Individual liability for board members in retaliation cases
I have written previously about a brighter spotlight being shone on board members and the higher level of accountability to which they are subject in their oversight capacity. But a decision handed down by a federal judge in the Northern District of California in late October takes accountability to new heights.
In Wadler v Bio-Rad Laboratories, a former general counsel of a company with extensive foreign sales in countries such as China, Russia and Vietnam sued to hold not only the company’s management but also individual board members liable for firing him for trying to report violations of the FCPA for insufficient record-keeping of company sales in China. Greg Keating, a partner at Choate Hall & Stewart who says 95 percent of his work is spent on whistleblower defense cases, considers Wadler significant for being ‘the first case of this kind to address that board members can be held liable individually’, and predicts it will ‘send reverberations out to corporate America.’
Although directors on many boards understand they are accountable for various matters that fall within their oversight duties, until now they were not aware they could be held personally liable for firing an executive officer as a retaliatory act, Keating adds.
The District Court’s decision concerns Keating because he sees it extending a trend he has seen of whistleblowing coming from in-house counsel or compliance officers. ‘The trend is noteworthy because obviously on one hand you have the desire to have anyone come forward and identify wrongdoing and not be retaliated against, and on the other hand you have individuals whose very job is to ferret out wrongdoing,’ he explains. ‘In order for in-house counsel to identify wrongdoing they are complaining about, they often have to disclose privileged information they came across in their role as counsel. It can get pretty disturbing when the same information you shared with individuals is then used in a publicly filed document.’
It’s a legitimate concern, says Susan Divers, a member of the advisory services practice at LRN, a provider of ethics and compliance advisory services and education. ‘The SEC rules on whistleblowers make exceptions for audit and compliance [officers] and, I believe, the general counsel – people involved in investigations – to put some parameters around the ability to use that information [against the company],’ she says. ‘The idea is not to allow them to abuse their position in the company to become a whistleblower.’
But if someone has legitimately reported issues about the company’s ethical behavior and ends up being fired because of those issues, and an investigation wasn’t made, ‘then I think anyone who participated in that [decision] can potentially have liability, including board members,’ Divers adds.
Keating is also the management representative on the Department of Labor’s (DoL) Whistleblower Protection Advisory Committee (WPAC). Last year WPAC voted to approve best practice recommendations for employers regarding handling whistleblower reports, and on November 5 the DoL Occupational Safety & Health Administration issued draft guidelines and asked for comments from the public to help it finalize the document. The public comment period ends on January 19, 2016. WPAC's original recommendations included 'things employers have not typically made part of their compliance program’, such as training board members and senior executives about what constitutes protected whistleblower activity and what their response should be to reports of alleged retaliation, Keating says.
Other recommendations include making responses to whistleblowing and alleged retaliation ‘a measurable benchmark’ of senior executives’ performance evaluations, expanding the number of channels through which alleged misconduct can be reported, conducting periodic audits and monitoring the kinds of complaints that are coming in from which geographic regions, Keating adds.
For board members to protect themselves from individual liability, Divers suggests they first get the facts by reviewing the case when a report comes in from an outside law firm that has a prior relationship with senior management and the board, as happened at Bio-Rad Laboratories. ‘Then the right thing to do is to hire an independent third party [to conduct] an impartial, thorough investigation,’ she says.
Divers also says the idea that companies can ensure ethics and compliance by having a rule for every occasion is going out of fashion. ‘Companies recognize that if employees internalize values they become empowered to use their judgment [when an ethical question arises],’ she notes. ‘The emphasis on rules promotes trying to find a way around them, while an emphasis on values shows respect for employees and encourages them to use their judgment.’