Wadler v. Bio-Rad Labs., Inc.

• Decision Date: 26 February 2019
• Docket Number: No. 17-16193,17-16193
• Citation: 916 F.3d 1176
• Parties: Sanford S. WADLER, Plaintiff-Appellee, v. BIO-RAD LABORATORIES, INC., a Delaware Corporation; Norman Schwartz, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

916 F.3d 1176

Sanford S. WADLER, Plaintiff-Appellee,

v.BIO-RAD LABORATORIES, INC., a Delaware Corporation; Norman Schwartz, Defendants-Appellants.

No. 17-16193

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 14, 2018 San Francisco, California

Filed February 26, 2019

Kathleen M. Sullivan (argued) and William B. Adams, Quinn Emanuel Urquhart & Sullivan LLP, New York, New York; Karin Kramer, Andrew P. March, and John M. Potter, Quinn Emanuel Urquhart & Sullivan, LLP, San Francisco, California; for Defendants-Appellants.

Michael John von Loewenfeldt (argued), Kenneth P. Nabity, and James M. Wagstaffe, Kerr & Wagstaffe LLP, San Francisco, California, for Plaintiff-Appellee.

Before: Susan P. Graber and Mark J. Bennett, Circuit Judges, and Leslie E. Kobayashi,^* District Judge.

BENNETT, Circuit Judge:

In this whistleblower retaliation case, Bio-Rad Laboratories, Inc. ("Bio-Rad" or "the Company") and its CEO, Norman Schwartz, appeal an $11 million jury verdict in favor of Bio-Rad’s former general counsel, Sanford Wadler.¹ The jury found that Defendants violated the Sarbanes-Oxley Act ("SOX"), the Dodd-Frank Act, and California public policy by terminating Wadler’s employment in retaliation for his internal report that he believed the Company had engaged in serious and prolonged violations of the Foreign Corrupt Practices Act ("FCPA") in China.

On appeal, Defendants argue that the district court erred by instructing the jury that statutory provisions of the FCPA constitute "rule[s] or regulation[s] of the Securities and Exchange Commission" ("SEC") for purposes of whether Wadler engaged in "protected activity" under SOX § 806, 18 U.S.C. § 1514A(a). We agree. We reject, however, Bio-Rad’s argument that no properly instructed jury could return a SOX verdict in favor of Wadler. Accordingly, we vacate the SOX verdict and remand for the district court to determine whether a new trial is warranted.

With respect to Wadler’s California public policy claim, by contrast, we conclude that the district court’s SOX instructional error was harmless and therefore we affirm the verdict and corresponding damages as to that claim.

In a memorandum disposition filed this date, we conclude that the instructional error was not harmless as to the SOX claim. We also reject Bio-Rad’s challenges to the district court’s evidentiary rulings and the sufficiency of the evidence. Finally, we vacate with instructions to enter judgment in favor of Bio-Rad as to the Dodd-Frank claim in light of Digital Realty Trust, Inc. v. Somers , ––– U.S. ––––, 138 S.Ct. 767, 778, 200 L.Ed.2d 15 (2018), which held that Dodd-Frank does not apply to purely internal reports. We therefore also vacate the portion of damages attributable solely to the Dodd-Frank verdict, approximately $2.96 million plus interest.

Accordingly, we vacate in part, affirm in part, and remand for consideration of whether a new trial is warranted as to the SOX claim.

I.

We must view the evidence at trial in the light most favorable to the verdict. Shafer v. Cty. of Santa Barbara , 868 F.3d 1110, 1115 (9th Cir. 2017), cert. denied , ––– U.S. ––––, 138 S.Ct. 2582, 201 L.Ed.2d 295 (2018). Because the jury returned a verdict in favor of Wadler on all claims, we review the pertinent facts adduced at trial in the light most favorable to him.

A.

The trial centered on a memorandum that Wadler delivered to the Audit Committee of Bio-Rad’s Board of Directors in February 2013 (the "Audit Committee Memo" or "Memo") and Schwartz’s subsequent decision to terminate Wadler’s employment in June 2013. Wadler stated in the Memo that he believed Bio-Rad employees in China had violated the FCPA’s bribery and books-and-records provisions, and that senior management was likely complicit.

The factual basis for the Memo, and Wadler’s reasons for writing it, can be traced back to 2009. In that year, Bio-Rad’s internal audit team discovered that Bio-Rad salesmen in Vietnam and Thailand had engaged in potential FCPA violations. At Wadler’s recommendation, Bio-Rad hired FCPA attorney Patrick Norton of Steptoe & Johnson to investigate.

Norton reported his findings to Bio-Rad’s Board of Directors in September 2011. Specifically, Norton reported that he had found evidence that Bio-Rad employees were violating the FCPA’s bribery and books-and-records provisions in Vietnam, Thailand, and Russia. As for China, Norton reported several "red flags," including "[v]ery high, unexplained commissions" and a "history of widespread corruption" in the country’s medical products market. Norton reported, however, that "no evidence of improper payments" had been found to date in China.

In June 2012, Wadler and Schwartz received the results of a sales documentation audit that had been initiated at the request of Bio-Rad’s licensor, Life Technologies, Inc. ("Life Tech"). The audit, which covered the years 2006 to 2010, revealed that Bio-Rad owed Life Tech around $30 million in royalty obligations due to Bio-Rad’s missing documentation of end-user prices for products primarily in the Chinese market.

Wadler and John Cassingham, an in-house patent lawyer who reported to Wadler, repeatedly attempted to obtain the missing sales documents from China. In November 2012, Cassingham finally succeeded in obtaining a complete set of documents for a single transaction and sent those documents to Wadler. Wadler testified that Cassingham thought the documents showed bribery. Wadler further testified that he subsequently told Schwartz about the potential bribery, but Schwartz responded that he was not going to do anything about it.

Wadler’s concerns increased as he and Cassingham spoke to other employees. In December 2012, for example, a senior Bio-Rad manager in China told Wadler that he had never visited one of Bio-Rad’s main distributors to look for documents, despite the distributor’s failure to comply with Bio-Rad’s documentation requests. A different Bio-Rad employee in China later told Cassingham (who in turn told Wadler) about a widespread "under the covers" scheme in which cover sheets on import/export documents were used to show the official number of products while the shipments themselves were padded with free extra products. Wadler later obtained around 160 sets of Chinese sales documents, thirty percent of which showed the product-padding pattern that fit the description of the "under the covers" scheme.

In January 2013, Wadler discovered that Bio-Rad employees in China had entered into unauthorized contracts with distributors. In the course of investigating those contracts, Wadler learned that they were not accurate translations of approved English-language distributor contracts, but had instead been translated from an earlier template that did not include FCPA compliance provisions. Wadler’s junior attorneys also informed him that the contracts provided for unauthorized "incentives payable in free product – between 1–3% of sales if [salesmen] achieved certain targets," with a "financial impact of ... approximately one million dollars."

B.

On February 8, 2013, Wadler delivered the Memo to the Audit Committee, reporting his belief that there were "serious and prolonged violations of the FCPA in Bio-Rad’s business in China." Wadler listed several sources of concern: (1) a free-product scheme that "suggest[ed] several possibilities for bribery"; (2) Bio-Rad’s inability to obtain documents for the Life Tech audit, which "could itself be considered a substantive and clear violation of [the FCPA’s] books and records requirements"; and (3) the Chinese distributor contracts without FCPA compliance language. Wadler concluded that "these practices [we]re endemic and that high levels of management within the company had to know they were happening ," which, he continued, was why he had not yet discussed his concerns with senior management (including Schwartz).

Wadler recommended that Bio-Rad "promptly conduct an in depth investigation into business practices in China" and that the Company report his suspicions to the government and to the Company’s auditors. The Company’s duty to report was "especially true," he wrote, because it had "meetings scheduled with the government agencies in late February to discuss the ‘tone at the top’ in relationship to penalties for the violations in Vietnam, Russia, Thailand and Brazil." Wadler opined that it "would deeply prejudice how the government would view the company if we had discussions about ‘tone at the top’ knowing that there [were] potentially serious additional violations that were being withheld."

C.

In response to the Memo, the Audit Committee authorized Wadler to hire Davis Polk & Wardwell to investigate his concerns. On February 20, 2013, the Chairman of the Audit Committee told Schwartz about the Memo. Two days later Schwartz informed the head of Bio-Rad’s human resources department that Wadler had "been acting a little bizarre lately" and that Schwartz might "want to put him on an administrative leave." By March, Schwartz had become "entirely frustrated" with Wadler but believed that "he must stay in place until [an] FCPA settlement" with the government was final.

Davis Polk reported the findings of its investigation to Bio-Rad’s Board of Directors on June 4, 2013. Davis Polk found that there was "no evidence to date of any violation—or attempted violation—of the FCPA" in China. Schwartz fired Wadler three days later. Bio-Rad later paid the government a total of $55 million to resolve its investigation into FCPA issues in Vietnam, Thailand, and Russia. Nothing was paid as a result of any FCPA issues in China.

II.

In May 2015, Wadler brought this action for compensatory and punitive damages against the Company and Schwartz. As relevant here, Wadler alleged violations of SOX and Dodd-Frank as to both Defendants, and a violation of California public policy under Tameny v. Atlantic Richfield Co. , 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330, 1336–37 (1980) (the " Tameny " claim) against the Company...