An important federal appeals court has just shed a little more light on how much ammunition workers have when suing corporations under the Sarbanes-Oxley Act for whistleblower retaliation.
The California-based Ninth Circuit Court of Appeals has ruled that two former in-house corporate lawyers can sue their former employer for wrongful termination under SOX, saying the pair need only demonstrate that they reasonably believed fraud had occurred at their company—not that fraud did actually occur. The decision, Van Asdale v. International Game Technology, is that circuit’s first attempt to define the requirements for a whistleblower-retaliation complaint under SOX.
SOX ostensibly protects employees from retaliation for blowing the whistle on corporate fraud. So far, however, the vast majority of such complaints have failed to get very far; most die during administrative hearings at the Department of Labor, which nominally oversees them. Complaints that then proceed to litigation also generally fail.
In this specific case, the appeals court ruled in favor of plaintiffs Shawn and Lena Van Asdale, a married couple who worked as lawyers for the Nevada-based International Game Technology. The two alleged that they were fired after telling senior executives at IGT to investigate whether the company inherited a flawed patent while acquiring another company, Anchor Gaming. They sued under Section 806 of SOX, but a federal district court in Nevada ruled against them in summary judgment.
The appeals court saw things differently. “It is not critical … that they prove that Anchor officials actually engaged in fraud,” the judges wrote in their Aug. 13 ruling. “Rather, the Van Asdales only need show that they reasonably believed that there might have been fraud and were fired for even suggesting further inquiry.”
Massoumi
Mandana Massoumi, a partner in the law firm Dorsey & Whitney, say the court’s application of the SOX provisions is in line with decisions made by other appeals courts and the Labor Department. That the plaintiffs happened to be in-house lawyers, raising questions of attorney-client privilege, “adds a different twist.”
The Van Asdales were seeking to use information protected by attorney-client privilege to support their claim, and the appeals court decision also allows them to do so—another fine point of whistleblower law that has not always been clear.
Roberts
“This highlights the importance of having preventive measures so an issue doesn’t escalate to this point.”
—Mandana Massoumi,
Partner,
Dorsey & Whitney
“The plaintiffs were in-house attorneys who, arguably, were acting within the scope of their duties,” says Allen Roberts, an employment lawyer at Epstein Becker & Green. “The real question … is whether a disclosure made in the course of one’s duties is protected under SOX.”
The recently passed American Recovery and Reinvestment Act does include language that protects disclosures made in the ordinary course of someone’s duties, Roberts says; SOX doesn’t specify the same, but the appellate decision clears that path. “I think this case will invite that kind of defense,” Roberts says.
Section 806 (also enshrined as Section 1514A of the U.S. Code) bars publicly traded companies from discriminating against a worker for providing information “regarding any conduct which the employee reasonably believes constitutes a violation” of federal securities law or any other federal law relating to fraud against shareholders. Plaintiffs suing under Section 806 typically must demonstrate four things:
The worker engaged in protected activity or conduct;
The named defendant knew or suspected that the worker engaged in protected conduct;
The worker suffered an unfavorable personnel action;
The circumstances sufficiently “raise the inference that the protected activity was a contributing factor in the unfavorable action.”
IMPACT OF DECISION
The following excerpt is from the Dorsey & Whitney alert, “Ninth Circuit Determines the Standard for Whistleblower Claims.”
The Ninth Circuit’s decision likely will not result in any expansion of whistleblower claims in California. First, the opinion does not depart from settled SOX whistleblower law, which primarily impacts publicly traded companies. Second, the standard outlined for the SOX whistleblower claim includes, for the most part, the same factors required for raising comparable whistleblower or retaliation claims under state law. See, e.g., Romaneck v. Deutsche Asset Management, 2006 WL 2385237, at *4 (N.D. Cal. Aug. 17, 2006) (citing Cal. Labor Code §§ 1102.5 & 6310); Gantt v. Sentry Ins., 1 Cal.4th 1083, 1090-91 (1992). Third, the SOX’s requirements of exhausting administrative remedies might discourage some plaintiffs from considering this option in lieu of a common law tort claim.
Curiously, the Court’s holding regarding disclosure of confidential attorney-client privileged information may mark the more significant departure from existing state law. Under California law, in-house attorneys may bring common law retaliatory discharge claims when the attorney was disciplined for following an ethical duty embodied in the California Rules of Professional Conduct, or when the crime-fraud exception to the attorney-client privilege applies. See General Dynamics v. Superior Court, 7 Cal.4th 1164, 1188 (1994). In so holding, the California Supreme Court cited with approval Illinois law, which held in-house counsel could not bring retaliatory discharge claims. In contrast, the Ninth Circuit distinguished that same Illinois law (the Van Asdales were licensed in Illinois) and held that an in-house attorney may pursue a SOX whistleblower claim based on privileged information, with no limitation as to the attorney’s ethical duties or the crime-fraud exception. The Court did address the role of the SOX statute in its holding, relying on the Act’s authorization for any “person” to file a complaint, and the fact there was no express prohibition on in-house attorneys bringing suit.
Thus, while under California law an in-house counsel may sue for retaliatory discharge only in cases involving mandatory ethical duties or the crime-fraud exception, under Van Asdale, in-house counsel might be able to sue as a SOX whistleblower by relying on privilege information. Despite this, the Court emphasized that measures may be employed to guard against disclosure of protected information (e.g., limiting testimony, protective orders, in camera proceedings).
The implications of this decision are yet to come, perhaps making it more difficult for an employer to feel its internal confidential communications are protected when an in-house counsel accepts more business-related functions within the organization. Nonetheless, if a SOX whistleblower claim arises, an employer might be able to argue the in-house counsel’s raising SOX-related issues was a part of her job duties, thus she would not be able to persuade a court that the purpose of her (supposedly good faith) report to the employer was to expose a fraud. Cf., e.g., Kidwell v. Sybaritic, Inc., 749 N.W.2d 855, 865 (Minn. Ct. App. 2008) (“ [A] former employee may not maintain an action under the [Minnesota] whistleblower act if the alleged report is a communication that was made to fulfill the employee’s job responsibilities.”); McKenzie v. Renberg’s Inc., 94 F.3d 1478, 1486-87 (10th Cir. 1996); Cyrus v. Hyundai Motor Mfg. Ala., LLC, 2008 WL 1848796, at *12 (M.D. Ala. Apr. 24, 2008).
Source
Dorsey & White Alert on IGT Decision (Aug. 17, 2009).
IGT argued that the Van Asdales shouldn’t be able to press their claim because it required attorney-client privileged information. The Ninth Circuit followed previous rulings from the Third and Fifth circuits, holding that “confidentiality concerns alone do not warrant dismissal of the Van Asdales’ claims.”
Rather, the court wrote, “The appropriate remedy is for the district court to use the many equitable measures at its disposal to minimize the possibility of harmful disclosures”—not to dismiss the suit altogether.
The court also found that nothing in the statute suggests that in-house attorneys aren’t protected from retaliation under the law, “even though Congress plainly considered the role attorneys might play in reporting possible securities fraud.”
Oswald
Scott Oswald, a principal with the Employment Law Group, says the Ninth Circuit’s decision “signals that SOX is still a robust remedy for corporate whistleblowers” despite the Labor Department “undermining the statute in its narrow interpretation of the statute.”
The Labor Department passes off SOX whistleblower complaints to its Administrative Review Board, where most of them die. Roberts notes that of the numerous laws that protect against whistleblower retaliation, “SOX has been exceptional in the low rate of reported wins, which is under 2 percent.”
“Most of these cases haven’t cleared the administrative hurdle, and we don’t see many getting to court,” he says. “The court here said there’s enough for the case to proceed, but isn’t ruling on the merits.”
Ed Rogich, a spokesman for IGT, calls the Van Asdale’s claims “without merit” and says the company “intends to continue to vigorously defend” against them. Mark Lenz of the law firm Piscevich & Fenner, who represents the Van Asdales, says his clients are pleased with the decision and “look forward to trying this case to a jury.”
Massoumi says the decision also highlights the importance of public companies having preventative measures and policies in place to address any employee concerns.
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