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Attorney whistleblowers weighed down by ethical obligations

November 13th, 2013  |  Ron Miller

Two recent cases found attorneys caught in ethical dilemmas involving the conduct of their employers. Each felt that their concerns about potential legal or ethical violations fell on deaf ears of management. Unfortunately, at least from the attorneys’ points of view, their strategies for dealing with their problems ran into stone walls with respect to the attorney ethical rules.

 In United States of America v Quest Diagnostics, Inc, the Second Circuit found that the former general counsel of a diagnostic lab violated his ethical obligations under the New York Rules of Professional Conduct by his participation in a qui tam action under the federal False Claims Act (FCA) based on allegations his former employer’s pricing structure perpetrated a fraud against the Medicare and Medicaid programs.

Ethical duty of confidentiality. The plaintiff in this case, Fair Laboratory Practices Associates (FLPA), was formed in 2005 by three former executives of Unilab for the purpose of bringing this qui tam action. FLPA alleged that Quest Diagnostics and Unilab violated the federal Anti-Kickback Statute. One of FLPA’s general partners was formerly general counsel to Unilab, and it was his involvement in the case that highlighted 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.

According to FLPA, Unilab and Quest operated a “pull-through” scheme by which they charged managed care organizations (MCOs) and independent practice associations (IPAs) commercially unreasonable discounted prices on non-federal business to induce referrals of Medicare and Medicaid business and then billed the government at dramatically higher prices. While still employed at Unilab, FLPA principals questioned whether the pricing structure violated the Anti-Kickback Statute. After Unilab changed its pricing structure and negotiated price increases, customers began slipping away to competitors. Thereafter, the company reversed course on its pricing.                                           

From 1993-2000, the former general counsel was Unilab’s sole in-house lawyer. He was responsible for all of the company’s legal and compliance affairs and managed all litigation against the company. FLPA alleged that when the former general counsel expressed concerns that Unilab’s new pricing structure created an inference of illegality, he was instructed to work with outside counsel to “find a way around.” He was also subsequently “frozen out” by Unilab’s management and was no longer asked for advice on compliance matters. Quest acquired Unilab and the executives left the company then formed FLPA.

 The district court permitted Quest and Unilab to take discovery regarding whether its former general counsel and FLPA had improperly used or disclosed Unilab’s confidences in this lawsuit. It subsequently dismissed the action after concluding that the former general counsel’s participation violated Rule 1.9(a) — the “side-switching rule”— and Rule 1.9(c)’s prohibition on disclosing client confidences beyond what was “necessary,” within the meaning of Rule 1.6(b), to prevent the commission of a crime. The district court also concluded that the FCA did not preempt applicable state ethical rules. In light of those rulings, the district court dismissed the complaint, and disqualified FLPA and its counsel from bringing this suit and any subsequent suits based on the same facts.

 Disclosure of confidential information. The Second Circuit agreed with the district court that the former general counsel violated Rule 1.9(c). Under Rule 1.9(c) a lawyer who has formerly represented a client in a matter shall not reveal the client’s confidential information or use that information to disadvantage that client. In any event, the attorney may not disclose confidences beyond what was “necessary” to prevent the commission of a crime, within the meaning of Rule 1.6(b).

 The Second Circuit rejected FLPA’s assertion that the FCA preempts application of Rule 1.6, observing that nothing in the FCA evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidences. Rather, the appeals court observed that Rule 1.6(b)(2) implicitly accounts for the federal interests at stake by permitting disclosure of information “necessary” to prevent the ongoing commission of a crime. Because Rule 1.6 balances the interests, it need not give way to FCA, Sec. 3730(b)(2)’s requirement of  disclosure of material evidence. Having found that the former general counsel violated ethical rules, the appeals court further concluded that the district court did not err or abuse its discretion in dismissing the complaint and disqualifying FLPA and its counsel from bringing this action or any subsequent action based on the same facts.

 Quid pro quo arrangement challenged. In an unpublished decision, in Gadlage v Winters & Yonker, PSC, a divided Sixth Circuit ruled that an attorney allegedly discharged because he refused to follow law firm policy of referring personal-injury clients to a specific chiropractor failed to state a claim for wrongful discharge in violation of public policy. The attorney believed that this quid pro quo arrangement created a conflict of interest in violation of Kentucky Supreme Court Rules.

The trial court granted the law firm’s motion to dismiss the complaint for failure to state a claim upon which relief could be granted, concluding that the employee’s allegations failed to establish that his termination was in violation of any public policy that would except him from the “at-will” employment doctrine in Kentucky.

 Supreme Court rules as source of public policy. Before the Sixth Circuit, the employee argued that the Kentucky Supreme Court Rules were derived from the state’s constitution and, therefore, triggered the public policy exception to the at-will doctrine.  Observing that because Kentucky has not addressed the precise issue presented in this case, the appeals court concluded that was required to predict how the state supreme court would rule “by looking to all the available data.”

 As an at-will employee, the plaintiff could be discharged for “for good cause, no cause, or for a cause that some might view as morally indefensible.” Moreover, Kentucky applies a narrow exception to this general rule when the termination undermines a “most important public policy.” The state permits this exception only when the discharge is shown to be “contrary to a fundamental and well-defined public policy as evidenced by existing law,” and when the policy is “evidenced by a constitutional or statutory provision.”

 After its ruling in Firestone Textile Co. Div. v. Meadows, the Kentucky Supreme Court adopted the additional caveat that “only two situations exist where ‘grounds for discharging an employee are so contrary to public policy as to be actionable’ absent ‘explicit legislative statements prohibiting the discharge.’” The first situation involves the failure or refusal to violate a law in the course of employment,” and the second is “when the reason for a discharge was the employee’s exercise of a right conferred by a well-established legislative enactment.”

Here, the Sixth Circuit majority noted that the employee failed to allege a single particularized rule violation in his complaint or appellate briefing, but relied on vague and generalized statements about third-party conflicts of interests and obligations to clients. Consequently, the appeals court determined that he had failed to state a claim that was “plausible on its face.”

 Whistleblower pitfalls for attorneys. Attorneys are not like your typical whistleblowers, they are constrained by ethical rules as to what actions they can take in reporting suspected wrongdoing. Foremost, they are to keep their clients’ confidences unless they seek to prevent criminal activity. Even then they are limited to making “necessary” disclosures. As a consequence, resorting to self-help or reporting to an outside agency to resolve an ethical dilemma presents pitfalls all their own as the attorneys in these cases found.