Directors May Be Personally Liable for Retaliating Against Whistleblowers Under SOX and Dodd-Frank: ND California | Practical Law

Directors May Be Personally Liable for Retaliating Against Whistleblowers Under SOX and Dodd-Frank: ND California | Practical Law

In Wadler v. Bio-Rad Labs, Inc., the United States District Court, Northern District of California, held that corporate directors may be held personally liable for retaliating against a whistleblower under both the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

Directors May Be Personally Liable for Retaliating Against Whistleblowers Under SOX and Dodd-Frank: ND California

by Practical Law Labor & Employment
Published on 03 Nov 2015 • USA (National/Federal)
In Wadler v. Bio-Rad Labs, Inc., the United States District Court, Northern District of California, held that corporate directors may be held personally liable for retaliating against a whistleblower under both the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).
On October 23, 2015, in Wadler v. Bio-Rad Labs, Inc., the United States District Court, Northern District of California, held that under both the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), corporate directors may be personally liable for deciding to terminate a whistleblower. The court acknowledged that both statutes were ambiguous on this issue, but found that subjecting directors to personal liability was consistent with each statute's purposes. (No. 15-CV-02356-JCS, (N.D. Cal. Oct. 23, 2015).)

Background

Sanford Wadler was general counsel for Bio-Rad, a corporate manufacturer and seller of products worldwide that was subject to the Foreign Corrupt Practices Act (FCPA). The FCPA:
  • Prohibits companies from engaging in bribery and kickback schemes involving public officials.
  • Requires that companies keep accurate records showing FCPA compliance.
From 2011 to 2013, Wadler raised concerns that certain of Bio-Rad's sales practices in China were violating the FCPA. After Bio-Rad's management was not receptive to his concerns, Wadler went to the audit committee of Bio-Rad's board of directors. The board hired a law firm to investigate the issues Wadler raised. Wadler objected, claiming the law firm had a conflict of interest. In March 2013, the law firm reported at a meeting with Bio-Rad that it had not found any violations of the FCPA regarding Bio-Rad's China sales. Wadler challenged the firm's conclusion at the meeting. In June 2013, after a vote of Bio-Rad's entire board of directors, Bio-Rad terminated Wadler.
After filing an administrative complaint with the DOL's OSHA Division, Wadler sued Bio-Rad in US district court, alleging, among other things, that Bio-Rad violated both SOX and Dodd-Frank by terminating him in retaliation for his raising concerns about Bio-Rad's potential FCPA violations. Wadler's SOX and Dodd-Frank retaliation claims named the company and all individual directors from the board.
Bio-Rad moved to dismiss Wadler's claims against the individual directors, claiming that:
  • Both SOX and Dodd-Frank do not provide for corporate directors to be held individually liable.
  • The claims were untimely because Wadler did not move to amend his DOL administrative complaint to add the directors until the 180-day period for filing an administrative complaint had already expired.
  • Wadler's Dodd-Frank claim should be dismissed because Wadler did not complain to the SEC but only complained internally.

Outcome

The district court denied Bio-Rad's motion to dismiss Wadler's SOX and Dodd-Frank claims against both Bio-Rad and Bio-Rad's directors (the court dismissed Wadler's SOX claims against certain individual directors on untimeliness grounds), holding that:
  • Both SOX and Dodd-Frank allow corporate directors to be held personally liable for deciding to retaliate against a whistleblower.
  • Dodd-Frank does not require that a whistleblower report violations directly to the SEC. An internal complaint is sufficient to constitute protected activity under Dodd-Frank.

SOX Claim

The district court addressed Wadler's SOX claim, noting that:
  • SOX:
    • imposes liability on an employer's "officers, employees, contractors, subcontractors or agents" who retaliate against whistleblowers (18 U.S.C. § 1514A(a)(1)(C)); and
    • is ambiguous as to whether a corporate "director" who is not an officer or an employee can be an agent.
  • Neither the US Court of Appeals for the Ninth Circuit nor any other circuit court has specifically addressed whether individual directors may be liable for SOX whistleblower retaliation. The US Court of Appeals for the Fourth Circuit once affirmed a jury verdict imposing liability on a board chairman for his involvement in a decision to terminate a whistleblower, but did not address the basis for the jury's finding the individual liable (Jones v. Southpeak Interactive Corp. of Delaware, 777 F.3d 658, 675 (4th Cir. 2015)).
The court found that:
  • Although a close call, holding Bio-Rad's directors personally liable as "agents" under SOX for their decision to terminate Wadler is consistent with SOX's central statutory purpose, protecting whistleblowers.
  • Wadler's failure to name the individual directors in the caption of his administrative complaint did not preclude him from suing them because the individuals were put on notice of Wadler's charge.
  • Wadler's SOX claim against Bio-Rad's CEO is timely because he was named in the body of Wadler's administrative complaint and therefore had notice of the claims. However,Wadler's claims against the other individual board members were untimely because they were not mentioned in the administrative complaint.

Dodd-Frank Claim

The court noted that:
The court found that:
  • Analyses of individual liability under statutes like the ADA and Title VII which similarly permit "employer" liability but have been found to preclude individual liability entirely are inapposite. Courts have held that those statutes do not impose individual liability relying on specific provisions within those statutes, not on any generalized definition of employer.
  • The meaning of "employer" in Dodd-Frank is ambiguous.
  • Dodd-Frank was passed to provide broader whistleblower protections than SOX.
  • Nothing in the legislative history indicates that Congress intended to eliminate individual liability for whistleblower retaliation.
  • The SEC rule interpreting Dodd-Frank's anti-retaliation provision as not requiring whistleblowers to report violations to the SEC warrants Chevron deference. Wadler can pursue his Dodd-Frank claim even though he only reported Bio-Rad's violations internally.

Practical Implications

The court's decision in Wadler holds that individual corporate directors may be held personally liable under both SOX and the Dodd-Frank Act when directors take part in a decision to terminate a whistleblower. District court precedent is not binding even within the district that issued this decision. However, this case highlights a new prospective form of individual liability for corporate directors and new prospective targets for whistleblower plaintiffs. Corporations and their boards should expect more claims of this kind until or unless the circuit court of their circuit declines to broadly interpret "employer" under Dodd-Frank and SOX.