SOX Whistleblower Liability Claim Raised by Firing IP Lawyers Who Reported Possible Inequitable Conduct by a Merger Party.

Husband & wife IP lawyers, working in-house, raised with their superiors the possibility of a material, pre-merger non-disclosure by a merger partner about its key patent, which could impact the post-merger revenue that the patent may generate. Within weeks, both lawyers were fired by execs who came over from the merger partner.

The Ninth Circuit reviewed the summary judgment dismissing the lawyers’ whistleblower claims under the Sarbanes-Oxley Act, as an issue of first impression in that Circuit. Van Asdale v. Int’l Game Technol., 2009 WL 2461906 (9th Cir. Aug. 13, 2009). With a bit of recasting of the facts, the decision could be the basis to turn inequitable conduct into grist for SOX whistleblower suits. While the panel emphasizes that no fraud may be proven later, they did reverse the summary judgment and remand for further proceedings.

Section 1514A of the SOX Act proscribes discriminatory action against employees for providing information about “conduct which the employee reasonably believes constitutes a violation of” federal statutes against fraud. The employee must have a subjective belief that the reported conduct violates those laws, and the belief must be objectively reasonable. To make the claim, the employee must establish a nexus between the “protected activity” of reporting possible fraud and the adverse employment action, here, getting fired right after the report. On that point, the decision holds that “causation can be inferred from timing alone.” The Van Asdales were fired days after the meeting where the fraud issues were discussed.

The facts, taken in the light most favorable to the plaintiffs, were that the merger partner had a patent that generated much of its revenue, which was described as “the Crown Jewel” that the merger partner brought to the deal. That patent was being asserted against a competitor, but the due diligence did not disclose a “flyer” that, as described, appears to have been Section 102(a) prior art. After the merger, one of the plaintiffs obtained the “flyer” from outside counsel, and that provoked his concern that its non-disclosure was material to the valuation of the merger partner, as well as to the revenue stream generated by the patent.

In a broad sense, awareness by counsel for publicly-traded companies that acquired IP may be challenged as invalid or unenforceable must be considered seriously. In the Van Asdale case, the employed lawyers had “allegedly accused high-level IGT executives who had previously worked at Anchor of intentionally withholding material information prior to the merger.” However, the SOX wrong only occurs if management takes adverse employment actions that ostensibly were done to retaliate against or to silence employees who reported the conduct.