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.
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).