California Court Rules Sarbanes-Oxley Preempts California Law Regarding Privileged Communications in Suit by Former In-House Counsel

by Jackson Lewis P.C.
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By determining that the Sarbanes-Oxley Act (“SOX” or the “Act”) preempts California’s ethical rules, the Northern District of California ruled that an in-house attorney can rely on privileged communications and confidential information to the extent they are reasonably necessary to assert a claim or defense. Wadler v. Bio-Rad Laboratories, Inc., et al., No. 3:15-cv-02356 (N.D. Cal. Dec. 20, 2016).

Plaintiff Sanford Wadler is former General Counsel for Defendant Bio-Rad Laboratories, Inc. Plaintiff served in that role for nearly twenty-five years until his discharge in 2013.  Thereafter, Plaintiff filed suit against the Company alleging that his employment was terminated because he was investigating potential Foreign Corrupt Practices Act violations, and had reported his concerns to the Company’s Audit Committee.  The Company contends that Plaintiff’s employment was terminated due to his sub-standard work performance and poor behavior.

In proceedings before both the Securities and Exchange Commission and the Department of Labor, as well as in the federal district court, the Company did not object to the public filing of allegedly privileged information, and did not raise any objections or defense on the basis of confidentiality or privilege. However, upon substituting counsel, the Company sought to exclude all evidence and testimony based on information Plaintiff learned in the course of his services as General Counsel on the basis of privilege.  In making this argument, the Company argued, inter alia, that California’s laws governing attorney conduct precluded the disclosure of any confidential client information that Plaintiff learned in his role as in-house counsel.  The Company argued that California’s statutory and ethical rules – which protect a client’s confidences except in cases of threatened criminal action that can lead to death or serious injury – barred Plaintiff from offering the evidence necessary to prove his claim.

The Court held that SOX preempts California’s ethical and statutory rules, and permit in-house attorneys to introduce privileged information and communications in whistleblower actions. Moreover, the Court held that, to the extent that California’s ethical rules allow for more limited disclosures of privileged and confidential communications, SOX permits an attorney pursuing a retaliatory discharge claim under the Act to make broader disclosures of privileged information and communications.  However, the Court held that an attorney would only be permitted to introduce privileged and confidential communications upon a showing of a reasonable belief by the attorney that the information is necessary to prove his or her claims or defenses.

 The Wadler decision presents a potential concern for employers facing retaliation lawsuits from in-house counsel.  Employers are typically concerned as to whether and to what extent communications between management and in-house counsel will be protected by the attorney-client privilege. Based on the Wadler decision, even communications that might otherwise be protected by the privilege could be subject to disclosure if the party claiming retaliation is in-house counsel. As a result, in taking adverse actions against in-house counsel, employers should review the potential impact of foreseeable disclosures or prior communications with that counsel in the event of a SOX retaliation lawsuit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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