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SDNY Rejects Director Liability for Sarbanes-Oxley Whistleblower Claims, Creating a Split Among Federal District Courts

Public company directors, who are under constant threat of claims, received welcome news earlier this month.  On December 9, 2019, the U.S. District Court for the Southern District of New York ruled that corporate directors cannot be sued for whistleblower retaliation under the Sarbanes-Oxley Act (SOX).  The SDNY decision splits with a 2015 opinion from a California federal district court permitting SOX claims against corporate directors to go forward. 

The SDNY case involved a number of “yieldco” subsidiaries formed by SunEdison to facilitate investment in renewable energy projects.  The plaintiff and alleged whistleblower was the CEO of two of these subsidiaries.  The CEO claimed that he started questioning SunEdison’s public statements about the subsidiaries’ finances and SunEdison’s liquidity and that, in response, the subsidiaries terminated his employment.  He also accused two SunEdison directors – the Board’s Executive Chairman and Governance Committee chair – of orchestrating his termination.  The CEO’s claim was consolidated with related shareholder litigation concerning the representations about SunEdison’s finances.

The court relied on the plain language of the SOX whistleblower retaliation statute, 18 U.S.C. § 1514A, to dismiss the former CEO’s claims against the directors.  SOX provides a retaliation claim against a “company” with publicly-traded securities, a “nationally recognized statistical rating organization,” “or any officer, employee, contractor, subcontractor, or agent of such company or nationally recognized statistical rating organization.”  Directors are not listed in the statute.  Given that SOX specifically regulates the conduct of corporate directors in other respects, the court refused to read the broad term “agent” to encompass corporate directors.  The court also noted that individual directors are not ordinarily regarded as agents of the corporation for which they serve.

The New York decision splits with a 2015 decision from the Northern District of California in Wadler v. Bio-Rad Laboratories, Inc.  There, the court found that SOX’s use of the term “agent” was ambiguous and construed it to include directors.  Although the Ninth Circuit ruled on appeal on various issues in the Wadler case earlier this year, it did not address the director liability issue.  No federal appellate court has yet ruled on this issue, leaving the question split between the New York and California federal district courts.

Since the SOX was enacted in 2002, plaintiffs and their counsel have been testing the scope of whistleblower claim, including the individuals and entities – such as directors – that can be held liable.  Director liability is worth closely watching with D&O insurance rates reportedly on the rise due to an uptick in shareholder litigation. 

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 2


About this Author

Conne Bertram Government Contract Lawyer Polsinelli Law Firm

Connie focuses her practice on whistleblower, trade secrets, government contractors and employee mobility counseling and litigation. She frequently conducts confidential internal investigations involving executive-level employees, including alleged fraud, theft or misuse of company data, trade secrets, sexual harassment and code of conduct violations. She routinely counsels, investigates and litigates restrictive covenant and trade secrets disputes between employers and former employees.

Connie has defended complex whistleblower, trade secrets and restrictive...

Jack Blum Polsinelli Employment Attorney

Jack Blum is an associate in the firm’s Employment Disputes, Litigation, and Arbitration practice, where he represents employers in connection with a wide range of employment law issues. Jack has extensive experience in defending employers against claims by their employees in federal and state courts, as well as before government agencies like the EEOC, Department of Labor, and state human rights commissions. Jack aggressively defends his client’s personnel practices and decisions while not losing sight of their underlying business goals and objectives. Jack represents clients in all aspects of complex employment litigation and has advised and defended employer clients regarding a wide variety of employee claims, including:

• Employment discrimination, harassment, and retaliation
• Wage and hour
• Employment contract disputes
• Independent contractor/employee misclassification audits 
• Tort claims arising out of the employment relationship

Jack also has extensive experience representing parties in litigation arising from employee mobility, including claims involving non-competition, non-solicitation, and confidentiality agreements as well as the misappropriation of trade secrets. Significantly, Jack has experience in both prosecuting and defending these claims and is, therefore, able to offer clients a well-rounded assessment of their options and courses of action. Jack also has experience redressing employee data breaches under the Computer Fraud and Abuse Act.

Jack also has a background in employment counseling, where he has worked closely with in-house counsel, human resources personnel, and business executives to craft personnel policies that meet the client’s business requirements while complying with applicable laws. Jack has particular experience in assisting clients with issues relating to employee/independent contractor classifications, and regularly advises clients regarding the defensibility of classifications, drafts independent contractor agreements to provide the strongest possible arguments in support of the classification, and defends misclassification claims asserted by employees and government agencies. Jack also walks clients through sensitive personnel actions to reduce the potential for litigation or at least best position the client in the event that litigation is inevitable. Jack draws heavily upon this counseling experience in representing clients in litigation.

During law school, Jack served as a legal intern in the U.S. Securities and Exchange Commission’s Office of the Inspector General where he contributed to several high-profile internal investigations, and also interned with the Maryland Attorney General’s Office.