The Ninth Circuit Court of Appeals took its first foray last
week in Van Asdale v. International Game Technology, No. 07-16597
(9th Cir. 2009), into what a plaintiff must show to establish a
whistleblower claim under the Sarbanes Oxley Act, 18 U.S.C. §
1514A (SOX). The Court found plaintiffs did not have to "prove
the existence of [actual] fraud before suggesting the need for an
investigation." Rather, they merely had to demonstrate they
believed fraud had occurred to trigger the employer's
obligation to conduct an investigation. The Court also held
in-house counsel, as plaintiffs, may rely on confidential
information protected by the attorney-client privilege to support
such a claim. While the Court's application of the SOX
provisions relied primarily on existing precedent set by the
Department of Labor and other circuit courts, the decision may
provide an expansion from existing law regarding in-house
counsels' rights to rely on privileged information in bring
retaliatory discharge claims under the SOX.
A. Summary of the Facts
The plaintiffs in the case, Shawn and Lena Van Asdale, were a
married couple of intellectual property attorneys who were
initially hired by defendant employer, International Game
Technology (IGT), a Nevada gaming machine manufacturer, as
Associate General Counsel. Shawn Van Asdale was later promoted to
Director of Strategic Development, where he was responsible for
overseeing IGT's intellectual property litigation. During the
Van Asdales' employment, IGT merged with another gaming machine
company, Anchor Gaming, which held patents for a particular slot
machine featuring a "bonus wheel." After the merger had
been completed (and several former Anchor officials became top
managers of IGT), and in preparation for litigation with Bally
Technologies, a former competitor of Anchor, Shawn Van Asdale
determined that a patent owned by IGT, which was based on a
valuable patent held by Anchor, was invalidated by an older machine
designed by Bally.
Shawn expressed concern to his bosses that the older Bally machine
had not been disclosed before the merger, stating his belief that
IGT had been intentionally misled about Anchor's value. Both
Van Asdales then raised the issue again with IGT's general
counsel (Anchor's former top lawyer), stating they believed the
nondisclosure of the Bally machine was suspicious and there was a
potential of fraud. The Van Asdales were terminated within a short
time following those meetings.
The couple sued, asserting a whistleblower claim under the SOX,
contending they were terminated for reporting possible shareholder
fraud in connection with that merger. The Nevada-based federal
trial court sided with the employer and granted its summary
judgment motion, finding the Van Asdales had not shown they had
discussed the suspected fraud specifically enough with IGT before
they were terminated.
B. Ninth Circuit's Reversal of the Trial Court's
Decision
The Ninth Circuit reversed the trial court's decision,
reinstated the case, and sent it back to the Nevada district court.
First, IGT argued plaintiffs' claims were precluded since they
could not establish their claim without reliance on attorney-client
privileged information. The Court found as follows: (1) disclosure
of IGT's confidential information might not be necessary in the
context of the claims raised; (2) to the extent disclosure of
confidential information becomes necessary, the court may use
"'equitable measures at its disposal' to minimize the
possibility of harmful disclosures"; and (3) there is nothing
in the SOX that precludes in-house counsel from the protections of
the Act. Thus, the Court did not find dismissal of plaintiffs'
claims on this ground was warranted.
Second, the Court considered the SOX claims to determine if they
were precluded by summary judgment. Section 1514A of the SOX
prohibits a publicly-traded employer from discharging,
discriminating, or retaliating against an employee for reporting
employer conduct that the employee "reasonably believes"
violates federal securities laws or for hindering an SEC
investigation. See 18 U.S.C. § 1514A. Thus, to establish a
whistleblower claim under the Act, a plaintiff must show by a
preponderance of the evidence that: "she engaged in protected
activity"; the employer knew or suspected, actually or
constructively, that the plaintiff engaged in protected activity;
the plaintiff "suffered an unfavorable personnel action";
and the circumstances raise an inference of retaliation. 29 C.F.R.
§ 1980.104(b)(1)(i)-(iv); Allen v. Admin. Review Bd., 514 F.3d
468, 475-76 (5th Cir. 2008).
This was the Court's first opportunity to discuss SOX's
whistleblower provisions. The Court stuck closely to established
law, including guidance provided by the Department of Labor and
other federal appellate courts. Regarding protected activity, the
Court held a plaintiff's communications to his/her employer
must "definitively and specifically" relate to one of the
categories of fraud listed in the statute (mail fraud, bank fraud,
securities fraud, shareholder fraud, or violation of an S.E.C.
regulation). These communications need not include any magic words
like "fraud" or "SOX." Further, a plaintiff
must have had a subjective belief that the reported conduct
amounted to fraud, and the belief must be objectively reasonable,
that is, must approximate the basic elements of a securities fraud
claim. The Court emphasized that, considering Congress's desire
to encourage disclosure, even a mistaken belief that an employer
engaged in fraud – as long it is reasonable –
may support a SOX whistleblower claim.
Applied to the Van Asdales, the Court concluded a dispute of fact
existed as to the whistleblower claim. While the couple had not
used the term "SOX" or phrase "shareholder
fraud," their communications did "definitively and
specifically" relate to shareholder fraud, namely, that Anchor
intentionally mislead IGT and its shareholders about the Bally
machine in order to appear more attractive for the merger. The
Court made absolutely clear, however, that it was making no
conclusion about whether Anchor actually committed fraud. Rather,
the Van Asdales needed to show only that they reasonably and in
good faith believed there may have been fraud and that they were
terminated for suggesting a need for further investigation.
C. Conclusions
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).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.