Ninth Circuit Confirms the Broad Scope of Protected Conduct Under SOX

On August 13, 2009, the Ninth Circuit issued a key decision on the scope of protected conduct under the whistleblower provision of the Sarbanes Oxley Act, rejecting the district court’s holding that SOX whistleblowers must prove that they blew the whistle on actual shareholder fraud.  In Van Asdale v. Int’l Game Tech., the court held that the “success, or failure of a [SOX] lawsuit does not depend on [whistleblowers’] ability to show any actual fraud, only that they reasonably believed that fraud had occurred” and that “[a]n employee need not cite a code section he believes was violated” to trigger the protections of § 1514A.  

The plaintiffs in Van Asdale  were former in-house attorneys at International Game Technology (“IGT”) who were terminated for reporting possible shareholder fraud in connection with a merger.  The district court granted IGT’s motion for summary judgment, concluding that the attorneys did not engage in protected conduct in that they “hadn’t reached a conclusion” that IGT engaged in actual shareholder fraud.  The Ninth Circuit reversed, holding that “[r]equiring 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.”  Noting that the legislative history of Section 806 of SOX makes clear that it protects “all good faith and reasonable reporting of fraud,” the court held that plaintiffs’ “subjective belief that the conduct that they were reporting violated a listed law” sufficed to demonstrate protected conduct.  Moreover, the court concluded that merely requesting an investigation of potential shareholder fraud constitutes protected conduct.

The Ninth Circuit also held that in-house counsel may proceed with a retaliation claim that may require the disclosure of attorney-client privileged information.  According to the Ninth Circuit, “confidentiality concerns alone do not warrant dismissal of [an employee’s] claims.”  The Ninth Circuit further concluded that “Congress plainly considered the role [in-house] 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.”

Tagged: Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)