Conscripting attorneys to battle corporate fraud without shields or armor? Reconsidering retaliatory discharge in light of Sarbanes-Oxley.

• Author: Vu, Kim T.

TABLE OF CONTENTS INTRODUCTION I. EXAMINING THREE APPROACHES TO RETALIATORY DISCHARGE SUITS BY ATTORNEYS II. READING SARBANES-OXLEY [section] 806 PROPERLY PROVIDES PROTECTION TO ATTORNEYS REPORTING UNDER [section] 307 A. The Plain Meaning of "Employee" under [section] 806 and the OSHA Regulations Includes In-House Counsel and Outside Attorneys B. Reading SOX as a Consistent Whole Supports Connecting [section] 806 with [section] 307 C. Legislative History Indicates [section] 806 Covers Reporting Attorneys D. Policy Considerations Support Interpreting [section] 806 to Protect Attorneys III. REJECTING THE TRADITIONAL VIEW IN THE CONTEXT OF SARBANES-OXLEY A. The Legislative Purpose of SOX Trumps the Attorney-Client Relationship B. Ethical Obligations Are Insufficient to Ensure Whistleblowing Actions 1. Career Incentives Align Corporate Attorneys with Management 2. Structure of Representation Creates Psychological Barriers CONCLUSION INTRODUCTION

The extraordinary outbreak of corporate scandals in large public companies like Enron and WorldCom (1) prompted Congress to enact the Sarbanes-Oxley Act of 2002 (2) ("Sarbanes-Oxley" or "SOX") to thwart corporate fraud and restore public confidence in corporate governance. (3) As the most far-reaching securities regulations since the securities laws originally passed in 1933 and 1934, (4) Sarbanes-Oxley sought to rein in corporate fraud by enhancing disclosure, strengthening auditor and audit committee independence, (6) holding senior management accountable, (7) and imposing tougher civil and criminal penalties for violations. (8)

Sarbanes-Oxley imposes internal reporting obligations on attorneys. (9) Under [section] 307 (10) of SOX and the Securities and Exchange Commission's ("SEC") implementation of SOX through Rule 205, (11) an attorney who detects evidence of a material violation (12) by her client must report the violation up the ladder to the corporation's chief legal officer ("CLO") or the chief executive officer ("CEO"). (13) If these officers do not provide an appropriate response, (14) the attorney must continue up the ladder and report to the audit committee, to a committee of independent directors, or to the full board of directors. (15) Section 307 caps the attorney's whistleblowing obligation at reports to the corporation's board of directors, (16) but permits attorneys to go outside the corporation and report to the SEC. (17) In other words, attorneys must serve as internal whistleblowers to the corporation, and may voluntarily serve as external whistleblowers to the SEC. (18)

While Sarbanes-Oxley provides protection to whistleblower-employees who expose corporate fraud, it remains unclear whether SOX protects whistleblower_attorneys. (19) Purportedly, SOX protects all reporting employees from retaliation through the whistleblower provisions under [section] 806. (20) Section 806 provides in part:

Civil action to protect against retaliation in fraud cases (a) Whistleblower protection for employees of publicly traded companies. No [public] company ... or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee [to provide information to a Federal agency, a member of Congress, or a supervisor over the employee of any conduct the employee reasonably believes is a violation of any SEC rule or regulation or any Federal law provision relating to fraud against shareholders]. (21) The whistleblower provision prohibits retaliation against employees of publicly traded companies for reporting or assisting in an investigation of fraud against shareholders. (22) The statutory text, however, does not explicitly address whether [section] 806 applies to reporting attorneys employed by public companies. Indeed, the statute does not provide explicit language connecting [section] 307's whistleblowing obligations with [section] 806's whistleblower protections. (23) Past case law on retaliatory discharge, which traditionally has not treated attorneys as employees, (24) creates uncertainty as to whether the Department of Labor (25) and the federal courts will treat reporting attorneys as "employees" under [section] 806. Unless statutory protection is clearly available to attorneys who report under [section] 307, attorneys will remain vulnerable to retaliation and may be reluctant to whistleblow on corporate fraud.

The current vulnerability of attorneys is apparent in the case of John E. Isselmann, Jr., the former general counsel of Electro Scientific Industries Incorporated ("ESI"). (26) ESI's chief financial officer ("CFO") and Controller engaged in an accounting scheme that inflated ESI's quarterly financial results. (27) The CFO and the Controller did not seek Isselmann's legal counsel when they eliminated employee benefits in Asia and fraudulently applied the money to ESI's bottom line to increase it by $1 million. (28) When Isselmann finally learned of the accounting fraud, he attempted to raise the legality issue in an audit committee meeting, but the CFO cut him off. (29) Fearing termination by management, Isselmann did not press the issue forward to the audit committee. (30) The company ultimately filed erroneous financial results. (31) Five months later, Isselmann reported the CFO's illegal activity to the audit committee and then resigned from ESI. (32) The SEC felt Isselmann's whistleblowing effort came too late. (33) Despite the fact that he eventually reported the misconduct and gave up his job, Isselmann still faced an enforcement action by the SEC for failing to report up the corporate ladder and prevent the fraud. (34) In this case, the whistleblower-attorney decided to quit before getting fired in retaliation, but consider the case if management had terminated him. Would Isselmann have had a remedy for retaliatory discharge? Might Isselmann have blown the whistle earlier if he had not borne the economic risk of losing his job?

Isselmann's predicament is not unique, and other attorneys have faced similar situations with immoral managers. (35) A case will eventually arise under SOX in which management discharges an attorney in retaliation for reporting under [section] 307. When such a case arises, the Department of Labor (36) and the federal courts will need to interpret and clarify SOX's whistleblower provision. As courts attempt to determine whether whistleblower-attorneys are protected under [section] 806, they will likely look to common law approaches and other federal whistleblower statutes for guidance.

Traditionally, the common law has left whistleblower-attorneys like Isselmann without a cause of action if they endure retaliatory discharge. (37) While the public policy exception to the employment-at-will doctrine (38) protects whistleblower-employees from termination in contravention of a public policy, courts traditionally have not treated attorneys like other employees. Currently, courts remain divided on how to address attorney retaliatory discharge claims. The case law has developed along three lines: (1) complete bans on attorney retaliatory discharge claims--the traditional view, (2) recognition of attorney retaliatory discharge claims tempered by limits on disclosure of confidential information--the limited-claim view, and (3) recognition of attorney retaliatory discharge claims without any limits on the use of confidential information--the wide-open view. (39)

This Note advocates that federal courts should allow attorneys to bring retaliatory discharge claims under SOX. Traditional rationales prohibiting the claims of retaliatory discharge by attorneys do not apply in the context of Sarbanes-Oxley. This Note contends that the Department of Labor and the federal courts should interpret the whistleblower provisions of [section] 806 as protecting attorneys who report under [section] 307. Assuring reporting attorneys that they have protection from retaliation will encourage them to whistleblow and thereby advance SOX's policy goal of ferreting out corporate fraud. Part I explores the legal landscape of retaliatory discharge suits by attorneys. This Part examines the rationales of the traditional view, the limited-claim view, and the wide-open view. Part II considers whether reporting attorneys are protected as "employees" under the whistleblower provisions of [section] 806. This Part argues that, based on plain meaning, statutory purpose, legislative history, and policy considerations, courts should interpret [section] 806 as covering attorneys reporting under [section] 307 to carry out the substantive goal of SOX. Part III counters the common law's traditional view that has denied retaliatory discharge claims by whistleblower-attorneys. This Part argues that the legislative goal of Sarbanes-Oxley to combat corporate fraud takes precedence over common law policies of preserving the traditional attorney-client relationship. This Part also rebuts the traditional rationale that attorneys already bound by ethical obligations do not need additional support to whistleblow, and instead, contends that strong economic and psychological incentives encourage attorneys to sidestep the reporting requirements.

1. EXAMINING THREE APPROACHES TO RETALIATORY DISCHARGE SUITS BY ATTORNEYS

   The traditional approach, represented by the seminal decision in Balla v. Gambro, (40) has relied on two reasons to deny claims of retaliatory discharge by whistleblower-attorneys. The first rationale of the traditional view is that such suits adversely affect the attorney-client relationship. (41) In Balla, the Illinois Supreme Court stated that extending the tort of retaliatory discharge to in-house counsel would have an undesirable chilling effect on attorney-client communications. (42) The Balla court explained that if courts grant in-house attorneys the...