Section 304 of SOX and Officer Certification: Digimarc and the Absence of a Private Right of Action

In In Re Digimarc Corporation Derivative Litigation, 549 F.3d 1223 (9th Cir. Or. 2008), shareholders alleged that the corporation’s officers and directors approved incorrect financial statements and filed suit against them for breaching their fiduciary duties. The shareholders argued that SOX Section 304 entitled them to file suit against the officers and directors of the company. The district court held that Section 304 did not contain a private right of action and the appellate court affirmed. The ruling eliminates a private right of action under SOX Section 304 to recover profits and bonuses from officers whose misconduct forced the company to restate its earnings.

In affirming the lower court’s ruling, the appellate court’s decision contained a thorough statutory analysis of Section 304. It quickly concluded that it did not contain an explicit private right of action and focused on whether Congress intended to provide one. The court rejected the plaintiff’s argument that Congress wrote Section 304 to resemble other language, which has been interpreted to create such a right. Moreover, the court examined the statute as a whole and found that analogous provisions expressly provided for private enforcement. This implied that where Congress intended to provide a private right of action within SOX, it would do so with express language.

The primary materials for the post are available on the DU Corporate Governance Website.

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