On December 9, 2019, the U.S. District Court for the Southern District of New York ruled that, as a matter of law, directors cannot be held liable under the anti-retaliation provisions of the Sarbanes-Oxley Act.  Zornoza v. Terraform Global Inc., No. 18-cv-11617.

Background

Plaintiff is the former President and CEO of the defendant companies which were owned and controlled by a third company (“Owner”) for the purpose of purchasing and operating its energy plants.  In 2015, Plaintiff allegedly became concerned that Owner was publicly overstating its liquidity.  Plaintiff alleged that he reported his alleged concerns to Owner’s CEO and CFO and certain board members.  Plaintiff alleged that, in response, he was removed from his position as president and CEO of the Companies, and replaced by an individual whom he claims diverted funds from the two companies to Owner in an attempt to mask its liquidity crisis.  Plaintiff filed suit against the CEO, CFO, the Companies and certain board members, alleging he was retaliated against in violation of Section 806 of SOX.

Ruling

The directors moved to dismiss the claims against them pursuant to Rule 12(b)(6), arguing they cannot be liable as directors.  The court dismissed the claims against the directors, concluding that Section 806 of SOX (Section 1514A(a)) does not provide for director liability.  Section 1514A(a) states that: “[n]o company…or any officer, employee, contractor, subcontractor, or agent of such company” may retaliate against an employee for reporting suspected violations of the securities laws.  Given that Congress had explicitly provided for director liability in other provisions, such as Section 7244(a)(1) (making it unlawful for “any director or executive officer of an issuer” to transact in securities during blackout periods) and Section 7242(a) (making it unlawful for “any officer or director. . . to take any action to fraudulently influence. . . any independent public or certified accountant . . .”), the court found its omission from Section 1514A(a) to be particularly significant.  Finding the plain language of SOX to be clear and unambiguous, the court declined to examine Congress’s intent in passing it, ruling that the directors could not be liable in their capacity as directors.

The court noted that in Wadler v. Bio-Rad Labs., Inc. (N.D. Cal. 2015) (which we blogged about here), a California court came to the opposite conclusion because it determined that the usage in Section 1514A(a) of the word “agent” was sufficiently ambiguous to include “directors” as well.  However, this court disagreed, noting that SOX had used “agents” and “directors” in Section 78u-3(c)(3)(A)(i) to denote separate categories of persons, thus precluding a broad definition of “agent” that could include “directors.”  The court drew additional support from agency law, noting that an individual director has no power to act on the corporation’s behalf, but instead directly controls the corporation as a member of its board.

Implications

Though there is now a division in district court authority as to whether directors can be held liable under Section 806, this decision provides useful and compelling reasoning upon which employers can be expected to rely.

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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

Photo of Pinchos Goldberg Pinchos Goldberg

Pinny Goldberg is a senior counsel in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and…

Pinny Goldberg is a senior counsel in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and in pre-litigation negotiations. Matters he works on include discrimination and harassment, wage and hour, wrongful discharge, whistleblowing and retaliation, covenants not to compete, breaches of fiduciary duty, unjust enrichment, and tort and contract claims.

In addition to handling litigation and dispute resolution, Pinny regularly advises clients on a wide variety of employment issues, including drafting, reviewing and revising handbooks and workplace policies. He also addresses questions and concerns related to hiring, wage and hour issues, employee leave, performance problems, terminations of employment, and separation agreements and releases.

Photo of Scott Tan Scott Tan

Scott Tan is a law clerk in the Labor & Employment Law Department and a member of the Employment Litigation & Arbitration Group.

Scott earned his J.D. from the UCLA School of Law, where he served as a problem developer and member of…

Scott Tan is a law clerk in the Labor & Employment Law Department and a member of the Employment Litigation & Arbitration Group.

Scott earned his J.D. from the UCLA School of Law, where he served as a problem developer and member of the Moot Court Honors Board. He also worked as a research assistant for Dean Jennifer Mnookin and Professor Hiroshi Motomura.