Whistleblower Protection, It's Complicated

When Congress included a whistleblower provision with the Sarbanes-Oxley Act, 18 U.S.C. Section 1514A, it was responding to a "culture" of wrongdoing that discouraged employees "from reporting fraudulent behavior." (Cal. Att'y Gen. Op. 00-1203, 84 Ops. Cal. Att'y Gen. 71 (May 23, 2001)). This "code of silence" hampered investigations and created a "climate" where wrongdoing could occur "with virtual impunity." The whistleblower provision was designed to encourage and protect employees who report misconduct. Whether it has succeeded remains to be seen. According to one report, of the 361 complaints of retaliation resolved by the Occupational Safety and Health Administration in the statute's first three years, it found for the employee only 13 times. (See Richard E. Moberly, Unfulfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 Wm. & Mary L. Rev. 65 (2007).)

Whistleblowers recently had more luck in Van Asdale v. Int'l Game Tech., 577 F.3d 989 (9th Cir. 2009), the 9th Circuit's first analysis of the Sarbanes-Oxley Act's whistleblower provision. The plaintiffs were in-house counsel for International Game Technology and were involved with the company's 2001 merger negotiations with Anchor Gaming. The crown jewel of Anchor Gamings's intellectual property portfolio was a slot machine "wheel" patent, which a competitor claimed was invalid, a claim that could have had a significant effect on the merger's value. International Game Technology satisfied itself the patent was valid, and the merger was completed.

The plaintiffs subsequently found themselves working at International Game Technology under a new chief executive officer and a new general counsel - both of whom had occupied those same positions at Anchor during the merger. In 2003, the plaintiffs discovered a document containing information seriously undermining the validity of the wheel patent. The information and the document were in the possession of Anchor Gaming - and possibly known to Anchor Gaming's then-CEO and general counsel - at the time of the merger but had not been disclosed to International Game Technology. The plaintiffs took their concerns to their new boss. While the parties disputed what transpired at the meeting, there was no dispute that within several months of that encounter, and despite previously positive reviews, both plaintiffs were fired.

The plaintiffs brought a lawsuit alleging that their terminations violated the Sarbanes-Oxley Act's whistleblower provision. The district court granted summary judgment for International Game Technology and the plaintiffs appealed, setting the stage for the 9th Circuit to interpret the Sarbanes-Oxley Act's whistleblower provision for the first time. While the most obvious practical aspect of the decision may be the Court's recitation of the elements needed to establish a prima facie case, plaintiffs' status as attorneys presents more nuanced issues.

International Game Technology initially contended that the action should be dismissed because plaintiffs could not establish their claim without using privileged attorney-client communications. The 9th Circuit first rejected International Game Technology's argument that state rules of professional responsibility (here, Illinois, where the plaintiffs were licensed) could preclude claims based on federal law. It then rejected the more general argument that federal common law precluded the use of such privileged information, determining that "confidentiality concerns alone do not warrant dismissal." The Court did not explain what additional concerns would warrant dismissal. Instead, it determined 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." (Kachmar v. SunGard Data Systems, Inc., 109 F.3d 173, 182 (3d Cir. 1997)). The one measure mentioned was limiting testimony to the plaintiffs' fraud allegations and avoiding any concurrent litigation-related discussions. The Court also looked to the language of the Sarbanes-Oxley Act itself, finding that "even though Congress plainly considered the role attorneys might play in reporting possible securities fraud," it had not limited the language of the statute authorizing any "person" to file a whistleblower complaint (15 U.S.C. Section 7245).

For whistle-blowing California lawyers, however, this may not be the only, or even most significant, analysis. There remains the state bar. California rules require attorneys to keep client confidences except in the face of death or substantial bodily harm. (See California Rules of Professional Conduct 3-600; California Business & Professions Code Section 6068(e) regarding why there is no exception for whistleblowers; California Bar Ethics Alert, The New SEC Attorney Conduct Rules v. California Duty of Confidentiality (Spring 2004); and 84 Ops. Cal. Atty. Gen. 71 regarding why California whistleblower statutes are not intended to supersede or impair privilege). The professional impact on an attorney whistleblower can be significant, even if the bar ultimately decides to take no action. (See Charles S. Doskow, The Government Attorney and the Right to Blow the Whistle: The Cindy Ossias Case and Its Aftermath (A Two-Year Journey to Nowhere), 25 Whittier L. Rev. 21 (2003).)

Ironically, it may be lawyers who are best positioned to satisfy the substantive elements required to maintain a Sarbanes-Oxley Act whistleblower suit. The statute prohibits discrimination against an employee for providing information "regarding any conduct which the employee reasonably believes constitutes" mail, wire, bank, securities, or "shareholder" fraud or violates a Securities and Exchange Commission rule or regulation. The 9th Circuit also requires that this subjective belief be objectively reasonable and that the whistle-blowing communication "definitively and specifically" "relate to" one of the enumerated frauds. Does that mean that the whistleblower must know the legal elements of fraud? If two employees report the same conduct, one because she believes it is unethical and violates a company policy and the other because he believes it defrauds shareholders, does only the latter recover as an aggrieved whistleblower?

The answer appears to be "yes." Had the plaintiffs told management that they believed Anchor Gaming had committed merely fraud on the Patent Office (International Game Technology's version of the facts), their claims would have failed. Moreover, not only must the plaintiff actually believe the requisite fraud may have occurred, but for that belief to be objectively reasonable the plaintiff's theory of fraud "must at least approximate the basic elements of a claim of securities fraud." (Day v. Staples, Inc., 555 F.3d 42, 55 (1st Cir. 2009)). While "an employee need not have cited a code section he believes was violated," it nevertheless appears that familiarity with the basic principles of corporate fraud would be a big help. Thus for better or worse, attorneys seem to be prime candidates for the Sarbanes-Oxley Act's whistleblower protection, even if that protection may go only so far.