Legal considerations regarding in-house whistleblowers
January 2018 | SPOTLIGHT | FRAUD & CORRUPTION
Financier Worldwide Magazine
January 2018 Issue
In the last 18 months, a clear trend has emerged concerning whistleblower retaliation actions filed against companies by their own in-house counsel and compliance professionals. This is a troubling development because these individuals are not only the ones whom companies task with being informed about serious compliance issues, but they are individuals who are often privy to highly sensitive and privileged information as part of their duties. Disturbingly, a number of plaintiffs’ attorneys have argued – with some success – that the rights of and protections afforded to whistleblowers should trump the attorney-client privilege in pursuing these claims.
Both the US Court of Appeals for the Second and Ninth Circuits have addressed the ability of in-house counsel and compliance personnel to act as whistleblowers. Although the case law generally requires that these employees act independently of their employers in order to qualify for whistleblower protection, there are few limitations on this type of whistleblowing.
In Taft v. Agric. Bank of China Ltd, the former chief compliance officer (CCO) of the Agricultural Bank of China alleged that the bank retaliated against her after she reported certain compliance issues to the Federal Reserve Bank of New York. The former CCO brought a whistleblower discrimination claim under the Bank Secrecy Act. The Southern District of New York considered the issue of whether the whistleblower provision of the BSA “applies to acts of retaliation against compliance officers who provided information about their banks that their job duties required them to report” to be a threshold question. The court noted that, although compliance personnel are not categorically exempt from the BSA’s whistleblower provision, it does not logically follow that every communication by a compliance officer about a possible violation of the law by the bank or an officer or employee should fall within the scope of the statute. The court further emphasised that it is often the duty of compliance personnel to report potential violations of the law to regulators and that whistleblower protection statutes are “plainly not intended to apply to persons who merely serve as the [employer’s] chosen conduits” for reporting problems on the employer’s behalf. Although the court rejected the bank’s argument that compliance personnel should be categorically excluded from whistleblower protection statutes, it did distinguish between whistleblowing by compliance employees and whistleblowing by other employees. “Put colloquially, it is not whistleblowing where the whistle is effectively blown by the employer.” Thus, Taft suggests that when an employee does not act independently of his or her employer, but merely conveys an employee-approved report to a regulator, it is the employer and not the employee that has ‘blown the whistle’.
The Ninth Circuit has also held that in-house attorneys can state a claim of retaliatory discharge under the Sarbanes-Oxley Act (SOX). In Van Asdale v. International Game Tech, the court rejected the defendant-employer’s argument that Nevada’s rules of professional responsibility created a per se bar against such lawsuits, and also rejected the notion that the claim should not go forward because it could not be litigated without disclosure of attorney-client privileged information. Instead, the court recommended various equitable measures in order to minimise the possibility of harmful disclosure of attorney-client privileged information.
The related issue of whether in-house counsel may qualify for whistleblower protection and awards based on providing information learned during privileged conversations has been addressed by the Ninth and Third Circuits, as well as by the Department of Labor’s Administrative Review Board (ARB).
In an early ARB decision, the ARB allowed an in-house attorney to assert claims of retaliation under SOX, despite the fact that bringing the claim entailed disclosure of privileged and confidential information. The ARB reasoned that the mandatory disclosure requirements for counsel, set forth in the Code of Federal Regulations title 17, section 205.3, and the whistleblower protections under SOX, should be read together to provide a remedy for attorneys alleging that they have been retaliated against for making a required disclosure. The ARB also noted that the Securities and Exchange Commission (SEC) regulation regarding attorney disclosure of material violations was modelled on the American Bar Association’s (ABA) Model Rules of Professional Conduct, Rule 1.6, which “allows an in-house attorney to use privileged information to establish a retaliatory discharge claim against the attorney’s employer”. Consequently, “if an attorney reports a ‘material violation’ in-house, in accordance with the SEC’s Part 205 regulations, the report, though privileged, is nevertheless admissible in a SOX section 806 proceeding as an exception to the attorney-client privilege in order for the attorney to establish whether he or she engaged in SOX-protected activity”. The ARB observed, however, that it remained within the ALJ’s discretion to issue a protective order to preserve the confidentiality of the privileged communications offered to support the retaliation claim.
A recent decision, which was based on rather unique facts, resulted in an in-house counsel being allowed to use privileged information in support of his SOX retaliation claim. In Wadler v. Bio-Rad Labs. Inc, a California jury awarded a former general counsel nearly $8m under SOX and Dodd-Frank retaliation claims. The former general counsel alleged that his employer’s international sales team had engaged in certain actions that violated the Foreign Corrupt Practice Act (FCPA). Although the company was cleared of any FCPA wrongdoing, the jury found that the former general counsel qualified for whistleblower protection. Generally, in order to prove a retaliatory discharge claim, whistleblowers must prove that: (i) they engaged in protected activity; (ii) that the employer knew that the whistleblower engaged in protected activity; (iii) that the whistleblower suffered an adverse employment action; and (iv) that the protected activity was the reason for the adverse employment action. Bio-Rad argued that its former general counsel would need to use confidential information he learned in the course of his role as the company’s general counsel, his communications with Bio-Rad and outside counsel, and advice of counsel reflected in Bio-Rad’s documents in order to establish a case of retaliation under SOX or Dodd-Frank. The court rejected Bio-Rad’s arguments and concluded that its former general counsel should be permitted to rely on privileged communications and confidential information reasonably necessary to any claim or defence in the case. Notably, the court largely based its decision on the fact that Bio-Rad had relied on privileged communications during discovery and had therefore waived the privilege. Bio-Rad has appealed this decision to the Ninth Circuit.
In addition to the increasing prevalence of compliance personnel and in-house counsel as whistleblowers, it appears that the definition of ‘protected activity’ may be expanding to include certain behaviour specific to in-house attorneys. Indeed, a recent Third Circuit opinion suggests that refusal by in-house counsel to violate the Rules of Professional Conduct may constitute protected activity and subsequent whistleblower protection. In Trzaska v. L’Oreal USA, Inc., the plaintiff was an in-house patent attorney for L’Oreal who alleged that he was fired for refusing to file frivolous or bad-faith patent applications that would violate his ethical obligations as a patent attorney. He brought suit for wrongful retaliatory discharge in violation of the New Jersey Conscientious Employee Protection Act (CEPA). The District Court granted L’Oreal’s motion to dismiss, but the Third Circuit reversed, holding that the termination of an employee for refusing to violate certain legal ethics rules is a proper basis for a CEPA claim.
Employers should not operate under the blanket assumption that those tasked with identifying and addressing problems, such as in-house counsel and compliance professionals, are unable to pursue whistleblower retaliation claims. The law remains unsettled and when an in-house attorney or compliance professional expresses concerns that not enough is being done to remedy a certain problem, employers should consult with counsel to determine the best course of action based on the jurisdiction involved and the facts presented. Finally, employers that are sued by in-house counsel should be very careful not to use privileged information or to at least take affirmative steps, such as filing such information under seal with the court to preserve an argument that such privileged information should not be permissible in a subsequent trial.
Gregory C. Keating is a partner and Virginia I. Selden is an associate at Choate, Hall & Stewart LLP. Mr Keating can be contacted on +1 (617) 248 5065 or by email: email@example.com. Ms Selden can be contacted on +1 (617) 248 4860 or by email: firstname.lastname@example.org.
© Financier Worldwide
Gregory C. Keating and Virginia I. Selden
Choate, Hall & Stewart LLP