Sanford Wadler. (Photo: Jason Doiy/ALM)

 

The Friday afternoon meeting on June 7, 2013, between Sanford “Sandy” Wadler and Norman Schwartz started out like most weekly check-ins between the two Bio-Rad Laboratories Inc. senior executives.

Wadler, the company’s longtime general counsel, walked four doors down the hall in the company’s Northern California headquarters to the office of Schwartz, Bio-Rad’s CEO. Wadler had a seat and began talking about the latest pressing legal issues at the Fortune 1000 life sciences company.

Schwartz, Wadler would note later, seemed a bit distracted. Wadler noticed that the CEO hadn’t closed his office door at the beginning of the meeting, as was his custom.

At some point the company’s human resources chief, Colleen Corey, quietly stepped in and had a seat next to Wadler. After Corey entered, Schwartz began to read from a prepared script.

“Sandy, you have served the company well for many years as we have grown,” said Schwartz, according to handwritten notes he used during the meeting that more than three years later would be used as evidence against Schwartz and the company in a whistleblower retaliation trial. “We are obviously a much different company today, with ever bigger challenges.”

The company’s board, Schwartz said, had “determined that the company needs to make a change.”

Wadler was mystified. He’d served the company for nearly 26 years, 20-plus as Bio-Rad’s general counsel. About six months before the June meeting, Schwartz had given him a raise, a title bump to executive vice president, and a glowing review labeling him the company’s “MVP on the negotiation front.”

But in the months since, Wadler had gone from MVP to persona non grata, irritating and exhausting the company’s leadership with a crusade to uncover potential violations of the Foreign Corrupt Practices Act in the company’s China operations. A formal report to Bio-Rad’s board in February 2013 forced Bio-Rad’s board to hire lawyers at Davis Polk & Wardwell to conduct an independent investigation that ran up $900,000 in legal bills. After all the expense, the investigators came up empty, reporting “no evidence of corruption” in China.

But that wasn’t why Wadler was being fired, Schwartz continued, reading from his script: “This has nothing to do with the recent Davis Polk investigation,” he said.

In February, a San Francisco jury weighing Wadler’s whistleblower claims didn’t buy Schwartz’s “this has nothing to do with” it line. At the end of a three-week trial, the nine jurors found that Wadler had been fired precisely because he blew the whistle and set the Davis Polk investigation in motion. Except where noted, the details of this story are taken directly from trial exhibits and testimony. Wadler, through his attorneys, declined to comment. Bio-Rad also declined to comment.

In total, Wadler was awarded $11 million in damages and interest and another $3.5 million in attorney fees and costs. The verdict was a win for Wadler’s legal team at San Francisco litigation boutique Kerr & Wagstaffe and a blow to Bio-Rad’s trial team at Quinn Emanuel Urquhart & Sullivan, led by San Francisco partner John Potter, co-chairman of the firm’s white-collar and government investigations group.

Wadler’s trial aired Bio-Rad’s corporate dirty laundry and provided a rare behind-the-scenes look at two internal FCPA investigations. Two lawyers retained by the company, former Steptoe & Johnson LLP partner Patrick Norton and Davis Polk partner Martine Beamon, testified that Wadler’s concerns about China weren’t backed up by available evidence. But the professional judgment of Bio-Rad’s internal investigators wasn’t persuasive when held up against Wadler’s claims that he had been fired for alerting the company to a potential problem.

Wadler’s case illustrates how carefully companies must tread when considering terminating a whistleblower. And it has lawyers in the whistle­blower defense bar concerned that other companies may come under attack from lawyers-turned-whistleblowers.

“It’s a very slippery slope when we open the doors to in-house counsel to have broad protections of whistleblowers,” says Gregory Keating, the chairman of Choate Hall & Stewart’s whistleblower defense practice. Keat­ing says it’s in-house lawyers’ job to identify potential legal issues and raise them with management and they owe their clients a “time-honored and sacred” attorney-client privilege that should put their work decisions off-limits to legal claims in all but the most extreme cases.

Lawyers who represent whistleblowers, meanwhile, see Wadler’s case as an illustration of why companies shouldn’t be exempt from valid retaliation claims from lawyers. “I think what we’re seeing here is a slow chipping away at the sanctity of the attorney-client privilege and a recognition that attorneys have a role to play beyond keeping their clients’ dirty secrets from ever coming forward,” says Constantine Cannon’s Eric Havian.

The FCPA Blind Spot

Bio-Rad began as the life sciences equivalent of a mom-and-pop shop in a 1,600-square-foot Quonset hut in Berkeley, California. Norman Schwartz’s parents, David and Alice, founded the company in 1952 after meeting in a class at UC-Berkeley. (Alice, now in her 90s, still sits on the company’s board and was deposed as part of Wadler’s case.) Bio-Rad began selling tools and reagents used to identify and analyze chemicals and biological material and later moved into providing the equipment and diagnostic tests used in hospitals and research facilities.

Consider Bio-Rad a bridge between Bay Area industrial giants such as Chevron Corp. and The Clorox Co. that were founded in the first half of the 20th century and technology firms that sprouted from Silicon Valley garages in the century’s latter half. In one important way Bio-Rad was a corporate forerunner of the region’s technology companies: The Schwartz family retains a majority of the company’s voting shares, effectively giving them control of the company’s board, just like founders at many younger public companies in the entrepreneur-friendly region.

Wadler joined in 1988 as the company’s first staff attorney to do patent work. A New York native, Wadler pursued graduate studies in biochemistry before working his way through Brooklyn Law School teaching ninth-grade science. Within his first five years at Bio-Rad, he was named the company’s first general counsel and his responsibilities broadened as the company went through a steady stream of international acquisitions, picking up France’s Sanofi-Pasteur in 1999, Switzerland’s DiaMed GmbH in 2007 and Germany’s BioTest AG in 2010.

“These acquisitions were so massive, they would drown the legal department,” Wadler testified at trial. Although Bio-Rad grew to nearly 8,000 employees and annual revenues of about $2 billion by the time he was fired in 2013, his legal department remained at around a dozen lawyers, he said.

Even at trial, three-and-a-half years after firing Wadler, Schwartz conceded that Wadler was “a good general counsel.” The CEO pointed out that Wadler was especially solid on the “negotiation front” during the company’s growth spurt.

But as the company grew to sell into more than 100 countries, Wadler and Bio-Rad developed a glaring blind spot in regards to the Foreign Corrupt Practices Act. The federal anti-bribery statute can put companies on the hook for large penalties for profiting from kickback schemes or failing to keep adequate accounting for overseas business dealings. At trial, Schwartz testified that after seeing a string of newspaper stories about other companies hit with big FCPA fines in the mid-2000s, he asked Wadler if he should be concerned. Wadler advised him that the law “had been on the books for many, many years” but was seldom enforced, Schwartz testified.

Beginning in 2009, Bio-Rad officials got a crash course in the FCPA after the company’s accounting department spotted irregularities in the records of its Vietnamese and Thai operations—outsized commissions to salespeople and mysterious payments to third parties.

After the company’s chief financial officer flagged the issue, Wadler hired Steptoe & Johnson partner Patrick Norton, an FCPA specialist, in January 2010, to conduct a preliminary inquiry. By February, Norton had confirmed there were illicit payments being made in Southeast Asia. In April, Norton’s team conducted a limited review of sales in five countries to determine if the problem might be more widespread. When they spotted additional potential issues in Russia, Bio-Rad’s board authorized a fuller investigation. Norton hired forensic audit firm Protiviti Inc. and on May 3, 2010, disclosed the investigation to the U.S. Department of Justice and the U.S. Securities and Exchange Commission. A day later the company disclosed the investigation in its quarterly report.

Following leads from the forensic accountants and a search of company emails, Steptoe lawyers interviewed 75 Bio-Rad employees in California, Singapore, Vietnam, Thailand, France, Russia, Hungary, China, Hong Kong, India, Brazil, Switzerland and the United Kingdom. The Steptoe lawyers found the most serious problems in Vietnam and Cambodia, where about $37 million of the company’s $52.9 million in sales from 2005 through 2009 involved improper payments to government doctors or hospital administrators—about $2.7 million in total kickbacks. Steptoe found a smaller-scale kickback issue in an arm of the company’s Thailand operations and noted some “red flags” in China, but found no evidence of FCPA violations there.

In January 2012, the Steptoe team made a presentation to government investigators explaining that Bio-Rad’s highly decentralized management structure—a remnant of its days as a smaller family-run business—left many decisions in the hands of local and regional managers. Whatever its commercial benefits, the structure had left the company vulnerable on the FCPA front. The company had no formal FCPA policy and relied on an ethics statement that simply stated employees weren’t allowed to pay bribes.

Bio-Rad’s board vowed to change. About half a dozen employees were fired as the company installed new policies, a global compliance officer, and new anti-corruption training. Settlement talks with the government ensued. In 2014, after Wadler was fired, the company paid the government $55 million as a result of the bribery issues in Vietnam and Thailand and its failure to maintain adequate books and records in Russia.

GC Turned Whistleblower

It was against the first investigation’s backdrop that Wadler said he stumbled on what he thought were additional issues in China that Steptoe had missed.

Wadler and his legal department were tasked with tracking down documents showing the price that end users paid for products sold in China as part of a licensing deal with rival Life Technologies Inc. Without documentation of what end users paid, Bio-Rad was required to pay 1.67 times the baseline royalty rate—potentially costing the company tens of millions of dollars. Over two years from 2010 to 2012, Wadler and his team had asked the company’s finance department and its China subsidiary to help track down distributor documents that would show the end user prices, but as of November 2012 he had only a single contract.

Even more concerning to Wadler than the paucity of documents was that the one contract he had in hand appeared to show that the customer—a public university in China—had paid for two items, but had been shipped five.To Wadler, it looked like a bribe. Wadler testified at trial that he found the document “very disturbing” and he went to Schwartz to discuss it. “Norman looked at me,” Wadler testified at trial. “You know, he was very casual. He just said ‘I know.’” Wadler said.

According to Wadler, Schwartz told him he had already spoken to another Bio-Rad executive about the issue. Wadler was left with the impression that Schwartz wasn’t going to do anything about his concern.

About 150 other example documents trickled in during subsequent months and about 30 percent showed the same pattern of more items shipped than purchased. Wadler testified he met with Schwartz again around the turn of the year to discuss the problem and Schwartz changed the subject. (Schwartz testified those conversations never took place.)

Convinced that something was wrong, Wadler hand delivered a memo about his conclusions to the Bio-Rad audit committee on Feb. 8, 2013.

“I have now become aware of what I believe to be serious and prolonged violations of the FCPA in Bio-Rad’s business in China,” Wadler wrote. “The earlier Steptoe & Johnson investigation did not delve deeply enough into the business practices in China and failed to uncover what I believe to be the FCPA violations.”

He wrote in italics, “The only conclusion I can draw from this limited collection of documents is that these practices are endemic and that high levels of management within the company had to know they were happening.”

Bio-Rad’s outside lawyers at Steptoe and Davis Polk reached very different conclusions about the importance of the documents Wadler considered evidence of FCPA violations. Steptoe’s Norton testified that the phenomenon Wadler had spotted could be explained in most instances as products that were purchased as a package, but shipped separately. Others included low-value toss-in items, such as test tubes, that didn’t rise to the level of bribery.

According to Norton, this wasn’t the first time he’d questioned Wadler’s legal judgment. Norton testified that he warned Wadler in September 2011 during his first investigation that he was going to suggest that Bio-Rad’s board fire the general counsel for letting the FCPA issues bubble up on his watch. “He didn’t argue with me. He—I thought he seemed rather taken aback,” Norton testified. Wadler denied ever getting such a warning.

To look into Wadler’s China allegations, Bio-Rad’s audit committee hired Davis Polk in February 2013. But in attempts to speed the second investigation along, the Davis Polk lawyers initially turned to Norton, a Chinese speaker who’d previously lived in China, to go to the country and interview Bio-Rad employees. Norton testified at trial that Wadler’s perception of corruption was based on misconceived notions of how business works in China. Norton said that Wadler didn’t understand that the company didn’t need sales information from Chinese distributors to find the data he needed. Distributors in China are bound by the prices set in deals with import/export agents, for whom Bio-Rad did have documents, Norton said.

Davis Polk partner Martine Beamon, like Norton, said Wadler had difficulty articulating why his concerns rose to the level of potential FCPA violations. “We repeatedly asked him for any evidence or information that he had that suggested that there was an FCPA issue in China,” Beamon said in her testimony. “I could never really get a clear understanding from him as to why it was that he believed that to be the case.”

On June 4, 2013, Davis Polk delivered its report to Bio-Rad’s board: “We have found no evidence to date of any violation—or attempted violation—of the FCPA.”

Two days later, Wadler was fired.

The defense narrative said Wadler was wrong in his suspicions. Wadler’s lawyers insisted that Bio-Rad and its outside attorneys never thoroughly investigated his concerns.

Mike Koehler, a professor at Southern Illinois University School of Law and author of the FCPA Professor blog, says that due to the lack of reported decisions and litigated cases involving the FCPA, the practice remains a “wishy-washy gray area.” There aren’t clear standards for what constitutes a violation or best practices for conducting an internal investigation, he says. “You could get 10 competent FCPA experts in a room and they would disagree over what does and does not constitute a violation,” Koehler says. “This isn’t like taking an X-ray of a patient and either the bone is broken or it’s not broken.”

The ‘Defense Playbook’

Bio-Rad’s lead trial lawyer, Quinn Emanuel partner John Potter, painted an even less flattering picture of Wadler than the company’s outside FCPA lawyers did. Potter and his colleagues put on testimony from the company’s chief financial officer, its human relations chief, and others within Bio-Rad to describe a series of outbursts by Wadler at meetings during his final months at the company. CFO Christine Tsingos testified that she even considered getting a home security system for fear of her personal safety after one heated exchange with Wadler. In his opening statement, Potter argued that Wadler was “terminated for becoming unreliable and unpredictable in the last six months of his tenure at the company.”

Attacking the whistleblower is “page one of the defense playbook,” says Constantine Cannon’s Havian.

“Whistleblowers almost by definition are not the go-along-to-get-along type of people. They are the people who are in your face,” he says. “If they see something that is wrong, they don’t zip it. They don’t shut up.”

Potter and the Quinn Emanuel team not only took aim at Wadler’s personality, but also attempted to undermine the credibility of his whistle­blowing. In his opening statement, Potter, a buttoned-up, baby-faced former federal prosecutor, said the February 2013 memo was Wadler’s attempt “to reinvent himself—to go from an FCPA slacker to an FCPA whistleblower.” To Potter, Wadler was a lawyer on his way to being fired who had set up his longtime employer with a set of allegations he knew were bogus.

The Quinn Emanuel team subbed in a little more than four months before trial, replacing a team at Latham & Watkins led by Linda Inscoe, co-chairwoman of the firm’s employment law practice. Inscoe declined to comment. Quinn Emanuel’s Potter didn’t respond to messages.

The Undelivered Review

In a case that referenced thousands of documents, one stuck out to jurors: A negative review Schwartz drafted for Wadler that was never delivered.

The document was dated April 15, 2013. But metadata—the underlying information that can be used to determine the source, type, and creation date of a particular file—indicated that it was created in July of that year, a full month after Wadler was fired.

Wadler’s lead lawyer, James Wagstaffe, insisted that the review was a fake and that Bio-Rad officials had created it to rationalize their decision to fire a whistleblower. Compounding the metadata problem, Schwartz and Bio-Rad HR chief Colleen Corey had signed sworn declarations in administrative proceedings before the Department of Labor that left the impression that the document had been created in April 2013.

In closing arguments, Potter conceded that he couldn’t “provide full explanations as to why the metadata shows that it was typed up in July,” but claimed that the assessment of Wadler’s performance contained in the unfinished review was true as of April.

Wagstaffe, meanwhile, knew the metadata was his smoking gun. “The metadata, the CSI metadata, is the most unbiased piece of testimony in this case,” he said.

The white-bearded lawyer cut a contrasting figure to Quinn Emanuel’s Potter. Wagstaffe introduced himself to potential jurors during voir dire saying his kids tease him that the J-I-M of his name stands for Jaws In Motion. Three weeks later during closings, he confessed to jurors that he hadn’t cut his hair during trial because of superstition.

“I want the jury to see me as a regular guy because lawyers can seem arrogant,” Wagstaffe said in a post-verdict interview with The American Lawyer affiliate The Recorder. “I was trying to be a person they could identify with.”

During deliberations, jurors asked for one clarification: Did the metadata refer to the date the file was created or the date it was modified? U.S. Magistrate Judge Joseph Spero of the Northern District of California told jurors it referred to the creation date.

Two hours later, the jury deemed Wadler a whistleblower and handed him the victory.

Why Air Its Dirty Laundry?

Given everything that Bio-Rad had already been through in settling with the government, Koehler, the Southern Illinois law professor, says that he would have expected the company to find a way to avoid trial with Wadler. “I’m awfully, awfully surprised that this company would press forward with defending this case and have their dirty laundry aired in public,” Koehler says.

But Constantine Cannon’s Havian says a closely held company such as Bio-Rad is more apt to fight whistleblower claims. “Whistleblower cases excite the greatest degree of irrationality and a desire for retaliation and revenge,” Havian says. Companies that don’t have a strong, independent board tend to be “much more susceptible to this desire” to fight, he says.

In the wake of the verdict, the company has vowed to fight on. In a posttrial motion for a new trial, Quinn Emanuel’s Potter wrote that a “company cannot keep a general counsel who has everyone walking on egg-shells, creates havoc around SEC filings, shows poor legal judgment, and leaves the CEO worrying about what he will do next.”

Three days after Potter’s court filing, the company announced a shake-up in its board: Four of the board’s independent members—including the chair of the audit committee who had been called to testify at trial—announced they would not seek re-election to the board. The reasons cited in the brief securities filing announcing the move were “disagreements with the management of the company regarding executive personnel and corporate governance matters.”

David Ruiz contributed reporting to this article.