The Second Circuit Court of Appeals recently limited the enforceability of employment separation agreements that seek to ban would-be whistleblowers from filing claims against their former employers. In U.S. ex rel. Ladas v. Exelis, Inc, et al., the Court held that broad lawsuit release provisions in employment separation agreements, which are increasingly common in the corporate sphere, cut against public policy by discouraging the filing of qui tam suits to uncover fraud against the government.
False Claims Act (“FCA”) Whistleblower Michael Ladas was the Director of Quality at Power Solutions. In 2005, Power Solutions entered into a contract with the U.S. Government to provide power supply devices. During this time, as Director of Quality, Ladas was responsible for ensuring production compliance with government contracts, product testing, and documenting and reporting manufacturing defects in Power Solutions’ products.
During Ladas’ employment as Director of Quality, Power Solutions entered into a subcontract with Innovative Mold Solutions (“IMS”), where IMS manufactured casing components for Power Solutions’ products. In November 2007, without alerting Power Solutions or the government, IMS made substantial changes in the manufacturing of its power supply case components, using a significantly less expensive adhesive material and considerably changing the process it used to apply that material. An engineering professor employed by Power Solutions alerted Ladas that a change in application method would require significant additional testing to ensure the casing’s reliability and durability; but neither IMS nor Power Solutions put the casing through additional testing, and the changes were not submitted to the government for approval.