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Ninth Circuit Takes Expansive View of SOX’s Anti-Retaliation Provisions

    Client Alerts
  • August 21, 2009

The Sarbanes-Oxley Act (SOX) was passed in the wake of the Enron and other corporate scandals earlier this decade.  Among other things, SOX prohibits publically-traded companies from retaliating against employees who complain internally or externally over violation of securities laws or matters that rise to the level of shareholder fraud.  Over the past year, the first SOX cases have made their way to the federal appellate level.  To date, federal courts (including the Fourth Circuit) have narrowly read SOX, limiting its application to clear complaints about matters of material financial importance to shareholders.

Last week, the Ninth Circuit Court of Appeals applied a less stringent initial threshold for SOX whistleblower claims.  In Van Asdale v. Int’l Game Technology, the plaintiffs were in-house attorneys who reported to management that patents relied upon as the basis for a merger may not be valid.  They allege that their report implied that the merged entity intentionally failed to disclose the patent problems during due diligence preceding the merger.  The plaintiffs were fired within a few weeks of the meeting involving the patent issues.

The district court dismissed the SOX complaints, finding that the plaintiffs did not make specific allegations of shareholder fraud.  The Ninth Circuit reversed this decision, remanding the matter for trial.  In its opinion, the Ninth Circuit stated that in order to constitute protected activity under SOX, the plaintiffs did not have to explicitly mention potential fraud.  Given the importance of the patents to the financial state of the company, any report of undisclosed information during the merger implied possible fraud.  Moreover, the court concluded that the plaintiffs had a reasonable subjective belief that they were reporting possible fraud to management.

If followed by other courts, this decision could extend SOX’s protections to general observations or reports from employees that are not explicit complaints or allegations of inappropriate behavior.  Employers would be placed in the difficult position of having to determine whether the claims could potentially involve conduct protected by SOX.

This difference between the federal appellate circuits may result in the U.S. Supreme Court being asked to establish the standard for recognizable SOX complaints.