By: Giulio A. Sanchez
Wadler v. Bio-Rad Laboratories, Inc.,No. 17-16193 (9th Cir. Feb. 26, 2019)
The Sarbanes-Oxley Act (SOX) prohibits public traded companies from retaliating against employees who report conduct that the employees “reasonably believe” violates specific federal statutes regarding mail fraud, wire fraud, bank fraud, or securities fraud, any rule or regulation of the Securities and Exchange Commission (“SEC”), or Federal law relating to fraud against shareholders. Under the Foreign Corrupt Practices Act (“FCPA”), it is illegal to bribe a foreign official, fail to keep accurate and reasonably detailed books and records, falsify such books and records, or circumvent or fail to implement a system of accounting controls. Last month, the Ninth Circuit Court of Appeals, holding that the FCPA’s “books-and-records” provisions are not “rules or regulations” of the SEC, vacated a jury verdict against a products manufacturer (“Corporation”) that fired its general counsel (“General Counsel”) for reporting possible violations of the FCPA.
In 2011, an internal investigation discovered evidence that Corporation’s employees in Vietnam, Thailand, and Russia had violated the bribery and books-and-records provisions of the FCPA. The investigation also noted “red flags” in China, including “unexplained commissions” and a “history of widespread corruption” in the market, but did not find evidence of improper payments.
Yet, in June 2012, General Counsel received the results of an audit, which showed that Corporation owed its licensor millions in royalty obligations caused by missing sales documentation in China. Upon receiving a portion of the missing documents, the attorney working under General Counsel informed General Counsel that he thought the documents showed bribery. Around this time, Counsel also learned about an “under the covers” scheme allegedly occurring in China, which involved padding Corporation’s shipments with ehttps://www.wjhattorneys.com/xtra products that were not included in import/export documentation.
Then, in January 2013, General Counsel discovered that employees in China had entered into unauthorized contracts with distributors. These agreements were not accurate translations of approved distributor contacts, excluded FCPA compliance provisions, and contained unauthorized sales incentives.
On February 8, 2013, General Counsel delivered a memorandum to Corporation’s Audit Committee stating his belief that there were violations of the FCPA” in China. However, on June 4, 2013, a law firm firm hired by Corporation to investigate the contents of General Counsel’s memorandum reported that there was “no evidence to date of any violation or attempted violation – of the FCPA in China.” Corporation fired General Counsel 3 days later.
General Counsel brought an action for compensatory and punitive damages against Corporation and its CEO, claiming that Corporation had violated SOX and California public policy by firing him for reporting possible violations of the FCPA.
Following the close of trial, the trial judge instructed the jury that the General Counsel had to prove that he engaged in “protected activity” under SOX, which depended on whether the conduct he disclosed violated a “rule or regulation of the” SEC. The trial court’s instruction provided that “under ‘the rules and regulations of the [SEC] applicable to [Corporation],’ it was unlawful to (1) bribe a foreign official; (2) fail to keep accurate and reasonably detailed books and records; (3) knowingly falsify books and records; and (4) knowingly circumvent a system of internal accounting controls.” The jury returned a verdict in favor of the General Counsel and against Corporation.
On Appeal, the Ninth Circuit held that the trial court incorrectly included all of the FCPA’s bribery and books-and-records provisions as “rules or regulations” of the SEC. The Court explained that, because SOX uses the phrase “rules or regulations” in conjunction with an administrative agency, “rules or regulations” must refer to administrativeregulations and rules only, not statutes like the FCPA. Further, the Court noted, Congress’s use of “any rule or regulation” of the SEC in the same list as “any provision of Federal law relating to fraud against shareholders,” suggests a difference between “rules or regulations” and the “law.” The “law,” not “rules and regulations of the [SEC],” encompasses statutes like the FCPA.
Despite the improper instruction, the Court sent the matter back to the trial court instead of reversing the verdict because a properly instructed jury could still reach a verdict in favor of General Counsel. Corporation had previously conceded that one of the FCPA’s “books-and-records” provisions is also a regulation of the SEC. Like the FCPA, the SEC regulations prohibit the falsification of any book, record, or account. Furthermore, the Court explained, SOX only requires that an employee “‘reasonably believed that there might have been’ a violation and that he [or she] was ‘fired for even suggesting further inquiry.’” Based on the evidence provided at trial, the Court concluded that a jury could find that General Counsel had a reasonable belief that Corporation falsified books and that General Counsel’s memorandum suggested further inquiry into whether Corporation falsified the books.
In addition to the SOX claim, the Court also addressed General Counsel’s public policy argument, which had been successful at trial. Tameny v. Atlantic Richfield Co.27 Cal.3d 167 (1980) allows discharged employees to bring an action for damages where the discharge violates a fundamental public policy that is “tethered to” a constitutional or statutory provision. Corporation argued that the error as to the SOX instruction tainted the General Counsel’s Tamenyverdict. However, per the Court’s holding, a plaintiff may bring a Tamenyclaim on the grounds that his or her discharge was retaliation for reporting SOX-protected activity, or for reporting a violation of the FCPA’s bribery and books-and-records provisions, irrespective of whether the latter is covered by the SOX. Accordingly, as General Counsel’s Tamenyclaim did not depend on the SOX claim, the SOX instructional error did not affect the Tamenyverdict.
Overall, the main takeaway is that SOX does not protect any and all reports of wrongdoing by a publicly traded company. Employees seeking protection under SOX must have reported conduct reasonably believed to violate either the fraud statutes enumerated by SOX or a specific regulation of the SEC.
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Giulio A. Sanchez is an associate at Wanger Jones Helsley PC in Fresno, CA. Giulio’s practice focuses on business and employment litigation. This article is intended to notify our clients and friends of updates to the law and provide general information. It is not intended, nor should it be used, as legal advice, and it does not create an attorney-client relationship between the author and the reader.