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Corporate Counsel Connect collection

July 2014 edition

The intersection of whistleblowing, ethics, and in-house counsel

Karen Deuschle, Corporate Counsel Connect Editorial

Timothy O'TooleThe attorney-client privilege is sacred – at the core of what it means to be a lawyer. And when you are corporate counsel, your client is the company; accordingly, you are protecting the very organization that signs your paycheck, and to whom, in many jurisdictions, you owe a duty of loyalty as an employee. Due to recent changes in the laws and monetary bounties for "whistleblowers," more companies have found themselves confronting an increased number of employees with whistleblower complaints and allegations. But what happens when it's the company's corporate counsel who identifies potential illegal activity by the company and brings a whistleblower complaint or allegation to light? What about the corporate counsel's obligation to retain client confidences? Does the reasoning change with the possibility the corporate counsel whistleblower making millions of dollars by turning the company in? Timothy O'Toole of Miller & Chevalier has been working on cases of whistleblowing and discusses the history of whistleblowing, ethical responsibilities of lawyers, and the narrow exceptions in which corporate counsel might be able to blow the whistle.

Whistleblowing as it stands today

While whistleblowing is certainly not new – laws within the U.S. regarding this subject date back to 1778 – recent laws and rewards, however, have drawn renewed attention to the practice. "At a federal level," says Tim, "whistleblowing provisions can be found in securities laws, tax laws and the False Claims Act, which generally applies to government contracts." While the whistleblowing portions of each one of those laws vary, the recent rewards underlying a successful claim can be significant. States Tim, "They generally provide employees who expose significant wrongdoing by their employers with bounties of up to 30% of the amount recovered by the government." Recent rewards have topped $100 million.

While these numbers and bounties can be tempting, corporate counsel have special constraints when it comes to whistleblowing on their employers. Explains Tim, "Although the whistleblowing guidelines do not categorically exclude lawyers, as a practical matter they are almost always ineligible for these awards because their duties of confidentiality and loyalty will prohibit them from providing information to government authorities, if that information was learned as part of their representation." That goes for both past and present employers, and is enforced by both the Securities and Exchange Commission (SEC) rules (including the Sarbanes Oxley Act & Dodd Frank Act) and the American Bar Association's Model Rules of Professional Conduct. "Both generally prohibit lawyers from affirmatively providing information to authorities that was learned in the representation of their client," says Tim.

Numerous stakeholders within the legal industry are unanimous on this matter. Shares Tim, "The SEC, state bar associations and the courts have all weighed in on this topic. The ACC has even indicated an interest in filing amicus briefs in some cases." Tim also recommends looking at the Second Circuit's recent decision in United States ex. rel. Fair Laboratory Practices Associates v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013). "This is probably the best, most current authority for in-house counsel to look at on this issue," he said.

The case involved an attempt by an in-house counsel to bring a federal whistleblower action under the False Claims Act against the medical diagnostics services company (Quest Diagnostics) that had purchased his former employer (Unilab), a clinical laboratory company. The former in-house counsel (and several other former Unilab executives) charged that Unilab had an illegal pricing scheme in which it paid kickbacks to clients by charging them low rates for providing non-federal services; in exchange, those companies brought them federal Medicare and Medicaid business, which Unilab billed at much higher rates. Explains Tim, "In that decision, the Court of Appeals addresses the ethical concerns that permeate this area, and ultimately found that the in-house counsel had violated ethics provisions by attempting to whistleblow on the former client."

(Rare) exceptions to the rule

Few exceptions to these rules exist for lawyers who want to pursue a whistleblower claim, advises Tim. "The pertinent SEC Rule, found at 17 CFR 240.21F-4(b)(4), denies whistleblower protections to lawyers who attempt to disclose attorney-client privileged information or information learned in the course of the representation unless disclosure is permitted by state ethics rules or is permitted by 17 CFR 205.3(d)(2)," explains Tim. The SEC rule permits attorney disclosures in certain, limited circumstances – to prevent serious financial harms, to prevent perjury and to rectify the harms caused by the misuse of the attorney's services – that can be argued to exceed the disclosures permitted by some state ethics rules. "It has been suggested that these rules permit disclosures that may not be permitted by some state ethics rules but it is not clear that is the case," explains Tim.

State ethics rules also vary, with the number and kinds of exceptions different throughout the country. "For example," states Tim, "in California, an attorney must 'maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client,' but 'may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual.'" Still, shares Tim, that lawyer "may be prohibited by the conflict of interest provisions from collecting a bounty based on the conduct of his or her client."

The ethical course of action

So what can corporate counsel do if she has a whistleblower claim? Tim responds, "The model state ethics rules – some version of which have been adopted by most states – strongly encourage lawyers to raise concerns in-house, through the highest channels within the organization itself. If the lawyer is not satisfied with the response, the lawyer should generally withdraw and resign as in-house counsel."

A lawyer who decides to blow the whistle is always taking the chance of violating ethical rules. Explains Tim, "The state bars around the country have not hesitated to punish lawyers who blow the whistle on their clients outside of the narrow circumstances permitted by the rules. And for good reason. One of the most important attributes of an attorney is his or her ability to maintain client confidentiality. If corporate counsel disclosed confidences at will, the attorney-client relationship as a whole would be greatly damaged."

Companies also have responsibilities to maintain an ethical course. Notwithstanding all of the ethical landmines, if an in-house counsel is willing to raise whistle-blower-type concerns through the proper channels, the company should ensure "claims are addressed promptly, thoroughly, and through the conduct of an independent investigation," says Tim. Other actions the company can take include adding bounty exclusion language into employment contracts with corporate counsel, requiring tailored confidentiality agreements to address these issues, and adopting failsafe reporting requirements for corporate counsel to ensure prompt and thorough reporting of any midsconduct.

Concludes Tim, "Whistleblower programs can serve important policy interests, but lawyers generally should not be part of them unless they are acting ethically under the lawyer-conduct rules that have been formulated over centuries."

The verdict

In sum, despite huge whistleblowing bounties, the sanctity of the attorney-client privilege trumps allegations of regulatory violations or other wrong-doing. Accordingly, corporate counsel who "squeal" on their employers (current or former) run the risk of breaching legal obligations and other sanctions.

About Tim

Timothy P. O'Toole, a Member at law firm Miller & Chevalier Chartered, counsels and defends individuals and companies in white collar criminal matters, conducts internal corporate investigations, and represents potential witnesses and targets in government investigations. He has significant experience handling matters involving export controls, embargo, criminal tax, bribery, public corruption, conspiracy, false representations to government agencies, obstruction of justice, and fraud.