In a recent decision, In re Digimarc Corporation Derivative Litigation, No. 06-35838, 2008 WL 5171347 (9th Cir. Dec. 11, 2008), the Ninth Circuit Court of Appeals affirmed that there is no private cause of action for alleged violations of Section 304 of the Sarbanes-Oxley Act, which requires executives to forfeit certain bonuses and profits from stock sales when their company has failed to comply with the financial reporting requirements of the federal securities laws and a restatement is required. The Ninth Circuit affirmed the decision of the lower court which had found that no private cause of action exists under this provision. The Ninth Circuit first held that Congress did not explicitly create a private right of action under Section 304 as nothing in its text mentions such a cause of action. Id. at *5. The Ninth Circuit then cited the following four-factor test set forth in Cort v. Ash, 422 U.S. 66 (1975), to determine whether Section 304 implicitly gives rise to a private remedy:
(1) whether the plaintiff is a member of the class for whose benefit the statute was enacted;
(2) whether there was Congressional intent to create a private remedy;
(3) whether the private cause of action is consistent with the underlying purpose of the legislative scheme; and
(4) whether such a cause of action is traditionally relegated to state law.
Id. at *6. The Court focused primarily on the second factor because, when either of the first two Cort factors weighs against finding a private action, it “is dispositive of [the Court’s] inquiry.” Id. at *8 (citations omitted).
The Court of Appeals found that Congress did not intend to create a private remedy pursuant to Section 304 because, “[w]here analogous provisions expressly provide for a private right of action, we must infer that Congress did not intend to create a private right of action . . . because when Congress wished to provide a private damages remedy, it knew how to do so and did so expressly.” Id. at *7 (internal citations omitted). For example, Section 306 of the Sarbanes-Oxley Act, which prohibits insider trading during certain black out periods, expressly allows a private remedy to recover profits from officers and directors who engage in such trading. Thus, the silence of Congress on this issue in Section 304 illustrates that they did not intend to create a private remedy. Id. at *7 – *8. Further, the Court specifically rejected plaintiffs’ attempts to point to other section of Sarbanes-Oxley which expressly prohibit a private cause of action as proof that Congress intended to create a private cause of action by its silence, finding that such an interpretation would “turn Cort on its head.” Id. at *7.
The Digimarc opinion is the first Court of Appeals decision to address this issue directly. Several district courts have been faced with the issue of whether Section 304 creates a private right of action and they have all similarly found no such action exists.