Thursday, June 24, 2010

In-House Whistleblower Claims Dismissed

A plurality of the Minnesota Supreme Court held that the former (and fired) in-house general counsel for Sybaritic, Inc. had failed to establish a whistleblower claim that he had been terminated from his position based on his advice that the client was illegally withholding discovery in litigation. The court held that the statute does not contain a job duties exception to bar an employee who reports suspected illegality as part of job duties from bringing a claim. The job duties of the reporting employee are relevant to determining good faith in the reporting.

Sybaritic is a company that sell that manufactures and sells equipment and spa products for spa and medical-spa industries.The in-house counsel sent around an e-mail entitled "A Difficult Duty" that expressed concern about a "pervasive culture of dishonesty" in the company and specific concerns about the conduct of an ongoing  matter in Estonia. The e-mail concluded by stating that he had a "firm conviction" that the company:

intends to continue to engage in tax evasion, the unauthorized practice of medicine and obstruction of justice...it is my intention to advise the appropriate authorities of these facts. I do this with no ill will. To the contrary, I wish that I was not obliged to do so. However, the demand of Sybaritic that I become attorney of record in the [intellectual property action] has made it impossible to ignore the obstruction of justice issue, and compels me to speak out about the tax evasion and unauthorized practice of medicine issues which the company has refused to address. I regret I se no other course of action available.

The company changed his supervisor the day after the e-mail was sent and fired him three weeks later. The parties at trial presented conflicting evidence concerning the reasons that in-house counsel had been fired. The company found he had copied his father on the e-mail and felt it could "no longer trust [him] as general counsel." He claimed that the reasons for discharge were pretextual. The jury sided with him and awarded $197,000 in damages. That award was overturned by the Court of Appeals.

 The court plurality here rejected the lower court's legal conclusion that a broad "job duties" exception barred the suit. However, the plurality concluded that the evidence established that the e-mail was sent as part of counsel's job duties, which precluded a whistleblower action:

When in-house counsel sends his client written advice in order to "pull" that client "back into compliance," as [he] said he did in this case, the lawyer is not sending a report for the purpose of exposing an illegality and the lawyer is not blowing the whistle.

Chief Justice Magnuson concurred, and would hold that the attorney's breach of his fiduciary duties to the client bars the claim. In the Chief Justice's view, the attorney's violation of the duty of confidentiality was fatal to the claims:

A lawyer may bring a whistleblower claim, but he or she is not thereby relieved of the fiduciary obligations imposed by the Rules of Professional Conduct, either before or after the claim is brought. Any disclosures of client confidences must be within the strict confines of the Rules of Professional Conduct. I would therefore hold that when a lawyer breaches his or her fiduciary duty to the client, the client has an absolute right to terminate the attorney-client relationship. And that right cannot be burdened by any claim from the lawyer for compensation or other damages.

Justice Anderson dissented, and would hold that the court plurality has created an "artificial evidentiary hurdle in proving mental state" that failed to give deference to the favorable jury award to the former in-house attorney at trial. The dissent finds sufficient evidence to support the jury's conclusion that the attorney acted in good faith and with an intent to blow the whistle. The dissent notes that the attorney's supervisor was an attorney convicted of mail fraud and suspended in 1984.

Justices Page and Meyer joined the dissent.

(Mike Frisch)

http://lawprofessors.typepad.com/legal_profession/2010/06/the-minnesota-supreme-court-held-that-the-dismissed-in-house-general-counsel-for-sybaritic-inc-failed-to-establish-a-whistl.html

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