A recent U.S. Supreme Court ruling in a Massachusetts case not only expanded whistleblower protections available under the Sarbanes-Oxley Act, but also seemed to go out of its way to make clear that lawyers themselves are entitled to such protections.
The 6-3 majority opinion in Lawson, et al. v. FMR LLC, et al., authored by Justice Ruth Bader Ginsburg, emphasized that SOX’s whistleblower protections against retaliation (reinstatement, back pay, etc.) extend not only to the employees of public companies, but also a public company’s private contractors and subcontractors. Lawyers specifically were called out throughout the opinion as the type of outside professionals who are most likely to have knowledge of fraud and, therefore, most worthy of protections against retaliation if they report it.
“It was recognized that they, along with accountants and others, would be the most likely whistleblowers,” said Connie N. Bertram, co-head of Proskauer Rose’s whistleblowing and retaliation practice group in Washington, D.C.
In practice, though, the idea of a lawyer-whistleblower raises thorny questions implicating the attorney-client privilege and internal debates within an organization or law firm. SOX is just one of dozens of federal and state laws with whistleblower provisions. Authorities across the country have weighed in on whether and to what extent lawyers can be whistleblowers under the laws, but, more often than not, uncertainty prevails.
“The law is in a state of … evolution and results can differ 180 degrees based on what statute you’re under and which jurisdiction you’re in,” said Gregory C. Keating, co-chairman of the whistleblowing and retaliation practice group at Littler Mendelson in Boston.
Keating said he has seen a huge uptick over the past two years in whistleblower claims brought by in-house counsel and compliance officers, and last year he tasked a group of Littler lawyers with putting together a white paper focused solely on the issue of whether attorneys can pursue remedies under whistleblower statutes as they are evolving.
The same factors that have led to an overall increase in whistleblowing also have enticed lawyers specifically to consider squealing on their clients, according to Keating. They include public opinion favoring the exposure of fraud by whistleblowers; rapid expansion of legislative and judicial rights and remedies for whistleblowers; the award of huge monetary “bounties” to whistleblowers who help the government; and increased government enforcement.
“We have a major, major bipartisan effort to embrace, support and protect whistleblowers,” Keating said. “It’s absolutely front and center in this administration … to incentivize and protect whistleblowers. I don’t have a problem with that, but I do think there are areas where we’re in danger of crossing certain lines.”
The lawyer-as-whistleblower trend is one of the areas that concerns Keating because of the particularly vulnerable position in which it puts clients.
“I have had various clients who have been fundamentally shocked that those who they charged with protecting them — and therefore shared their most cherished secrets with — can then use those against them,” Keating said. “I think it’s fundamentally inconsistent with an attorney’s obligations.”
Caselaw, however, tends to be moving in the opposite direction of Keating’s sentiment. Littler’s white paper, for example, “identified the growing trend toward allowing in-house attorneys to pursue retaliation claims and collect bounty awards for blowing the whistle” despite the ethical questions such behavior prompts.
“It raises a whole host of issues to have a lawyer as a whistleblower,” said Christopher F. Robertson, co-chairman of the national whistleblower team at Seyfarth Shaw in Boston. “If they have to breach privilege, some courts have dismissed claims. Other courts have tried to work around that by placing stuff under seal.”
Both the 9th U.S. Circuit Court of Appeals and the Department of Labor (in its administrative proceedings) have adopted the latter approach of allowing lawyers to advance whistleblower claims, even if they must disclose attorney-client privileged information, and taking steps to lessen the damage by limiting testimony or issuing protective orders.
The Professional Ethics Committee of the New York County Lawyers’ Association, however, issued an opinion in October finding that practitioners in that state are presumptively barred from collecting whistleblower bounties under the Dodd-Frank Act “because doing so generally gives rise to a conflict between the lawyers’ interests and those of their clients.”
Later that same month, the 2nd Circuit upheld the dismissal of a False Claims Act claim brought by a former general counsel against the company for which he had worked.
The three-judge panel agreed that the attorney had “violated his ethical obligations under the New York Rules of Professional Conduct” by participating in the qui tam action.
Circuit Judge José A. Cabranes wrote that the appeal “reflects the tension between an attorney’s ethical duty of confidentiality and the federal interest in encouraging ‘whistleblowers’ to disclose unlawful conduct harmful to the government.” But the panel ultimately found that the attorney had broken the New York rule prohibiting the use of “confidential information of a former client … to the disadvantage of the former client.”
Massachusetts lawyers lack such explicit guidance. One decision that provides a close parallel, however, is the 1995 Supreme Judicial Court opinion in GTE Products Corp. v. Stewart, a wrongful-discharge case brought by an in-house counsel.
The SJC limited wrongful-discharge claims by in-house counsel to cases in which complying with an employer’s request would require the lawyer to violate the Massachusetts Rules of Professional Conduct and where the claim can be proven without violating client confidences.
Robertson said Massachusetts courts might apply a similar test to an attorney-whistleblower claim.
But Paul F. Beckwith of Goulston & Storrs in Boston, who as an associate represented the defendant lawyer in GTE Products, said the question essentially was rendered moot when Massachusetts updated its own Rules of Professional Conduct in 1998.
Like most states, Massachusetts adopted an American Bar Association model rule that creates an exception and allows attorneys to reveal confidential client information “to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client.”
Keating said attorney-whistleblower claims are most likely to be invalidated in states, such as New York, that have adopted more restrictive ethical rules than the ABA’s regarding the disclosure of client confidences.
Impact of ‘Lawson’
Keating said while all the lawyer-whistleblowers he has defended against thus far have been in-house counsel, the Supreme Court’s decision in Lawson likely will open the door to similar claims by outside lawyers hired by public companies.
The petitioners in the Massachusetts case were investment advisers who sought protection under SOX even though they were employed by private companies that provide advising or management services, by contract, to the Fidelity family of mutual funds. The respondents argued that Section 1514A, the whistleblower provision in SOX, applies only to employees of publicly traded companies.
A majority of the court’s justices disagreed.
“There would be a huge hole … were the dissent’s view of §1514A’s reach to prevail: Contractors’ employees would be disarmed; they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company’s investors, even a scheme engineered entirely by the contractor,” Ginsburg wrote. “Not only would mutual fund advisers and managers escape §1514A’s control. Legions of accountants and lawyers would be denied §1514A’s protections.”
Eric Schnapper, a professor at University of Washington School of Law who made the petitioners’ oral arguments before the Supreme Court, said that, as it pertains to outside lawyers, the Supreme Court’s ruling simply affirms their right to report fraud to the client or higher-ups in their firm without fear of retaliation.
Robertson, however, said the ruling could create troubling and confusing situations. He suggested a situation in which lawyers at a firm representing a public company disagree over whether a particular disclosure is required to be made to the Securities and Exchange Commission.
“The partners may make a decision not to make the disclosure, which an associate disagrees with,” Robertson said. “If the associate voices his reservations out loud at a meeting, it could annoy the partners and be the beginning of the end of that associate’s career at the law firm. Is that associate covered? I think law firms need to think about it.”
Bertram agreed. In the wake of Lawson, she said, firms need to do an accounting of who their public company clients are and identify their risk exposure to a potential whistleblower claim, which could come from someone who simply disagreed with a decision that was made and subsequently was fired.
“It’s a very challenging thing to determine when someone is engaging in debate or discussion versus blowing the whistle,” she said.
Keating advised both businesses with lawyers on staff and law firms to review their compliance programs and ensure there are effective and comprehensive internal reporting procedures in place.
“The better the compliance program, the more likely you are to have this reported where you want it to be reported — which is within your organization,” Keating said, adding that organizations also should strengthen existing enforceable agreements pertaining to the nondisclosure of confidential information.
“Set the expectation that we are not comfortable with people going outside the company with company-specific information,” he said.
Meanwhile, Robertson said that “huge, dramatic” changes probably are not necessary, but that firms must, at a minimum, recognize their lawyers likely are covered by SOX’s whistleblower protections.
As a practical matter, however, he said he doubts the lawyer-as-whistleblower trend will gain much steam due to the professional risk it poses to the potential attorney-whistleblowers. Robertson said he has only had two such cases, both of which “settled quickly, quietly and in an employer-friendly manner.”
“Lawyers realize it could not be good for their careers,” Robertson said. “The question for a lawyer is, if I advance my claim publicly, do I breach my obligations and risk my license?”