In-House Counsel as Whistleblowers Under the Sarbanes-Oxley Act

I recently published a post on in-house counsel who turn whistleblower, which is available here. This post is a deeper dive into SOX retaliation claims on behalf of in-house counsel.

SOX specifically contemplates protection of attorney whistleblowers.

Generally, Section 806 of SOX prohibits a publicly traded company, or any contractor or agent of such company, from retaliating against an employee who blows-the-whistle on what she reasonably believes to be a violation of 18 U.S.C. §1341 [mail fraud], §1343 [wire fraud], §1344 [bank fraud], or §1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. See 15 U.S.C. §1514A(a)(1).

Specific to whistleblower-attorneys, Section 307 of SOX, titled “Rules of professional responsibility for attorneys,” instructed the SEC to issue rules regarding the “standards of professional conduct for attorneys” and specifically mandated that such rules “requir[e] an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof” to the company’s general counsel or CEO, or if those persons fail to respond appropriately, to the audit committee of the board of directors. See 15 U.S.C. §7245. The SEC carried out this mandate by issuing the “Standards of Professional Conduct for Attorneys,”17 C.F.R. Part 205, which requires attorneys to report material violations “up the ladder” until the attorney receives an “appropriate response.” See 17 C.F.R. §205.3(b) (“Duty to report evidence of a material violation”).

The Administrative Review Board (ARB) has interpreted the SOX anti-retaliation provisions and their relation to the provisions and rules specifically relating to attorneys, holding that “SOX Section 307 requiring an attorney to report a ‘material violation’ should impliedly be read consistent with SOX Section 806, which provides whistleblower protection to an ‘employee’ … who reports such violations. Thus, attorneys who undertake actions required by SOX Section 307 are to be protected from employer retaliation under the whistleblower provisions of SOX Section 806.” Jordan v. Sprint-Nextel Corp., ARB No. 06-105, ALJ No. 2006-SOX-041, slip op. at 16 (ARB Sept. 30, 2009).

Courts have routinely found that in-house counsel may be protected under Section 806 if they engage in other forms of protected activity. See, e.g., Van Asdale v. Int’l Game Tech., 577 F.3d 989, 996 (9th Cir. 2009) (“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…” (emphasis added)). Further, the Supreme Court has indicated that Section 806’s protections extend even to attorneys at law firms that provide services to public companies. See Lawson v. FMR LLC, 134 S. Ct. 1158, 1170 n.13 (2014) (“The Act indisputably covers private accounting firms and law firms that provide services to public companies.”).

Recently, in Wadler v. Bio-Rad Laboratories, Inc., Case No. 15-cv-02356 (N.D. Cal. Dec. 20, 2016) the court issued an order holding that the “Standards of Professional Conduct for Attorneys,”17 C.F.R. Part 205, preempt state ethics rules regarding the same conduct in a SOX whistleblower case. Under Wadler, SEC Rule 205.3 governs the use of client confidences in such cases and permits the use of confidential information to the extent necessary for the attorney whistleblower to prove her claims, even though the state ethics rule would not have permitted such use. Therefore, if Wadler is upheld by the 9th Circuit, as the Van Asdale opinion indicates will occur, attorney whistleblowers should be permitted to use client confidences to prove their SOX retaliation claims.