It will not come as news to anyone that corporate directors face the possibility of direct personal liability for their actions or omissions in the capacities as directors. However, the scope of these individuals’ potential liability exposures can and does change. As a result of recent legal developments, at least two new areas of potential liability exposure for corporate directors have emerged. As discussed below, a recent federal district court decision suggests that directors can be held personally liable under both the Sarbanes-Oxley Act and the Dodd-Frank Act for whistleblower retaliation, and a recent California legislative enactment provides that corporate directors can be held personally liable for violations of the state’s wage and hour laws.
Director Liability for Retaliation Claims
On October 23, 2015, Northern District of California Magistrate Judge Joseph Spero held that both the Sarbanes-Oxley Act and the Dodd-Frank Act allow corporate directors to be held personally liable for retaliation against a whistleblower. A copy of the Magistrate Judge’s opinion can be found here.
The decision arose out of a claim by Sanford Wadler, the former general counsel of Bio-Rad, that he had been terminated from the company for raising concerns that the company’s activities in China may have violated the Foreign Corrupt Practices Act. Wadler claimed that his termination violated the anti-retaliation provisions of both Sarbanes-Oxley and Dodd-Frank. In his complaint, Wadler named as defendants not only the company itself, but also the individual members of the companies board of directors, among others. The individual directors moved to dismiss Wadler’s claims against them, arguing that neither of the two statutes specified directors as among those who could be held liable to a whistleblower for retaliation.
In identifying who can be held liable for whistleblower retaliation, Sarbanes-Oxley refers to “any officer, employee, contractor, subcontractor or agent of such company.” The individual directors argued that the exclusion of “directors” from this list meant that directors are not among those who can be held liable for retaliation. However, given what he saw as the statute’s remedial purposes, Judge Spero agreed with Wadler that for purposes of the anti-retaliation provision, a director was an “agent” of the employer who could be held liable to a whistleblower for retaliation.
The Dodd-Frank Act, by contrast, provides that an “employer” can be held liable to a whistleblower for retaliation. Judge Spero found that while the term “employer” as used in the provision is ambiguous, Congress intended in the Dodd-Frank Act to provide retaliation protection at least as broad as under Sarbanes-Oxley, and therefore that directors can be held liable for whistleblower retaliation under the Dodd-Frank Act as well.
Judge Spero also held that the company and the directors could be held liable under the Dodd-Frank Act’s anti-retaliation provisions even though he only made his whistleblower report internally and did not make a whistleblower report to the SEC.
A November 17, 2015 post on the Orrick law firm’s Employment Law and Litigation Blog discussing the Bio-Rad Labs case can be found here.
California Wage and Hour Laws
Earlier this fall, the California legislature enacted certain provisions amended the state’s Wage and Hour law, specifying that directors, as well as other corporate officials, could be held individually liable for violation of the state’s Wage and Hour laws. Specifically, Section 10 of Senate Bill 588 provided that:
558.1. (a) Any employer or other person acting on behalf of an employer, who violates, or causes to be violated, any provision regulating minimum wages or hours and days of work in any order of the Industrial Welfare Commission, or violates, or causes to be violated, Sections 203, 226, 226.7, 1193.6, 1194, or 2802, may be held liable as the employer for such violation.
(b) For purposes of this section, the term “other person acting on behalf of an employer” is limited to a natural person who is an owner, director, officer, or managing agent of the employer, and the term “managing agent” has the same meaning as in subdivision (b) of Section 3294 of the Civil Code.
(c) Nothing in this section shall be construed to limit the definition of employer under existing law.
This bill, which California’s governor signed into law on October 11, 2015, will go into effect on January 1, 2016.
The practical effect of this provision is that now under California law owners, directors, officers and managing agents of the employer can be held individually liable for willful failure to pay wages, provide a pay stub, failure to pay minimum wages or overtime, or indemnify an employee for proper business expenses.
The developments described above suggest the likelihood that directors increasingly will be named as defendants in both whistleblower retaliation cases under Sarbanes-Oxley and under the Dodd Frank Act, and in California wage and hour cases.
The whistleblower retaliation case discussed above was, it should be emphasized, a decision of a federal district court, and as such has no precedential authority. Other courts might well reach a different conclusion on the question of director liability for whistleblower retaliation. However, at a minimum, the district court’s ruling underscores at least the potential liability of directors for whistleblower retaliation.
Under the new California statutory provision, corporate officials, including corporate directors, face potentially significant new liabilities for failing to comply with California’s wage and hour laws. The likelihood that these individuals will increasingly be named as defendants in actions alleging violations of the state’s laws seems high.
It is important to note that both of these developments relate to employment law matters. It may be relatively unusual for boards of directors to be involved with these kinds of employment law issues. However, the situation at Bio-Rad shows that there are kinds of employment law situations in which corporate boards can become involved. For that reason, it will be important for board and those that advise them to be aware of these potential liabilities.
The expanding scope of potential director liabilities that these developments highlight also raises insurance issues. The kinds of retaliation claims presented in the Bio-Rad lawsuit presumptively would be addressed under a company’s Employment Practices Liability policy. However, to the extent a claimant’s complaint incorporates claims that reach beyond retaliation issues, the claims potentially could implicate a company’s D&O insurance policy. The potential for these types of claims to trigger the D&O policy underscores the need to review the policy’s terms and conditions in order to ensure, among other things, that a whistleblower’s retaliation claim would not be precluded from coverage under the D&O policy’s insured vs. insured exclusion.
A wage and hour claim against a company’s directors and officers. EPL policies generally will at most provide sublimited defense cost coverage. Coverage for unpaid wages or fines and penalties imposed for wage and hour violations typically will not be covered under an EPL insurance policy. The possibility that directors and officers might be drawn into these kinds of claims raises a concern about how these individuals might be protected. One possibility is that it is something that at least potentially could be addressed in a Side A/DIC policy, at least for defense expenses.