The United States has paved the wave globally in terms of providing financial awards to whistleblowers. A few other countries have begun to follow their lead, including Canada.
In 2011, for example, the US Securities and Exchange Commission (SEC) approved new whistleblower compensation rules. To be eligible for whistleblower compensation several conditions must be met: (i) the individual must voluntarily provide information, that is the person must provide it before requested to do so by the government or a self-regulatory organization; (ii) the information must be provided to a governmental or self-regulatory organization. A report to a company’s internal compliance or corporate governance official can count as a report to the government provided either the whistleblower or his or her company reports the information to the government within 120 days of the internal report; (iii) the information must be based upon the whistleblower’s own knowledge or analysis and (i) the information must lead to a successful enforcement action.
The rules also establish who is not eligible for compensation including: (i) anyone who had a pre-existing legal or contractual duty to report the information to the governmental entity; (ii) attorneys who report privileged information, unless such reports are permitted under SEC rules or state bar rules; (iii) anyone who obtains the information through the commission of a crime; (iv) foreign government officials; (v) employees who learn the information through a firm’s hotline; (vi) compliance and internal audit personnel, with some exceptions; and (vii) governmental employees and people who are criminally convicted in connection with the conduct they report.
Canada Following Suit
In January 2014, Canada followed the lead of the United States and started offering rewards for tax whistleblowers. The Canada Revenue Agency will pay for tips concerning international tax noncompliance through its Offshore Tax Informant Program. The program allows for an award of between 5% and 15% when more than $100,000 in federal taxes are collected.
There is a growing concern in the U.S. that as the “relator’s share” awarded to whistleblowers continues to rise and is increasingly well publicized… lawyers serving as in-house counsel or compliance officers may turn the tables against their employers.
In Ontario, the Ontario Securities Commission (OSC) recently invited comment on a proposed comprehensive whistleblowing program which would award eligible whistleblowers up to $1.5 million for reporting securities law misconduct that leads to significant enforcement or settlement orders.
U.S. Court Decision Regarding In-House Counsel
The United States Court of Appeals for the Second Circuit has issued an important ruling affecting in-house counsel who act as whistleblowers in litigation against their current or former employers.
In United States ex. rel. Fair Laboratory Practices Associates v. Quest Diagnostics Inc., the Second Circuit upheld a Southern District of New York ruling which dismissed an action brought by the former general counsel of the defendant Unilab Corp., a wholly-owned subsidiary of Quest Diagnostics, and two other Unilab executives. The ruling disqualified them and their external counsel from bringing any subsequent related action seeking a whistleblower award, on the basis that “such measures were necessary to prevent the use of [the former general counsel’s] unethical disclosures against defendants.”
There is a growing concern in the U.S. that as the “relator’s share” awarded to whistleblowers continues to rise and is increasingly well publicized, and the number of statutes encouraging reporting and providing for recovery to those who report increases, lawyers serving as in-house counsel or compliance officers may turn the tables against their employers.
The Second Circuit decision is of interest to general counsel in Canada who represent companies with a presence south of the border. It also holds important lessons for our legislators in terms of balancing the public interest in encouraging disclosure and attorney-client privilege as Canada wades into whistleblower legislation providing for financial awards.
Final Thoughts
It will be interesting to see how Canadian legislators, including the OSC, will address the issue of attorney-client privilege in the context of regulatory violations. I suspect they will arrive at the same conclusion as the Second Circuit: The sanctity of the attorney-client relationship will in general trump allegations of regulatory violations. An additional caution can be extracted from the decision: In-house counsel who appear motivated primarily by financial gain or act out of spite may be denied compensation notwithstanding how instrumental they may have been in blowing the whistle and saving taxpayers significant dollars.
You can read this full article online in the current issue of Canadian Lawyer: In-House.