Indemnity Rights Under The False Claims Act: Fact Or Illusion

1. Introduction

   Health care providers often contract with third parties to perform services at the provider's facility. Assume for example, that a hospital contracts with a specialized cancer treatment center to provide services within the hospital. If the hospital bills for such services and signs the Medicare certifications, the hospital is exposed to False Claims Act ("FCA") liability if those certifications contain false information.1

   When an FCA action arises, the relator and/or the government will name both the hospital (or other provider) submitting the claims and the third party providing the services. Is the hospital in this situation able to recover its costs and legal fees from the treatment center for defending the FCA litigation? If the hospital decides to settle the FCA litigation, can it recover the amounts paid in settlement from the treatment center? The answer to both questions is yes. That is, assuming the original contract between the parties includes a properly worded warranty and indemnification clause.

2. Generally, Public Policy Prevents FCA Defendants From Seeking Common Law Indemnification for FCA Violations

   Indemnity is a remedy that secures the right of one person to recover reimbursement from another upon the occurrence of an event. Indemnity essentially shifts the loss from one party to another, either because the parties have agreed in advance on who should bear the loss or because principles of fairness compel the shifting.

   The right of indemnity can be contractual or it can arise under common law or statute. The distinction between common law indemnity (seeking to shift liability based on judicial precedent) and contractual indemnity (seeking to shift liability based on the terms of a contract) is critical in the context of an FCA case.

   This is because when considering a party's right to indemnity, courts evaluate public policy concerns associated with shifting loss from one party to another. "Public policy seeks to encourage people to exercise due care in their activities for fear of liability, rather than to act carelessly cloaked in the knowledge that [indemnification] will relieve such indifference."2

   Based on this principle, courts have generally held that a party found liable for violating the FCA may not seek to recover all or some of the liability it has or may suffer under a theory of common law indemnity or contribution. Thus, one wrongdoer has no common law right to seek indemnification or contribution from a joint wrongdoer in an FCA proceeding.3

   In Mortgages Inc. v. United States, the Court examined the legislative history of the FCA, noting both an absence of any mention of contribution or indemnification as well as recognition that the qui tam provisions of the FCA were based upon the idea of "setting a rogue to catch a rogue."

   With respect to congressional intent, the court concluded as follows: "The FCA is in no way intended to ameliorate the liability of wrongdoers by providing defendants with a remedy against a qui tam plaintiff with 'unclean hands.' Congress did not intend to create a right of action for contribution or indemnification under the FCA."4

   The policy justification for such a holding is the need to encourage whistleblowers to come forward freely, which could be hampered if whistleblowers were subject to counterclaims.

   It makes sense that common law indemnity is not allowed in FCA cases because common law indemnity is an equitable remedy. Equitable remedies are based in fairness, which means the party seeking...