Whistleblowers Awarded $2.2 Million in Sarbanes-Oxley Case

A federal jury awarded Sarbanes-Oxley whistleblowers Shawn and Lena Van Asdale $2.2 million in a lawsuit they filed against their former employer International Game Technology (“IGT”).   IGT is a publicly-traded company specializing in computerized gaming and slot machines.  IGT’s management hired the Van Asdales in 2001 as in-house intellectual property attorneys, quickly promoting Shawn to the Director of Strategic Development and Lena to the Director of IP Procurement.  

In 2003, Shawn reported to his supervisors that he believed Anchor Gaming, which merged with IGT in 2001, misled IGT regarding the validity of the patent for one of Anchor’s popular slot machine designs.  If the patent is invalid, then the benefits of IGT’s merger with Anchor Gaming was likely overvalued and IGT’s shareholders may have been defrauded. 

Following the merger, many from Anchor’s management accepted positions in IGT’s management, including Anchor’s General Counsel, David Johnson, who became IGT’s General Counsel.  Johnson decided to fire Shawn seventeen days after Shawn received a positive performance review and three days after Shawn reported the potential shareholder fraud to Johnson in a meeting.  Johnson then fired Lena after learning that she had requested access to allegedly sensitive information that Johnson believed she planned to use to assist her husband. 

The Van Asdales brought their lawsuit in federal court alleging IGT violated the whistleblower protection provisions of the Sarbanes-Oxley Act (SOX), which prohibits publicly traded companies from retaliating against employees who report what they reasonably believe to be shareholder fraud.  Whistleblowers do not have to prove any actual fraud took place – only that they reported potential fraud to their employer and that their employer retaliated against them.  Initially, IGT prevailed against the Van Asdales when a federal judge granted their motion for summary judgment.  However, Judge Bybee of the United States Court of Appeals for the Ninth Circuit reversed the federal court’s decision and allowed the lawsuit to proceed to trial where a federal jury awarded the Van Asdales $2.2 million in compensation for being illegally fired by IGT.

Does Attorney-Client Privilege Strip Company Lawyers of Whistleblower Protections?

According to Judge Bybee, attorney-client privilege alone does not warrant dismissal of a lawyer’s claim of whistleblower retaliation by an employer, stating:

There is no reason why the district court cannot limit any testimony to [allegations of shareholder fraud], while avoiding testimony regarding any litigation-related discussions that also took place. To the extent this suit might nonetheless implicate confidentially-related concerns, we agree… that the appropriate remedy is for the district court to use the many equitable measures at its disposal to minimize the possibility of harmful disclosures, not to dismiss the suit altogether.  (citations omitted).

Furthermore, the court noted that the Sarbanes-Oxley Act expressly authorizes any “person” alleging unlawful retaliation to file a complaint with the Secretary of Labor and, thereafter, to bring suit in an appropriate district court.

The Sham Affidavit Rule Narrowly Applied

 Under the sham affidavit rule, a party cannot create an issue of fact (and thus survive the opposition’s motion for summary judgment) by merely submitting an affidavit that contradicts the party’s prior deposition testimony.  The rule is intended to strike at stalling tactics used by lawyers to keep their lawsuit alive through pretrial motions.  The court briefly identified the facts that triggered the application of the sham affidavit rule in this case:

Johnson executed a sworn declaration stating that neither Shawn nor Lena made any suggestion to him regarding a potential fraud on the shareholders; however, this declaration directly contradicted Shawn’s affidavit.  Typically, of course, such a stark factual dispute must be decided by a fact finder and cannot be resolved on summary judgment.  In this case, however, the district court disregarded the portion of Shawn’s [affidavit] in which he said that he raised concerns of shareholder fraud with Johnson, because the district court viewed this portion of the [affidavit] as contradicting Shawn’s [prior] deposition testimony.

Judge Bybee explained why the sham affidavit rule must be applied narrowly and with caution:

… [I]t must be recognized that the sham affidavit rule is in tension with the principle that a court’s role in deciding a summary judgment motion is not to make credibility determinations or weigh conflicting evidence.  Aggressive invocation of the rule [] threatens to ensnare parties who may have simply been confused during their deposition testimony and may encourage gamesmanship by opposing attorneys.  We have thus recognized that the sham affidavit rule should be applied with caution.

 …

First, we have made clear that the rule does not automatically dispose of every case in which a contradictory affidavit is introduced to explain portions of earlier deposition testimony, rather, the district court must make a factual determination that the contradiction was actually a ‘sham.’   Second, our cases have emphasized that the inconsistency between a party’s deposition testimony and subsequent affidavit must be clear and unambiguous to justify striking the affidavit.  Thus, the nonmoving party is not precluded from elaborating upon, explaining or clarifying prior testimony elicited by opposing counsel on deposition [and] minor inconsistencies that result from an honest discrepancy, a mistake, or newly discovered evidence afford no basis for excluding an opposition affidavit. (Citations omitted).

Since nothing in Shawn’s affidavit flatly contradicted his earlier deposition testimony, and his affidavit was a legitimate attempt to explain or clarify prior deposition testimony, the district court incorrectly applied the sham affidavit rule when it struck portions of Shawn’s affidavit. 

The Whistleblower Reasonable Belief Standard

To trigger the whistleblower protections of the Sarbanes-Oxley Act, the employee must have a subjective belief that the conduct being reported violated a securities law, and this belief must be objectively reasonable.  Judge Bybee applied this standard to the Van Asdales, ruling:

It is not critical to the Van Asdales claim that they prove that Anchor officials actually engaged in fraud in connection with the merger; rather, the Van Asdales only need show that they reasonably believed that there might have been fraud and were fired for even suggesting further inquiry.  To encourage disclosure, Congress chose statutory language which ensures that an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation… is protected.  We think that the Van Asdales have met this minimal threshold requirement. (Citations omitted).

…

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.

For more information about the whistleblower protections of the Sarbanes-Oxley Act, click here.

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