[The previous essays in this series are here, here, here, here, here, here, here, here, here, and here.]
Investigative reporter John Carreyrou’s gripping and best-selling account of Theranos Inc., Bad Blood: Secrets and Lies in a Silicon Valley Startup (2018), presents many personal and professional questions for law students to consider.
Theranos claimed that it had developed a device that could, by miniaturizing and combining existing technologies, conduct many different diagnostic tests on the same small sample of a patient’s blood.
However, as detailed by Carreyrou (then reporting forThe Wall Street Journal, and now with The New York Times), the company never realized that goal, and instead appears to have supplied dangerously inaccurate results to some people whose blood it tested.
In January 2022, Theranos founder and CEO Elizabeth Holmes was convicted of three counts of wire fraud, and one count of conspiracy to commit wire fraud, on the company’s investors. That November, she was sentenced to a prison term of more than eleven years.
In July 2022, Theranos’s former chief operating officer Ramesh “Sunny” Balwani was convicted of ten counts of wire fraud and two counts of conspiracy to commit wire fraud; five months later, he was sentenced to a term of almost thirteen years.
Balwani, when discussing in 2010 with representatives of Walgreens the early stages of an arrangement to install Theranos devices in their drugstores (a parallel partnership was created for Safeway’s grocery stores), scuttled a suggestion to involve Walgreens’s information technology personnel. He declared that, “IT are like lawyers, avoid them as long as possible.”
Yet Carreyrou’s chronicle contains no shortage of lawyers, some of whom might have been more advantageously consulted earlier:
● The company’s in-house and outside counsel threatened and sued its former employees, claiming that they had stolen trade secrets.
● Theranos’s lawyers attempted to compel an employee to surrender his patent for a method of affixing lights to bicycle wheels (an invention for which he had successfully raised funds on Kickstarter), asserting that the company was legally entitled to all intellectual property created by its employees.
● After one employee, distraught about developments at the company and about his professional prospects, ended his own life, his widow left a message for Holmes, only to receive that day “an email from a Theranos lawyer requesting that she immediately return [his] company laptop and cell phone and any other confidential information he might have retained.”
● When a newly-terminated laboratory director refused to sign any more legal papers, Balwani laughably “offered to hire him an attorney to expedite matters.” (After retaining a lawyer on his own, the former employee complied with the company’s demands to destroy his copies of company documents.)
● An inventor and (former) friend of Holmes’ family engaged a lawyer to file, in 2006, a patent application essential to some planned functions of Theranos’s devices.
● Because the inventor’s son was a partner at Theranos’s regular patent law firm, that firm declined to represent Theranos in challenging the application. Theranos then sued the father and both of his sons, alleging that the lawyer had conveyed some of the company’s confidential intellectual property to his father.
● Because of the U.S. Central Command’s military interest in using Theranos’s device on the battlefield, a Army lawyer met with Holmes. He “noted that she had brought no regulatory affairs expert to the meeting. He suspected the company didn’t even employ one. If he was right about that, it was an incredibly naïve way of operating. Health care was the most highly regulated industry in the country and for good reason: the lives of patients were at stake.”
● The prestigious advertising agency Chiat\Day, concerned about its potential liability for statements made in marketing materials prepared for Theranos (and reviewed by Theranos’s counsel), consulted its own lawyers.
● Most notably, Theranos ultimately retained Boies, Schiller & Flexner, the firm of prominent lawyer David Boies. Boies subsequently became a director of the company, and the law firm became a shareholder in Theranos. (Holmes would later claim that she had believed that Boies had represented not only the company but herself personally; in the course of dismissing that contention, a federal magistrate judge noted in June 2021 that there had been no written retention agreement between the law firm and Theranos.)
● Lawyers from Boies, Schiller “ambushed” former employee Tyler Shultz at the home of his grandfather, former Secretary of State (and, at the time, Theranos director) George Shultz, accusing Tyler of having contacted the Wall Street Journal.
● Tyler, refusing to sign a document that those lawyers pressed on him, observed, “A Theranos lawyer had drafted this with Theranos’ best interests in mind. . . . I think I need a lawyer to look at it with my best interests in mind.”
● Tyler later “arranged for [his parents] to have their own legal counsel. That way he could communicate with them through attorneys and those conversations would be protected by the attorney-client privilege.”
● At a meeting in the Journal’s headquarters, Boies and colleagues immediately activated “little tape recorders. . . at each end of the conference table” to capture their conversation with Carreyrou, his editor, and the newspaper’s deputy general counsel.
They would later send the newspaper a letter that “sternly demanded that the Journal ‘destroy or return’ all Theranos trade secrets and confidential information in its possession. Even though Boies must have known there was zero chance we would do that, it was a shot across the bow.”
● However, in response, “the Journal’s legal department dispatched a technician to copy the contents of my laptop and phone in preparation for litigation.”
● Finally, after (starting in October 2015) Carreyrou’s front-page stories (which the newspaper’s “standards editor and the lawyers would comb through line by line”) were published, field inspectors from the federal Centers for Medicare and Medicaid Services (CMS), “the chief regulator of clinical laboratories,” visited Theranos for four days. “As soon as she sat down” for an interview, a lab associate who had worked on the Theranos technology “asked for an attorney. She looked coached and afraid.”
Among the practical issues that Bad Blood raises are:
● What danger signs should compel current and potential employees, directors, investors, and lawyers to investigate, if not reevaluate, their relationship with a company and its leaders? What disclosure policies, or other protocols or processes, should be instituted to detect, and follow up on, such “red flags”?
At Theranos, not only were firings apparently frequent, but employee access to information was extremely compartmentalized. Although Holmes and Balwani explained that internal secrecy was an aspect of the company’s “stealth mode,” one employee privately pondered that other firms had “cross-functional teams with representatives from the chemistry, engineering manufacturing, quality control, and regulatory departments working toward a common objective.”
On another level, it was not only some employees who were surprised to learn of the personal relationship between Holmes and Balwani. Carreyrou asks, “If Holmes wasn’t forthright with her board about her relationship with Balwani, then what else might she be keeping from it?”
● By what techniques and processes can individuals and companies, and their counsel, prevent themselves from succumbing to the “almost hypnotic” and “mesmerizing effect” of an Elizabeth Holmes’ “mixture of charm, intelligence, and charisma”?
Holmes won the support of, among others, the associate dean of Stanford’s School of Engineering (one of her former teachers); venture capitalists; Oracle founder Lawrence Ellison; and board members who included not only Shultz and fellow former Secretary of State Henry Kissinger but also the former head of the U.S. Central Command, a former admiral, a former Secretary of Defense, a former CEO of Wells Fargo, and former Congressmen.
Carreyrou observes that at an emergency meeting of Theranos’ board, convened after company insiders had reported misleading revenue projections and statements of technical progress, Holmes managed to talk the directors out of removing her as CEO.
● To what degree do personal, corporate, and technological interconnections compound, or clarify, complexities?
Carreyrou, meeting with a source, notes that “As we drove around in her car, I was struck by how small and insular Palo Alto was,” and proceeds to detail the proximity of some of the people and companies involved.
Holmes “was able to leverage the family connections of a wealthy Mexican student at Stanford” to obtain government authorization to use Theranos devices in Mexico; made her brother the associate director of Theranos’ product mangement; and later hired some of his friends.
Of the company’s engineering efforts, Bad Blood notes, “When you packed that many instruments into a small, enclosed space, you introduced unanticipated variations in temperature that could interfere with the chemistry and throw off the performance of the overall system.”
One component of the product, a cartridge in which the sample of blood was combined with chemicals, “was a complicated, interconnected system compressed into a small space. One of [the company’s] engineers had an analogy for it: it was like a web of rubber bands. Pulling on would would inevitably stretch several of the others.”
● How can individuals and companies resist the pressure to form agreements out of a Fear of Missing Out (FoMO)? Carreyrou suggests that such concerns motivated both Walgreens (worried about about rival CVS) and Safeway to partner with Theranos.
● How do potential whistleblowers document their concerns in the face of company counsel’s demands (excerpts from which are included) that they destroy or return, by a specified deadline, any proprietary information (including, in some cases, emails that employees had forwarded to their own personal accounts)?
● How and when, and under what conditions, should current and former employees contact, and/or cooperate with inquiries from, journalists?
● At what point if any, should counsel for a source, and counsel for the journalist’s organization, become involved? (In addition, should the journalist ever retain her own personal lawyer in this connection?)
● What practices should the journalists and/or lawyers recommend, and what agreements should they adopt, to protect the identities of potential and actual sources?
Carreyrou himself starts becoming a major part of Bad Blood only in “The Tip,” the nineteenth of the book’s twenty-four chapters. One potential source “told me he would speak to me only if I promised to keep his identity confidential. Theranos’s lawyers had been harassing him and he was certain the company would sue him if it found out he was talking with a reporter. I agreed to grant him anonymity.”
Another source agreed to talk, “but only off the record. This was an important journalistic distinction: [other sources] had agreed to speak to me on deep background, which meant I could use what they told me while keeping their identities confidential. Off the record meant I couldn’t make any use of the information.”
Tyler Shultz, rejoining Carreyrou a year after their first meeting (which Tyler had arranged after “calling me from a burner phone that couldn’t be traced back to him”), “didn’t want to discuss the subject in an open place within earshot of other people.” Once in a private setting, he says, “My lawyers forbade me from talking to you, but I can’t keep this bottled up anymore.” (“I agreed to keep whatever he was about to tell me off the record and only to write about it in the future if he gave me his permission to do so.”)
● To what degree do potential sources know about these options, and how standard are they? Does their meaning depend on the form of media? The particular publication? The particular journalist?
● How, if at all, are a source’s understandings with a journalist (including with whom, and under what circumstances, the journalist can reveal that source’s identity to one or more of her colleagues) clarified and documented?
● If any form of promised confidentiality is compromised, how can a source demonstrate the terms of the original arrangement if he sues the journalist and her organization?
● Finally, under what circumstances should lawyers adopt or adapt for their own purposes one of the Wall Street Journal’s practices, “a cardinal rule called ‘No surprises’”?
“We never went to press with a story without informing the story subject of every single piece of information we had gathered in our reporting and giving them ample time and opportunity to address and rebut everything.”
