Ninth Circuit Permits In-House Counsel to Proceed with SOX Whistleblower Claims

The Ninth Circuit recently issued its first decision addressing the substantive requirements necessary to establish a claim under the whistleblower protection provision of the Sarbanes-Oxley Act (SOX). See Van Asdale v. International Game Technology (9th Cir. August 13, 2009). In overturning the trial court's grant of summary judgment to the employer, the Ninth Circuit relied on the text of the statute and the Department of Labor's (DOL) regulations interpreting the statute.

In this case, the plaintiffs were hired as in-house attorneys for International Game Technology (IGT) in 2001. A couple of years after the plaintiffs were hired, IGT merged with Anchor Gaming. IGT discharged the plaintiffs in 2004. Subsequently, the plaintiffs sued IGT under the SOX whistleblower provision and under state law, claiming they were discharged in retaliation for reporting possible shareholder fraud in connection with IGT's merger with Anchor.

The SOX whistleblower provision prohibits a publicly traded company from discriminating against an employee for providing information regarding any conduct which the employee reasonably believes constitutes mail, wire, or bank fraud, any rule or regulation of the Securities and Exchange Commission or any provision of federal law relating to fraud against shareholders.

The Ninth Circuit held that the plaintiffs established a prima facie case of retaliation under SOX and that the employer failed to show that it would have taken the same adverse action in the absence of protected activity. Citing the DOL regulations, the court held that the requirements of a prima facie case of a SOX whistleblower claim are: (a) the employee engaged in protected activity or conduct; (b) the named person knew or suspected that the employee engaged in protected activity; (c) the employee suffered an unfavorable personnel action; and (d) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action. The court found that the plaintiffs met all of these requirements.

The primary issue in this case was whether the plaintiffs engaged in protected conduct. Relying in part on the decision of the DOL's Administrative Review Board (ARB) in Platone v. FLYi, Inc. (Sept. 29, 2006), the court held that to constitute protected activity under the Act, the communications in question must "definitively and specifically" relate to one of the listed categories of fraud or securities violations listed in the Act. The court found that the plaintiffs' statements to their superiors regarding the nondisclosure of certain information prior to the IGT/Anchor merger met this requirement. The court noted that the plaintiffs were not required to "cite a code section" they believed was violated to trigger the protection of the Act.

The court also found that the plaintiffs had a subjective belief that the conduct being reported violated the law and that this belief was objectively reasonable. In reaching this decision, the court emphasized that it was not holding that shareholder fraud actually occurred, only that the plaintiffs reasonably believed that there might have been fraud and were fired for even suggesting further inquiry. "Requiring an employee to essentially prove the existence of fraud before suggesting the need for an investigation would hardly be consistent with Congress's goal of encouraging disclosure."

Further, the court also found that the proximity between the plaintiffs' disclosure of their concerns and their discharges created an issue of fact regarding whether their protected activity was a contributing factor in their discharges. Accordingly, the court reversed the decision in favor of the employer and remanded the case to the trial court for further proceedings.