Financial Rewards for Whistleblowing Lawyers

Abstract

The federal government relies increasingly on whistleblowers to ferret out fraud, and has awarded whistleblowers over $4 billion under the False Claims Act and the Dodd-Frank Wall Street reform and Consumer Protection Act. May lawyers ethically seek whistleblower rewards under these federal statutes? A handful of lawyers have tried to do so as FCA qui tam relators. They have not yet succeeded, but several court decisions suggest that they might be able to do so under confidentiality exceptions to state ethics law, which several courts have held are not preempted by the FCA. No lawyer has been publicly identified as seeking a whistleblower reward under Dodd-Frank, perhaps because the program is young, but also because the SEC process for determining whistleblower eligibility is secret.

This article is the first to conduct an in-depth analysis of several questions that are key to determining whether a lawyer may receive whistleblowing award under a federal program without violating state ethics law: 1) When may a lawyer disclose a client’s confidential information to others? 2) When does a lawyer’s obligation of loyalty preclude acting adversely to a client, including seeking personal benefit when engaging in conduct that is permissible for other purposes, such as to prevent or rectify harm to another? 3) Are any of a lawyer’s obligations under state law preempted by the federal law that provides for financial incentives for whistleblowers? 4) Which state’s law applies to lawyers who move from state to state as they work for national and international companies?

These questions are enormously complex. State confidentiality exceptions differ widely among states, and contrary to the suggestions of recent court opinions, disclosure may not be “reasonably necessary” either to prevent the continuation of continuing crimes or frauds or to rectify or mitigate past wrongdoing. State loyalty obligations include not only conflict of interest rules for current and former clients, but also a lawyer’s common law fiduciary duty not to profit from a client’s confidential information. Although not yet identified by any court or commentator as a basis for excluding lawyers from seeking whistleblower rewards, this well-settled fiduciary duty is so broad that it may prohibit a lawyer from seeking a financial reward for disclosing client information without the client’s consent, even when the targeted company is a third-party non-client about whom the lawyer acquired information while representing a client.

In view of the potential breadth of a lawyer’s confidentiality and loyalty obligations, which has yet to be acknowledged, the federal preemption question is an important one. Given the complexity of the issues, we do not purport to suggest the final answer, but we do briefly address the central questions that should be raised with respect to the preemption of state law by the FCA, which poses more problems in this regard than does Dodd-Frank. Most significantly, we question the analysis of several recent federal court decisions, including a Second Circuit decision, that concluded without much discussion that the FCA does not preempt a lawyer’s state law obligations. None of these courts confronted the fact that federal courts in FCA cases involving nonlawyer-relators have apparently preempted the state law fiduciary or contractual duties of these individuals in situations where enforcing these obligations could effectively prevent most company insiders from serving as FCA relators. We suggest ways in which lawyer-relators might be distinguished from nonlawyer-relators, but it is unclear whether federal courts will accept this distinction. We also question the analysis of recent federal court decisions in determining the choice of law rule that federal courts should apply in deciding which state’s ethics law applies when there are several states with significant contacts with the matter.

We conclude with a summary of our findings and a caveat concerning the wisdom of Dodd-Frank’s secret process for granting whistleblower awards.

Keywords: attorney-client privilege, attorneys, Choice of law, compliance, Confidentiality, conflict of interest, corporate fraud, Dodd Frank, false claims act, financial incentive, Legal ethics, Loyalty, Preemption, professional responsibility, Qui tam, retaliation, Sarbanes-Oxley, Whistleblower, S.E.C.

JEL Classification: G18, G28, G38, I18, K22, K23, K40, K42