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Board Members May Be Held Individually Liable for Silencing In-House Counsel’s Complaints of Corruption

Published by on December 7, 2015

With a recent court determination that members of a company’s board of directors may be held individually liable for retaliation against a whistleblower, employers must fully examine their board governance strategies.

The U.S. District Court for the Northern District of California recently determined, in a matter of first impression, that members of a company’s board of directors may be held individually liable under the anti-retaliation provisions of the Sarbanes-Oxley Act (“SOX”) and the Dodd-Frank Act (“Dodd-Frank”). This expansion of liability highlights courts’ permissive interpretations of employee-friendly statues, as well as the importance of educating all employment decision-makers—including boards of directors — of whistleblowers’ rights and the best practices for legal compliance.

In Wadler v. Bio-Rad Laboratories, Inc., Case No. 15-cv-02356-JCS, 2015 WL 6438670 (N.D. Cal, October 23, 2015), Plaintiff Sanford Wadler, a 25-year employee and former general counsel of Defendant Bio-Rad Laboratories, Inc., was terminated after repeatedly voicing concerns to Bio-Rad’s senior management over the company’s China-related sales.

Wadler expressed concern over the sufficiency of outside counsel’s investigations of Bio-Rad’s compliance with the Foreign Corrupt Practices Act (FCPA), and suspected that Bio-Rad’s agents had willingly failed to comply with FCPA record keeping.

Notably, Wadler discovered that standard FCPA language had been removed from China-related documents without his knowledge or consent. Wadler’s concerns were “stonewalled” by senior management and he was terminated, pursuant to a vote of Bio-Rad’s Board of Directors, just weeks before Bio-Rad disclosed deficiencies in its FCPA compliance and reporting to the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”).

Wadler named Bio-Rad and its individual board members in his administrative complaint, and later sued them in federal court.

The defendants moved to dismiss Wadler’s complaint on a number of grounds, asserting among them that individual board members could not be held liable under the SOX or Dodd-Frank anti-retaliation provisions, and that Wadler could not invoke Dodd-Frank’s whistleblower protection because he did not direct his complaint to the SEC.

The district court rejected Bio-Rad’s assertions, determining in “a close call” that the term “agent” in the anti-retaliation provision of SOX was ambiguous, and that the context and broad purpose of the provision supported the conclusion that individual board members could be held liable.

The court further concluded that Dodd-Frank’s anti-retaliation provision was similarly ambiguous, and given the fact that Dodd-Frank was enacted subsequent to SOX and generally expanded SOX’s reach, it followed that individual board members must be subject to Dodd-Frank’s anti-retaliation provision as well.

Finally, the court followed the Southern District of New York (rejecting the Fifth Circuit’s position), and determined that Wadler qualified as a whistleblower because Dodd-Frank incentivizes broader reporting of illegal activities and the SEC’s regulations encouraged internal reporting of violations.

Welter Insight:

Wadler follows the adage that “bad facts make bad law” — at least for employers. Bio‑Rad’s board should have provided Wadler with whistleblower protection as soon as he raised concerns over FCPA compliance. Given Bio-Rad’s subsequent admissions of FCPA violations, the district court was likely inclined to provide relief to Wadler and interpreted the SOX and Dodd‑Frank statutes broadly.

Employers are wise to ensure that insider whistleblowers are protected, as courts may interpret anti-retaliation provisions broadly, particularly when the whistleblower’s concerns are merited and the board members and/or senior management are aware of such.

Image Credit: ITU (Flickr @ Creative Commons)

 

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