In Van Asdale v. International Game Technology, the U.S. Court of Appeal for the Ninth Circuit issued its first decision defining the scope of protected conduct under the whistleblower protection provisions of the Sarbanes-Oxley Act of 2002 ("SOX"). SOX protects employees of publicly traded companies from retaliation for providing information related to possible violations of federal securities laws (e.g., shareholder fraud) or for hindering an investigation by the U.S. Securities and Exchange Commission (SEC). The court held that to state a claim for protection under SOX, plaintiffs did not have to prove the existence of actual fraud, but rather, merely had to demonstrate they had an actual and objectively reasonable belief that shareholder fraud had occurred.
The plaintiffs in this case were former in-house attorneys at International Game Technology ("IGT") who were terminated shortly after allegedly telling senior executives to investigate whether the company inherited a flawed patent while acquiring another company. Rejecting the district court's finding that plaintiffs failed to engage in protected activity under SOX, the Ninth Circuit clarified that protected activity must "definitively and specifically" relate to one of the listed categories of fraud or securities violations" under SOX (mail fraud, wire fraud, bank fraud, securities fraud, shareholder fraud, or violation of a SEC regulation). A plaintiff, however, is not required to use any magic words such as "stock fraud" or "fraud on shareholders" or even reference "Sarbanes-Oxley" during communications with his or her employer in order to engage in protected activity under 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. Finding that Congress intended to protect all good faith and reasonable reporting of fraud, the court emphasized that even a mistaken belief that an employer engaged in fraud – as long it is reasonable – may support a SOX whistleblower claim. Moreover, the court concluded that merely requesting an investigation of potential shareholder fraud can constitute protected conduct.
The Ninth Circuit also held that plaintiffs in-house counsel may proceed with a retaliation claim that may require the disclosure of attorney-client privileged information. The court concluded that "Congress plainly considered the role attorneys might play in reporting possible securities fraud," and thus, to the extent that a suit may implicate confidentiality-related concerns, a court must use "equitable measures at its disposal to minimize the possibility of harmful disclosures, not dismiss the suit altogether."
This case illustrates the broad scope of protection under SOX and highlights the importance for public companies to have preventive policies and procedures in place to address employee concerns.