$6 Million Verdict for SOX Whistleblower Leads to Malpractice Suit Against Defense Counsel

Playboy Enterprises is suing its former defense counsel Sheppard Mullin after being hit with a $6 million jury verdict in a SOX whistleblower case, the highest jury award in a SOX case to date.  In Zulfer v. Playboy Enterprises, Inc., Playboy’s former Controller Catherine Zulfer claimed her employment was terminated in part because she objected to an improper instruction by Playboy’s CFO to accrue $1 million in discretionary bonuses for executives when those bonuses had not been approved by Playboy’s Board.  A jury agreed and found that Playboy unlawfully retaliated against Zulfer by firing her for her protected reports under SOX and also terminated her employment in violation of public policy under California law.  The jury awarded $6 million in unspecified damages with no allocation between the SOX claim and the California wrongful termination claim.

In Playboy’s current suit, the company alleges that defense counsel should have advised it that a verdict against it could have exceeded the $5 million cap on Playboy’s liability insurance policy, and worked to settle the case instead of trying it.  Instead, according to the complaint, Playboy’s counsel told the company that it had a 75% chance of succeeding at trial.

The Zulfer case and its fallout serve as a stark reminder of the large potential liabilities for terminating putative whistleblowers under both SOX and applicable state laws.