November 8, 2013

Ethical issues faced by in-house counsel in whistleblower claims

Posted in Corporate Litigation, Employment Law by Gene Killian |

In his little gem of a book, “The West Point Way of Leadership,” Larry Donnithorne wrote that the best advice he ever got in the military was: “Be prepared to give up your career tomorrow.” Donnithorne meant that there would be times when you were called upon to do things that you knew were unethical, and that you shouldn’t abandon your moral code for the sake of advancement within an organization. Since we all need to look ourselves in the mirror every morning, this is excellent advice. The advice may be difficult for some to follow, though, because as lawyers or other professionals, they become accustomed to a certain standard of living, and may feel “trapped” by their jobs in order to sustain that level. At the end of our careers or lives, though, it would be best not to regret the moral choices that we’ve made.

We’ve seen a number of corporate debacles over the past few years, and in many of them, general counsel have been faced with difficult ethical choices. A recent report by Kroll states that corporate corruption continues to rise, so these issues aren’t going away any time soon. The Kroll survey involved 10 industries with no fewer than 50 respondents from each. 70% of the responding companies said they had been affected by fraud in the prior year. 

What happens, though, when a perceived ethical obligation to report wrongdoing (perhaps enhanced by a potential lucrative outcome under whistleblower statutes) collides with the ethical obligations of in-house attorneys to maintain client confidentiality? That was the issue recently considered by the Second Circuit in United States v. Quest Diagnostics.

The case involved Medicare fraud allegedly committed by Unilab.  According to the allegations of Fair Laboratory Practices Associates ("FLPA") (the relator in the qui tam action) Unilab and Quest Diagnostics (clinical laboratory companies, which merged) operated a scheme in which they charged commercially unreasonable discounted prices to doctors to induce referrals of Medicare and Medicaid business. They then billed the business to the government at dramatically higher prices. FLPA argued that the commercially unreasonable discounted prices constituted unlawful kickbacks, bribes or rebates, and, as such, constituted fraud upon the government.

To me (one who doesn’t handle qui tam cases), the background of FLPA is a bit disconcerting.  FLPA was a partnership specifically formed to pursue whistleblower claims against Unilab and Quest.  One of the general partners of the partnership was Mark Bibi, the former General Counsel of Unilab, who apparently had been terminated by the company and, perhaps in retaliation, provided substantial information to FLPA’s counsel to prosecute the qui tam case.  Obviously, Bibi had a financial stake in a successful outcome for FLPA.

Here’s the tension: Whistleblower statutes, and their legislative history, encourage corporate employees (including, presumably, General Counsel) to come forward with information showing that the company is committing wrongdoing or fraud. And whistleblower provisions are endemic, appearing in many state and federal statutes, including places you might not expect to look. For example, the American Recovery and Reinvestment Act (the “stimulus package”) contains whistleblower provisions. Of the $840 million doled out by the federal government under ARRA, estimates are that $11.1 million of the funds were lost to fraud. If a company accepted stimulus funds, ARRA contains whistleblower provisions protecting employees who disclose relevant information that they reasonably believe is evidence of, for example, “a gross waste of stimulus funds.”

On the other hand, the Rules of Professional Conduct generally (with certain limited exceptions) require attorneys to maintain client confidences. In the FLPA case, defense counsel argued that, by divulging confidential information obtained during the course of his employment as Unilab’s General Counsel, Bibi violated various provisions of the ethical rules, including RPC 1.9(c), which prohibits attorneys from using “confidential information of a former client… To the disadvantage of the former client.”  This obligation is not unlimited, however. RPC 1.6(b)(2), for example, authorizes a lawyer to “reveal or use confidential information to the extent that the lawyer reasonably believes necessary:… (2) to prevent the client from committing a crime.”

In the FLPA case, the Court held that whistleblower statutes do not “trump” a lawyer’s obligation to maintain client confidences, and that Bibi had violated his ethical obligations.  The Court wrote: “Rule 1.6(b)(2), which permits a lawyer to reveal or use confidential information to the extent that the lawyer reasonably believes necessary to prevent the client from committing a crime, does not justify Bibi’s disclosures in this case: Bibi reasonably could have believed in 2005 that defendants intended to commit a crime. His disclosure of Unilab’s confidential information, however, went well beyond what was ‘necessary’ within the meaning of [Rule 1.6(b)(2)] to prevent Unilab from committing a crime inasmuch as there was ample non-confidential information on which to bring [a False Claims Act] action. Therefore, Bibi’s conduct in this qui tam action violated his ethical obligations under [Rule 1.6(c)].”

The Court dismissed the complaint, and disqualified FLPA, all of its general partners, and its outside counsel from bringing any subsequent related qui tam action, on the basis that these measures were necessary to prevent the use of Bibi’s unethical disclosures against the defendants.         

I think the point is, if you’re serving as in-house counsel, you should work hard in advance of any potential problems to ensure that there are strong internal controls and reporting procedures, with strong management buy-in.  Bibi may have felt he was doing the right thing by bringing a qui tam action, but when a Court holds that a lawyer has committed an ethical violation, it definitely doesn’t look good on the resume.

You can read the full decision by clicking here.

-- Gene Killian