Federal court opinions interpreting the FCPA are rare indeed — my informal tally puts the number at a dozen or so since 1977. This week, that number increased by one, thanks to the 9th Circuit’s opinion in Wadler v. Bio-Rad Laboratories, which grows out of Bio-Rad’s $55 million FCPA settlement in 2014.
As has been previously reported, Bio-Rad’s former general counsel, Sanford Wadler, identified what he believed to be potential violations of the FCPA’s accounting and substantive anti-bribery provisions in Bio-Rad’s China operations. At the time, Bio-Rad was in the middle of the investigation that would ultimately result in the company’s 2014 settlement.
According to Wadler, he raised these concerns to the company’s chief executive, who purportedly rebuffed him. Wadler therefore decided to report the potential China issues directly to the audit committee of Bio-Rad’s board of directors. Ultimately, Bio-Rad’s settlement with the DOJ and SEC did not address any wrong-doing in China. Three days after the resolution, Bio-Rad terminated Wadler.
Wadler filed suit against Bio-Rad and the CEO in federal court, alleging that he had been terminated in retaliation for reporting the potential China issues to the audit committee. Among other things, Wadler alleged that his termination violated Section 806 of the Sarbanes-Oxley Act (SOX), 18 U.S. Code § 1514A, which prohibits retaliation against employees who lawfully report “any conduct which the employee reasonably believes constitutes a violation of … any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.”
When Wadler’s case when to the jury, the trial judge instructed the jurors that the provisions of the FCPA constitute rules or regulations of the SEC under SOX Section 806, and an individual reporting violations of them is therefore protected from retaliation.
The jury ultimately returned a verdict in Wadler’s favor on the SOX claim. Bio-Rad filed motions with the district court for judgment as a matter of law and for a new trial. The district court denied the motions, finding that the FCPA is a “rule or regulation of the SEC” under SOX because it is an “amendment to the Securities … Exchange Act of 1934 and is codified within it.” Bio-Rad appealed to the 9th Circuit Court of Appeals.
On February 26, the 9th Circuit held that the district court had erred in its instructions to the jury. In particular, the panel held that the phrase “a rule or regulation of the Securities and Exchange Commission” in the context of Section 806 “encompasses only administrative rules or regulations” and not statutes enacted by Congress, such as the FCPA.
However, the 9th Circuit noted that while the books and records provision contained in the FCPA is not itself an SEC rule or regulation, the agency has promulgated regulations addressing the same requirements. 17 CFR § 240.13b2-1 states that “no person shall directly or indirectly, falsify or cause to be falsified, any book, record or account.” The panel therefore held that a reasonable jury could have found that Wadler’s concerns about Bio-Rad’s activities in China, to the extent that they dealt with the company’s books and records, fell within the protections of Section 806.
Intriguingly, the court might have left open the possibility that Section 806 of SOX might also protect those who report violations of the FCPA’s substantive anti-bribery provisions from retaliation, so long as they make the right arguments at trial. In dicta, the court stated that “if a new trial is warranted, the district court may consider in the first instance whether to allow” Wadler to argue that he faced retaliation for reporting violations of “provision of Federal law relating to fraud against shareholders.”
We’ll just have to wait and see what happens when the case goes back to the trial court.
Bill Steinman, pictured above, is a Contributing Editor of the FCPA Blog. He’s the senior partner at Steinman & Rodgers LLP, a boutique law firm in Washington, D.C. specializing in international anti-corruption compliance and investigations.