A fired GC of a public company recently fended off dismissal of his whistle-blower retaliation claims in California district court. Adding to a split in authority, the chief magistrate judge for the Northern District of California held (1) that the protections of the Dodd-Frank Act applied even though the GC made his report internally, and not to the SEC; and (2) that the anti-retaliation provisions of Dodd-Frank and the Sarbanes-Oxley Act can impose liability on individual directors, and not only the company.

In denying the company’s motion to dismiss in Wadler v. Bio-Rad Laboratories, Inc., the district court ruled that the GC could sue the individual directors in addition to the company, and upheld his SOX claim against one director. On November 23, Bio-Rad moved to certify the ruling for interlocutory appeal.

In his suit against Bio-Rad, the former GC alleged that he was fired in retaliation for reporting to upper management his concerns about the company’s possible violation of the Foreign Corrupt Practices Act, stemming from the company’s dealings in China. The GC asserted claims under both Dodd-Frank and SOX.

Company-only reporting protected

Dodd-Frank and SOX federalize some aspects of the ethical duty of confidentiality, and make some reporting of client misconduct mandatory. The relationship between the federal statutory scheme and various state versions of Model Rule 1.13, which applies to lawyers in “reporting up” and “reporting out” client misconduct that could substantially harm the company, has been the subject of significant commentary. See, e.g., here (pub. forthcoming, 33 Yale J. on Reg., 2016; draft cited with permission).

The issue of whether Dodd-Frank’s anti-retaliation provisions apply to individuals who only report their concerns internally and not to the SEC has divided the federal Courts of Appeal that have ruled on it.

The SEC’s own position, as set out in 17 C.F.R. § 240.21F-2, is that Dodd-Frank does protect internal whistle-blowers.

Most recently, in Berman v. Neo@Ogilvy LLC, the Second Circuit ruled in line with the SEC’s view. But the Fifth Circuit, in 2013, ruled the other way, holding that only individuals who have provided information or assistance to the SEC qualify for anti-retaliation protection.

In Wadler, the district court wrote that the SEC’s position has been accepted by a majority of the lower courts that have grappled with the issue, which have accorded deference to the agency’s position. Therefore, the fact that the company’s GC didn’t turn outside with his FCPA concerns did not defeat his claim, the court held.

Individual directors liable

In enacting SOX, Congress did not expressly include directors in the list of corporate “agents” who are subject to individual liability for retaliating against a corporate whistle-blower. But in Wadler, the court said that didn’t signify a legislative intent to shield directors from such liability. Instead, the “context and general purpose” of SOX supports “the conclusion that the term ‘agent’ is intended to encompass directors.” As for Dodd-Frank, the court wrote that Congress intended that Act’s anti-retaliation reach to be “at least as extensive” as that of SOX.

Headed for SCOTUS?

In mid-November, the SEC issued its annual report to Congress on the Dodd-Frank whistle-blower program, reporting that the number of whistleblower reports to the agency has increased every year since the program was instituted in 2011. (H/T to Kevin LaCroix over at The D&O Diary.) In Berman, the Second Circuit case, the court granted a stay on October 14, to allow the defendants to petition for Supreme Court review. So stay tuned. The extent of a lawyer’s duty and ability to report up and out, and the liability that can be imposed for retaliatory conduct, might be headed for further resolution by the high court.