Sunday, August 30, 2009

Whistleblowers have had a difficult time obtaining the protection afforded under Sarbanes-Oxley (SOX) Section 806. This is largely because the Department of Labor (DOL), who administers whistleblower complaints, has taken positions hostile to employees seeking protection under SOX's whistleblower provisions. For example, see DOL Rewrites Sox Whistleblower Provision to a New Employer-Friendly Standard. There is some belief that the Obama administration will alter some of these policies, but this has been slow in coming. In late February 2009, in the first case signaling a DOL policy change, the DOL Administrative Review Board affirmed the Administrative Law Judge's opinion in Kalkunte v. DVI Financial Services. In the Kalkunte case, the DOL reversed its position that only publicly-traded parent companies were subject to SOX.

Because of the DOL's hostility to SOX whistleblowers, the only real relief for employees has been through the district courts. Last week, the Ninth Circuit (in re: Van Asdale v. International Game Technology, Case No. 07-16597) made its first ruling on the standard necessary for fired employees to claim protection under SOX's whistleblower provisions. Under the Ninth Circuit's standard, a husband and wife pair of in-house intellectual property lawyers was allowed to pursue wrongful discharge and retaliation claims under SOX's whistleblower provisions based on a more lenient standard. Accordingly, the district court's summary judgment against the couple was reversed.

The fired lawyers claimed the actual value of several patents was withheld from shareholders of International Game Technology (IGT) during its $1.5 billion stock swap acquisition of Anchor Gaming (i.e., the patents were actually worthless). Similar to most whistleblower wrongful termination suits, IGT claimed the employees were dismissed because of poor performance and an uncooperative attitude.

The now-reversed district court granted IGT's motion for summary judgment under the rationale that the fired attorneys did not engage in protected conduct because they "hadn't reached a conclusion" that IGT engaged in actual shareholder fraud. The Ninth Circuit reversed, holding that:

"It is not critical to the Van Asdales' [the fired employees] claim that they prove that Anchor officials actually engaged in fraud in connection with the merger; rather, the Van Asdales only need show that they reasonably believed that there might have been fraud and were fired for even suggesting further inquiry. To encourage disclosure, Congress chose statutory language which ensures that 'an employee's reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected.' Allen, 514 F.3d at 477. We think that the Van Asdales have met this minimal threshold requirement.

We also conclude that the Van Asdales had a subjective belief that the conduct that they were reporting violated a listed law. … Requiring an employee to essentially prove the existence of fraud before suggesting the need for an investigation would hardly be consistent with Congress's goal of encouraging disclosure."

We suspect that the Ninth Circuit's ruling will be followed by other courts. The most surprising thing about the Van Asdale ruling is how many times lower courts and the DOL have taken more narrow interpretations of SOX's whistleblower protection statute.

Fulcrum Inquiry is a forensic accounting firm that performs fraud and accounting investigations. We use this experience in operating whistleblower collection and reporting systems that improve governance processes for both businesses and nonprofit organizations.