Trend Seen Toward Growing Whistle-Blower Protections

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By Phyllis Diamond

Oct. 26 — A recent federal district court decision allowing Bio-Rad Laboratories Inc.'s former general counsel to proceed with claims he was fired for alerting upper management to possible Foreign Corrupt Practices Act violations is part of a trend toward greater protection for corporate whistle-blowers, New York lawyer Jordan Thomas told Bloomberg BNA.

Whistle-blowers will be increasingly comfortable coming forward knowing they have these protections, Thomas, a member of Labaton Sucharow LLP, said in an Oct. 26 telephone conversation.

Although the Bio-Rad court dismissed the plaintiff's Sarbanes-Oxley Act claims against the individual director defendants as untimely, it also concluded that individual directors may be held liable for whistle-blower anti-retaliation violations under both SOX and the Dodd-Frank Act. It also said a whistle-blower needn't take his or her concerns to the Securities and Exchange Commission to be a whistle-blower within the meaning of Dodd-Frank—an issue the Ninth Circuit has yet to address.

FCPA Violations

Earlier this year, plaintiff Sanford Wadler filed suit in the U.S. District Court for the Northern District of California against Bio-Rad, Chief Executive Officer Norman Schwartz and several individual Bio-Rad directors.

Wadler claimed that after learning that Bio-Rad was involved in extensive FCPA violations in Russia, Thailand and Vietnam, he investigated—and uncovered—similar activity in China. After bringing his concerns up the chain of command, Wadler was fired in June 2013, allegedly because he “refused to be complicit” in the entity's wrongdoing. The defendants countered with a motion to dismiss the allegations.

Individual Liability

Chief Magistrate Judge Joseph Spiro denied the dismissal motion in most respects.

Among other specifics, the court concluded that directors may be held individually liable for violating both SOX and Dodd-Frank Act whistle-blower anti-retaliation provisions. As to SOX, the court said Congress's failure expressly to include directors in the list of corporate “agents” who may be individually liable doesn't support the conclusion that it “intended to shield directors who engage in retaliatory conduct from individual liability.”

The “context and general purpose” of the statute “support the conclusion that the term `agent' is intended to encompass directors,” the court held.

It also declined to dismiss Wadler's Dodd-Frank claims against the individual defendants, saying Congress intended for the anti-retaliation protections of that law to be “at least as extensive” as those under SOX.

Circuit Split

Finally, the court concluded that Dodd-Frank whistle-blower protections aren't limited to individuals who report their concerns to the SEC—an issue that already has divided the two federal appeals courts that have weighed in on the question.

In 2013, the U.S. Court of Appeals for the Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC that a former G.E. Energy (USA) LLC employee couldn't sue his employer for firing him for reporting possible FCPA violations because he hadn't tipped off the SEC. More recently, in Berman v. Neo@Ogilvy LLC, a divided U.S. Court of Appeals for the Second Circuit ruled in a corporate whistle-blower's favor on the so-called reporting question. However, it stayed its judgment until the U.S. Supreme Court has decided whether to take up the question. Although no certiorari petition has been filed, the appeals court's ruling gave rise to a split among the federal appeals courts, making it a prime candidate for high court review.

It may not happen this term, but the Supreme Court will weigh in on the topic, Labaton's Thomas predicted. “There's a circuit split and it's growing,” he noted. The reporting-out question “affects so many people it can only help to have clarity on this issue.”

Thomas also said issuers that claim Dodd-Frank doesn't protect whistle-blowers unless they report their concerns to the SEC should “be careful what you wish for.” Imposing a reporting-out requirement could encourage whistle-blowers to bypass corporate management, depriving it of the opportunity to address potential problems.

It's also possible that Congress will take action to clarify its intent, Thomas added.

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