So You Want to Accept That Board Position? One More Reason to Pause: Directors Can Be Personally Liable Under Sarbanes-Oxley and Dodd-Frank

3 minute read | November.17.2015

On October 23, 2015, in a suit filed by Bio-Rad’s former general counsel Sanford Wadler, the United States District Court for the Northern District of California issued a decision granting in part and denying in part Defendants’ motion to dismiss in Wadler v. Bio-Rad Labs, Inc. (No. 15-CV-02356-JCS, 2015 WL 6438670 (N.D. Cal. Oct. 23, 2015), holding, among other things, that corporate directors may be held personally liable for retaliating against a whistleblower under both the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

Plaintiff Wadler was Bio-Rad’s general counsel for nearly 25 years. He claims that from 2011 to 2013, he raised concerns that certain of Bio-Rad’s sales practices in China violated the Foreign Corrupt Practices Act (“FCPA”). He alleges Bio-Rad’s management was not receptive to his concerns, and so he reported his concerns to the board of directors’ audit committee. The board hired a law firm to investigate. Wadler contends that in March 2013, the law firm reported at a meeting with Bio-Rad that it had not found any violations of the FCPA regarding the company’s China sales, and he challenged the firm’s conclusion at the meeting. Wadler then alleges that, shortly after that meeting, in June 2013, after a vote of Bio-Rad’s entire board of directors, Bio-Rad terminated Wadler.

Wadler filed an administrative complaint with the DOL’s OSHA Division and filed suit against Bio-Rad in U.S. District Court, alleging that Bio-Rad had violated both SOX and Dodd-Frank by terminating him in retaliation for raising concerns about Bio-Rad’s potential FCPA violations. Wadler’s SOX and Dodd-Frank retaliation claims named the company and all individual directors on the board, including the CEO. Bio-Rad moved to dismiss Wadler’s claims against the individual directors, claiming, among other things, that both SOX and Dodd-Frank do not provide for corporate directors to be held individually liable.

Although Wadler’s SOX claims against the individual board members other than the CEO were ultimately dismissed because of lack of adequate notice, in reaching its decision, the District Court held that both SOX and Dodd-Frank do allow corporate directors to be held personally liable for retaliating against a whistleblower. The District Court noted that SOX imposes liability on an employer’s “officers, employees, contractors, subcontractors or agents” who retaliate against whistleblowers, and while the statute is ambiguous as to whether a corporate “director” who is not an officer or an employee can be an “agent,” holding Bio-Rad’s directors personally liable as “agents” is consistent with SOX’s central statutory purpose of protecting whistleblowers.

As to Wadler’s Dodd-Frank claim, the Court noted that “employers” who retaliate against whistleblowers can be liable under Dodd-Frank, and while the definition of “employers” is also ambiguous, Congress intended that Dodd-Frank provide for individual liability that is at least as extensive as that of SOX, and therefore, directors may be held individually liable for retaliating against whistleblowers under Dodd-Frank.

The Court’s decision in Wadler underscores yet another risk individuals face when accepting invitations to join corporate boards: the prospect of being a defendant in a whistleblower retaliation lawsuit. While directors must oversee corporate accounting and compliance issues, they do not generally need to be involved in making employment decisions with regard to putative whistleblowers. In light of Wadler, directors may want to stay out of such decision-making to the extent possible.