A recent decision from the U.S. District Court for the Northern District of California clarifies that federal law permitting in-house lawyers to blow the whistle using confidential information trumps state rules of professional responsibility.

Takeaways for Attorney-Whistleblowers

• Where evidence for federal and state-law claims overlaps, federal common law governs the application of the attorney-client privilege.

• Where a retaliatory-discharge claim is brought under SOX and overlaps with a state-law claim, and the state’s ethical rules preclude the use of privileged or confidential information that SEC regulations would permit, the SEC’s regulations preempt the state’s rules.

• The public disclosure of privileged information, generally including such disclosure in government proceedings, expressly waives the attorney-client privilege as to that information. And the use of such information to put an attorney’s performance into issue impliedly waives the attorney-client privilege as to all communications relating to that information.

Background of Wadler SOX Case

Sanford Wadler was hired as general counsel of Bio-Rad in 1989, a position he held for almost 25 years. During that time, Mr. Wadler says, he investigated and internally reported potential violations of the Foreign Corrupt Practices Act (“FCPA”) in China, and brought his concerns to Bio-Rad’s audit committee. Mr. Wadler was fired in June, 2013.

Mr. Wadler sued Bio-Rad in the U.S. District Court for the Northern District of California, claiming that Bio-Rad terminated him in retaliation for his investigation and disclosures, and so violated SOX, the Dodd-Frank Act, and California state law. Bio-Rad asserted that his termination was “due to poor work performance and behavior.”

The Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) addressed Mr. Wadler’s claims in administrative proceedings regarding Bio-Rad’s potential FCPA violations. Mr. Wadler raised the same concerns in a SOX whistleblower complaint with the Department of Labor (“DOL”).

Bio-Rad’s outside counsel presented a slideshow to the SEC and DOJ, which addressed Mr. Wadler’s concerns in detail. The presentation included details about Mr. Wadler’s correspondence with the company’s audit committee, as well as the subsequent investigations into those concerns by outside counsel, the involvement of Bio-Rad’s in-house legal team, and specific legal advice that was provided. The presentation concluded that there was no evidence of either a violation or an attempted violation of the FCPA.

In his DOL complaint, Mr. Wadler detailed his reasons for believing that Bio-Rad had violated the FCPA and that his termination was in retaliation for his disclosures to the audit committee. In response, Bio-Rad described the external investigations into Mr. Wadler’s claims and argued that those investigations prove that his allegations are untrue. Bio-Rad’s response included declarations from high-level individuals at the company that addressed the external investigations into Mr. Wadler’s concerns of potential FCPA violations. The declarations included details about “interactions and communications between Bio-Rad and Wadler and between Bio-Rad and outside counsel on a wide variety of issues.” Bio-Rad stated in its reply that it had not waived attorney-client privilege and that Mr. Wadler’s DOL complaint included certain privileged information. Asserting attorney-client privilege and work-product protection, the company refused to provide documentation related to Mr. Wadler’s memo to the audit committee or the investigations undertaken by outside counsel.

Bio-Rad filed a motion to dismiss Mr. Wadler’s complaint before the federal district court. In its motion, the company did not object to any of Mr. Wadler’s allegations on confidentiality or privilege grounds. Rather, Bio-Rad addressed Mr. Wadler’s substantive claims and publicly filed, as an exhibit, Mr. Wadler’s DOL complaint, despite previously claiming that the DOL complaint contained privileged materials and correspondence.

The court set September 23, 2016, as the deadline for filing dispositive motions. However, on October 7, 2016, Bio-Rad stated, for the first time, that it planned to file a motion arguing that Mr. Wadler could not prove his case without using the company’s privileged or confidential information.

Bio-Rad’s Motion to Exclude

Just before trial, Bio-Rad moved to exclude “all testimony that may be based on information [Mr. Wadler] learned in the course of his service as Bio-Rad’s general counsel.” This constituted “virtually all of the evidence and testimony [Mr. Wadler] might rely upon to prove his case.”

In its motion, Bio-Rad argued that “Wadler’s claims and Bio-Rad’s defenses are ‘inextricabl[y] intertwined with Bio-Rad’s privileged and confidential information,’ requiring that the Court make a document-by-document, witness-by-witness and question-by-question privilege determination” at trial. The company argued, further, that California’s strict ethical and statutory rules regarding attorney conduct apply because “federal courts look to state ethical rules in areas of ‘traditional state regulation,’” and neither SOX nor Dodd-Frank “evidences a clear legislative intent to preempt California’s ethical and statutory rules regulating an attorney’s duty of confidentiality when an attorney brings claims for retaliatory discharge under those Acts.

Bio-Rad argued that to prove the elements of a retaliatory-discharge claim, Mr. Wadler would have to rely on documents protected by California’s ethical and statutory rules, including: “(i) confidential information Mr. Wadler learned in the course of his role as Bio-Rad’s general counsel; (ii) Mr. Wadler’s communications with Bio-Rad and with outside counsel; (iii) outside counsel’s communications with Bio-Rad and each other; and (iv) advice of inside and outside counsel reflected in Bio-Rad’s documents.” Relying on General Dynamics v. Superior Court, 876 P.2d 487 (Cal. 1994), Bio-Rad argued that retaliatory-discharge claims brought by in-house counsel could be pursued only where they could be adjudicated without breaching client confidences. Given Mr. Wadler’s inevitable reliance on privileged or confidential information, Bio-Rad argued, Mr. Wadler had the burden to prove that a fair trial could be held without disclosing any of that information.

Mr. Wadler argued, in opposition, that Bio-Rad’s motion was dispositive and so untimely. Alternatively, he argued, federal privilege law, which allows attorneys to use privileged and confidential information in whistleblower actions, applied because the action involved overlapping federal and state claims. Mr. Wadler argued that SOX and Dodd-Frank preempt state ethical and statutory rules and pointed out that the SEC had previously argued that “use of client confidences in Section 806 retaliation proceedings is appropriate, and . . . that Section 205 preempts federal common law.”

Mr. Wadler argued that by disclosing information about his claims and the company’s defenses, both in administrative proceedings and in public documents filed in the instant action, Bio-Rad had waived any privilege or confidentiality that might have covered that information. First, Bio-Rad disclosed the information in the slideshow presented in the SEC and DOJ proceedings, which slideshow was also sent to the DOL and to Mr. Wadler. Second, in opposing Mr. Wadler’s complaint before the DOL, Bio-Rad produced detailed information about Mr. Wadler’s performance as general counsel. Finally, Bio-Rad publicly divulged all the client confidences in the instant action that its motion sought to protect.

Bio-Rad’s Motion Was Untimely

The court determined that Bio-Rad’s motion was dispositive because it did not identify specific evidence that should be precluded, but rather argued that the case could not move forward fairly. The motion was therefore untimely and so was denied. Nevertheless, the court went on to address the substance of Bio-Rad’s motion.

Federal Common Law Governs Privilege Analysis in a SOX Case

Citing Wilcox v. Arpaio, 753 F.3d 872 (9th Cir. 2014), the court determined that federal common law applied to Bio-Rad’s privilege claims because Mr. Wadler’s retaliation claims under federal and state law overlapped. It found that Bio-Rad’s reliance on General Dynamics was misguided, as that case dealt with retaliatory-discharge claims only under California state law, and Mr. Wadler had claims under both state and federal law. Citing Van Asdale v. International Game Technology, 577 F.3d 989 (9th Cir. 2009), the court determined that California’s state-law limitations are inapplicable under federal common law and, therefore, do not apply to Mr. Wadler’s federal SOX claim.

In-House Counsel Can Use Privileged Information to Prove a  Retaliatory-Discharge Claim

The court surveyed the sparse federal appellate cases dealing with the ability of in-house counsel to use information covered by attorney-client privilege in bringing retaliation suits. Citing Van Asdale, the court determined that “there is some room for the use of privileged information, including the use of such evidence offensively, to establish whistleblower retaliation claims under Sarbanes-Oxley.” Therefore, it held, Mr. Wadler may use privileged communications and confidential information that is “reasonably necessary” for any of his claims or defenses.

Bio-Rad Waived Attorney-Client Privilege

The court reviewed the rules regarding waiver of privilege: where a party publicly discloses privileged information, which generally includes disclosure in government proceedings, it has expressly waived that privilege. And where a party puts its lawyer’s performance at issue in litigation, it has impliedly waived its attorney-client privilege. Applying those rules, the court found that by taking an “open and aggressive” tack in both the instant case and the preceding administrative proceedings, Bio-Rad had waived its attorney-client privilege regarding the information that its motion sought to protect.

First, Bio-Rad waived attorney-client privilege regarding the information it disclosed in the SEC and DOJ proceedings—namely, the slideshow presentation. Moreover, citing IGT v. Alliance Gaming Corp., No. 2:04-cv-1676-RCJ (RJJ), 2006 WL 8071393 (D. Nev. Sept. 28, 2006), and Federal Rule of Evidence 502, the court found that by using the slideshow “as a sword,” to attack Mr. Wadler’s performance as in-house counsel, Bio-Rad waived its privilege as to “any privileged communications about the specific matters disclosed in the .”

In the DOL proceeding, Bio-Rad introduced not only the slideshow but also alternative reasons for having fired Mr. Wadler, as well as corroborating declarations by upper-level managers. Those declarations included information that Bio-Rad claimed as privileged and used to attack Mr. Wadler’s performance as in-house counsel. Therefore, the court concluded, Bio-Rad waived the attorney-client privilege as to any “privileged communications between Wadler and Bio-Rad . . . [and] communications on the same subject matter.”

Finally, in the instant action, in arguing that it was justified in firing Mr. Wadler, Bio-Rad disclosed detailed information about Mr. Wadler’s communications with Bio-Rad managers and with the company’s audit committee, his legal advice to Bio-Rad, and the investigations conducted by outside counsel into his reports of potential FCPA violations. The court determined, therefore, that Bio-Rad had expressly waived its privilege as to all the information it disclosed and had impliedly waived its privilege as to all communications relevant to its asserted reasons for firing Mr. Wadler.

SOX Regulations Preempt California State Law

The SEC filed an amicus brief in support of Mr. Wadler’s ability to rely on evidence that is precluded under California’s ethical rules but permitted under SOX. Guided by the SEC’s brief, the court looked to the SEC’s Standards of Professional Conduct for Attorneys (“Part 205”), enacted under SOX. Part 205 requires that attorneys “report material violations ‘up the ladder’ by making a Part 205 Report” and continue to do so until they receive an “appropriate response.” 17 C.F.R. § 205.3(b). Moreover, Part 205 allows attorneys to use “[a]ny report under this section (or the contemporaneous record thereof) or any response thereto (or the contemporaneous record thereof) . . . in connection with any investigation, proceeding, or litigation in which the attorney’s compliance with this part is in issue.” Id. § 205.3(d)(1) (emphasis added by the court). In the comments to the rule, the SEC stated that “it is important to make clear in the rule that attorneys can use any records they may have prepared in complying with the rule to protect themselves.”

Part 205 provides, further, that “[w]here the standards of a state or other United States jurisdiction where an attorney is admitted or practices conflict with this part, this part shall govern.” Id. § 205.1. In its accompanying comments, the SEC stated that it “reaffirms that its rules shall prevail over any conflicting or inconsistent laws of a state or other United States jurisdiction in which an attorney is admitted or practices.”

The court found that Part 205 demonstrates an “unambiguous intent to preempt state ethical rules that prevent attorneys from disclosing privileged information necessary to comply with Sarbanes-Oxley.” Therefore, California’s ethical rules are preempted insofar as they limit the disclosure of privileged or confidential information more than SOX does.