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Corporate Counsel Connect collection

January 2014 Edition

FCA and privileged information; customer privacy policies; proposed Dodd-Frank Act diversity standards

FCA and privileged information

Following a recent Second Circuit decision, an attorney cannot use or disclose privileged information to bring a whistleblower suit under the False Claims Act (FCA) against a former client.

In United States v. Quest Diagnostics Inc., a former general counsel (GC) and two former executives brought a qui tam action under the FCA against Quest alleging violations of the federal Anti-Kickback Statute. The Second Circuit affirmed the district court's dismissal of the action, holding that:

  • By participating in the lawsuit, the GC violated New York state ethics rules, which prohibit attorneys from revealing client confidences.
  • The GC could not rely on exceptions to the rule permitting disclosure when necessary to prevent a crime because the lawsuit could have been brought based on information known to the other two executives and without disclosing the privileged information.
  • The FCA does not preempt New York state ethics rules.

The Second Circuit also affirmed the disqualification of all three relators and their counsel from bringing subsequent qui tam actions against Quest because:

  • The two former executive relators and outside counsel were tainted by the GC's disclosure of confidences.
  • Other potential whistleblowers or the government could still pursue an FCA action.

The Quest decision instructs that:

  • Privileged information is afforded substantial protection.
  • Inside counsel's ethical duties almost always prohibit them from being FCA relators.

This decision also promotes candor between companies and their inside counsel to create a culture of compliance without the risk of counsel using that information in an FCA action.

Customer privacy policies

The recent objection by the Texas Attorney General (AG) to the proposed sale of a bankrupt dating website's customer database demonstrates the importance of maintaining privacy policies that clearly address customer data transferability.

True.com filed for Chapter 11 bankruptcy protection and the trustee sought consent for the sale of the company's assets, including its database of customers' personal information, to rival dating website PlentyOfFish. The AG petitioned to block the proposed sale on the grounds that it would expose True.com's millions of customers to unexpected privacy risks. In response, PlentyOfFish withdrew its offer to purchase the assets.

In his petition, the AG noted that True.com informed its customers during sign-up that their personal information would not be transferred without consent. However, its privacy policy stated that customers' personal information would be a transferable asset if the company was acquired by a third party, in which case True.com would provide notice before the transfer and an opt-out opportunity. The AG argued that this created an ambiguity that should be construed against True.com and that True.com should provide customers with an opt-in process to approve or object to the transfer of their personal information.

Companies that collect customers' personal information should ensure that:

  • Their privacy disclosures clearly grant the company sufficient rights to customer data and unless commercially impracticable, include the right to transfer the data in the event of a merger, sale, bankruptcy proceeding or other corporate event.
  • They comply with their own customer privacy policies.

For a model website privacy policy, see Standard Document, Website Privacy Policy.

Proposed Dodd-Frank Act diversity standards

Financial services companies regulated under the Dodd-Frank Act and their contractors should anticipate more regulatory action to increase diversity in employment and contractor selection.

On October 25, 2013, six federal agencies published a proposed interagency policy statement setting diversity standards for the companies they regulate concerning recruiting, retaining and promoting employees, and selecting suppliers and contractors. Comments on the proposed regulations are due by December 24, 2013.

All employers should consider creating or improving diversity programs to both get ahead of the agencies' pending standards and position themselves for greater contracting opportunities with the regulating agencies and the regulated companies. In particular, employers should consider:

  • Gaining executive support for a diversity program and assembling a team responsible for improving diversity. The team might include individuals from the legal, business, human resources and public relations departments.
  • Assessing employee and contractor diversity and the protocols for measuring and increasing diversity.
  • Setting realistic diversity goals and procedures to reach them, while preserving attorney privileges that may apply to diversity program planning and legal analysis documents.
  • Broadening the prospective employee and contractor pool by, for example, advertising job and contracting opportunities in untapped markets. However, employers must conduct due diligence and not select candidates just to increase diversity.
  • Publishing non-privileged data and information about the diversity program to meet pending transparency requirements.
  • Training managers to lawfully and effectively implement the diversity program.

This look at the major issues on the horizon for corporate counsel comes from Practical Law – an online legal know-how service. View all the looming issues now – compliments of Practical Law The Journal, which covers the latest transactional and compliance topics that impact your practice. To gain access to more related know- how resources, please visit http://us.practicallaw.com.


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