Judge Holds that SOX and Dodd-Frank Allow Individual Director Liability

On October 23, 2015, a federal magistrate judge in California held that individual corporate directors may be found liable under the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Plaintiff Sanford Wadler brought a whistleblower action under SOX, Dodd-Frank, and state law, against Bio-Rad Laboratories, Inc. and the individual members of its Board.  Wadler claimed that Bio-Rad wrongfully terminated him in retaliation for disclosures he made to Bio-Rad‘s upper-level management regarding possible violations of the Foreign Corrupt Practices Act (FCPA) in China.  The defendants filed a motion to dismiss, leading to the October 23, 2015 ruling.

Bio-Rad manufactures and sells products around the world, and is subject to the FCPA.    Bio-Rad agreed to pay $55.1 million in fines for possible FCPA violations in Thailand, Vietnam, and Russia.  Subsequent to discovering these violations, Bio-Rad hired Steptoe and Johnson LLP to investigate possible bribery by Bio-Rad employees in China.  The firm found no evidence of improper payments.

Wadler, then Bio-Rad’s general counsel, discovered documents that provided “unambiguous evidence of potential bribery in China.”  He also found FCPA compliance language had been removed from documents translated into Chinese for Bio-Rad’s operations in China.  Alleged obstruction of his investigation by management led Wadler to suspect that management was aware of FCPA violations in China.

Wadler then disclosed his concerns to the Audit Committee of the Board.  The Board reengaged Steptoe and Johnson to investigate.  Wadler objected because he felt Steptoe and Johnson had a conflict of interest stemming from the fact that it had found no violation in its 2011 investigation.  He continued to voice objections after Steptoe and Johnson’s second investigation again concluded that there was no evidence of improper payments.

On June 7, 2013, Bio-Rad terminated Wadler’s employment by a vote of the full Board.  Several members were aware that Wadler had reported bribery, books-and-records violations, and related misconduct to supervisors and to others who could have investigated and put a stop to the alleged violations.

In its October 23, 2015 opinion, the court analyzed whether individual directors could be deemed “agents” as that term is used in SOX.  Magistrate Judge Spero rejected the defendants’ argument that Congress’s failure to expressly include directors within the definition of agent, while including officers and employees, should decide the question.

The court referred to a memo that Senator Patrick Leahy spoke about during consideration of SOX in the Senate.  The memo was sent by Enron’s outside counsel and noted that Texas law would not prevent the company from firing a high-level employee whistleblower.  Judge Spero concluded that a key purpose of SOX was to protect such whistleblowers, but this protection would be substantially eroded if SOX shielded directors from personal liability.  He also noted that the term “employer” in the statute should be construed broadly, consistent with its broad interpretation in the context of other statutes.

The opinion concluded that “while the language of Section 1514A(a) is ambiguous, the context and broad purpose of Sarbanes-Oxley support the conclusion that a director may be held individually liable as an ?agent under that provision.”  He further found that “Congress intended that Dodd-Frank provide for individual liability that is at least as extensive as that of Sarbanes-Oxley, and therefore, that directors may be held individually liable for retaliating against whistleblowers under Dodd-Frank.”

In 2009, The Employment Law Group, P.C. litigated a case before the Department of Labor’s Administrative Review Board (ARB).  In that case, Kalkunte v. DVI Financial Services, the ARB ruled that individual directors could be found liable under SOX to the extent they were involved in the underlying retaliatory decision.  The opinion in Wadler broadens this principle and applies it to Dodd-Frank, which is significant because that statute has a four-year statute of limitations in contrast to SOX’s 180-day statute of limitations.

Judge Joseph C. Spero issued the opinion issued in the case, Wadler v. Bio-Rad Laboratories, Inc., Case No. 15-cv-02356-JCS, 2015 WL 6438670 (N.D. Cal. October 23, 2015), in the United States District Court for the Northern District of California.  Chief Administrative Appeals Judge M. Cynthia Douglass and Administrative Appeals Judge Wayne C. Beyer issued the opinion in Kalkunte v. DVI Financial Services, Inc., ARB No. 05-139 & 05-140 (ARB February 27, 2009).

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