He returned to Paisley on loan and his three-year spell at Ewood Park came to an end in 2002 having made just one substitute appearance for Rovers.
O'Brien spent three seasons with Livingston before a similar spell with Wednesday.
He becomes the fifth signing Falkirk head coach John Hughes has made this summer, following deals for Neil McCann, Jackie McNamara, Lee Bullen and Dermot McCaffrey.
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