Securities Regulation Daily FCPA violation is not violation of ‘SEC rules or regulations’ for SOX purposes
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Tuesday, February 26, 2019

FCPA violation is not violation of ‘SEC rules or regulations’ for SOX purposes

By Amy Leisinger, J.D.

The district court erred in instructing the jury that statutory provisions of the FCPA constitute rules or regulations of the SEC for purposes of whether a whistleblower engaged in protected activity under Sarbanes-Oxley Act Section 806.

A Ninth Circuit panel has vacated in part a verdict in favor of a whistleblower claiming retaliation for an internal report that he believed the company had engaged in violations of the Foreign Corrupt Practices Act in China. According to the panel, the district court erred by instructing the jury that statutory provisions of the FCPA constitute "rules or regulations" of the SEC for the purpose of determining whether the whistleblower engaged in "protected activity" under SOX. As such, the panel vacated the SOX verdict and remanded to the district court for a determination as to whether a new trial is warranted. The panel did, however, find that the SOX instructional error was harmless with respect to the whistleblower’s California public policy claim and affirmed the verdict and corresponding damages (Wadler v. Bio-Rad Laboratories, Inc., February 26, 2019, Bennett, M.).

Potential violation. In February 2013, Sanford Wadler, former general counsel for Bio-Rad Laboratories, delivered a memo to the company’s audit committee reporting his belief that there were serious and prolonged FCPA violations in the company’s business in China. The audit committee authorized Wadler to hire outside counsel to investigate; the firm found no evidence of any FCPA violation in China, and Wadler was fired shortly thereafter. Bio-Rad later resolved a government investigation into FCPA issues in Vietnam, Thailand, and Russia, but not China.

Jury award. In February 2017, a jury awarded Wadler $2.96 million in past economic loss damages and $5,000,000 in punitive damages in his whistleblower action against Bio-Rad and its CEO. The jury found the defendants liable on all three of Wadler‘s claims: a SOX violation, a Dodd-Frank violation, and wrongful termination in violation of public policy under California law. At the close of trial, the judge had given several jury instructions concerning when an employee engages in "protected activity." For each of the three claims, the instructions stated that Wadler had to prove he engaged in protected activity under SOX, which depended on whether he disclosed conduct that he reasonably believed violated a "rule or regulation" of the SEC.

The defendants challenged the jury’s findings, arguing that Wadler’s disclosure of alleged FCPA violations was not protected activity under SOX because provisions of the FCPA, a statute, do not constitute SEC rules or regulations. The court found that Wadler presented sufficient evidence supporting the jury‘s finding as to his subjective and objective belief of the company’s wrongdoing. Because there is an SEC rule regarding the subject of Wadler’s report, his reporting a violation could support a SOX claim, the court stated.

"Rule or regulation" of the SEC. On appeal, Bio-Rad and its CEO reiterated their argument that the district court erred in instructing the jury that statutory provisions of the FCPA constitute SEC rules or regulations for the purposes of SOX. The panel noted that courts presume that Congress acts intentionally when using particular word choices in one part of a statute but not in another. As such, the court explained, the text of SOX Section 806 is clear: an FCPA provision is not a "rule or regulation of the [SEC]." Notably, the panel stated, Congress uses the phrase "any rule or regulation of the [SEC]" in the same list in which it uses "any provision of Federal law," which "strongly suggests" a difference between the meanings of "rule or regulation" and "law." "The most obvious explanation is that ‘law’ encompasses statutes, like the FCPA, whereas ‘rule or regulation’ does not," the panel stated.

However, the panel continued, if properly instructed, a jury could permissibly find sufficient evidence to support the objective reasonableness of Wadler’s belief that a violation had occurred. Accordingly, the panel vacated the SOX verdict against Bio-Rad and its CEO and remanded for the district court to consider whether a new trial is warranted.

With respect to the California public policy claim, the panel stated that the evidence indicates the instruction referred to protected activity under SOX simply to present the jury with a single factual theory of liability. As such, the panel concluded that any instructional error with regard to the state claim was harmless and affirmed the verdict and the damages as to that claim. In light of this, the panel directed the district court to consider whether any retrial would result in an impermissible double recovery.

The panel also vacated the Dodd-Frank verdict with instructions to enter judgment in favor of Bio-Rad in light of Digital Realty Trust, Inc. v. Somers, which held that Dodd-Frank does not apply to purely internal reports.

The case is No. 17-16193.

Attorneys: Kenneth P. Nabity (Kerr & Wagstaffe LLP) for Sanford S. Wadler. John M. Potter (Quinn Emanuel Urquhart & Sullivan, LLP) for Bio-Rad Laboratories, Inc.

Companies: Bio-Rad Laboratories, Inc.

MainStory: TopStory DoddFrankAct SarbanesOxleyAct WhistleblowerNews CaliforniaNews

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