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| Breon Peace |
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| Jennifer Kennedy Park |
With this unprecedented level of aid, significant scrutiny into how that aid is being used is following, both by government authorities and individuals who may potentially serve as whistleblowers.
Indeed, the U.S. Department of Justice has made clear that it has "prioritize[d] the investigation and prosecution of Coronavirus-related fraud schemes," including violations of the False Claims Act,[1] and set up a national whistleblower hotline to report potential fraud.[2] As a result, individual whistleblowers have a strong incentive to focus on companies' participation in the CARES Act programs and whether companies are compliant with its requirements and the requirements for receiving government funding more broadly.
Individuals may report suspected fraud to the government or file a qui tam[3] complaint on their own alleging violations of the FCA, which can result in large financial rewards for the complainant, known as a relator in the FCA context. The DOJ reported that 633 FCA actions were filed by qui tam relators in 2019, which resulted in $265 million in whistleblower rewards.
While there are major incentives for individuals to report potential violations to authorities and commence qui tam actions, not all potential whistleblowers are equally situated to report. Attorneys, in particular, face constraints regarding the ability to disclose information obtained from clients or to file actions.
Particular focus on the role of attorneys is critical because the changing nature of the requirements for CARES Act relief make it more likely that lawyers were involved in applications and compliance efforts. There are a number of ethical duties and responsibilities that limit whether and how an attorney can proceed in the face of concerns regarding violations of the FCA or other laws.
Can an attorney ethically bring an FCA qui tam claim?
When an attorney is the whistleblower, there are unique circumstances that make bringing a whistleblower action more challenging. A key question when it comes to attorneys bringing FCA qui tam claims is whether an attorney can ethically make such a claim without divulging privileged information or creating a conflict of interest. As discussed in further detail below, the answer will almost always be no.
There are a number of ethics rules that are relevant when an attorney is considering whether to bring a qui tam claim. These include the rules providing that an attorney must protect privileged and confidential attorney-client communications and may not use information relating to an attorney's representation to the disadvantage of the client.[4]
However, there are strong public policy interests in exposing and preventing potential fraud against the government that could warrant disclosing confidential information.[5] To navigate this tension, there are a few questions that should be considered before an attorney attempts to file a qui tam action.
First, what information can an attorney disclose when blowing the whistle or filing a qui tam complaint? Generally, consistent with the New York Rules of Professional Conduct and the American Bar Association's Model Rules of Professional Conduct, an attorney may only disclose confidential information when it is necessary to do so and only under one of a handful of enumerated exceptions in the ethics rules.[6]
The most applicable of these exceptions in the context of a FCA claim would be to prevent a crime[7] or to withdraw a representation made by an attorney that was based on inaccurate information and is being used to further a crime or fraud.[8] But even when attorneys can disclose confidential information in these scenarios, they are still limited to only disclosing what is necessary, and that limit is narrowly construed.[9]
Indeed, in U.S. ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Inc., a former general counsel of a Quest subsidiary filed an FCA complaint against the company and a subsidiary alleging a kickback scheme. The U.S. District Court for the Southern District of New York found in a 2011 decision that the disclosures in the complaint violated the ethics rules, as the exceptions allowing disclosure of a crime did "not give [the] former counsel the ability to disclose client confidences regarding completed conduct."[10]
In other words, the alleged crime or fraud had been committed and so the disclosure was not necessary to prevent it. As the court noted, the strict construction of the ethics rules forces a narrow reading of the exceptions and limits what is actually necessary to disclose.[11] As evidenced by Quest Diagnostics, the amount of information needed to fully support a qui tam action will likely be beyond what is reasonably necessary to prevent or correct the crime or fraud that permits a disclosure under the ethics rules.
Second, does bringing a FCA qui tam claim create an unethical conflict of interest? Attorneys cannot use information gathered during a representation to the disadvantage of a client.[12] Similarly, attorneys may not take a pecuniary position that is adverse to a client's interests.[13]
That an attorney could receive a monetary reward in exchange for bringing a qui tam claim that is potentially adverse to the a client's interest based on knowledge gained during a representation could immediately create a conflict of interest between the attorney and the client.[14] With qui tam rewards potentially worth millions of dollars, a lawyer could be highly incentivized to disclose confidential information or act in some manner against a client's interest in pursuing a FCA claim.
For example, in U.S. ex rel. Holmes v. Northrop Grumman Corp., the U.S. District Court for the Southern District of Mississippi found that, in making his case as a relator, an attorney-whistleblower had taken a position contrary to that of his client in related litigation.[15]
Coupled with the fact that as a relator he was asking for over $2.5 billion in damages — which could result in a payment of over $375 million to the relator personally — this created a conflict that posed a significant risk that the attorney's representation of his client "was materially limited by [his] personal interest in pursuing [the] qui tam case, such that [the attorney's] conduct created a concurrent conflict of interest jeopardizing his obligation of loyalty" to his client.[16]
Relevantly, in construing the Dodd-Frank Wall Street Reform and Consumer Protection Act whistleblower bounty program, the New York County Lawyers Association's Committee on Professional Ethics concluded that "New York Lawyers who are acting as attorneys on behalf of clients presumptively may not ethically serve as whistleblowers for a bounty against their clients … because doing so generally gives rise to a conflict between the lawyers' interests and those of their clients."[17]
The ethics committee presumes that any payment in excess of $100,000 "gives rise to a conflict of interest between the lawyer's personal interest and that of the client"[18] and the "sums of money would tend to cloud lawyers' professional judgment, influencing lawyers to report out a violation regardless of their clients' interests."[19]
Given that the potential for a reward, in and of itself, could create the inference of a conflict of interest, there are extremely limited situations in which a relator could overcome the potential conflict of interest inherent in qui tam actions.
What happens when attorneys file FCA qui tam complaints?
When an attorney can disclose a fraud against a government while abiding by ethical obligations, including not disclosing privileged information and not creating a conflict of interest, then the attorney may act as a relator.[20] But qui tam complaints brought by attorneys will be scrutinized closely for ethical breaches.[21] And, attorneys that file FCA complaints as relators should be aware that they risk either being dismissed as a relator or even having the entire complaint dismissed if the case has been tainted by ethical violations.
It is up to the trial judge to determine if there have been ethical violations and whether the violations so prejudiced the other side that the action should be dismissed or the attorney disqualified, or if another remedy can be fashioned.[22] Additionally, if the court finds that the attorney did disclose confidential information or violate some other ethical rule, the attorney could be referred to a state bar for disciplinary proceedings.[23]
In Holmes v. Northrop Grumman,[24] the U.S. Court of Appeals for the Fifth Circuit held that the record was "developed primarily through the fruits of [an attorney's] unethical conduct" and so dismissing the case would be appropriate because the opposing party was so prejudiced by revelation of confidential information that the case could not fairly continue.[25]
Because the complaint was flawed based on both the conflict of interest[26] and disclosure of confidential information, the trial court found, and the appellate court affirmed, that counsel was disqualified from serving as a relator in the case.[27]
However, when a complaint can stand on its own without the confidential information provided by the attorney-relator, then only the attorney-relator must be removed.[28]
In the 2016 case In re: Examination of Privilege Claims, for example, a second relator was seeking to continue an FCA action against the defendants after an attorney-relator had been disqualified as a relator for breaching the client's confidences.[29] The U.S. District Court for the Western District of Washington allowed the nonattorney-relator to continue the action because the allegations of the nonattorney relator were sufficiently separate from those of the attorney-relator that the nonattorney could not be found to be profiting in any way from the attorney's breach of client confidences.[30]
What exceptions exist under the FCA?[31]
While generally attorneys cannot disclose confidential or privileged information to pursue FCA claims as relators, an ethics exception exists for attorneys who were wrongfully discharged in violation of the retaliation provision of the FCA.[32] The FCA provides a cause of action for reinstatement, back pay, costs and attorney fees against an employer for any employee who was "discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against" for lawfully blowing the whistle under the FCA statute.[33]
In connection with such retaliatory discharge actions, attorneys may disclose certain confidential information if it is necessary to do so.[34] This view is supported by ethics opinions issued by the New York City Bar Association and the ABA, which make clear that the exception under current Rule of Professional Conduct 1.6(b)(5) — formerly Rule 1.6(b)(2) — that a lawyer may reveal information related to a representation to the extent necessary "to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client" applies in the context of retaliatory discharge or discrimination claims in the FCA context.[35]
But note that while both opinions directly support the ability of an attorney to disclose confidential information in order to establish a retaliatory discharge claim, they also emphasize that only necessary information can be disclosed and that information sufficient to establish a full FCA claim would likely be beyond what is necessary as it would no longer be about retaliatory discharge but righting the alleged underlying fraud against the government.
In an analogous context, in a 2016 decision in Wadler v. Bio-Rad Laboratories Inc., the U.S. District Court for the Northern District of California permitted an attorney's use of confidential and privileged information.[36]
In Bio-Rad, Sanford Wadler, who had served as Bio-Rad's general counsel and secretary for nearly 25 years, had concerns about potential Foreign Corrupt Practices Act violations that were investigated by outside counsel. After the external investigation did not uncover any violations, Wadler continued the investigation on his own and reported his concerns to the audit committee under the Sarbanes-Oxley Act.
The audit committee hired the same outside law firm to investigate Wadler's allegations, and concluded there was no evidence of FCPA violations. The board terminated Wadler shortly thereafter and he sued for wrongful termination.[37]
The complaint alleged retaliation under SOX and Dodd-Frank as well as California state law wrongful termination in violation of public policy. The court found that Wadler was able to maintain a wrongful termination action and use confidential and privileged information so long as it was "reasonably necessary to any claim or defense," relying on ABA Model Rule 1.6.[38] While Bio-Rad was litigated under the SOX and Dodd-Frank whistleblower provisions, similar determinations would likely be made in the FCA context, given the interpretation of the applicable ethical rule.[39]
What about reporting to authorities?
Even when attorneys are considering reporting potential violations of law to authorities, in the FCA context or otherwise, they must be mindful of and adhere to ethical responsibilities, which present limitations as noted above, and may differ from state to state, or with what federal law allows.
In addition to the exceptions set out in ABA Model Rule 1.6(b), Model Rule 1.13 and similar state rules allow for a lawyer of an organization to report potential violations of law outside of the organization if "reasonably necessary to prevent substantial injury to the organization" and if the highest authority for the organization refuses to act.[40]
However, this rule is limited. It is not applicable to policies or business operations that only entail "serious risk" to an organization, but is reserved only for when a lawyer "knows" an action or inaction related to a violation of a legal obligation will seriously injure the organization.[41] Further, part of the rubric of deciding when to reveal information includes that a lawyer should "minimize … the risk of revealing information relating to the representation to persons outside the organization."[42]
Again, this highlights that reporting to an authority is only a matter of last resort when all else fails and serious injury will occur if the lawyer fails to report.
Although outside the FCA context, it is worth noting that the U.S. Securities and Exchange Commission permits attorneys practicing before the SEC in representation of issuers to blow the whistle to the SEC regarding violations of securities regulations under SOX. Rules have been promulgated under SOX to instruct attorneys on steps that must be taken before reporting to the SEC.
The SEC requires the attorney to report a material violation to the chief legal officer and then up the chain of command until the attorney reasonably believes the violation is being addressed.[43] If the violation is not adequately addressed after the process as laid out in the rules has been followed, and the attorney reasonably believes it is necessary, the attorney may report the matter to the SEC and reveal confidential information to the SEC, though the attorney is not required to do so.[44]
The SOX whistleblower provisions have been found to be consistent with state ethical requirements in some jurisdictions.[45] However, compliance with the SOX rules may be deemed in conflict with ethics rules of other states.
For example, the New York County Lawyers Association ethics committee opinion discussed above notes that an attorney may only disclose information outside the organization if the disclosure also comports with one of the exemptions in Rule 1.6.[46] The opinion continues by discussing the fact that the SEC's regulations are broader than New York's rules and thus allow for disclosure when it would otherwise be prohibited in New York.[47]
However, it concludes by confirming that, when New York lawyers are governed by New York's Rules of Professional Conduct, they must adhere to those rules and only disclose privileged or confidential information when consistent with New York's rules, even if the SEC's regulations state otherwise.[48]
Thus, an attorney should consult the applicable local jurisdiction's rules and ethics opinions before disclosing confidential information to the SEC[49] or to authorities outside the organization generally, to ensure that any such disclosures would be in compliance with the attorney's ethical obligations.
Conclusion
In light of the DOJ's current focus on COVID-19-related fraud and the financial incentives for whistleblowers to bring qui tam complaints, whistleblowers are likely to continue to play a major role in enforcement of the FCA. An attorney considering blowing the whistle should keep in mind the relevant ethical rules that govern whether an attorney can bring a qui tam complaint and what information can be disclosed to support that claim.
Breon S. Peace and Jennifer Kennedy Park are partners at Cleary Gottlieb Steen & Hamilton LLP.
Cleary associates Aaron Francis, Drew Kramer and Charity Lee contributed to this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] The FCA imposes liability on any person who: (i) knowingly submits a false claim to the government; (ii) causes another to submit a false claim to the government; or (iii)knowingly makes a false record or statement in order to have a false claim paid by the government. 31 U.S.C. §3729.
[2] Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud; see also Memorandum from Attorney General William P. Barr, U.S. Dep't of Justice (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download; Lydia Wheeler, Coronavirus False Claims Task Force Urged at Justice Department, Bloomberg Law (Mar. 17, 2020), https://news.bloomberglaw.com/health-law-and-business/coronavirus-false-claims-task-force-urged-at-justice-department.
[3] Under the FCA, a whistleblower may bring a lawsuit on behalf of the government in an effort to stop the fraudulent use of government funding. These kinds of lawsuits are called qui tam law suits and allow a "relator" (i.e., the whistleblower") to receive between 15%-25% of the government's judgment against the perpetrator.
[4] Model Rules of Pro. Conduct, r. 1.6-1.8; N.Y. Rules of Pro. Conduct, r. 1.6-1.8.
[5] See U.S. ex rel. Doe v. X Corp.
, 862 F. Supp. 1502, 1507-08 (E.D. Va. 1994) ("[T]o the extent that state law permits a disclosure . . . then the attorney's use of the qui tam mechanism to expose that fraud should be encouraged, not deterred.").[6] See Model Rules of Pro. Conduct, r. 1.6(b)(2); N.Y. Rules of Pro. Conduct, r. 1.6(b)(2).
[7] Model Rules of Pro. Conduct, r. 1.6(b)(2); N.Y. Rules of Pro. Conduct, r. 1.6(b)(2).
[8] Model Rules of Pro. Conduct, r. 1.6(b)(3); N.Y. Rules of Pro. Conduct, r. 1.6(b)(3).
[9] See U.S. ex rel. Fair Lab. Practices Assocs. v. Quest Diagnostics Inc.
, No. 05-CV-5393, 2011 WL 1330542, at *10 (S.D.N.Y. Apr. 5, 2011).[10] Id.
[11] Id.
[12] Model Rules of Pro. Conduct, r. 1.8(b); N.Y. Rules of Pro. Conduct, r. 1.8(b).
[13] Model Rules of Pro. Conduct, r. 1.7(a)(2), 1.8(a).
[14] See NYCLA Eth. Op. 746 (N.Y. St. Bar. Assn. Comm. Prof. Eth.) ("NYCLA Formal Op."), 2013 WL 11305903, at *6 (Oct. 7, 2013). While this opinion discusses Dodd-Frank Act and the Sarbanes-Oxley Act and may have been preempted by the court in Bio-Rad, see infra note 48, it may be instructive as to how the New York ethics rules may apply to whistleblower claims under the FCA with respect to conflicts of interested created by rewards.
[15] U.S. ex rel. Holmes v. Northrop Grumman Corp.
, No. 1:13cv85-HSO-RHW, 2015 WL 3504525, at *6 (S.D. Miss. June 3, 2015).[16] Id. (internal quotations omitted).
[17] NYCLA Formal Op. 746, at *8.
[18] Id. at *6.
[19] Id. at *7.
[20] See U.S. ex rel. Doe v. X Corp.
, 862 F. Supp. 1502, 1506(E.D. Va. 1994) ("[L]awyers are not per se barred from serving as qui tam relators against former clients.").[21] Even when the attorney is not the relator, there is still the risk that an attorney's involvement in bringing the suit will so taint the suit as to merit dismissal. In September 2020, for example, AT&T alleged that a former in-house attorney offered to sell privileged information to a relator for a share of any award. AT&T alleges that this was a violation of attorney-employee's duty of confidentiality and loyalty owed to AT&T, and since the FCA claim relies on the documents sent from the attorney-employee to the relator, the complaint is so tainted as to merit dismissal. See Memorandum of Law in Support of Motion for Sanctions, U.S. ex rel. Heath v. AT&T, Inc., No. 1:11-cv-01897 (RJL) (D.D.C. Sept. 15, 2020), ECF. 73-2.
[22] See U.S. ex rel. Fair Lab. Practices Assocs. v. Quest Diagnostics Inc.
, No. 05-CV-5393, 2011 WL 1330542, at *11 (S.D.N.Y. Apr. 5, 2011).[23] See X Corp., 862 F. Supp. 1502, at 1507 ("[W]here an attorney's disclosure of client confidences is prohibited by state law in a given circumstance, that attorney risks subjecting himself to corresponding state disciplinary proceedings should he attempt to make the disclosure in a qui tam suit.").
[24] U.S. ex rel. Holmes v. Northrop Grumman Corp, 642 F. App'x. 373 (5th Cir. 2016).
[25] Id. at 378. See also Quest Diagnostics, 2011 WL 1330642, at *12-13 (finding that the former in-house counsel's information so permeated the knowledge of the other relators and counsel that the complaint had to be dismissed as to all the relators and counsel disqualified).
[26] See supra notes 16-17 and accompanying text.
[27] Northrop Grumman, 642 F. App'x. at 378.
[28] See, e.g., In re: Examination of Privilege Claims, Nos. MS15-15-JPD, C-12-2091-JCC, 2016 WL 11164791 (W.D. Wash. May 20, 2016).
[29] Id., at *1-2.
[30] Id., at *13.
[31] While not an exception, per se, the restrictions on attorney-whistleblowers only apply to attorneys acting in their legal and not business capacities. See NYCLA Formal Op. 746, at *8 (restricting the opinion only to "lawyers who are acting as attorneys on behalf of clients").
[32] See 31 U.S.C. § 3730(h)(1).
[33] Id.
[34] See X Corp. v. Doe
, 816 F. Supp. 1086, 1091 (E.D. Va. 1993) (noting that an attorney-whistleblower in an FCA case for retaliatory discharge may disclose confidential information, but only in "exceptional circumstances").[35] ABA Formal Op. 01-424 at 1 (2001), see also NYC Eth. Op. 1994-1 (N.Y.C. Assn. B. Comm. Prof. Jud. Eth), 1994 WL 780800 at *2 (Mar. 21, 1994).
[36] Wadler v. Bio-Rad Labs. Inc.
, 212 F.Supp.3d 829, 849 (N.D. Cal. 2016) (allowing plaintiff to use privileged information in his Sarbanes-Oxley Act whistleblower action based on federal common law).[37] See generally, Complaint, Wadler v. Bio-Rad Labs Inc., No. 15-cv-2356 (JCS) (N.D. Cal. May 23, 2015), ECF No. 1.
[38] Bio-Rad, 212 F. Supp. 3d at 849.
[39] Since attorneys are allowed to disclose confidential or privileged information to pursue wrongful discharge or discrimination complaints under the FCA when necessary, it is important for employers who receive a whistleblower complaint from an attorney not to retaliate against the attorney and carefully document the rationale for any adverse action taken against the attorney. For additional information on the risks when dealing with whistle-blowers and anti-retaliation laws, refer to Whistleblowers: Who Are They and Why Should You Care?, Cleary Gottlieb Steen & Hamilton (July 31, 2019), https://www.clearyenforcementwatch.com/2019/07/whistleblowers-who-are-they-and-why-should-you-care/, and Memorandum from Cleary Gottlieb Steen & Hamilton, Jury Awards Ousted General Counsel Nearly $11 Million in Whistleblower Retaliation Action – Key Takeaways (Feb. 21, 2017), https://www.clearymawatch.com/wp-content/uploads/sites/106/2017/02/Wadler-Alert-Memo-w.-Revision.pdf.
[40] Model Rules of Pro. Conduct, r. 1.13(c). See also Breon S. Peace, Elizabeth Vicens and Sue S. Guan, Ethical Considerations When Outside Counsel Conduct Internal Investigations, WESTLAW J.: WHITE COLLAR CRIME, 3, 4 (2015).
[41] Model Rules of Pro. Conduct, r. 1.13 cmt.
[42] Id.
[43] 17 C.F.R. § 205.3 (2013).
[44] See id.
[45] See 2005 N.C. Eth. Op 9 (N.C. St. Bar.), 2006 WL 980308 (permitting lawyers for public companies to report violations under SOX to the SEC) and OK Adv. Op. 323 (Okl. Bar Assn. Leg. Eth. Comm.), 2009 WL 806564 (same).
[46] NYCLA Formal Op. 746, at *4.
[47] Id.
[48] Id.
[49] Notably, the Bio-Rad court held that SOX preempts state ethics rules. Bio-Rad, 212 F.Supp.3d, at 857.
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