Posted Nov 08, 2004 11:16 am CST
Filed claims against their employers, alleging that they were forced from their jobs in retaliation for legal advice or gripes against management that the companies didn’t appreciate.
But the key issue in those lawsuits became the use of confidential client information that Pearce and Ausman sought to support their claims.
The Confidential Difference
Courts often reject retaliatory discharge claims brought by lawyers because of potential public exposure of client secrets. But a few courts are warming to lawyer wrongful termination claims that entail use of confidential material. The issue puts Pearce and Ausman on the front line of a seething larger debate over lawyers’ duties to guard their clients’ secrets in the post-Enron corporate atmosphere.
In-house lawyers find themselves in the middle of the bigger argument because retaliatory discharge actions almost inevitably depend on private information protected by both professional conduct rules and evidence codes that shelter the client-lawyer privilege.
As the law continues to develop, in-house lawyers likely will remain in the forefront of the confidentiality debate because, unlike their counterparts in law firms, they often find themselves with nowhere else to go once they have been fired.
By 2000 Pearce had seen enough of State Farm. He claims that he and the other half-dozen lawyers in the office had watched their professional judgment and control slowly slip away to nonlawyer claims adjusters. To Pearce, that meant State Farm’s financial health took the driver’s seat ahead of the insurer’s duty to defend claims against its policyholders. It was more than Pearce and his boss, Richard K. Spratley, could stomach ethically. They quit in June 2000.
A year later, the two sued State Farm on multiple claims, including wrongful discharge. Anticipating that any case would depend heavily on confidential information they learned in their roles as lawyers, the two had taken copies of documents and other materials with them when they left their jobs.
Though State Farm vigorously fought back, Pearce and Spratley won permission from the Utah Supreme Court to use confidential information to pursue their claim. Spratley v. State Farm Mutual Auto. Ins. Co., 78 P.3d 603 (2003). Pearce says the material was essential to prove the case at trial. State Farm settled a few months later. Like Pearce and Spratley in Utah, Ausman sued. The similarities end there. Ausman had been on the job for only about six months when surgery forced her to take an extended disability leave. One day as she recuperated, someone knocked on the door of her condominium in a downtown Chicago high-rise.
“They had sent my office home,” Ausman says. “I thought, ‘Gee, that’s kind of strange.’ ” In January 2002, Ausman received a letter from Andersen summarily firing her. She figures the firm was retaliating for several objections she had raised to ventures it had assembled for clients as possible violations of Securities and Exchange Commission regulations.
Ausman came out on the short end of her suit. Citing a 1991 Illinois Supreme Court decision, a midlevel state appeals court kicked out her claim this spring. The appellate panel repeated the high court’s earlier warning that lawyer actions for retaliatory discharge could chill the client-attorney relationship and discourage executives from confiding to in-house counsel for fear company secrets one day may be spilled in open court. Ausman v. Arthur Andersen LLP, 810 N.E.2d 566 (Ill. App. 1st Dist. May 18). Ausman expected to learn by early October whether the supreme court would take her case and reconsider its 1991 position.
The outside lawyer defending Arthur Andersen didn’t respond to interview requests. Andersen has argued in court, however, that the dispute involves simple disagreement over internal company procedures for ensuring SEC compliance that doesn’t cross the public policy threshold needed to maintain a cause of action.
Chances of success are faint for any kind of worker bringing a retaliatory discharge claim, largely due to the dominant employment-at-will doctrine, which means that companies can fire workers for any reason or no reason at all. To trump at-will employment, an employee claiming retaliatory discharge typically must cite a clear policy interest such as public health, safety or welfare. The confidentiality question makes in-house lawyers’ odds for success even slimmer.
Except in extremely limited circumstances, clients remain free to sack outside lawyers at will. Some courts, however, say in-house lawyers, sometimes called employed lawyers, deserve special treatment because they have only one client–the company–and can’t simply move on to the next one if that relationship goes bad. Corporate clients don’t make such distinctions.
“The concern we have is that lawyers who are employees are really no different than lawyers who work in law firms,” explains Alan L. Sullivan, a Salt Lake City defense lawyer hired to represent State Farm. “They both receive privileged information, and it should remain so. If every client has to worry about whether its privileged information is going to be used down the road in a retaliatory discharge case, then clients would think twice about sharing secrets with lawyers.”
To be sure, lawyers also face similar dilemmas in disciplinary proceedings and in malpractice actions that may require them to divulge client secrets to mount a defense. But so-called offensive use of confidential material in wrongful termination claims may well mold emerging new attitudes toward lawyers’ ethical obligations to keep quiet and the scope of the evidentiary privilege.
Though considerable sentiment has grown for loosening the rules, it remains difficult to dislodge the traditional views of confidentiality and privilege as inviolable under any circumstances. Former in-house lawyers with beefs against their employers say legal uncertainty and the emotional strain of getting fired–then going to court as plaintiffs–make for anything but a holiday.
Judith M. Alexander expects to take her case to trial in the wake of an intermediate Florida appeals court’s July 7 rejection of an attempt to disqualify her lawyer. The decision also presumably clears the way for her claim under the state’s whistle-blower act. Alexander v. Tandem Staffing Solutions Inc., No. 4D04-224 (Fla. App. 4th Dist.). Alexander, Tandem’s former general counsel, alleges the Delray Beach temporary employment agency fired her and two other executives in 2002 after she told the board that the then-chief operating officer had been visiting Internet child pornography sites on his company-issued computer. Tandem is urging the Florida Supreme Court to take another look at the case.
“There was no precedent to give me any guidance for this, but it didn’t matter to me because it was the right thing to do,” Alexander says of her decision to sue. “It’s emotionally devastating. It eats away at your confidence. It eats away at your self-esteem. Knowing that you did the right thing and that you’re being persecuted for it–that’s the hardest part.”
Retaliatory discharge actions can occur under common law or under statutes that protect whistle-blowers, such as the Florida statute in Alexander’s case or the federal Sarbanes-Oxley Act, which is supposed to clean up corporate governance.
“One reason that this is becoming a bigger issue is because the corporate environment has changed after the passage of Sarbanes-Oxley and the scandals that inspired it,” says Memphis professional responsibility lawyer Lucian T. Pera. “The privilege is really where the rubber meets the road.”
States Split the Issues
Though some cases may have slipped through the cracks, only a dozen or so states allow lawyers to bring some form of retaliatory discharge claim, according to Pera’s research for a paper prepared this spring for the Association of Corporate Counsel. Of those, only 10 allow confidential information, and several of them severely restrict its use. New Jersey, for example, permits confidential material but also lets the employer file an ethics complaint against the lawyer using it. Another six states and Puerto Rico have barred retaliatory discharge actions. Still, as many as 32 others and the District of Columbia have not addressed the issue.
The case law of retaliatory discharge has developed along three lines: flat-out bans, claims tempered by limits on confidential information, and claims in which lawyers may divulge client secrets to the degree reasonably considered essential to prove them. Regardless of a particular court’s stance, the outcomes turn heavily on use of confidential information, often relegating retaliatory discharge itself almost to an afterthought. Bans reached their zenith with the Illinois Supreme Court’s 1991 holding in Balla v. Gambro Inc., 584 N.E.2d 104. (Former Arthur Andersen lawyer Ausman wants that decision reversed.)
In-house lawyer Roger D. Balla claimed that Gambro Inc. fired him after he told the company’s president he “would do whatever necessary” to stop it from selling kidney dialysis machines that did not comply with federal regulations and posed some risk to patients. The Food and Drug Administration seized the equipment after Balla reported his concerns to the agency the day after he was shown the door. Balla argued that without an action for retaliatory discharge, he would face two equally unappealing choices. He could remain silent about the machines and risk professional discipline and perhaps criminal charges. Or he could tell the authorities and lose his job.
The court didn’t bite. Instead, it said the state’s professional conduct rules left Balla with no choice but to report. Thus, the court reasoned, public health was protected without letting lawyers file retaliatory discharge actions. But possible damage to confidentiality shared equal billing with the tort itself.
“We base our 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,” the justices stated.
The story changed slightly in 1994 when the California Supreme Court allowed in-house lawyer Andrew D. Rose to sue General Dynamics Corp. Rose complained General Dynamics fired him for investigating drug use among company workers, for protesting its refusal to investigate the electronic bugging of the security chief’s office, and for advice that its salary policies might violate federal wage and hour laws. General Dynamics Corp. v. Rose, 876 P.2d 487.
But what the court gave with one hand, it took away with the other by limiting disclosure of company secrets to specific and narrow situations already permitted under the state’s conduct rules and evidence code, such as a client’s intention to commit a crime. That means judges must dismiss claims that plaintiffs can’t fully develop without violating the privilege. Indeed, the Supreme Court warned of discipline for lawyers who reveal privileged material in the process of bringing unsuccessful actions. “The in-house attorney who publicly discloses the client’s secrets will usually find no sanctuary in the courts,” the justices wrote. “Except in those rare instances when disclosure is explicitly permitted by an ethics code provision or a statute, it is never the business of the lawyer to disclose publicly the secrets of the client.”
The third perspective began to appear in 2000 with decisions from state supreme courts in Montana, then in Tennessee and most recently in the Utah court’s discussion in Spratley. That line of cases follows ABA Model Rule of Professional Conduct 1.6, which allows a lawyer to reveal confidential material “to the extent the lawyer reasonably believes necessary … to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client.”
Though the third line envisions liberal use of client secrets, trial courts and plaintiffs also must shield the information from general public exposure through an array of devices, such as filing under seal, in camera inspection and protective orders. “The professional judgment of the former in-house attorney and the stringent limitations available to the trial courts are of paramount importance in restricting disclosures within the bounds of Rule 1.6,” wrote the Utah court.
Thus, because Spratley and Pearce’s complaint involved only State Farm, they couldn’t reveal information about individual policyholders they also represented while working there. The Supreme Court went on to warn lawyer- plaintiffs that a trial judge’s failure to prevent improper disclosure wouldn’t afford them safe harbor from professional discipline or sanctions in the litigation.
The offensive-minded take on lawyers’ confidentiality obligation under the conduct rules is of recent vintage. Indeed, the old ABA Model Code of Professional Responsibility limited disclosure to disputes over lawyers’ fees.
Expanding the Rule
When the ABA House of Delegates adopted the model rules in 1983, it expanded offensive use to “a controversy between the lawyer and the client,” a term that neither the rule nor the comments define. Indeed, the original comments only referred to fee disputes. In 2001, however, the ABA Standing Committee on Ethics and Professional Responsibility expressly held that in-house lawyers may use confidential information to establish retaliatory discharge claims. Formal Opinion 01-424.
Meanwhile, most commentators agree that the ABA was slow to expand other aspects of Rule 1.6 that also could allow release of confidential material in wrongful termination cases. The rule always had contained an exception that allowed disclosure to prevent a client from committing a crime that could cause death or serious physical injury. But that was it.
“It was just a bad road,” says Memphis lawyer Pera, who served as a member of the ABA Ethics 2000 Commission, which unsuccessfully sought to expand disclosure under the Model Rules. “Having started down that road, it took us 20 years to get off it.” The House in February 2002 voted down the Ethics 2000 proposal, which would have enlarged disclosure to cover contemplated and past financial and property crimes involving the lawyer’s services, as well as allowing disclosure to comply with another law or court order.
Passage would have moved the ABA closer to the mainstream of changing attitudes toward confidentiality already occurring in the states. But by late 2002 the breadth of the corporate scandals had become clearer. Congress and regulatory agencies reacted with passage of Sarbanes-Oxley and an accompanying SEC requirement that in-house lawyers report wrongdoing up the corporate chain of command. Also on the table was a still-live threat to force lawyers to go to outside authorities if necessary.
At the urging of the ABA Task Force on Corporate Responsibility, known as the Cheek Commission, the House of Delegates in August 2003 added the broader disclosure provisions to Rule 1.6 and to Rule 1.13, which governs lawyers’ duties when the client is an organization.
Also crucial to the law governing confidentiality is the relationship between client information in disciplinary conduct rules and client-lawyer privilege in evidence codes. Privilege governs admission of information learned from the client when a lawyer is called on to testify in courts or other proceedings. Conduct rules are broader because they cover all information relating to the representation, regardless of the source. Permitted disclosure can vary between the two doctrines, though courts may employ conduct rules in determining admissibility in a retaliatory discharge case.
“You’ve got to run it through both bodies of law,” Pera urges.
As the ABA changed its tune amid fallout from the corporate crime spree, the 16,500-member Association of Corporate Counsel also began to re-examine confidentiality in a new world. As amicus, the association had argued for the position the Illinois Supreme Court took in Balla. But now it’s studying the idea of at least letting an action proceed, so long as the court can guard client secrets from public view. The organization was expected to take up the matter at its annual meeting in October.
“Filing under seal may be the way a court can consider a claim without opening the file,” says association general counsel Susan Hackett. The trick, Hackett says, will be to ensure a lawyer-plaintiff a day in court while warding off spin-off actions and other dangers that can arise from widespread public disclosure. “We’re all involved in trying to strike that balance.”
Trial and Strategy
State Farm defender Sullivan, however, sees nothing but a snowball rolling down that slippery slope if courts start dabbling with sealed files and other techniques to keep the lid on client information. Besides the possibility of leaks, there’s the question of what happens at trial.
“I don’t know how you’re going to protect anything if you have a public trial,” Sullivan says. “It blows it wide open.” Terms of the Spratley settlement, by the way, are confidential.
So it’s not shocking that corporations have vigorously fought retaliatory discharge claims from the get-go, sometimes using unorthodox strategies. Among other issues, for example, both Spratley and Alexander involved attempts by the defendant companies to disqualify counsel for the former in-house lawyers on theories that counsel either participated in or could take undue advantage of the confidentiality breaches by advising their lawyer clients. Both defendants failed.
“Frankly, I think it’s just a delay tactic,” says Alexander’s lawyer, Stuart A. Rosenfeldt of Fort Lauderdale, Fla. Rosenfeldt says Tandem in effect considered him as another in-house lawyer–who also owed it a duty of confidentiality–because he helped his client prepare a letter detailing her allegations of retaliation and describing the company’s potential liability in the kiddie porn matter.
“I wanted to render them a bill based on that, but then I would have made their argument for them,” Rosenfeldt says.
While Rosenfeldt and Alexander view the intermediate court’s holding as granting them a cause of action for retaliatory discharge, Tandem so far only has asked that the Florida Supreme Court consider the disqualification question. In any event, it’s a case of first impression for the Sunshine State.
“As far as the issue of whether she has a claim goes, we haven’t even gotten there yet,” says outside defense lawyer Virginia Herrero Pagliery of Miami. In Spratley, State Farm was especially worried that plaintiff’s lawyer L. Rich Humpherys would obtain evidence from the former in-house lawyers for use in litigation for other clients Humpherys represented against the insurance company. Included were Curtis and Inez Campbell, policyholders who won $145 million in punitive damages in a case that arose from State Farm’s initial refusal to settle a claim against them for an auto accident. Their bad-faith allegations were similar to accusations by lawyers Spratley and Pearce in the retaliatory discharge case.
The U.S. Supreme Court eventually reversed the Campbells’ punitive damages award. The Utah Supreme Court said Humpherys perhaps could be disqualified from representing other litigants if he had learned confidential information from the in-house lawyers, but not from the retaliatory discharge case.
That wasn’t all. The trial court had ordered Spratley and Pearce to return the files they took with them when they left State Farm. The two filed an interlocutory appeal, figuring they could hold the materials until the issue was decided. But State Farm in the meantime asked the trial court to hold them in contempt. However, before the cell door slammed shut on the plaintiffs, the state Supreme Court stepped in and stayed the trial judge’s order. Pearce says he doubts he and Spratley ever would have seen the files again had they surrendered them.
“It was one of the darkest days of this litigation,” Pearce recalls. “We were forced to decide whether to give up everything or go to jail. Richard and I had a long talk, and I was ready to go to jail if that’s what it took to hold on to our evidence. I don’t remember ever thinking about just throwing up our hands and walking away.”
Staying the Course
From carpenters to high-level executives, all workers claiming wrongful discharge face financially and emotionally taxing uphill battles. It may be worse for lawyers. Besides the drain of going to court as plaintiffs, lawyers who have filed retaliatory discharge actions also face possible ostracism by their peers. And neither companies nor firms are particularly eager to hire a lawyer who’s trying to expose a client’s dirty laundry in a courtroom.
Yet none of the three lawyers interviewed for this story say they would have done things differently.
Pearce’s life story as a lawyer basically had consisted of in-house insurance defense work. Though some colleagues were supportive, Pearce says doing the same job on the outside was out of the question. So he never tried.
“I knew if I got a job in an insurance defense firm I probably would make the partners and the clients queasy,” Pearce says. He and Spratley changed hats and started their own personal injury plaintiff practice instead.
“I went 18 months without bringing home a dime,” says Pearce, who is married with five children. “We had to start drumming up business from PI sources against whom we had been doing battle for more than a decade. So it took a while to get things rolling in our favor.”
In Florida, Alexander says losing her job at Tandem was financially devastating. It took her eight months to land another one. And she knew she couldn’t hide the reasons for her departure from prospective employers. For Alexander, honesty wasn’t just the best policy. It was the only policy.
“The last thing you want to do in an interview is focus on that,” she says. “But the questions themselves are not as bad as the fear [from anticipation] about what you are going to say and how you’re going to explain it. That’s where the stress comes in.” In Chicago, former Arthur Andersen lawyer Ausman says she has been able to get by with a little law practice and with another business venture, though she declines to elaborate. But she reports an encounter with a headhunter that suggests she’s going to have to wait awhile before she’s employable.
“He said, ‘No one’s going to hire you until your litigation is resolved,’ ” Ausman recalls. “I think if you ask people in general if whistle-blowing is a good idea, they’d say yes. People think whistle-blowers are great, but they don’t necessarily want one in their organizations.”
Nevertheless, Ausman says she has the wherewithal and the stamina to see her case through to the end.
“Who’s going to benefit and who’s going to get hurt?” she asks. “Is that what the attorney-client privilege is for–so someone can hide behind it? How does that help the legal profession?”
Whether it’s a civil malpractice action or an analogous claim of ineffective assistance in a criminal case, clients assume the almost inevitable risk that lawyers will turn their secrets against them in self-defense.
Though only the client can waive the privilege that shelters communications with counsel, the protection is not universal. Professional conduct rules and evidence codes contain exceptions that allow the lawyers to use confidential client information against clients who accuse them of misconduct or shoddy work in the representation. While the provisions appear clear on their face, they begin to blur when someone other than the client enters the picture.
A third party may assert injury from the lawyer’s representation of a particular client, either by the lawyer and client acting together or by the lawyer alone. Involvement of the lawyer, client and the third party in a business venture gone bad may trigger such a claim. Or even if a client lodges an ethical grievance against the lawyer with a disciplinary agency, the agency, not the client, effectively becomes the plaintiff, and the third party question arises again.
ABA Model Rule of Professional Conduct 1.6 on confidentiality does allow lawyers to disclose client secrets in matters where third parties allege wrongdoing by lawyers and clients acting together. Less clear to practitioners, however, is what happens when the lawyer alone stands accused in a disciplinary proceeding.
“I think, frankly, client consent must be obtained,” says Sarah Diane McShea, a professional responsibility lawyer from New York City who specializes in disciplinary matters. “The lawyer has to continue thinking for the client, even when the lawyer is defending himself in a proceeding.”
While such situations are rare, lawyers facing professional punishment understandably find the third party dilemma troubling, says James J. Grogan, chief counsel for the Illinois Attorney Registration & Disciplinary Commission.
“Few attorneys really understand the limits and protections of Rule 1.6,” Grogan says. “What we try to do is work around it. We investigate around it. There’s always something out there.”
The commission can subpoena client files, but Grogan says it prefers first to work out waivers with clients. Public records from courts and other sources also can be rich with information lawyers need to defend themselves.
“It’s surprising how often a grievance can be concluded without formal action by looking to the public record,” Grogan says.
Lawyers using client information also should draw the line as closely as possible to nondisclosure, McShea advises.
“Where the actual line gets drawn is going to depend on the nature of the complaint, the seriousness of the allegations and the sources,” she says. Disciplinary investigations ordinarily don’t pose a major risk of wholesale public release of client secrets because they usually remain closed unless they result in recommendations of formal punishment.
Malpractice actions in public courts present a larger danger. To prevent that, professional responsibility lawyers regularly urge courts to seal client materials, inspect them in camera or issue protective orders that can mean sanctions for violators. Relevance also is key, regardless of the setting. So, for example, while certain materials may be appropriate in a contract dispute, a document dump that includes the client’s entire mental health history may cross the line. And though courts may be entitled to privileged information, that doesn’t mean everyone is.
That not only includes third-party matters but direct disputes between lawyers and clients. “If my client accuses me of bad things, I can defend it to the bar, but I can’t take out an ad in The New York Times decrying my client’s behavior,” says professional responsibility specialist Peter R. Jarvis of Portland, Ore.
– John Gibeaut
John Gibeaut is a senior writer for the ABA Journal.
John Gibeaut is a senior writer for the ABA Journal.