(by Kathleen Clark & Nancy J. Moore)
Financial rewards for whistleblowers are becoming an increasingly important tool for law enforcement. The federal government has awarded over $4 billion to whistleblowers under the False Claims Act (“FCA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
May lawyers – like other employees and insiders – receive whistleblower awards? We explore this question in an article that will be published by the Boston College Law Review next month.
On November 13, 2015, a New York state court ruled against a whistleblower-lawyer who sought a financial award under New York’s False Claims Act. New York ex rel. Danon v. Vanguard Group Inc., No. 100711-13 (Sup. Ct., N.Y. Cnty., May 8, 2013). The court’s decision is consistent with other precedents that have also prevented lawyers from obtaining FCA whistleblower rewards.
David Danon, formerly in-house counsel to Vanguard, filed a qui tam FCA case alleging that the company engaged in large-scale tax fraud. According to the lawsuit, Danon repeatedly raised questions within the company about its allegedly illegal practices, to no avail. In January of 2013, Vanguard told Danon that he would be terminated. He began collecting documents and turned them over to the New York Attorney General’s office, the SEC and the IRS. (Both the SEC and the IRS have whistleblower reward programs.)
In May of 2013 – one month before he was terminated – Danon filed his qui tam lawsuit under seal. (This is the first reported case in which a lawyer-whistleblower filed an FCA lawsuit against a client while still employed by the client.) After the New York Attorney General declined to intervene and the case was unsealed, Vanguard sought dismissal of the suit and disqualification of Danon and his counsel, arguing that in bringing the qui tam lawsuit, Danon violated ethical rules on confidentiality and conflicts of interest.
The court dismissed Danon’s qui tam lawsuit because it determined that he violated New York’s confidentiality standards, Rule 1.6 and 1.9(c). While New York permits a lawyer to disclose otherwise confidential information in order to prevent a client from committing a crime, the lawyer may disclose only that information the lawyer “reasonably believes necessary” to prevent the crime.
According to the court, bringing a qui tarn action is not “reasonably necessary to prevent [a client] from committing … a crime” because a lawyer could simply inform law enforcement, as Danon did, rather than seeking an FCA award. In our forthcoming article, we suggest that there are times when filing an FCA lawsuit may be reasonably necessary to prevent ongoing crimes (or rectify past crimes) because the government often relies on whistleblowers’ lawyers to conduct a preliminary investigation to determine which claims are worth pursuing. The court also found that Danon’s extensive disclosure of Vanguard’s past misconduct was improper because disclosing past misconduct is not “necessary to prevent” a client’s future violations. In addition to dismissing the case, the court disqualified both Danon and his lawyer from pursuing any related qui tam action.
The court did not address Vanguard’s argument that Danon also violated New York’s conflict of interest rule, which prohibits a lawyer from representing a client if there is a significant risk that the lawyer’s judgment will be adversely affected by the lawyer’s own financial interest.
Danon worked in-house for Vanguard in Pennsylvania, and was licensed in both Pennsylvania and New York. The court applied New York’s confidentiality rules. The Pennsylvania rules, unlike the New York rules, permit disclosure in order to rectify or mitigate a client’s past crime or fraud if the client used the lawyer’s services in the wrongdoing. The court’s decision did not indicate whether Vanguard used Danon’s services in furtherance of its alleged fraud. Nor did it explain why it applied New York (rather than Pennsylvania) rules.