On January 18, 2018, the Ontario Securities Commission (“OSC”) released for comment a proposed change to OSC Policy 15-601 - Whistleblower Program. The proposed change aims to clarify when in-house counsel are eligible to make a submission under the Whistleblower Program, and when they are barred from doing so. Specifically, the proposal would clarify that counsel are prohibited from participating in the program when the information they wish to report was obtained when acting in their legal capacity. This clarification apparently seeks to reflect respect for lawyers’ obligations of confidentiality and fidelity to their clients, even when they become aware of their employers’ wrongdoing.
The OSC Whistleblower Program
Launched in July 2016, the Office of the Whistleblower and the Whistleblower Program offer financial incentives to individuals in return for information that leads to significant enforcement action.
Under the program, individuals including employees and suppliers who voluntarily submit original information relating to a violation of Ontario securities law, such as illegal insider trading and/or tipping (excluding criminal or quasi-criminal matters), are eligible for a ‘bounty’ of between 5 and 15% of the total sanctions imposed and/or voluntary payments made where the amounts total $1 million or more - if such information leads to an administrative proceeding, and certain conditions are met. The Whistleblower Program has been the subject of prior commentary by Osler.
In addition to the monetary awards, whistleblowers are also afforded protection from reprisals under the Ontario Securities Act (“OSA”) which prohibits reprisals by employers against employees for reporting securities violations. The OSA also provides that any confidentiality provision which precludes or purports to preclude the employee from such reporting, are void.
The proposed change
Currently, individuals who obtained their information while providing legal services to the subject of the submission are ineligible to participate in the Whistleblower Program. As a result, in-house counsel are not permitted to make whistleblower submissions except in a limited set of circumstances where:
- the whistleblower has a reasonable basis to believe that the disclosure of information is necessary to prevent substantial injury to the financial interest or property of the entity or investors;
- the whistleblower believes that the subject of the submission is engaging in conduct that will impede an investigation; or
- at least 120 days have elapsed since the whistleblower became aware of the relevant information and either made an internal report on it or became aware of an internal report on the information.
While the existence of these exceptions recognizes that there are often situations in which an employee provides both legal and non-legal functions within an organization, the Law Society of Ontario has raised concerns that they may tacitly ‘permit’ professional misconduct on the part of in-house counsel.
The proposed change to the Whistleblower Program therefore sets out that the exceptions to ineligibility would no longer apply to in-house counsel with respect to information obtained when acting in their legal capacity, unless disclosing the information would otherwise be permitted under applicable Law Society rules.
In-house counsel as whistleblowers in the US
Similar concerns regarding in-house counsel as whistleblowers exist in the United States. Although most whistleblowing guidelines in the US do not categorically exclude lawyers from participating, they are generally ineligible if the information was learned while acting in their legal capacity.
In the Securities and Exchange Commission (“SEC”) whistleblower program, Rule 17 CFR 240.21F-4(b)4 of the Corporate Finance Rules (“CFR”) denies whistleblower protections to lawyers who attempt to disclose information learned in the course of representation unless disclosure is permitted by state ethics rules or other specific exemptions listed in the SEC CFR. Notably however, the SEC CFR can be seen in some cases to permit disclosure otherwise not expressly permitted by the ethics rules in a number of states. For example, the SEC Rules allow disclosure in cases where it is required to prevent serious financial harms – something which is not contemplated as a justifiable breach of the duty of confidentiality under legal ethics rules in California. This is of course significantly different than the OSC proposed change, which appears to clearly defer to any applicable Law Society rules.
The issue of in-house counsel as a whistleblower has been addressed in US case law as well, though no clear consensus has emerged. In United States ex. Rel. Fair Laboratory Practices Associates v Quest Diagnostics Inc., 734 F.3d 154, 163 (2d Cir. 2013), the Second Circuit upheld a ruling which dismissed an action brought by the former general counsel of the defendant, Unilab Corp. In the decision, the Second Circuit held that state statutes and rules regulating an attorney’s disclosure of client confidences were not pre-empted by the applicable whistleblower program (the False Claims Act in this case). The former general counsel’s decision to “spill his guts and freely disclose Unilab’s confidential information” went well beyond what was authorized under the crime/fraud exception of the New York Rules of Professional Conduct. The dismissal also disqualified the former general counsel from bringing further whistleblower claims on the basis that “such measures were necessary to prevent the use of [the former general counsel’s] unethical disclosures against [the] defendants.”
However, as we have commented on previously, the recent case of Wadler v Bio-Rad Laboratories, Inc. has taken a different approach. In Wadler, the Plaintiff brought a retaliatory discharge claim under the Sarbanes-Oxley whistleblower program. In allowing the plaintiff to use as evidence privileged information gained during his time as counsel to Bio-Rad Laboratories, the Court held that in cases where federal and state-law claims overlap, federal common law shall govern the application of attorney client privilege – not state ethics rules.
Takeaways and considerations
In-house counsel often walk a blurred line between being a legal advisor, and acting in a business capacity. The proposed changes emphasize that when acting in a legal capacity, in-house counsel are strictly governed by their professional obligations, as required of them by the Law Society. The proposal emphasizes that in-house counsel who fulfill both legal and non-legal roles within an organization consistently need to consider both their role and obligations if and when they contemplate reporting their employers’ misdeeds. Comments on the proposed change may be submitted to the OSC until March 20, 2018.