A whistleblower must take his retaliation claims to arbitration first, despite protections under the Sarbanes-Oxley Act (SOX), according to a federal judge.

Judge Beth Labson Freeman’s ruling acknowledged that while a whistleblower’s SOX claim cannot be subjected to arbitration due to statutory protections, the arbitration agreement he signed with his employer, Super Micro Computer, Inc. (SMCI), is enforceable for state law claims. She granted SMCI’s request for a stay on the SOX claim while arbitration is pending.

Background

In late 2023, Bob K. Luong, then employed at SMCI, raised concerns regarding the company’s accounting practices. Luong reported what he believed to be misleading accounting activities and other misconduct within the organization.

Following his disclosure, Luong alleges that the company, led by its CEO, Charles Liang, engaged in retaliatory actions against him. Consequently, Luong filed a lawsuit in April 2024, asserting claims under SOX, the California Labor Code, and the Fair Employment and Housing Act (FEHA).

SMCI, countering Luong’s lawsuit, filed a motion to compel arbitration on the state claims, referencing the arbitration agreement in Luong’s employment contract. Luong contended that the arbitration agreement was unenforceable due to “unconscionability” and violations of SOX, and argued that even if arbitration were compelled for the state claims, the SOX claim should proceed in court.

Arbitration agreement deemed valid

In assessing the validity of the arbitration agreement, the court examined potential procedural and substantive unconscionability. Procedural unconscionability focuses on the fairness and transparency of the agreement’s formation process, while substantive unconscionability pertains to the fairness of the terms themselves.

Luong argued procedural unconscionability by highlighting the mandatory requirement to sign the arbitration agreement as an employment condition. He also alleged the policy was “buried” within the employee handbook.

However, the court found that Luong had sufficient time — a week between receiving and accepting the employment offer — to review the documents, which were not lengthy or particularly complex. The court noted that Luong, a highly skilled professional with a substantial salary offer, had ample opportunity to seek legal engagement if desired.

Thus, the court deemed Luong’s allegations insufficient to establish procedural unconscionability or render the arbitration agreement unenforceable.

Should the SOX claim be stayed?

The debate over whether the SOX claim should be stayed hinges on arguments about judicial economy and the potential impact on legal proceedings. On one hand, staying the claim aligns with conserving judicial resources and reducing parallel litigation processes. Allowing the arbitration to conclude first could simplify or clarify factual and legal issues applicable to the SOX claim.

However, Luong argued that a stay on the SOX claim could prejudice his ability to fully litigate the claim in court, given potential limitations on discovery in the arbitration process and the risk of adverse effects stemming from an arbitration decision against him.

Ultimately, the court affirmed the applicability of the arbitration agreement to Luong’s state law claims and permitted the stay of the SOX claim pending the arbitration outcome.