Last week, the United States Court of Appeals for the Second Circuit heard arguments on whether lawyers are allowed to bring whistleblower lawsuits against their employer and client (U.S. ex rel. Fair Laboratory Practices Associates vs. Quest Diagnostics Inc. et al.).  A U.S. District Court threw out the case in April of 2011, ruling that the in-house lawyer violated his duty to keep his client’s information confidential.

The case involves a Quest Diagnostics subsidiary, Unilab Corp., and the subsidiary’s former general counsel, Mark Bibi.  Bibi brought suit against Unilab in 2005 after leaving the company.  Unilab’s former CEO and former CFO are also plaintiffs in the case.  The suit claims that Quest fraudulently undercharged doctors’ associations for testing in order to increase the amount of Medicare and Medicaid services referred to it.  Bibi is fighting to have the case reinstated, arguing that the suit is within an exception to the rules protecting lawyer-client confidentiality.  Bibi’s lawyers argue that the exception applies in this case because Bibi believed Quest was participating in ongoing crime.

It was clear during oral arguments that the Second Circuit judges were concerned about a lawyer having the ability to turn on his or her client and did not appear ready to allow lawyers to bring qui tam suits against former employers, particularly for financial gain.  The Second Circuit opinion in this case is expected to be released in the next couple of months.

At least three other courts considered this issue and allowed the lawyer to proceed if an exception to the lawyer’s confidentiality obligation was met.  This case may turn on New York’s ethics rules related to confidentiality of client information because the state’s restrictions on client information are particularly strong.

Further complicating this case is the fact that Bibi stands to gain financially from the lawsuit.  As a qui tam relator under the False Claims Act, Bibi could be awarded a percentage of any judgment against Quest in this case.  It is one thing for a lawyer to be able to blow the whistle and stop a former client from engaging in illegal activity, but it is an entirely different matter for a lawyer to be able to get large sums of money for bringing the illegal activity to light.

Our insight.  Your advantage.  Companies that employ in-house attorneys should watch the outcome of this case closely and review their corporate structure and state ethical restrictions to understand whether they are at risk for such a lawsuit.  While the best protection against such lawsuits is to avoid illegal activity, it is also important to understand the type of lawsuit a disgruntled employee, including an in-house attorney, may be able to bring.