Public company directors, who are under constant threat of claims, received welcome news earlier this month.  On December 9, 2019, the U.S. District Court for the Southern District of New York ruled that corporate directors cannot be sued for whistleblower retaliation under the Sarbanes-Oxley Act (SOX).  The SDNY decision splits with a 2015 opinion from a California federal district court permitting SOX claims against corporate directors to go forward. 

The SDNY case involved a number of “yieldco” subsidiaries formed by SunEdison to facilitate investment in renewable energy projects.  The plaintiff and alleged whistleblower was the CEO of two of these subsidiaries.  The CEO claimed that he started questioning SunEdison’s public statements about the subsidiaries’ finances and SunEdison’s liquidity and that, in response, the subsidiaries terminated his employment.  He also accused two SunEdison directors – the Board’s Executive Chairman and Governance Committee chair – of orchestrating his termination.  The CEO’s claim was consolidated with related shareholder litigation concerning the representations about SunEdison’s finances.

The court relied on the plain language of the SOX whistleblower retaliation statute, 18 U.S.C. § 1514A, to dismiss the former CEO’s claims against the directors.  SOX provides a retaliation claim against a “company” with publicly-traded securities, a “nationally recognized statistical rating organization,” “or any officer, employee, contractor, subcontractor, or agent of such company or nationally recognized statistical rating organization.”  Directors are not listed in the statute.  Given that SOX specifically regulates the conduct of corporate directors in other respects, the court refused to read the broad term “agent” to encompass corporate directors.  The court also noted that individual directors are not ordinarily regarded as agents of the corporation for which they serve.

The New York decision splits with a 2015 decision from the Northern District of California in Wadler v. Bio-Rad Laboratories, Inc.  There, the court found that SOX’s use of the term “agent” was ambiguous and construed it to include directors.  Although the Ninth Circuit ruled on appeal on various issues in the Wadler case earlier this year, it did not address the director liability issue.  No federal appellate court has yet ruled on this issue, leaving the question split between the New York and California federal district courts.

Since the SOX was enacted in 2002, plaintiffs and their counsel have been testing the scope of whistleblower claim, including the individuals and entities – such as directors – that can be held liable.  Director liability is worth closely watching with D&O insurance rates reportedly on the rise due to an uptick in shareholder litigation.