Corporate directors liable as individuals

http://www.chicagolawbulletin.com/Articles/2015/12/17/Adam-Glazer-forum-12-17-15.aspx

Serving as a director on corporate boards is often quite an honor, carries prestige and can prove rewarding. Yet, as a San Francisco federal court just demonstrated, it can also come with significant risk.

For nearly 25 years, Sanford Wadler served as general counsel of Bio-Rad Laboratories Inc., a publicly traded manufacturer of life science research and clinical diagnostic products for hospitals and public entities.

Operating in worldwide markets, Bio-Rad is subject to the Foreign Corrupt Practices Act, the federal anti-bribery and record-keeping statute. After previously admitting in a consent decree to violating the FCPA by making improper payoffs to officials in Vietnam, Thailand and Russia, Bio-Rad agreed to pay more than $55 million in fines to the federal government.

While Bio-Rad’s sales in China were far greater, Wadler noted virtually no documentation of Chinese sales existed. In 2011, the law firm Steptoe & Johnson LLP was brought in to investigate, but found no evidence of bribery in China. As general counsel, Wadler grew concerned that the lack of record keeping itself violated the FCPA and that it suggested the concealment of additional bribery.

Wadler’s efforts to obtain company records from the CEO, CFO and other executives were stymied, but he still obtained a few documents, which revealed to him signs of unlawful bribery. Feeling “stonewalled” by Bio-Rad’s senior management, whom he suspected of complicity, he took his suspicions to the company’s board of directors’ audit committee.

The committee responded in 2013 by again engaging Steptoe to investigate. Again, no evidence of improper payments in China was found. Wadler objected to the hire, reasoning Steptoe was conflicted because a current finding of improper Bio-Rad conduct would demonstrate its failure in 2011 to uncover the FCPA violations.

Soon after Wadler challenged Steptoe’s renewed finding clearing the company, the Bio-Rad CEO moved to fire him, a move the entire board approved.

A federal whistleblower complaint promptly followed, alleging the Wadler’s termination was due to his investigation of potential FCPA violations and because he reported his views “up the ladder” when reasonable steps to investigate and correct the violations were not taken.

Wadler’s complaint setting forth the above allegations invoked two well-known federal statutes providing whistleblower protection, Sarbanes-Oxley and Dodd-Frank. The Sarbanes-Oxley Act, enacted in 2002 following the Enron debacle to restore trust in the financial markets, specifically barred publicly traded companies and their officers, employees or agents from retaliating against an employee for reporting upstream a violation of securities laws.

The Dodd-Frank Act of 2010, enacted in response to the 2008 financial crisis, included amendments to the securities laws to generously compensate whistleblowers when a successful prosecution results, while creating a private cause of action against employers in the event of retaliation. Significantly, Wadler relied upon both statutes to claim against not only Bio-Rad, but individual members of its board.

His complaint alleged the board members, in voting to fire him, were aware he had reported bribery activities and record-keeping violations, and of his own investigation of the company’s failure to take reasonable steps to address the FCPA violations.

Bio-Rad aggressively responded to Wadler’s suit, including by asserting he was fired for his “abusive and damaging conduct” that disrupted and embarrassed the company, not due to his FCPA reporting. Its motion to dismiss attacked the individual liability theories in particular.

“Bio-Rad has been unable to locate a single Sarbanes-Oxley or Dodd-Frank whistleblower anti-retaliation case in which a director was held liable individually as a defendant,” railed its motion, “or any precedent indicating that directors can be held liable under these provisions.”

Considering the Sarbanes-Oxley theory first, the district court noted “scant case law” addresses whether directors may be held individually liable for retaliatory conduct. The parties therefore turned to secondary sources, including Black’s Law Dictionary and the Restatement of Agency for support. The court, meanwhile, deemed the act’s text ambiguous as to whether the word “agent” included directors and so attempted to divine congressional intent.

In “a close call,” the court concluded the “context and general purpose of Sarbanes-Oxley” to protect whistleblowers would be undermined by construing “agent” to exclude directors and so ruled the statute permits directors to be held individually liable.

Harkening back to the Enron whistleblower, the court noted that excluding directors from Sarbanes-Oxley coverage would unfairly enable them to retaliate, while the same conduct by the company’s managers would subject them to individual liability.

Turning to the Dodd-Frank claim, the court again noted that “there appears to be no case in which a court has squarely decided the question of whether individual directors may be sued under this provision.”

Relying on the statute’s language authorizing whistleblowers to sue an “employer” for retaliation, without referencing the directors individually, Bio-Rad argued Dodd-Frank was not intended to subject directors to individual liability.

Because “employer” is undefined in Dodd-Frank, the district court reviewed other federal statutes using the term and found some define it to include directors, while others do not, leading it to conclude Dodd-Frank too is ambiguous.

The court, therefore, considered legislative history and found its stated purpose was “to enact more stringent measures than were contained in Sarbanes-Oxley to protect whistleblowers.”

Based on Congress’ desire to increase protections for whistleblowers, the court found “Congress intended that Dodd-Frank provide for individual liability,” subjecting the Bio-Rad directors to potential liability for retaliating against Wadler.

A final argument the directors raised was to challenge Wadler’s eligibility for protection under Dodd-Frank when he only blew the whistle internally at Bio-Rad, not to the Securities and Exchange Commission. A minority of courts only applies Dodd-Frank to individuals who report to the SEC about possible violations.

In interpreting Dodd-Frank’s anti-retaliation provisions, which prove ambiguous on this question too, the SEC itself determined they also cover internal whistleblowers, and a majority of courts defers to its interpretation.

The district court followed the majority view, noting the SEC interpretation is consistent with Dodd-Frank’s intent to incentivize the reporting of illegal actions, and is a permissible construction, so it is entitled to deference.

Bio-Rad’s motion to free the directors of individual liability was denied.

On Nov. 23, however, Bio-Rad took the unusual step of seeking from the 9th U.S. Circuit Court of Appeals certification of interlocutory appeal. The district court case is Wadler v. Bio-Rad Laboratories Inc., No. 15-cv-02356 (N.D. Calif., Oct. 23, 2015).