Should attorneys’ ethical obligations bar them from bringing whistleblower claims?

Should attorneys’ ethical obligations to their clients bar in-house counsel from bringing whistleblower claims against their employers? In Van Asdale v International Game Tech (2009 U.S. App. LEXIS 18037, August 13, 2009), the Ninth Circuit Court of Appeals found that the ethical obligations of two Illinois-licensed attorneys, who claimed that a gaming machine company fired them in retaliation for raising fraud claims related to a merger, did not prohibit them from bringing federal SOX whistleblower claims. The federal appellate court ruled that the Van Asdales, a husband and wife who both worked for the company, could bring their SOX claims – even though the Illinois Supreme Court, in Balla v Gambro, Inc (145 Ill. 2d 492, December 19, 1991), has held that in-house counsel cannot bring a state law retaliatory discharge tort claim.  

In Balla, the Illinois Supreme Court held that a corporation’s general counsel, who was terminated as a result of his efforts to prevent a shipment of misbranded and/or adulterated medical devices, could not bring a retaliatory discharge claim even though his discharge was in contravention of a clearly mandated public policy. The state supreme court reasoned that extending the tort of retaliatory discharge to in-house counsel would compromise the attorney-client relationship because employers might be less willing to be forthright and candid with their in-house counsel. Moreover, allowing the claim would not promote disclosure of the misconduct because the attorney was required under the state’s rules of professional conduct to report the employer's intention to sell the misbranded and/or adulterated medical devices; thus, the public policy of protecting the lives and property of citizens was adequately safeguarded. Finally, the court reasoned that if the tort were extended to in-house counsel, “the employer/client would be forced to pay damages to its former in-house counsel to essentially mitigate the financial harm the attorney suffered for having to abide by [the Illinois] Rules of Professional Conduct,” which was “impermissible” because attorneys may “have to forego economic gains in order to protect the integrity of the legal profession.”

Citing Balla, the company that employed the Van Asdales asserted that allowing them to maintain their SOX claim would violate the attorneys’ obligations under the Illinois Rules of Professional Conduct. Rejecting this argument, the Ninth Circuit distinguished Balla, noting that the Illinois Supreme Court explained that it “base[d its] decision as much on the nature and purpose of the tort of retaliatory discharge, as on the effect on the attorney-client relationship that extending the tort would have.” Furthermore, the Ninth Circuit concluded that “federal courts in Illinois have uniformly declined to apply Balla to claims based on federal law.”  

The company then argued that, irrespective of the specific rules applicable to Illinois-licensed attorneys, the Van Asdales should not be permitted to maintain their SOX claim because doing so would require use of attorney-client privileged information. However, the Ninth Circuit determined that such concerns did not justify barring the Van Asdales’ SOX claims because nothing in statute indicates that in-house attorneys are not protected from retaliation “even though Congress plainly considered the role attorneys might play in reporting possible securities fraud.” In addition, it was unclear to what extent their suit required disclosure of confidential information and the trial court could use equitable measures to minimize the possibility of harmful disclosures, the federal appellate court observed. 

It seems that the federal nature of the SOX claim was a key distinction here. Securities laws are exclusively under the jurisdiction of the federal government, and, as the Ninth Circuit indicated, Congress “plainly considered” when enacting SOX that attorneys would be privy to information regarding possible securities fraud. That being the case, it appears Congress determined that any adverse impact on attorney-client communications did not outweigh its goal of encouraging disclosures related to securities fraud.