Employment Law | Expert Legal Commentary

November 9, 2009

Van Asdale v. Int’l Game Tech.: In-house Counsel Can Bring SOX Whistleblower Claim

Van Asdale v. International Game Technology

By Jeremy J. Gray of Zuber & Taillieu

Van Asdale v. Int’l Game Tech.: In-house Counsel Can Bring SOX Whistleblower Claim

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The Ninth Circuit ruled that two in-house counsel could sue their former employer for wrongful termination under the Sarbanes-Oxley whistleblower provision, stating that the plaintiffs only needed to demonstrate that they reasonably believed fraud had occurred, not that fraud actually had occurred. In Van Asdale v. International Game Technology, 577 F.3d 989 (9th Cir. 2009), a case of first impression for the Ninth Circuit on the substantive SOX whistleblower claims, was a nationwide case of first impression on the question of whether in-house counsel could bring such claims, especially when their claims might involve disclosure of attorney-client privileged information. The Court determined that the potential disclosure of privileged information did not bar in-house attorneys from asserting the claim.

BACKGROUND

Married couple Shawn and Lena Van Asdale are intellectual property attorneys who were hired as associate general counsel for defendant International Game Technology (“IGT”), a Nevada-based publicly traded company specializing in gaming machines and related products. During the Van Asdales’ employment, IGT merged with another gaming company, Anchor Gaming, which held a patent for a particular slot machine feature called a “wheel.”

After the merger was complete and several Anchor officials became top managers of IGT, Shawn Van Asdale determined that Anchor’s “wheel” patent may be invalid in light of prior art, meaning that the benefits of the merger may have been overvalued. If Anchor failed to disclose concerns about the validity of its patent prior to the merger, IGT shareholders may have been defrauded. Shawn and Lena shared Shawn’s concerns with IGT officials, who terminated first Shawn, then Lena shortly thereafter.

The Van Asdales filed a lawsuit in the U.S. District Court of the District of Nevada on various grounds, including a claim of retaliatory discharge in violation of the Sarbanes-Oxley Act, 18 U.S.C. section 1514A (“Sarbanes-Oxley” or “SOX”), as well as various state law claims. The district court granted summary judgment in favor of IGT on the Van Asdales’ SOX claims and declined to exercise jurisdiction over the pendant state law claims. The Van Asdales appealed. Van Asdale v. International Game Technology, 577 F.3d 989 (9th Cir. 2009).

It was the first time the Ninth Circuit had addressed the substantive elements of a SOX whistleblower claim, and no court had addressed the question of whether in-house counsel could bring a SOX whistleblower action, due to the potential disclosure of attorney-client privileged documents involved.

In-House Counsel can bring a SOX whistleblower claim

The Ninth Circuit rejected IGT’s argument that the Van Asdales should be prohibited from bringing a SOX whistleblower claim because it would likely require the disclosure of attorney-client privileged information. The Court looked at other jurisdictions’ decisions construing federal whistleblower laws and determined that “confidentiality concerns alone do not warrant dismissal of the Van Asdales’ claims.” 577 F.3d at 995.

The Court specifically pointed to the language of SOX, which authorized any “person” alleging discrimination based on protected conduct to bring a SOX whistleblower claim – it does not exclude “in-house counsel.” Id. at 996. The Court explained that “[t]o 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 dismiss the suit altogether.” Id. (referencing Kachmar v. SunGard Data Systems, Inc., 109 F.3d 173 (3rd Cir. 1997)).

No proof of fraud required—reasonable belief of fraud is enough

The Court then addressed the substantive merits of the Van Asdales’ SOX whistleblower claims, setting the standard for what employees must establish in order to set forth a prima facie case. As this was a case of first impression for the Ninth Circuit, the Court relied heavily on the language of SOX itself, the Department of Labor’s regulations, and decisions from other courts that have construed the statute. Id. at 996-997.

The Court relied on DOL regulations in reciting the four required elements of a prima facie case of SOX whistleblower retaliation: “a) the employee engaged in a protected activity or conduct; b) the named person knew or suspected, actually or constructively, that the employee engaged in the protected activity; c) the employee suffered an unfavorable personnel action; and d) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.” 29 C.F.R. section 1980.104(b)(1)(i)-(iv). Once an employee established a prima facie case, the burden shifts to the employer to show by “clear and convincing evidence” that it would have taken the same adverse action even in the absence of the employee’s activity. Id. at 996.

The Court noted that while the protected activity must “’definitively and specifically’ relate to [one] of the listed categories of fraud or securities violations,” the employee does not have to use magic language like “stock fraud,” “fraud,” or “Sarbanes-Oxley” to claim protection. Id. at 997. Moreover, the employee need not prove that actual fraud occurred in order to succeed on the SOX whistleblower claim – he only needs to show that he reasonably believed that there might have been fraud. Id. at 1000. The Court noted that even an employee’s mistaken belief that the employer engaged in fraud, as long as it is a reasonable belief, may support a SOX whistleblower claim. Id. at 1001. This result is “consistent with Congress’ goal of encouraging disclosure.” Id. at 1002.

Turning to the Van Asdales’ specific claims, the Court noted that while the couple had not specifically referred to “SOX” in their communications, they had “definitively and specifically” referenced “shareholder fraud.” Id. at 1000. The Court was very clear that while it was not making any conclusion about whether actual fraud occurred, it did find that the Van Asdales reasonably believed, in good faith, that there may have been fraud and they were terminated for suggesting that an investigation was warranted. Id. at 1002.

CONCLUSION

While Van Asdale was a case of first impression in the Ninth Circuit, the decision was very much in line with both Department of Labor decisions and regulations and cases decided in other federal circuit courts. The case indicates the courts’ and DOL’s desire to encourage, rather than discourage, employee reporting and disclosure of fraud. Employers should be prepared for continuing broad interpretation of whistleblower statutes in the future.

Employers can mitigate the significant exposure and risk that accompany whistleblower claims by ensuring that the employer’s policies and procedures for receiving, investigating, and responding to reports and complaints of alleged violations are clear, accessible to employees, and well executed. Van Asdale is particularly significant in opening up the risk of potentially significant corporate damage by allowing that former in-house counsel may introduce attorney-client privileged documents in order to establish their case. In that vein, it is particularly important for employers to take reports and concerns by in-house counsel very seriously and respond appropriately.