimbursement for CTI’s cancer drug, Trisenox. (1st Am. Compl. (Dkt. # 139) ¶¶ 1-2.) 12 Lash advised CTI that Medicare would reimburse for “off-label” uses of Trisenox. (Id. ¶ 13 3.) This advice turned out to be incorrect. In 2004, the government began investigating 14 CTI and Lash for misrepresenting Trisenox’s eligibility for reimbursement and for the 15 improper Medicare claims that resulted. (Id. ¶¶ 30, 32-33.) 16 These improper Medicare claims triggered potential liability for CTI under the 17 FCA. (Id. ¶ 33.) The FCA contains qui tam provisions that allow individuals, known as 18 “relators,” to bring suit on behalf of the United States for FCA violations. 31 U.S.C. § 19 3730(b). In 2006, James Marchese, a CTI employee, brought a qui tam suit against CTI 20 21 22 1 The court refers to Lash and Documedics collectively as “Lash” because the two became the same entity when Documedics merged with Lash in 2003. (1st Am. Compl. ¶¶ 8-9.) ORDER- 2 1 and others. See United States ex. rel. Marchese v. Cell Therapeutics, Inc., No. C06-01682 MJP (W.D. Wash.). The government intervened, and alleged five claims against CTI, 3 only two of which arose under the FCA. (1st Am. Compl. ¶ 36.) CTI eventually entered 4 into a settlement agreement (“Settlement Agreement”) with the government for the sum 5 of $10.5 million, plus interest, and CTI was dismissed from the qui tam suit. (Id. ¶ 35.) 6 The Settlement Agreement provides that the government released CTI “from any civil or 7 administrative monetary claim[s],” and stated that the Settlement Agreement “is neither 8 intended by the parties to be, nor should be, interpreted as an admission of liability by 9 CTI.” (Id. ¶¶ 37-38.) 10 B. Present Action 11 In January 2007, while the qui tam suit was pending, CTI filed this lawsuit against 12 Lash. (See Compl. (Dkt. # 1).) In its first amended complaint, CTI alleges five causes of 13 action against Lash: (1) declaratory relief that Lash is contractually obligated to 14 indemnify CTI for damages related to the government’s investigation and the settlement 15 thereof; (2) breach of the terms of the contract between CTI and Lash; (3) breach of the 16 contract’s indemnification clause; (4) breach of the implied warranty of good faith and 17 fair dealing; and (5) negligence/breach of the duty of care in providing professional 18 services. (1st Am. Compl. ¶¶ 51-78.) CTI seeks to recover against Lash for “all 19 liabilities, losses, costs and expenses (including reasonable attorneys’ fees) and damages 20 arising out of the government’s investigation into and claims regarding Trisenox 21 reimbursement.” (Id. at 19.) 22 ORDER- 3 1 In its amended answer, Lash asserted the affirmative defense that “CTI’s claims 2 are barred, in whole or in part, because it seeks indemnification or contribution for its 3 liability under the False Claims Act (31 U.S.C. § 3729 et seq.).” (Am. Answer (Dkt. # 4 143) ¶ 82.) 5 C. Prior Proceedings 6 This court previously granted Lash’s motion for judgment on the pleadings, 7 concluding that the Settlement Agreement barred CTI’s claims, as discussed below in 8 Part III.C. (Dkt. # 94.) CTI appealed to the Ninth Circuit. (Dkt. # 97.) The Ninth 9 Circuit reversed this court’s order and remanded the case for further proceedings. Cell 10 Therapeutics Inc., 586 F.3d at 1212-13. III. 11 ANALYSIS 12 A. The False Claims Act 13 The FCA serves to discourage fraud against the government and imposes civil 14 liability on any person who knowingly uses a “false record or statement to get a false or 2 15 fraudulent claim paid or approved by the Government,” 31 U.S.C. § 3729(a)(2) (1984) , 16 and any person who “conspires to defraud the Government by getting a false or 17 fraudulent claim allowed or paid,” 31 U.S.C. § 3729(a)(3). See Cell Therapeutics Inc., 18 586 F.3d at 1205. The qui tam provisions of the FCA permit a relator to bring a civil 19 action for violations of § 3729 on behalf of the relator and the government. 31 U.S.C. § 20 3730(b)(1). The government has the option of intervening. 31 U.S.C. § 3730(b)(2). If it 21 2 The FCA was amended in 2009, but the court cites the prior version under which CTI 22 was charged. See Cell Therapeutics Inc., 586 F.3d at 1205 n.1. ORDER- 4 1 does not intervene, the relator may proceed with the FCA litigation. 31 U.S.C. § 2 3730(c)(3). By contrast, if the government does intervene, the relator remains part of the 3 suit as a qui tam plaintiff, but the government may dismiss or settle the action without the 4 relator’s approval. 31 U.S.C. 3730(c)(1) & (2)(A)-(B). The FCA entices relators to 5 come forward by offering two important incentives: a significant bounty and whistle6 blower protection. 31 U.S.C. § 3730(d) & (h); Cell Therapeutics Inc., 586 F.3d at 1206. 7 B. The Mortgages-Madden Framework 8 The Ninth Circuit’s decisions in Mortgages, Inc. v. United States District Court, 9 934 F.2d 209 (9th Cir. 1991), and United States ex rel. Madden v. General Dynamics 10 Corp., 4 F.3d 827 (9th Cir. 1993), establish the general framework used by courts to 11 evaluate the viability of counterclaims brought by qui tam defendants against relators in 12 qui tam actions. These decisions have “fashioned a remedy designed to protect qui tam 13 relators from retaliation by defendants.” Cell Therapeutics Inc., 586 F.3d at 1207. 14 Together, Mortgages and Madden, as discussed in greater depth below, require courts to 15 separate out those claims for damages brought by qui tam defendants which only have the 16 effect of offsetting the defendant’s liability for fraud or conspiracy to commit fraud under 17 the FCA from those claims that are not dependent on a qui tam defendant’s liability under 18 the FCA. Id. at 1209-10. Dependent claims must be dismissed while independent claims 19 may proceed on their merits. Id.; Madden, 4 F.3d at 830-31. 20 First, in Mortgages, the Ninth Circuit held that a qui tam defendant could not 21 assert counterclaims against the relator seeking indemnification and contribution for the 22 defendant’s FCA liability. The court found nothing in the language of the FCA or its ORDER- 5 1 legislative history to support such claims, concluding that “Congress did not intend to 2 create a right of action for contribution or indemnification under the FCA.” Mortgages, 3 934 F.2d at 213. The court also declined to recognize a federal common law right to 4 contribution or indemnity. Id. In reaching this result, the court took note of the FCA’s 5 “comprehensive procedures for enforcement, including a provision to limit the reward of 6 a qui tam plaintiff if the court determines that party is also a wrongdoer.” Id. Finally, 7 “because there is no basis in the FCA or federal common law to provide a right to 8 contribution or indemnity in a FCA action,” the Ninth Circuit held that “there can be no 9 right to assert state law counterclaims that, if prevailed on, would end in the same result.” 10 Id. at 214. 11 Second, in Madden, the Ninth Circuit revisited the question of claims against a 12 relator, establishing that a qui tam defendant may bring independent claims against a 13 relator. Madden, 4 F.3d at 831. The court rejected a blanket rule that counterclaims are 14 forbidden in qui tam actions because such a rule would unfairly presume that all qui tam 15 defendants are liable, effectively preclude qui tam defendants from seeking damages 16 against relators, and ultimately violate procedural due process. Id. Instead, the court 17 concluded that qui tam defendants can bring counterclaims for independent damages 18 without running afoul of Mortgages and without regard to the qui tam defendant’s 19 liability: 20 21 22 ORDER- 6 1 The decision in Mortgages is designed to prevent qui tam defendants from offsetting their liability. Counterclaims for indemnification or contribution by definition only have the effect of offsetting liability. Counterclaims for independent damages are distinguishable, however, because they are not dependent on a qui tam defendant’s liability. 2 3 4 Id. at 830-31. 5 The Ninth Circuit, to prevent qui tam defendants from engaging in an end run 6 around Mortgages, has set forth a two-stage process for resolving FCA liability prior to 7 adjudicating counterclaims: 8 If a qui tam defendant is found liable, the counterclaims can then be dismissed on the ground that they will have the effect of providing for indemnification or contribution. On the other hand, if a qui tam defendant is found not liable, the counterclaims can be addressed on the merits. 9 10 Id. at 831; see Cell Therapeutics Inc., 586 F.3d at 1209. It is necessary to address the 11 issue of a qui tam defendant’s liability as the first stage of the process because “even 12 dependent counterclaims should not be foreclosed until the qui tam defendant’s liability 13 is established.” Cell Therapeutics Inc., 586 F.3d at 1208. 14 C. The Ninth Circuit’s Opinion in Cell Therapeutics 15 The present case introduced a new wrinkle into the Mortgages-Madden 16 framework, namely, “what happens when a target defendant settles with the government 17 and the relator and then seeks recovery against a third party for contractual indemnity and 18 independent claims?” Cell Therapeutics Inc., 586 F.3d at 1205. Unlike Mortgages and 19 Madden, which were qui tam actions and involved counterclaims against relators, this 20 case is not a qui tam action and concerns a former qui tam defendant’s claims against a 21 third party, not a relator. This court originally concluded that Mortgages required the 22 ORDER- 7 1 dismissal of CTI’s claims against Lash because its claims were dependent on its FCA 2 liability and granted Lash’s motion for judgment on the pleadings. (Dkt. # 94.) In 3 reaching this conclusion, the court viewed the Settlement Agreement as effectively 4 establishing CTI’s liability. 5 Addressing this issue of first impression on appeal, the Ninth Circuit reversed, 6 concluding that “the FCA does not preclude such claims.” Cell Therapeutics Inc., 586 7 F.3d at 1205; see generally Claire M. Sylvia, The False Claims Act: Fraud Against the 8 Government § 11:95 (2010). In its analysis, the Ninth Circuit first determined that certain 9 of CTI’s claims, regardless of the effect of the Settlement Agreement, did not only have 10 the effect of offsetting FCA liability and thus should not have been treated as dependent 11 claims subject to dismissal. Id. at 1209-10. The court next determined that the 12 Settlement Agreement does not constitute a finding of liability under the FCA and, 13 therefore, CTI’s indemnification claims should not have been dismissed on that basis. Id. 14 at 1213. The Ninth Circuit ultimately held that “qui tam defendants may bring third party 15 claims under the circumstances outlined in [its] opinion,” id. at 1213, and remanded the 16 case with the following instructions: 17 18 The district court should reconsider whether the claims are independent and, for third party claims that are not independent, should assess how to proceed in light of our holding that the Settlement Agreement does not constitute a finding of liability under the FCA. 19 Id. at 1212-13. 20 21 22 ORDER- 8 1 D. Motion to Strike 2 Pursuant to Federal Rule of Civil Procedure 12(f), CTI moves to strike Lash’s 3 affirmative defense that some or all of CTI’s claims are barred because it is allegedly 4 liable under the FCA. (Mot. to Strike at 1.) Under Rule 12(f), “[t]he court may strike 5 from a pleading an insufficient defense or any redundant, immaterial, impertinent, or 6 scandalous matter.” CTI argues that Lash’s defense must be stricken because Lash is not 7 a relator; Lash does not have standing to assert the issue of liability; and the issue of 8 CTI’s alleged FCA liability has already been resolved. In response, Lash contends that 9 CTI’s alleged FCA liability is central to CTI’s indemnification claims; that the Ninth 10 Circuit did not disturb the principle that qui tam defendants may not seek indemnification 11 for their FCA liability; that standing is not at issue; and that CTI’s alleged FCA liability 12 has not been resolved. 13 The present inquiry asks, in essence, whether Lash is entitled to litigate the issue 14 of CTI’s alleged liability under the FCA in this action. Due to the Settlement Agreement, 15 this issue was not resolved in the qui tam action: CTI was neither found liable nor found 16 not liable. By litigating the issue in this action, Lash hopes to establish a basis to dismiss, 17 either in part or in whole, CTI’s indemnification claims, which seek, inter alia, to recoup 18 costs arising from CTI’s defense and settlement of the qui tam action. Having studied the 19 Ninth Circuit’s opinion in Cell Therapeutics and having considered the arguments of the 20 parties, the court concludes that CTI’s motion to strike must be granted. 21 22 ORDER- 9 1 The court begins with the Ninth Circuit’s holding that the Settlement Agreement 2 does not constitute a finding of liability under the FCA and, accordingly, that CTI’s 3 indemnification claims should not have been dismissed on that basis. Cell Therapeutics 4 Inc., 586 F.3d at 1212-13. In other words, the Settlement Agreement, standing alone, 5 does not establish that CTI’s indemnification claims only have the effect of offsetting 6 liability and must be dismissed as dependent claims. This holding must be viewed in 7 relation to the teaching of Madden that, absent a finding of FCA liability, dependent 8 claims cannot be dismissed. As the Ninth Circuit explains, “even dependent 9 counterclaims should not be foreclosed until the qui tam defendant’s liability is 10 established” because premature dismissal would offend due process. Id. at 1208 11 (emphasis added). Accordingly, CTI’s indemnification claims cannot be dismissed until 12 such time as CTI’s alleged FCA liability is established. 13 In this action, however, CTI cannot be held liable under the FCA. This action is 14 not a qui tam action, CTI is not now a qui tam defendant, and proceedings in this action 15 cannot subject CTI to actual liability under the FCA. Thus, even if the issue of CTI’s 16 alleged FCA liability were litigated in this action, it would not alter the simple fact that 17 none of CTI’s indemnification claims have the actual effect of offsetting its FCA liability 18 because CTI still would have no such liability. The consequence is that Lash cannot 19 establish CTI’s alleged FCA liability here through additional proceedings. 3 Without the 20 21 22 3 Moreover, CTI is not at risk of being held liable under the FCA in the qui tam action in light of the Settlement Agreement and resulting dismissal. ORDER- 10 1 ability to establish liability, Lash likewise cannot show that CTI’s indemnification claims 2 should be dismissed on this basis. Though unsatisfactory to Lash, this result accords with 3 principles of procedural due process and recognizes, as did the Ninth Circuit, that the 4 interests which animate this action are different than those at play in qui tam actions. 4 Id. 5 at 1213. 6 In support of its position, Lash focuses on the Ninth Circuit’s statement that 7 “claims that merely indemnify CTI for its FCA liability or seek contribution for the same 8 must be dismissed if CTI is liable under the FCA.” Id. at 1210. Lash reads this 9 statement, paired with the Ninth Circuit’s instructions, as an invitation to litigate the issue 10 of CTI’s liability. This statement is plain on its face, but difficult to reconcile with Cell 11 Therapeutics as a whole. 5 Yet, even accepting this statement as a correct statement of 12 law, the court is not persuaded that the Ninth Circuit envisioned that this court would 13 14 15 16 17 18 19 20 4 Because this is not a qui tam action, “[t]he reasons for restricting the ability of a qui tam defendant to seek recovery against a relator are not in play here.” Cell Therapeutics Inc., 586 F.3d at 1213. First, CTI’s indemnification claims do not run afoul of the FCA’s comprehensive procedures to restrict the ability of a relator to collect a qui tam bounty because “there are no counterpart or comprehensive procedures in the FCA to address the wrongdoing of a nonrelator third party.” Id. Second, “[t]he need [the Ninth Circuit] identified in Madden to ensure that relators do not engage in wrongful conduct is no more acute than the need to ensure that third parties do not avoid liability for their wrongful conduct, even if the party wronged is a qui tam defendant.” Id. Third, “unlike Mortgages, this case does not present the threat of chilling future suits by qui tam relators, who may collect their bounties regardless of whether the qui tam defendant seeks relief from a third party.” Id. These interests counsel in favor of allowing CTI to assert its indemnification claims against Lash instead of dismissing them without evaluating the merits of the claims. 5 Specifically, the Ninth Circuit’s statement is difficult to reconcile with its rejection of the gloss placed on Mortgages by those courts that “have interpreted Mortgages to foreclose qui tam defendants from bringing claims against third parties,” as well as the court’s discussion of 22 the different interests at play in qui tam actions and third party actions. Cell Therapeutics Inc., 21 ORDER- 11 1 preside over a quasi-qui tam action as a prelude to sorting between independent and 2 dependent claims, nor is there any indication that such an approach would be appropriate 3 or feasible. Instead, the Ninth Circuit’s conclusion that “qui tam defendants may bring 4 third party claims under the circumstances outlined in [its] opinion” suggests simply that 5 CTI’s claims may proceed on the merits. Id. at 1213. Though the result might have been 6 different if CTI’s alleged FCA liability had been established in the qui tam action, the 7 fact is that it was not. 8 The court is also not persuaded by Lash’s other arguments. First, the court 9 declines to read overmuch into the fact that the Ninth Circuit remanded this case. Lash 10 contends that the Ninth Circuit remanded with the instruction that this court devise a 11 procedure for separating independent and dependent claims. (Resp. to Mot. to Strike 12 (Dkt. # 148) at 5.) The court agrees that the Ninth Circuit remanded for this court to 13 distinguish between different types of claims, but disagrees that the Ninth Circuit 14 anticipated the result of this sorting process or indicated that Lash is entitled to litigate 15 the issue of liability. Rather, as discussed above, this court is of the view that CTI’s 16 indemnification claims must be allowed to proceed on their merits because Lash cannot 17 18 586 F.3d at 1212-13. CTI suggests that the court’s statement is merely hypothetical and deserves 19 20 21 22 little weight. (Mot. at 10.) This court, too, hesitates to rest its analysis on this statement until the Ninth Circuit has the opportunity to squarely address the application of the Mortgages-Madden framework to a third party action in which the plaintiff has previously been found liable under the FCA. At a minimum, the Ninth Circuit’s rejection of the reasoning in United States v. Dynamics Research Corp., 441 F. Supp. 2d 259, 264 (D. Mass. 2006), suggests that the court views the application of Mortgages and Madden to third party actions as not yet fully settled. See Cell Therapeutics Inc., 586 F.3d at 1213 (“Mortgages did not address that issue.”). In any event, even accepting this statement wholesale, the court does not view it as requiring Lash’s favored approach on the facts of this case, in which there has been no finding of liability. ORDER- 12 1 establish CTI’s alleged FCA liability in this action. Second, the court rejects Lash’s 2 argument that it has a right to litigate the issue of CTI’s alleged FCA liability in order to 3 probe the basis of the Settlement Agreement. (Id. at 6.) This argument conflates two 4 distinct issues and the case law cited by Lash does not mandate its preferred result. 5 Third, though mindful of Lash’s view that CTI “affirmatively and voluntarily placed its 6 FCA liability at issue by seeking indemnification” from Lash, the court finds that the 7 interests in this action weigh against Lash’s preferred approach. (Id.) 8 In sum, the court reads the Ninth Circuit’s opinion in Cell Therapeutics, in 9 conjunction with Mortgages and Madden, to establish that CTI’s indemnification claims 10 against Lash may proceed on their merits unless Lash can establish that the claims only 11 have the effect of offsetting CTI’s alleged FCA liability. Lash cannot do so. The Ninth 12 Circuit found that the Settlement Agreement did not constitute a finding of FCA liability, 13 and CTI cannot now be exposed to FCA liability as the result of proceedings in this 14 action. In response to CTI’s motion to strike, Lash proposes that CTI’s alleged FCA 15 liability be resolved for purposes of its affirmative defense by litigating the issue as a 16 preliminary stage of the proceedings on remand. Lash suggests no other means by which 17 to prove up CTI’s alleged FCA liability. Having declined Lash’s proposal, the court 18 discerns no basis upon which Lash’s affirmative defense could be deemed potentially 19 20 21 22 ORDER- 13 1 sufficient or viable as a matter of law. Therefore, pursuant to Rule 12(f), the court grants 2 CTI’s motion to strike and strikes the Lash’s affirmative defense. 6 3 E. Motion to Bifurcate 4 Pursuant to Federal Rule of Civil Procedure 42(b), Lash moves to bifurcate the 5 trial. Under Rule 42(b), “[f]or convenience, to avoid prejudice or to expedite and 6 economize, the court may order a separate trial of one or more separate issues, claims, 7 crossclaims, counterclaims, or third-party claims.” In light of the court’s ruling on CTI’s 8 motion to strike, the court denies as moot Lash’s motion to bifurcate. IV. 9 10 CONCLUSION For the foregoing reasons, the court GRANTS CTI’s motion to strike (Dkt. # 145) 11 and DENIES as MOOT Lash’s motion to bifurcate (Dkt. # 144). 12 Dated this 3rd day of August, 2010. 13 14 A 15 JAMES L. ROBART United States District Judge ____ 16 17 18 19 20 21 6 This ruling does not prevent Lash from presenting evidence of CTI’s alleged 22 wrongdoing in the course of asserting its other affirmative defenses. ORDER- 14
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