Revenge of the Whistle-blower: Possible Consequences of Compliance Failures

2/14/2017 Articles

In a company with a robust compliance culture, potential whistleblowers can express their concerns without fear of retribution. By contrast, the penalty for a culture that silences whistleblowers just got steeper. Companies caught punishing those who raise red flags, especially when they turn out to be lawyers, could be forced to confront documents otherwise inadmissible against the company due to attorney-client privilege.

Sanford Wadler was once the General Counsel for the Northern California-based pharmaceutical company Bio-Rad. In February 2013, Wadler reported possible Foreign Corrupt Practices Act violations to the company’s audit committee. The report triggered an internal investigation, a $55 million dollar settlement with the DOJ and SEC, and, as a federal jury held yesterday, resulted in Wadler’s wrongful termination.

Wadler was terminated in June 2013—allegedly for performance problems—after 25 years with the company. He brought suit in 2015 alleging illegal whistleblower retaliation. To make his case Wadler sought to introduce company documents from the FCPA internal investigation and other records gleaned from his years at the companyBio-Rad responded that “virtually every document in the case” could be protected by the attorney-client privilege and any use of that material would violate state ethics rules. Notably, the SEC weighed in, arguing that federal securities law supersedes state ethics rules and federal common law related to privilege.

Magistrate Judge Spero agreed with Wadler and the SEC, finding that, “privileged communication and confidential information may be used, with appropriate protections, to establish whistleblower retaliation claims under the federal common law.” As a result, Wadler was able to use sealing orders to introduce privileged material against his former employer, resulting in an almost $8 million victory.

As a result of this verdict, corporate counsel with compliance concerns now have stronger protections if they are punished for escalating their concerns. To protect the corporate privilege and strengthen compliance norms, corporations must ensure mechanisms for adequately responding to and protecting whistleblowers, whether in-house lawyers or otherwise.