Former GC wins $8 million; SOX pre-empted state ethics rule on client confidentiality

Feb. 22, 2017

By Karen Rubin

A whistle-blowing general counsel won an $8 million federal jury verdict earlier this month, in a case that might encourage other GC’s to call out corporate wrongdoing.

Compensatory and punitive damages

After deliberating only three hours, the jury in Wadler v. Bio-Rad found that the GC had a reasonable basis for reporting his suspicions about the company’s Chinese sales operations to the organization’s audit team.

The GC’s allegations prompted an internal investigation by outside counsel, which concluded that the sales team had not violated the Foreign Corrupt Practices Act.

But the jury found that the company had retaliated against the GC by firing him after the report, in violation of the Sarbanes-Oxley Act, and that absent the report, he would not have been terminated for legitimate reasons.

The award to the GC included $5 million in punitive damages.  Speaking to Law360 (subs. req.), the GC’s lawyer attributed the punitive damages to the company  CEO’s creation of a back-dated negative performance review; computer metadata proved that the review hadn’t been created until after the GC had been fired.

Does SOX protection trump company’s privilege?

Judgment on the jury verdict was entered on February 10.  It will almost certainly be the subject of post-trial motions and possibly an appeal.

But the verdict stands out as a rare trial win for a GC in a whistle-blower case based on retaliatory firing.  Such suits have often been foreclosed before trial because of restrictions on a company lawyer’s ability to use confidential information of the employer in proving the GC’s case.

For example, in 2013, the Second Circuit affirmed dismissal of a GC’s whistle-blower suit brought under the federal False Claims Act, holding that the allegations relied on privileged information that could not be disclosed, and that the FCA did not preempt New York state ethics rules on confidentiality.

In the Bio-Rad case, however, the federal magistrate judge found at the end of 2016 that the whistle-blower protections of SOX trumped the company’s attorney-client privilege, and turned back the company’s motion to preclude use of privileged information at trial.

The GC’s ability to use this information as evidence arguably spelled the difference here.

Key factors in the magistrate judge’s ruling:

  • As a federal claim asserted under SOX, the federal common law of privilege applied; that took the case outside the scope of the California Supreme Court’s 1994 ruling in General Dynamics Corp. v. Superior Court, which had limited retaliatory discharge claims to those that could be established without breaching the attorney-client privilege;
  • The text and structure of SOX doesn’t indicate that in-house lawyers aren’t protected from retaliation, and SOX § 1514(A)(b) and particularly the SEC’s final rule (17 C.F.R. § 205) preempts the California state ethics rule on client confidentiality;
  • Model Rule 1.6 is the guiding standard, which—unlike the California state rule—permits a lawyer to reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary to establish the lawyer’s claim in a controversy between the lawyer and the client; and
  • Bio-Rad made so many disclosures to the SEC, the DOJ and the DOL during the course of previous investigations and administrative proceedings, and to the court in the pre-trial phase of the case, that the company waived the privilege as to many communications.

The SEC had filed an amicus brief during the briefing on the company’s motion to exclude, supporting the position that the magistrate judge took—that SOX trumps state legal ethics rules regarding client confidentiality.

Trend or outlier?

Whether the Bio-Rad case will be upheld, and whether it is a trend or an outlier, remain to be seen.  But in the short run, it may encourage other GC’s to blow the whistle.

Content courtesy of The Law for Lawyers Today: Ethics, Professional Responsibility and More blog. Ohio State Bar Association member Karen Rubin is an attorney for Thompson Hine.


Watch an OSBA CLE OnDemand seminar featuring Karen Rubin and her take on Legal Ethics and Using Social Media to Market Your Law Practice.

Register Now





Phone

1-800-282-6556

Staff Directory

Contact Information

Hours

8 A.M. - 5 P.M.
Monday - Friday