In-House Attorneys Get SOX Whistleblower Protection

The Sarbanes-Oxley whistleblower protection provision shields in-house attorneys, even if they haven't proved fraud occurred--and even if bringing the claim will violate attorney-client privilege, the 9th Circuit ruled.

Two former in-house attorneys, husband and wife Shawn and Lena Van Asdale, filed suit against Nevada-based gaming machine company International Game Technology (IGT), claiming it fired them in retaliation for calling out a possible shareholder fraud that occurred during a 2001 merger with Anchor Gaming.

IGT pursued the merger largely because Anchor professed to have a valuable patent for a slot machine wheel. But after Shawn discovered another company's slot machine invalidated the patent--which Anchor may have known--he told IGT's general counsel he believed shareholders were misled about the merger's value. Soon after, the company terminated both him and his wife.

The Van Asdales filed suit against IGT in December 2004, seeking relief under the whistleblower protections of the Sarbanes-Oxley Act (SOX). The district court granted IGT summary judgment in June 2007.

But in its first examination of the standard required to bring such a claim, the 9th Circuit reversed and vacated the decision in Van Asdale v. International Game Technology, et al. on Aug. 13, remanding it to the lower court.

By ruling employees needn't prove actual fraud to bring a claim, the decision affirms other circuits' precedent: Employees must show only that they suspect fraud has occurred--not that it actually occurred. As Judge Jay Bybee wrote, "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 ... is protected.'"

The 9th Circuit also asserted that in-house counsel shouldn't be barred from bringing wrongful termination suits, even if the claim necessitates a breach of attorney-client privilege regarding other company litigation.

"The bar has been set low for the purpose of stating a claim," says Patrick Hicks, a shareholder at Littler Mendelson. "As long as the employee has a subjective belief [fraud occurred] that is objectively reasonable, they can state a claim and survive summary judgment."

Ambiguous Suspicion

Shawn uncovered the alleged fraud in 2003 while preparing for a patent infringement suit IGT planned to file against Bally Gaming, which produced a similar slot machine to Anchor's star product. Bally showed proof of an Australian version of the slot machine that squelched any possible patent claims against them--and nullified IGT's supposedly valuable patent.

Shawn brought his concerns to IGT executives, including its general counsel, Sarah Beth Brown. Former Anchor GC David Johnson replaced Brown as IGT's GC in November 2003, and Shawn and Lena, who was not present at the meeting with Brown, repeated their concerns to him. Three days later, Johnson decided to fire Shawn--although he postponed the termination until February 2004. Johnson terminated Lena soon after.

The Van Asdales didn't use trigger words such as "fraud" or "Sarbanes-Oxley" when discussing the alleged corporate misconduct. But the 9th Circuit ruled Shawn's statements related to shareholder fraud definitively enough to protect him under SOX's shield. And though the parties dispute the details of what was said during those conversations, the court determined "it was objectively reasonable for Shawn and Lena to suspect that [Anchor's] non-disclosure [of the patent issue to IGT] ... could have been deliberate."

Hicks points out that the appeals court took pains to emphasize the shareholder fraud in question is possible--not confirmed--fraud, setting a low bar for stating a retaliation claim.

The court's threshold for Lena's claim was even lower, says David Greenhaus, a partner at Jackson Lewis. While Shawn made specific statements about the suspected fraud, Lena only said the company might need to do an investigation. "She wasn't saying, 'Yes, there was fraud,'" he says. "All she was saying was, 'Something's fishy. Let's investigate the possibility.'"

Question of Privilege

Because the Van Asdales' case could require discussing the budding litigation against Bally, IGT maintained that arguing the retaliation claim would violate attorney-client privilege. Though the court determined potential breach of privilege shouldn't prevent the claim from going forward, it emphasized that every effort should be made to keep confidential information private.

"This case demonstrates that attorneys have the same rights as all other employees," Greenhaus says, "even though they're talking about company decisions and the legal ramifications of those decisions all day."

An established internal procedure for dealing with investigations into whistleblower claims can help prevent a case from going to court at all, says Mandana Massoumi, a partner at Dorsey & Whitney. And if a whistleblower retaliation case does end up in court, she says a documented investigation can substantively aid the defense.

"The company's analysis should be, 'Did the employee raise anything related to fraud whatsoever?' Then you really want to make sure you have documentation to support whatever action you take," Greenhaus says.

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