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A California Federal Magistrate Judge in Sanford S. Wadler v. Bio-Rad Laboratories Inc. et al., No. 3:15-cv-02356 (N.D. Cal. Dec. 20, 2016), recently ruled that the Sarbanes-Oxley Act preempts California’s ethical rules regarding the disclosure of attorney-client privileged information, and that an in-house lawyer may use privileged information as the foundation for his retaliation claim.
Background
Plaintiff Sanford Wadler, the former General Counsel of Defendant Bio-Rad Laboratories, Inc. (the “Company”), filed suit against the Company and its individual board members after his employment was terminated in June 2013. Plaintiff asserted six claims against the Company, including whistleblower retaliation claims under SOX and Dodd-Frank. On the eve of trial, the Company filed a motion to prevent Plaintiff from introducing virtually all of the evidence and testimony he intended to rely upon to prove his case, including all the information that he had learned in the course of his service as the Company’s General Counsel, claiming it was protected from disclosure by attorney-client privilege.
The SEC filed an amicus brief in support of Plaintiff’s position that the Sarbanes-Oxley Act preempts California’s ethical rules and thus the former in-house lawyer should be able to rely upon privileged information in establishing his retaliation claim. In support of its argument, the SEC cited its Rule 205.3(d)(2), which permits attorneys to reveal confidential information obtained in the course of representing a client, without the client’s consent, to the extent the attorney reasonably believes necessary:
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To prevent the company from committing a material violation of securities laws that is likely to cause substantial injury to the financial interests or property of the company or investors;
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To prevent the company from committing or suborning perjury in an SEC proceeding; or
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To rectify the consequences of a material violation of securities laws that caused, or may cause, substantial injury to the financial interests or property of the company or investors in the furtherance of which the attorney’s services were used.
The Court’s Ruling
Magistrate Judge Spero held that “privileged communications and confidential information may be used, with appropriate protections, to establish whistleblower retaliation claims under the federal common law.” Notably, Judge Spero relied in part on the fact that the Company, through public filings and other means, had waived privilege in a “significant quantity of evidence,” including, among other things, communications between Plaintiff and the Company and with outside counsel regarding Plaintiff’s concerns.
Magistrate Judge Spero further held that the Sarbanes-Oxley Act preempts California’s ethical rules. Despite the fact that SOX does not expressly preempt state law, the court held that the SEC’s rules “reflects an unambiguous intent to preempt state ethical rules that prevent attorneys from disclosing privileged information necessary to comply with Sarbanes-Oxley.”
Implications for Employers
This is a troubling decision for employers and one that may further embolden in-house attorneys to file whistleblower suits. Notably, Judge Spero acknowledged that “[t]here are few federal circuit court cases addressing the rights of in-house counsel to use attorney-client privileged information in a retaliation suit.” Therefore, employers should continue to strongly oppose any use of attorney-client privileged information as the foundation for a whistleblower lawsuit.
