Bernabei & Wachtel Blog

Sarbanes-Oxley whistleblower claims by in-house counsel

The U.S. Court of Appeals for the Ninth Circuit issued an interesting decision involving Sarbanes-Oxley (SOX) whistleblower claims brought by two former in-house counsel at a gaming company. The plaintiffs alleged that they were terminated after reporting that a supposed asset of the company (several patents) that the company used in its valuation during a corporate takeover was actually worthless.

The decision is worth noting on two points. First, it confirms that in-house counsel are protected under the whistleblower statutes, even though the attorney-client privilege may have to be addressed during discovery and at trial. Second, it rejects the view of some other courts that a whistleblower must prove actual fraud, since only a reasonable belief that the employer engaged in fraud is required.

Some excerpts follow.

http://www.ca9.uscourts.gov/datastore/opinions/2009/08/13/07-16597.pdf

Van Asdale v. International Game Technology, Inc., No. 07-16597 (9th Cir. Aug. 13, 2009)

Appeal from the United States District Court for the District of Nevada

Robert A. McQuaid, Magistrate Judge, Presiding

Argued and Submitted

March 12, 2009—San Francisco, California

Filed August 13, 2009

Before: J. Clifford Wallace, Sidney R. Thomas, and Jay S. Bybee, Circuit Judges.

Opinion by Judge Bybee

COUNSEL

Margo Piscevich (argued), Mark J. Lenz, Piscevich & Fenner, Reno, Nevada, for the plaintiffs-appellants.

Richard G. Campbell Jr. (argued), Lance P. Maiss, Armstrong Teasdale LLP, Reno, Nevada, Gordon E. Krischer, Nathaniel L. Dilger, Mark W. Robertson, O’Melveny & Myers LLP, Los Angeles, California, for the defendant-appellee.

OPINION

BYBEE, Circuit Judge:

This case presents our first opportunity to examine the substantive requirements necessary to establish a claim under the whistleblower-protection provisions of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A.

Plaintiffs Shawn and Lena Van Asdale appeal from the district court’s summary judgment in favor of their former employer, International Game Technology ("IGT"), on their claim of retaliatory discharge in violation of § 1514A, as well as the district court’s dismissal of their factually-related Nevada state-law claims. We conclude that the Van Asdales raised a genuine issue of material fact regarding the cause of their terminations and that summary judgment should not have been granted. We reverse the district court’s summary judgment in favor of IGT on the Van Asdales’ Sarbanes-Oxley claim and vacate the dismissal of their state-law claims. . . .

. . . A. Attorney-Client Privilege

. . . IGT next argues that, irrespective of the specific rules applicable to Illinois-licensed attorneys, the Van Asdales should not be permitted to maintain their Sarbanes-Oxley claim because doing so requires use of attorney-client privileged information. IGT reasons that the Van Asdales’ only evidence of protected activity consists of a conversation the two had with Johnson regarding a pending litigation matter involving the company.

There are few federal circuit court cases addressing the right of in-house counsel to use attorney-client privileged information in a retaliation suit. In Willy v. Administrative Review Board, 423 F.3d 483 (5th Cir. 2005), an in-house attorney brought suit against his former employer, alleging retaliation as a result of a report he had written; it was undisputed that the contents of the report were covered by the attorney-client privilege. Id. at 494 n.48. The Fifth Circuit allowed the suit to go forward, rejecting the notion "that the attorney-client privilege is a per se bar to retaliation claims under the federal whistleblower statutes, i.e., that the attorney-client privilege mandates exclusion of all documents subject to the privilege." Id. at 500. However, Willy involved a claim before an administrative law judge and the Fifth Circuit expressly reserved the question of whether its holding would apply to "a suit involving a jury and public proceedings." Id. at 500-01.

Similarly, in Kachmar v. SunGard Data Systems, Inc., 109 F.3d 173 (3d Cir. 1997), the Third Circuit held that a former in-house attorney could maintain a Title VII suit for retaliatory discharge; the Third Circuit reasoned that "concerns about the disclosure of client confidences in suits by in-house counsel" did not alone warrant dismissal of the plaintiff ’s action. Id. at 181. Rather, the Third Circuit suggested that a district court should "balanc[e] the needed protection of sensitive information with the in-house counsel’s right to maintain the suit," while considering any protective measures that might be taken at trial to safeguard confidential information. Id. at 182.

Although neither case is precisely on point, we agree with the careful analysis of the Third and Fifth Circuits and hold that confidentiality concerns alone do not warrant dismissal of the Van Asdales’ claims. As a threshold matter, it is not at all clear to us to what extent this lawsuit actually requires disclosure of IGT’s confidential information. Shawn and Lena allege that they raised claims of shareholder fraud at their November 24, 2003 meeting with Johnson and that they were terminated in retaliation for these allegations. There is no reason why the district court cannot limit any testimony regarding this meeting to these alleged disclosures, while avoiding testimony regarding any litigation-related discussions that also took place. To the extent this suit might nonetheless implicate confidentially-related concerns, we agree with the Third Circuit that the appropriate remedy is for the district court to use the many "equitable measures at its disposal" to minimize the possibility of harmful disclosures, not to dismiss the suit altogether. Id. at 182.

We also note that the text and structure of the Sarbanes-Oxley Act further counsel against IGT’s argument. Section 1514A(b) expressly authorizes any "person" alleging discrimination based on protected conduct to file a complaint with the Secretary of Labor and, thereafter, to bring suit in an appropriate district court. Nothing in this section indicates that in-house attorneys are not also protected from retaliation under this section, even though Congress plainly considered the role attorneys might play in reporting possible securities fraud. See, e.g., 15 U.S.C. § 7245. We thus agree with the district court that dismissal of the Van Asdales’ claims on grounds of attorney-client privilege is unwarranted.

B. Sarbanes-Oxley Act

. . . To be sure, Brown testified that she did not believe Shawn used the words "fraud," "fraud on shareholders," or "stock fraud" and she could only say that Shawn "may have" used the term "Sarbanes-Oxley" or "SOX"; the record similarly contains no evidence that Shawn used any such language in his conversation with Pennington. However, as the Fourth Circuit has recognized, "[a]n employee need not cite a code section he believes was violated" to trigger the protections of § 1514A. Welch, 536 F.3d at 276 (internal quotation marks omitted). It is clear to us that, taking the facts in the light most favorable to the Van Asdales, Shawn’s statements to both Brown and Pennington reported conduct that definitively and specifically related to shareholder fraud. That is all that § 1514A requires.

. . . . As noted above, § 1514A prohibits discriminating against an employee for "provid[ing] information . . . regarding any conduct which the employee reasonably believes constitutes a violation of" a listed law. The plain language of this section, as well as the statute’s legislative history and case law interpreting it, suggest that to trigger the protections of the Act, an employee must also have (1) a subjective belief that the conduct being reported violated a listed law, and (2) this belief must be objectively reasonable. See Harp v. Charter Commc’ns, Inc., 558 F.3d 722, 723 (7th Cir. 2009); Day, 555 F.3d at 54; Welch, 536 F.3d at 275; Allen, 514 F.3d at 477 ("We agree that an employee’s reasonable belief must be scrutinized under both a subjective and objective standard."); S. Rep. No. 107-146, at 19 (2002) ("[S]ubsection (a)(1) . . . is intended to impose the normal reasonable person standard used and interpreted in a wide variety of legal contexts.").

We first address whether the circumstances in which the Van Asdales found themselves permitted them to form an objectively reasonable belief that the apparent failure to disclose the Australian Flyer to IGT prior to the merger constituted shareholder fraud. We agree with the First Circuit that, "[t]o have an objectively reasonable belief there has been shareholder fraud, the complaining employee’s theory of such fraud must at least approximate the basic elements of a claim of securities fraud." Day, 555 F.3d at 55.

. . . It is not critical to the Van Asdales’ 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. The legislative history of Sarbanes-Oxley makes clear that its protections were "intended to include all good faith and reasonable reporting of fraud, and [that] there should be no presumption that reporting is otherwise, absent specific evidence." 148 Cong. Rec. 57420 (daily ed. July 26, 2002) (statement of Sen. Leahy). In this case, there is no evidence that Shawn’s various complaints were made in bad faith and IGT does not suggest otherwise.

. . . . The district court’s conclusion that this testimony precluded Lena from claiming protection under the Sarbanes-Oxley Act is contrary to the language of § 1514A. Although Lena acknowledged that she "hadn’t reached a conclusion" as to whether fraud had occurred, the context of this statement was Lena’s discussion of the need for an investigation. Moreover, in passing the Sarbanes-Oxley Act, Congress noted the existence of "a culture, supported by law, that discourage[s] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally." S. Rep. No. 107-146, at 5 (2002). 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. . . .

[Alan R. Kabat, Bernabei & Wachtel, PLLC]

Disability claims and the EEOC charge

Judge Bates issued an interesting decision in a DCHRA and ADA disability discrimination and retaliation case brought by a former office worker at Georgetown University Hospital. The plaintiff alleged that she was discriminated against on the basis of her asthma (which was triggered by a temporary transfer to the Emergency Room), and subsequently retaliated against for having made a request for accommodation that instead led to her termination.

There is good language in the opinion about how the plaintiff was not required to "check the retaliation box" or use magic words in her EEOC charge in order to exhaust her retaliation claims – and it is surprising that employers continue to invoke this defense to retaliation claims.

And, the court has to explain, yet again, that DCHRA claims are tolled while a charge is pending with the EEOC, but that did not stop this employer from asserting that defense.

Judge Bates allowed plaintiff to amend her complaint to clarify the nature of her disability claims, while also allowing Georgetown the opportunity to take limited additional discovery specifically related to those amendments.

Some excerpts follow:

https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2008cv1174-39

Ellis v. Georgetown Univ. Hosp., No. 08-1174 (JDB) (D.D.C. June 6, 2009)

Plaintiff Lakeisha Ellis brings this action against her former employer, Georgetown University Hospital ("Georgetown" or the "Hospital"), alleging disability discrimination and retaliation in violation of federal anti-discrimination laws and the District of Columbia Human Rights Act ("DCHRA"). Now before the Court are Georgetown's motion for partial dismissal of plaintiff's amended complaint or, in the alternative, for summary judgment and Ellis's motion for leave to file a second amended complaint. In its motion, Georgetown contends that Ellis's retaliation claims should be dismissed because she failed to exhaust her administrative remedies. Georgetown also asserts that Ellis's retaliation claim under the DCHRA is barred by the relevant statute of limitations. Ellis opposes Georgetown's motion, arguing that her retaliation claims are not defective and should be allowed to proceed. With respect to her own motion, Ellis portrays her proposed second amended complaint as simply a clarification of her existing claims. . . .

. . . In responding to the [EEOC] questionnaire, Ellis checked the box indicating her belief that she had been discriminated against because of her disability. Pl.'s Ex. 1 at 3. She did not, however, check the box indicating that she had been subject to retaliation. Id. On December 13, 2006, Ellis filed a formal Charge of Discrimination against the Hospital with the EEOC. Pl.'s Ex. 3 (Dec. 13, 2006 EEOC Charge of Discrimination). Once again, Ellis marked the box alleging that the Hospital had discriminated against her based on her disability, but she did not mark the box alleging that she had been the victim of retaliation. . . .

A. Exhaustion of Administrative Remedies.

. . . As an initial matter, "[w]hile the boxes aid a claimant in identifying the nature of her charge, a claimant is not necessarily limited to the boxes she selected if she provides the basis for her claim in her written explanation." Robinson-Reeder v. Am. Council Educ., 532 F. Supp. 2d 6, 13 (D.D.C. 2008); see also Maryland v. Sodexho, Inc., 474 F. Supp. 2d 160, 162 (D.D.C. 2007) (explaining that while the EEOC charge form makes it easy to identify the nature of the charge "with its boxes that an employee can merely check," an employee "need only describe it in the text of the charge form" if he is unsure which box applies). Because Ellis failed to select the "Retaliation" box in her formal EEOC charge, the Court must examine her written explanation. See Pl.'s Ex. 3. Although Ellis does not specifically mention "retaliation," the Court's task is not to search for magic words -- it must parse the substance of the allegations to determine whether they "fairly embrace" a retaliation claim. Marshall, 130 F. 3d at 1098. . . .

. . . Although she was not required to allege facts sufficient to make out a prima facie case of retaliation in her EEOC charge -- and, indeed, is under no such pleading obligation even with respect to her complaint in this case, see Swierkiewicz, 534 U.S. at 510-11 (rejecting the creation of a heightened pleading standard in discrimination cases that would require plaintiffs to plead the elements of a prima facie case) -- careful examination of her charge reveals that Ellis did allege facts sufficient to do so.

First, following her illness in late July 2006, Ellis alleges that she spoke to her supervisor, Fannice Beckett, and informed her that, after consulting with her doctor, she "would not be able to work in the Emergency Department because of how it affects the symptoms of [her] disability." Pl.'s Ex. 3. She further alleges that just days later, on July 31, 2006, she "was called into a meeting with Fannice Beckett and the Department Director, Cindy Hecker, to discuss if they had chosen to make accommodations" for her with respect to her asthma and her request to work outside of the Emergency Department. Id. Hence, as alleged in her EEOC charge, Ellis made a request for an accommodation -- not to work in the Emergency Department -- based on her putative disability. . . . Second, Ellis plainly alleges that she was subjected to an adverse employment action because she was "terminated from [her] position" soon after requesting an accommodation. Pl.'s Ex. 3. Finally, the temporal proximity of Ellis's termination to her accommodation request -- just two days later -- is sufficient to establish the necessary causal link between the adverse employment action and the protected activity. See, e.g., Woodruff v. Peters, 482 F.3d 521, 529 (D.C. Cir. 2007) (stating that temporal proximity can support an inference of causation where the two events are "very close" in time).

In view of these allegations, the Court concludes that the facts set forth in Ellis's December 13, 2006 EEOC charge, while not labeled as such, were nevertheless sufficient to raise a retaliation claim. Consequently, the Court rejects Georgetown's contention that Ellis failed to exhaust her administrative remedies with respect to her retaliation claim because the allegations contained in her EEOC charge "fairly embrace" such a claim. . . .

B. Statute of Limitations -- DCHRA Retaliation Claim

. . . When a charge of discrimination is filed with the EEOC in the District of Columbia, a claim is automatically cross-filed with the D.C. Office of Human Rights ("DCOHR") pursuant to a "worksharing agreement" between the two agencies. 29 C.F.R. § 1601.13(a)(4)(ii)(A); see Carter v. George Washington Univ., 387 F.3d 872, 879 (D.C. Cir. 2004). Pursuant to D.C. Code § 2-1403.16(a), "[t]he timely filing of a complaint with the [DCOHR] . . . shall toll the running of the statute of limitations while the complaint is pending." Cases interpreting this provision have established that the timely filing of a charge with the EEOC, and the automatic cross-filing of a claim with the DCOHR that follows, is sufficient to toll the one-year statute of limitations for filing a claim under the DCHRA. See Zelaya v. UNICCO Serv. Co., 587 F. Supp. 2d 277, 283 (D.D.C. 2008); Ibrahim v. Unisys Corp., 582 F. Supp. 2d 41, 45 (D.D.C. 2008); Ware v. Nicklin Assocs., Inc., 580 F. Supp. 2d 158, 164 (D.D.C. 2008); Estenos v. PAHO/WHO Fed. Credit Union, 952 A.2d 878, 886 (D.C. 2008).

Ellis filed her EEOC charge on December 13, 2006, just over four months after the alleged retaliatory act (her termination) occurred. Her charge was pending with the EEOC – and the DCHRA statute of limitations was tolled by virtue of the cross-filing of a claim with the DCOHR -- until April 4, 2008 when the EEOC issued a Right to Sue Letter. A little over three months later, on July 7, 2008, this action was commenced. Hence, by the time Ellis filed suit, less than eight months had elapsed for statute of limitations purposes and, accordingly, her DCHRA retaliation claim appears to have been timely filed. . . .

Discovery sanctions decision

In a whistleblower and disability discrimination case brought by a social worker, Judge Sullivan issued an interesting electronic discovery decision, finding that the District of Columbia government willfully destroyed emails several months after being put on notice of the need to preserve the emails, and failed to produce backup emails that were in offsite storage, so that monetary sanctions, as well as additional depositions of D.C. employees at D.C.’s expense, were warranted.

Some excerpts follow:

https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2006cv1705-62

Ripley v. District of Columbia, et al.,

No. 2006-CV-1705 (EGS) (D.D.C. July 2, 2009)

. . . On January 18, 2008, the District admitted that it destroyed evidence – e-mails from Stowe and Ahluwalia. Defendants were on notice of the nature of this litigation at least eight months before Stowe’s e-mails were destroyed and at least eighteen months before Ahluwalia’s e-mails were destroyed. A party has an obligation to preserve material "when a party should have known that the evidence might be relevant to future litigation." Mazloum v. D.C. Metro. Police Dep’t, 530 F. Supp. 2d 282, 291 (D.D.C. 2008). In August 2008, defendants told plaintiff that e-mails from back-up tapes could not be recovered. Defendants’ duty to preserve material evidence first arose before litigation, as the duty arises "when a party reasonably should know that the evidence may be relevant to anticipated litigation." Silvestri v. Gen. Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001); see also Leon v. IDX Systems Corp., 464 F.3d 951, 959 (9th Cir. 2006) ("A party’s destruction of evidence qualifies as willful spoliation if the party has ‘some notice that the documents were potentially relevant to the litigation before they were destroyed.’" (quoting United States v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002))). Defendant had notice of the litigation, yet failed to properly protect material evidence from destruction.

In defendants’ original opposition, they claimed to have produced all available e-mails in their possession that were non-privileged and responsive to plaintiff’s discovery requests. Defendants asserted that Stowe’s e-mails were archived and her computer was wiped clean and recycled, per agency practice, before the District had notice of plaintiff’s lawsuit. Defendants also argued that they had repeatedly searched for e-mails and that they did not find anything else that would be responsive to plaintiff’s request. Based on these contentions, defendants opposed the motion to compel, arguing that plaintiff sought the production of documents that the District was unable to produce. Plaintiff challenged defendants on these contentions in her reply.

Defendants’ sur-reply acknowledged that after further supervisory review of its earlier filing pursuant to a court order issued in another case, it found back-up tapes from its storage facility that contained thousands of e-mails that were responsive to plaintiff’s request. . . .

. . . Accordingly, Plaintiff’s motion to compel is GRANTED. Defendants are ORDERED to (1) supplement their discovery responses; (2) make available Brady Birdsong, Donna Whitman, and Kevin Bell for depositions at defendants’ expense; and (3) provide competent witnesses pursuant to Rule 30(b)(6) for depositions to address e-mail destruction and preservation at defendants’ expense. The Court now turns to the issue of sanctions.

B. Motion for Sanctions

The Court notes that its April 6, 2007 Scheduling Order clearly states, "[c]ounsel are hereby notified that the party that does not prevail on the discovery dispute shall pay the costs involved, including attorney’s fees." Scheduling Order, Apr. 6, 2007, Docket Entry #8.

Defendants argue that its failure to produce certain e-mails was inadvertent and not a basis for sanctions. For all of the reasons above, and for the additional reasons below, the Court will impose sanctions on the defendants. Defendants assert that this discovery dispute involves no bad faith on their part, and that the newly discovered e-mails were not the result of plaintiff’s motions. Whether or not the newly discovered e-mails were the result of plaintiff’s motions is of no consequence. Plaintiff’s attorneys have been extremely diligent since January 2008 in requesting documents and supplemental information. While it is plausible that defendants did not intentionally hide documents, it is clear that defendants were not as meticulous as they could have been with plaintiff’s discovery requests and with their duty to supplement.

Federal Rule of Civil Procedure 37(e) prohibits a Court from imposing sanctions only if a party fails "to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system." Fed. R. Civ. P. 37(e). Defendants, however, did not operate their e-mail system in a routine, good-faith manner. Deposition testimony from Wilson Ndeh, CFSA’s Technology Manager, demonstrates that defendants were unable to provide electronically stored information only because they had not searched all of the available files. Dep. of Wilson Ndeh, at 23:8. Ndeh’s testimony made clear that there are back-ups of all e-mails – a point defendants repeatedly ignored up until the filing of the instant motions.

For eight months, plaintiff asserted that defendants had more information. Defendants routinely missed production deadlines and told plaintiff that they had provided all information responsive to plaintiff’s discovery requests. At one point, in response to plaintiff’s repeated requests for back-up files that Ndeh testified existed, defendants’ counsel wrote in an e-mail, "[t]here are no more back ups. Please stop asking for them." Pl. Mot. at 11. It was only after plaintiff filed this motion, and its reply to defendants’ opposition – which pointed out the possibility that documents might be in the District’s storage facility – that defendants found other documents in the District’s storage facility. In its reply, plaintiff pointed to specific deposition testimony from the CFSA Chief Technology Officer that indicated that "every e-mail is backed up." Ndeh Dep. at 23:8. Only then did the defendants finally acknowledge that they had back-up tapes of e-mails and offer to produce the back-up tapes and make witnesses available for further deposition. Rule 37(e) does not stand in the way of relief plaintiff seeks.

Plaintiff’s motion for sanctions is GRANTED.

[Alan R. Kabat, Bernabei & Wachtel, PLLC]