Sarbanes-Oxley and Related State Whistleblower Protections in the United States

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1 200 Sarbanes-Oxley and Related State Whistleblower Protections in the United States Philip M Berkowitz * Sarbanes-Oxley Scope of protection The anti-retaliation protections of the Sarbanes-Oxley Act ( Sarbanes Oxley or SOX ), enacted into law on 30 July 2002, protect employees of public companies 1 against retaliation in the terms and conditions of employment as a result of their providing information, causing information to be provided or otherwise assisting in an investigation of alleged violations of postal fraud, electronic communications, radio, or television fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission (SEC), or any provision of federal law relating to fraud against shareholders. 2 These whistleblower protections support the overarching policy objective of SOX to deter potential financial fraud against shareholders by providing unprecedented federal-level protection to employees who report evidence of fraud to their supervisors or federal officials. The Senate s report analysing SOX states that the whistleblower provisions provide the single most effective * Philip M Berkowitz, Nixon Peabody LLP, 437 Madison Avenue, New York, New York 10022, , pberkowitz@nixonpeabody.com. The author would like to thank Trent Sutton, an associate at Nixon Peabody LLP, and Ms Do Hyun Kim, a law student at New York University School of Law (class of 2010) and a summer associate at Nixon Peabody LLP, for their contributions to this article. 1 Companies with a class of securities registered under s 12 of the Securities Exchange Act 1934, or that are required to file reports under s 15(d) of the Securities Exchange Act See 18 USCA 1514A(a)(1).

2 Sarbanes-Oxley and Related Whistleblower Protections in the US 201 measure possible to prevent recurrence of the Enron debacle and similar threats to the nation s financial markets. 3 To be protected under these provisions, an employee must provide such information or assistance to, or the investigation must be conducted by, a Federal regulatory or law enforcement agency; any member or committee of Congress; or a person with supervisory authority over the employee (or other such person working for the employer who has authority to investigate, discover, or terminate misconduct). An employee is not required to demonstrate that a violation has actually occurred. Rather, in order to be protected, an employee must demonstrate that he or she reasonably believes that a violation is occurring. In one case, a buyer at a clothing store complained about issues in the recording of inventory markdowns and collection of markdown allowances from vendors. Even though the employee had no accounting background and no knowledge of the employer s actual accounting practices, the court held that the employee had a reasonable belief because the employer had deemed her complaints reasonable enough to warrant an internal investigation. 4 In fact, the accuracy of the allegation is immaterial. A complaint has been found reasonable even where the conduct about which the employee complained was later determined to be legal. The accuracy or falsity of the allegations is immaterial; the plain language of the regulations only requires an objectively reasonable belief that shareholders were being defrauded to trigger the Act s protections. 5 More recent cases have held SOX whistleblower plaintiffs to a somewhat higher standard. In Livingston v Wyeth, Inc, 6 a 2008 decision of the United States Court of Appeals for the Fourth Circuit, the court made a number of important holdings: (1) To be protected as a SOX whistleblower, the plaintiff or complainant must allege that the employer s conduct constitutes fraud. Complaints about mere administrative missteps or inadvertent omissions from filing statements were not intended to be protected by SOX. 7 (2) SOX requires both a subjective belief and an objectively reasonable belief that the company s conduct constitutes a violation of the relevant law. 8 That is, the plaintiff must show not only that he believed that the 3 See 148 Cong Rec, S Johnson v Stein Mart, Inc, 2007 WL , Case No 06-CV-341 (M D Fla 20 June 2007). 5 See Halloum v Intel Corp, No 2003-SOX-0007, 2004 DOLSOX LEXIS 73, at *40 (ALJ 4 March 2004) F 3d 344 (4th Cir 2008). 7 Ibid, at Ibid.

3 202 Business Law International Vol 9 No 3 September 2008 conduct constituted a violation, but also that a reasonable person in his position would have believed that the conduct constituted a violation. (3) The plaintiff must show that he held a reasonable belief about an existing violation of law. The statute does not protect complaints about something that might happen, or that is not in progress. 9 In another important case, Welch v Cardinal Bankshares, 10 the Department of Labor (DOL) Administrative Review Board (ARB) held in 2007 that the concept of reasonable belief includes both a subjective and objective component, and indicated that complainants who are more educated or who sit at higher levels of a corporate hierarchy will be subjected to a higher standard of reasonableness. 11 In several cases, employers have relied on the materiality standard under federal securities law 12 to narrow the scope of what qualifies as a valid allegation of fraud in employee complaints made under SOX. Administrative judges and courts are divided as to whether there is a materiality threshold for SOX complaints. In Morefield v Exelon Services, Inc, 13 the administrative law judge (ALJ) refused to dismiss an employee s complaint where the employer argued that the alleged manipulation 14 of internal financial data involved only per cent of its revenues, 15 stating that Sarbanes-Oxley places no minimum dollar value on the protected activity it covers. 16 However, more recently, in Livingston v Wyeth, Inc (above), the court held that, to the extent the plaintiff alleged that the company s conduct constituted a violation of section 10(b) of the Securities Exchange Act and Rule 10b-5, it must concern a material fact. 17 (Emphasis in original.) That is, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. 18 In spite of some uncertainty regarding the issue of materiality, it seems reasonably clear that complaints are only protected if they address the specific violations referenced in the statute. In another recent decision, 9 Ibid. 10 ARB No , 2007, DOLSOX, LEXIS 34 (ARB 31 May 2007). 11 Ibid, at * The Supreme Court has held that the materiality threshold for certain SEC Rules is met if there is a substantial likelihood that the disclosure of the omitted fact would be viewed by the reasonable investor as having significantly altered the total mix of information made available. TSC Industries, Inc v Northway, Inc, 426 US 438, 449 (1976). 13 ALJ No 2004-SOX-2, 2004 DOLSOX LEXIS 81 (ALJ 28 January 2004). 14 Ibid, at *16, Ibid, at * Ibid, at * F 3d 344, 355 (4th Cir 2008). 18 Ibid (quoting Basic, Inc v Levinson, 485 US 224, (1988)).

4 Sarbanes-Oxley and Related Whistleblower Protections in the US 203 Allen v Administrative Review Bd, 19 the United States Court of Appeals for the Fifth Circuit held that an employee s protected communications must relate definitively and specifically to the subject matter of SOX 20 any of the (six) listed categories of fraud or securities violations under 18 USCA 1514A(a)(1). As another case held to similar effect, reporting: questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is not protected conduct under the SOX. A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough. 21 Finally, a simple disagreement with, or an unspecified refusal or objection to, a particular course of action (as opposed to providing information to a person with supervisory authority, for example) will not be considered protected activity. 22 SOX also provides protection for employees who file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed, which relates to the violations enumerated under the statute; provided, however, that the employer has knowledge of such a proceeding. Notably, SOX does not specifically define what constitutes a proceeding. Moreover, an employee may be protected for participating in such a proceeding even if the employee does not reasonably believe that the employer engaged in a violation enumerated under the statute. Retaliatory conduct Sarbanes-Oxley protects employees who engage in protected conduct from being discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms or conditions of their employment. Although some judges have construed these terms narrowly, others have interpreted them more broadly F 3d 468 (5th Cir 2008). 20 Ibid, at Stojicevic v Arizona-American Water, ARB No , ALJ No 2004-SOX-73, at *28 (ARB 30 October 2007), citing Harvey v Home Depot, USA, Inc, ARB Nos , 115, ALJ Nos SOX-20, 36 (ARB 2 June 2006). 22 Getman v Southwest Securities, Inc, ARB No , ALJ No 2003-SOX-8, 2005 DOLSOX LEXIS 18, at *17 18 (ARB 29 July 2005).

5 204 Business Law International Vol 9 No 3 September 2008 An example of the narrow approach is Dolan v EMC Corp, 23 in which an ALJ determined that an unfavourable performance evaluation, in the absence of a tangible job consequence, did not constitute an adverse employment action under SOX. 24 More recent cases apply the broader standard adopted by the Supreme Court in its 2006 decision, Burlington Northern and Santa Fe Ry Co v White, 25 for retaliation claims filed under Title VII of the Civil Rights Act 1964, which prohibits employment discrimination based on race, religion, gender, national origin and other protected characteristics. In Burlington, the court held: the [anti-retaliation] provision covers those (and only those) employer actions that would have been materially adverse to a reasonable employee or job applicant. In the present context that means that the employer s actions must be harmful to the point that they could well dissuade a reasonable worker from making or supporting a charge of discrimination. 26 Procedure for bringing SOX claims In order for an employee to bring a SOX claim against his or her employer, he must first exhaust his administrative remedies. Within 90 days of the alleged violation, an employee must file a complaint with the US DOL, which has assigned the investigation of SOX complaints to the US Occupational Safety and Health Administration (OSHA). OSHA investigates to determine whether a prima facie case is established. To establish a prima facie case under SOX, an employee must establish that: (1) he or she engaged in a protected activity; (2) the employer was aware of the protected activity; (3) he or she suffered an adverse employment action; and (4) the circumstances are sufficient to raise an inference that the protected activity was likely to be a contributing factor in the unfavourable action ALJ No 2004-SOX-l, 2004 DOLSOX LEXIS 60 (ALJ 24 March 2004). 24 See also Haywood v Lucent Technologies, Inc, 323 F 3d 524 (7th Cir 2003) (holding that an employer s negative performance reviews did not qualify as adverse employment action in the absence of a showing of change in the terms or conditions of employment) S Ct 2405 (2006). 26 Ibid, at 57. Accord Deremer v Gulfmark Offshore, Inc, ALJ No 2006-SOX-2, 2007 DOLSOX LEXIS 46, at * (ALJ 29 June 2007) ( An employment action is unfavorable if it is reasonably likely to deter employees from making protected disclosures. A complainant need not prove termination or suspension from the job, or a reduction in salary or responsibilities ); McClendon v Hewlett Packard, Inc, No 2006-SOX-29, 2006 DOLSOX LEXIS 138, at * (ALJ 5 October 2006) CFR (b) (2005).

6 Sarbanes-Oxley and Related Whistleblower Protections in the US 205 While the temporal proximity of an adverse action to the time the employer learned of the protected activity may generally be sufficient to infer unlawful retaliation, it does not compel such a conclusion. If a prima facie case is established, the investigator must then determine whether the employer has shown, by clear and convincing evidence, that it would have taken the said unfavorable personnel action in the absence of the complainant s protected behavior or conduct. 28 If the employer makes such a showing, the complaint will be dismissed. If not, and the investigator determines that there is reasonable cause to believe that a violation has occurred, he or she may issue a preliminary order awarding relief, including reinstatement. 29 Either party may appeal this initial determination, within 30 days of receiving it, and request a hearing before an ALJ. 30 The ALJ will review the matter de novo. 31 Either party may then appeal the ALJ decision to the ARB within ten days of the ALJ decision. 32 Review before the ARB is discretionary. 33 If the case proceeds to decision by ARB, either party may appeal that determination to the US Court of Appeals for the circuit in which the violation allegedly occurred. 34 If the ARB does not issue a final decision within 180 days of the filing of the initial complaint, and there is no showing that such delay is due to the bad faith of the claimant, the employee has the right to file an action in federal district court, which shall review the matter de novo. 35 Under the statutory framework, a plaintiff in federal court must first show, by a preponderance of the evidence, that a protected activity was a contributing factor in an adverse employment action. 36 In other words, a plaintiff must establish a prima facie case (as set forth above). If a plaintiff meets this burden of proof, a defendant may avoid liability if it can demonstrate, by clear and convincing evidence, that it would have taken the same unfavorable personnel action in the absence of [protected] activity. 37 Under the retaliation provisions of the federal anti-discrimination statutes, once an employer meets this burden, an employee can still prevail by showing that the proffered reason is a pretext for unlawful retaliation, ie, that the rationale offered by the employer was not the actual motivation. It 28 Ibid, (c). 29 Ibid, (a)(1). 30 Ibid, (c), (a). 31 Ibid, (b). 32 Ibid, (c), (a). 33 Ibid, (b). 34 Ibid, Ibid, USC The legal burdens of proof in Sarbanes-Oxley are modelled after the burdens of proof for claims under the Wendell H Ford Aviation Investment Reform Act for the 21st Century ( AIR 21 ), 49 USC Ibid, 42121(b)(2)(B)(iv).

7 206 Business Law International Vol 9 No 3 September 2008 is not clear under SOX whether the employee may do so. The regulations state: Relief may not be ordered if the named person demonstrates by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of any protected behavior, suggesting that complainants are not afforded this opportunity. 38 Notwithstanding this language, ALJ decisions often proceed under the assumption that by meeting its burden, the employer has merely rebutted the presumption of retaliation, and that the complainant may still prevail by showing pretext. 39 No Circuit Court of Appeals has ruled on this issue. Damages In the event that an employee prevails under SOX, that employee is entitled to all relief necessary to make the employee whole. 40 The statute specifically refers to compensatory damages and specifies that these shall include, in addition to reinstatement and back pay, compensation for any special damages sustained. The statute includes three examples of special damages : litigation costs, expert witness fees and reasonable attorneys fees. 41 Thus, the statute appears not to include emotional distress, damages for injury to reputation or punitive damages. 42 However, courts have differed on whether damages for loss to one s reputation are viable special damages. 43 Extraterritorial application 44 Sarbanes-Oxley s anti-retaliation provisions are silent as to their application outside the territories of the United States. As the Supreme Court has ruled CFR See Riedell v Verizon Communications, No 2005-SOX-00077, 2006 DOLSOX LEXIS 81 (ALJ 14 August 2006) USC 1514A(c). 41 Ibid, 1514A(c). 42 See Murray v TXU Corp, No 3:03-CV-0888-P, 2005 US Dist LEXIS 10945, at *9 10 (N D Tex 7 June 2005). 43 Compare Mahony v Keyspan Corp, No 06CV00554 (EDNY 12 March 2007) (allowed reputation damage) with Murray v TXU Corp, 03 CV 0888, 2005 US Dist LEXIS *8 (N D Tex 2005) (prohibited reputation damage). 44 SOX requires covered employers to put in place procedures for the confidential submission of employee complaints regarding auditing or accounting matters. In the international employment context, there exist important conflicts between the obligations of US employers to implement confidential whistleblower policies, on the one hand, and European restrictions on data privacy, on the other. To see how one government has sought to resolve the conflict between SOX and European data privacy laws, see guidelines issued by the Commission nationale de l informatique et des libertés (CNIL). CNIL, Guideline Documents for the Implementation of Whistleblowing Systems (Paris, 10 November 2005), fileadmin/documents/uk/cnil-recommentations-whistleblowing-va.pdf

8 Sarbanes-Oxley and Related Whistleblower Protections in the US 207 in other contexts, silence generally means that the law is only intended to apply within US territory. 45 The strength of this canon increases in the employment context where Congress specifically addressed and defined the extraterritorial scope of three primary employment statutes: Title VII of the Civil Rights Act ( Title VII ), 46 the Americans with Disabilities Act (ADA) 47 and the Age Discrimination in Employment Act (ADEA). 48 Given such care, it appears that if Congress intends a particular employment protection to apply to employees in foreign jurisdictions, Congress will say so. In Carnero v Boston Scientific Corp, 49 the United States Court of Appeals for the First Circuit refused to apply SOX anti-retaliation protections to a foreign national working in a foreign country. The employee was an Argentine working for a SOX-regulated company in South America. The employee claimed that the company fired him for reporting accounting infractions. The First Circuit held that section 806 of SOX does not have extraterritorial application; Congress did not provide for it. 50 Since that time, this relatively straightforward rule has been successfully applied in numerous administrative cases. 51 A 2008 decision of a federal trial court in New York, however, casts doubt on the simplicity of the Carnero rule and argues, instead, that if a retaliatory decision has a sufficient nexus with the United States, SOX can apply even to foreign nationals in foreign countries. In O Mahony v Accenture Ltd, 52 the plaintiff was a partner and employee of Accenture LLP, the US subsidiary of Accenture Ltd, a Bermuda company listed on the New York Stock Exchange. An Irish national, she was employed in France until August 2004, after which she became a partner and employee of Accenture SAS, Accenture Ltd s French subsidiary, until October She remained in France for the balance of her employment. While employed by the US subsidiary, O Mahony allegedly informed various executives of the company s responsibility to pay French social 45 EEOC v Arabian Am Oil Co (Aramco), 499 US 244, 248 (1991), superseded in other respects by 42 USCA 2000e(f), 12111(4) ( It is a long-standing principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States ). 46 See 42 USC 2000e. 47 See ibid, See 29 USC F 3d 1 (1st Cir 2006), cert den, 126 S Ct 2973 (2006). 50 Ibid, at Beck v Citigroup, Inc, US DOL ALJ case no 2006-SOX (ALJ 1 August 2006) (antiretaliation provision of SOX does not reach German national working in Germany); Ede v Swatch Group, US DOL ALJ case no 2004-SOX-068/069 (14 January 2005) (anti-retaliation provision of SOX does not reach foreign nationals working in foreign countries); Concone v Capital One Fin Corp, US DOL ALJ case no 2005 SOX-006 (3 December 2004) (similar) F Supp 2d 506 (SDNY 2008).

9 208 Business Law International Vol 9 No 3 September 2008 security contributions owed on her behalf, contributions that had accrued to approximately US$3.7 million. 53 She claimed that after her employment transferred to Accenture SAS, she was told by Accenture LLP s global finance controller in New York that Accenture LLP s interests would be better served by not making French social security contributions and affirmatively concealing from the French authorities the length of her residency in France. O Mahony allegedly objected to these actions and said that she would not be a party to tax fraud. Shortly thereafter, Accenture LLP s global business operations director in New York allegedly made the decision to reduce O Mahony s level of responsibility, which led to a significant reduction in compensation. The DOL dismissed her charge on the ground that the elements of her complaint occurred in France and SOX s whistleblower protections do not apply extraterritorially. 54 The DOL Office of Administrative Law Judges upheld the appeal. 55 However, the United States District Court for the Southern District of New York reversed the DOL s dismissal. Accenture had argued that, consistent with Aramco, a federal statute will not have extraterritorial application in the absence of explicit Congressional provision. In the case of Title VII, the ADEA and the ADA, Congress amended those laws to provide expressly that they apply, in certain limited circumstances, to overseas conduct committed by a US-owned or controlled company, so long as the alleged discrimination is directed to a US citizen. But the O Mahony court took a different approach to the issue, instead focusing on the location of the alleged adverse decision rather than the place of employment. Since the alleged decision to avoid paying French taxes and to retaliate against O Mahony was made by executives in the United States, the court held the issue of extraterritorial jurisdiction was not implicated. 56 O Mahony raises concerns because the court upholds the application of the SOX whistleblower remedy in circumstances in which a similar claim under the ADEA, the ADA or Title VII, statutes with explicit extraterritorial provisions, would be likely to fail. The ADEA, ADA and Title VII prohibitions against age, disability and other employment discrimination apply extraterritorially only to US citizens who work for US or US-controlled companies in foreign jurisdictions. These extraterritorial provisions, debated and then enacted by Congress, would not grant protection to the employee in O Mahony because the employee is a foreign national, not a US citizen. 53 See Complaint, O Mahony v Accenture, 07 CV 7916, 20 (SDNY 7 September 2007). 54 See O Mahony v Accenture Ltd, 537 F Supp 2d 506, 508 (SDNY 2008). 55 Ibid, at Ibid, at

10 Sarbanes-Oxley and Related Whistleblower Protections in the US 209 In reaching its decision, the court in O Mahony applied two tests that had been used by the Second Circuit in SEC v Berger 57 and Psimenos v E F Hutton & Co 58 to determine whether subject-matter jurisdiction existed over predominantly foreign transactions: the conduct and effects tests. 59 These tests provide factors for courts to evaluate in determining whether Congress would have wished the precious resources of United States courts and law enforcement agencies to be expended on issues arising from predominantly foreign transactions. 60 The conduct and effects tests, respectively, direct courts to consider: (1) whether the wrongful conduct occurred in the United States: and (2) whether the wrongful conduct had a substantial effect in the United States or on US citizens. 61 A plaintiff need only satisfy one of the tests for a court to find subject-matter jurisdiction. 62 O Mahony s reliance on the tests used by these Second Circuit cases, however, seems misplaced. Both Berger and Psimenos applied the conduct test in the specific context of transnational securities fraud, with the threshold question being whether substantial acts in furtherance of the fraud were committed within the United States. 63 (Emphasis added.) In Berger, the SEC charged the defendant with violating anti-fraud provisions of federal securities laws by making false representations to investors regarding the net assets of the offshore investment fund which he had taken part in forming and to which he was the sole active director. 64 Even though the harmed investors were mostly foreign nationals and the statements actually conveying the fraudulent information were prepared and mailed in Bermuda, 65 the court found subject-matter jurisdiction over the dispute because the defendant had masterminded and implemented the fraudulent scheme from the United States, instructing the fund s administrator in Bermuda to send out the fraudulent information to the investors. 66 In other words, activities materially related to the fraud had taken place in the United States, satisfying the conduct test F 3d 187 (2nd Cir 2003) F 2d 1041(2nd Cir 1983). 59 O Mahony, 537 F Supp 2d at 512, Ibid, at (quoting SEC v Berger, 322 F 3d 187, 192 (2d Cir 2003)). 61 Ibid, at Ibid. 63 SEC v Berger, 322 F 3d 187, 193 (2nd Cir 2003) (citing Psimenos E F Hutton & Co, 722 F 2d 1041,1045 (2nd Cir 1983)). 64 Ibid, at The offshore investment fund s administration services were located in Bermuda and the fund itself was formed under the laws of the British Virgin Islands. SEC v Berger, 322 F 3d at SEC v Berger, 322 F 3d at 194.

11 210 Business Law International Vol 9 No 3 September 2008 Similarly, in Psimenos, a foreign national sued a Delaware-based corporation for allegedly fraudulent procurement and management of his commodities trading account. 67 The court found that the defendant s activities of trading on US futures markets had consummated the alleged fraud and, as such, constituted material acts directly causing Psimenos claimed losses. 68 The court thus held that the conduct test had been satisfied and subject-matter jurisdiction could be extended over the transaction. 69 The Psimenos decision, on which the more recent Berger court heavily relies, suggests that the conduct and effects test are specifically intended to be applied to cases involving transnational securities fraud, or similar crimes that implicate significant public interest. In describing the conduct test, the Psimenos court notes that the test focuses on the nature of the conduct within the United States as it relates to carrying out the alleged fraudulent scheme, on the theory that Congress did not want to allow the United States to be used as a base for manufacturing fraudulent security devices for export. 70 (Emphasis added.) This language suggests that the public interest in preventing the United States from serving as a venue for concocting or implementing international securities fraud may be a key factor driving the decision to extend US courts subjectmatter jurisdiction to cover transactions with major foreign elements. The public interest implicated in preventing securities fraud, however, is not equally applicable to individualised acts of alleged retaliation involving a single employee. The O Mahony court s application of the conduct test to justify the extraterritorial application of Sarbanes-Oxley protections to foreign employees does not find strong support in the Second Circuit precedents on which it relies. Overall, for employers, the O Mahony decision signals a warning: a judge may be willing to find a sufficient nexus with the United States and extend subjectmatter jurisdiction to SOX complaints by foreign nationals employed in foreign jurisdictions if the decision to retaliate against the complainant was made by executives in the United States or the complaining employee worked in the United States for any length of time. The legal basis for the O Mahony court s expansion in the scope of Sarbanes-Oxley is unsettled, and seems inconsistent with the Supreme Court s long-held presumption against extraterritorial application of federal statutes in the absence of affirmative Congressional intent. 71 In any case, adoption of the O Mahony approach by lower courts is bound to increase litigation between employers and employees under SOX. 67 Psimenos E F Hutton & Co, 722 F 2d 1041,1042 (2nd Cir 1983). 68 Ibid, at Ibid, at Ibid, at 1045 (citing IIT v Vencap, Ltd, 519 F 2d 1001, 1018 (2d Cir 1075)). 71 See EEOC v Arabian Am Oil Co (Aramco), 499 US 244, 248.

12 Sarbanes-Oxley and Related Whistleblower Protections in the US 211 Arbitration Federal district courts and administrative judges have unanimously held that SOX claims can be compelled to arbitration. In Boss v Salomon Smith Barney, Inc, for example, the court compelled a former employee to submit his SOX claim to binding arbitration, holding: There is nothing in the text or legislative history of the Sarbanes-Oxley Act evincing intent to pre-empt arbitration claims under the act. Nor is there an inherent conflict between arbitration and the statute s purposes. 72 Waiver of Sarbanes-Oxley claims SOX does not specifically address whether employees may waive their rights under the statute. The regulations implementing Sarbanes-Oxley, however, do address settlement of complaints after they have been filed with the DOL. Once a complaint is filed with the DOL, but before the findings and/or order are objected to or become a final order, a party may withdraw his or her complaint due to settlement. The settlement must be agreed to by all parties, including the Assistant Secretary of Labour for OSHA. A complaint may be settled further along in the process as well, with approval of the parties and the ALJ or the ARB (depending on how far along the case is). Any such settlement will be considered the final order of the DOL, and failure to comply with such a settlement agreement permits the aggrieved party to file a civil action seeking enforcement of the agreement in federal district court. 73 At least one case before the ARB has addressed the issue of whether a general release of employment claims that does not specifically reference Sarbanes-Oxley claims also releases those Sarbanes-Oxley claims. In Moldauer v Canadaigua Wine Co, 74 an employee entered into a severance agreement and general release with his employer three weeks after his termination. Five months later, while acting pro se, he filed a SOX claim with the DOL. The ARB dismissed the proceeding on the ground that Moldauer s complaint was untimely and barred under equitable tolling principles. 75 It did not reach the question of the release. However, a concurring administrative F Supp 2d 684, 685 (SDNY 2003). See also Kimpson v Fannie Mae Corp, Case No 1:06- CV (DDC 31 March 2007); Guyden v Aetna Inc, Case No 3:05-CV-1652 (D Conn 25 September 2006); and Ulibarri v Affiliated Computer Services, 2005-SOX-46 and 47 (13 January 2006). 73 See generally 29 CFR ARB No (ARB 30 December 2005). 75 Ibid, at *1.

13 212 Business Law International Vol 9 No 3 September 2008 appeals judge noted that courts have generally held that a general release that releases all claims against an employer also releases claims that are not specifically mentioned in the release. 76 The release Moldauer signed released all claims and while it did not specifically mention Sarbanes-Oxley by name, it did mention wrongful discharge and any claims based on any form of discrimination. Accordingly, the judge held that, in executing a general release of all claims against his employer, Moldauer also knowingly and voluntarily released any claims for discrimination he might have had under Sarbanes-Oxley. 77 Jury trial Sarbanes-Oxley does not address whether a claim is to be decided by a jury. To date, only one district court has considered, on the merits, whether a claim is to be decided by a jury. The court held that because SOX does not explicitly provide for jury trials or legal remedies, SOX claims must be tried to the Bench. 78 State whistleblower statutes In addition to Sarbanes-Oxley, many states have enacted their own laws providing whistleblower protections. These laws provide a myriad of protections for employees on a number of different subjects, and may vary significantly from each other and from Sarbanes-Oxley. As examples of those laws, this article examines the whistleblower laws of New Jersey, New York and California. New Jersey The New Jersey Conscientious Employee Protection Act (CEPA) 79 protects employees who engage in a broad range of whistleblowing activity with respect to their employers. CEPA prohibits an employer from taking any retaliatory action against an employee because the employee discloses (or threatens to disclose), to a supervisor or public body, an activity, policy or practice of the employer 76 Ibid, at * Ibid, at * See Murray v TXU Corp, No 3:03-CV-0888-P, 2005 US Dist LEXIS 10945, at *5 (N D Tex 7 June 2005). In Fraser v Fiduciary Trust Co, 417 F Supp 2d 310 (SDNY 2006), the district court deferred a dispositive ruling, deciding instead to wait for the motion to be brought at a later date after other courts have had opportunity to rule on the issue. 79 NJ Stat 34:19-1 et seq.

14 Sarbanes-Oxley and Related Whistleblower Protections in the US 213 (or another employer with whom there is a business relationship) that the employee reasonably believes is in violation of a law, or a rule or regulation or is fraudulent or criminal. The law similarly protects an employee who provides information to, or testifies before, any public body conducting an investigation, hearing or inquiry into such conduct. 80 The law goes further, however, and provides protection to employees who object to, or refuse to participate in, any such conduct or who object to, or refuse to participate in, any conduct that the employee reasonably believes is incompatible with a clear mandate of public policy concerning the public health, safety or welfare or protection of the environment. 81 A CEPA plaintiff has the immediate threshold burden of identifying a statute, regulation, rule, or public policy that closely relates to the complained-of conduct. 82 The plaintiff must set forth facts that would support an objectively reasonable belief that a violation has occurred. 83 The court makes a threshold determination that there is a substantial nexus between the complained-of conduct and the policy identified. If such a nexus exists, then the jury determines whether the plaintiff held such a belief and whether the belief was objectively reasonable. 84 The remedies available to employees under CEPA include injunctive relief (including reinstatement with full benefits and seniority), compensation for lost wages and benefits, litigation costs and attorneys fees and punitive damages. In addition, the employer may be subject to a civil fine of up to US$10,000 for the first violation and $20,000 for each violation thereafter. 85 Notably, CEPA also provides a remedy to employers where an employee brings a frivolous claim. Specifically, CEPA provides that, where a court determines that an action brought by an employee was without basis in law or in fact, the court may order that reasonable attorneys fees and court costs be awarded to an employer. 86 In addition to the foregoing, CEPA requires employers to communicate and conspicuously display notices of CEPA protections and obligations, 80 Ibid, 34:19-1 et seq. In order for an employee s disclosure to a public body to constitute protected activity, the employee must have first brought the activity, policy or practice to the attention of a supervisor of the employee in writing, and afforded the employer a reasonable opportunity to correct the activity, policy or practice; provided, however, that such notice is not required where the employee is reasonably certain that the activity, policy or practice is known to one or more supervisors or where the employee fears physical harm as a result of the disclosure, and provided that the situation is emergency in nature. Ibid, 34: Ibid, 34: Dzwonar v McDevitt, 177 NJ 451, 463 (NJ 2003). 83 Ibid, at Ibid, at NJ Stat 34: Ibid, 34:19-6.

15 214 Business Law International Vol 9 No 3 September 2008 including identification of the person designated by the employer to receive written complaints of a prohibited activity, policy or practice. Moreover, if an employer has more than ten employees, CEPA also requires the employer to distribute, on an annual basis, written notices to all employees listing the protections, obligations, rights and procedures provided under CEPA. 87 California California law provides a number of protections for whistleblowers. First, an employer may not retaliate against an employee for disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or violation or noncompliance with a state or federal regulation. The law also prohibits an employer from retaliating against an employee for refusing to participate in an activity that would result in a violation of a state or federal statute. 88 Under the law, a plaintiff has the burden of demonstrating by a preponderance of the evidence that an employee s protected activity was a contributing factor in the alleged retaliatory act. If the plaintiff meets this burden, the employer then has the burden of proof to demonstrate by clear and convincing evidence that the alleged retaliatory act would have occurred for legitimate, independent reasons even if the employee had not engaged in the protected activity. 89 Any employer who violates this statute is guilty of a misdemeanour punishable, in the case of an individual, by imprisonment in the county jail not to exceed one year or a fine not to exceed US$1,000 or both, and, in the case of a corporation, by a fine not to exceed US$5, In addition to these penalties, a corporation or limited liability company may be liable for a civil penalty not exceeding US$10,000 for each violation. 91 California s whistleblower law also requires the office of the Attorney- General to maintain a whistleblower hotline to receive calls from persons who have information regarding possible violations of state or federal statutes or violations of fiduciary responsibility by a corporation or limited liability company to its shareholders, investors or employees. The Attorney-General is then required to refer such calls to the appropriate government authority for review and possible investigation. 92 Employers are also required prominently 87 Ibid, 34: Cal Lab Code (2008). 89 Ibid, Ibid, Ibid, Ibid,

16 Sarbanes-Oxley and Related Whistleblower Protections in the US 215 to display a written notice which lists the hotline telephone number, and the employee s rights and responsibilities under the state s whistleblower laws. 93 In addition to the foregoing protections, the Labor Code Private Attorneys General Act of 2004 (commonly referred to as the bounty hunter law ) permits private employees to file lawsuits to enforce provisions of the California Labor Code a task that was previously entrusted only to the state Labor Commissioner. This law permits aggrieved employees to recover 25 per cent of awarded civil penalties penalties that previously could only have been collected by the Labor Commissioner on behalf of the state. The remaining 75 per cent of the penalties is distributed to the Labor and Workforce Development Agency. 94 New York The New York whistleblower laws are relatively limited in scope, compared to both New Jersey and California. The New York Labor Law prohibits employers from taking any retaliatory personnel action against an employee because the employee discloses, or threatens to disclose, to a supervisor or to a public body, information involving an activity, policy or practice of the employer that is in violation of law, rule or regulation which violation creates and presents a substantial and specific danger to the public health or safety, or which constitutes health care fraud. 95 (Emphasis added.) Courts have construed the public health and safety requirement narrowly. 96 The law also protects employees who: (1) provide information to, or testify before, any public body conducting an investigation, hearing or inquiry into 93 Ibid, Ibid, The Act also established catch-all civil penalties for those provisions of the Labor Code that did not previously provide for civil penalties. Ibid. 95 N Y Lab Law 740(2)(a) (2008). A retaliatory personnel action includes discharge, suspension, demotion or other adverse employment actions in terms or conditions of employment. Ibid, 740(1)(e). 96 See Pipia v Nassau County, 34 AD 3d 664, 666 (2d Dep t 2006) (allegedly improper and corrupt purchasing practices do not pose a substantial and specific danger to the public health); Vail-Ballou Press, Inc v Tomasky, 266 AD 2d 662, (3d Dep t 1999) (reversing denial of motion to dismiss; holding that alleged wrongdoing that presented a danger to the health of certain employees did not pose a substantial and specific danger to the public health or safety, and, therefore, could not state a cause of action for a whistleblower claim) (emphasis in original); Schultz v North American Ins Group, 34 F Supp 2d 866, 869 (WDNY 1999) ( fraudulent economic practices do not constitute a danger to public health or safety ). Compare Kraus v New Rochelle Hosp Med Ctr, 216 AD 2d 360 (2 Dep t 1995) (physician who failed properly to perform and document bronchoscopic procedures on several patients and also failed to obtain the patient s consent for treatment created a substantial and specific danger to the public health and safety under s 740).

17 216 Business Law International Vol 9 No 3 September 2008 any such violation of a law, rule or regulation; or (2) object to, or refuse to participate in, any such activity, policy or practice in violation of a law, rule or regulation. 97 The scope of the rights granted under the law is limited, as demonstrated in a recent New York whistleblower case. In Deshpande v TJH Med Servs, PC, 98 the court held that to secure whistleblower protection under section 740 of the New York Labor Law, a plaintiff must allege an actual violation of a law, rule, or regulation. (Emphasis added.) In other words, an employee must establish with the requisite particularity and specificity necessary to support a cause of action that the violation occurred. 99 Under New York law, an employee s good faith, reasonable belief that a violation occurred is thus insufficient to secure whistleblower protection. 100 Health care service employees employed by health care service providers have additional whistleblower protections. Such employers are prohibited from taking retaliatory action against an employee for: (1) disclosing or threatening to disclose, to a supervisor or public body, an employer activity, policy or practice that the employee, in good faith, reasonably believes constitutes improper quality of patient care ; or (2) objecting to, or refusing to participate in, any employer activity, policy or practice that the employee, in good faith, reasonably believes constitutes improper quality of patient care. 101 Notably, employee whistleblower protection is not available under this section unless the employee has first brought the matter to the attention of a supervisor and afforded the employer a reasonable opportunity to correct the activity, policy or practice except where an imminent threat to public health or safety or to the health of a specific patient exists and the employee reasonably believes in good faith that reporting to a supervisor would not result in corrective action. 102 An employee alleging a violation of section 740 or 741 of the New York Labor Law may bring a civil action seeking reinstatement with full fringe benefits and seniority, compensation for lost wages and benefits, costs of litigation and attorneys fees. Injunctive relief is also available to restrain continued violations. 103 Moreover, an employee who brings a claim under section 740 or 741 of the New York Labor Law waives any other claim s/he may have against the employer based on the same alleged retaliation. Section 740(7) states that the institution of an action in accordance with this section shall be deemed a waiver of the rights and remedies available under any 97 N Y Lab Law 740(2)(b) (c). 98 No 27808/05, 2008 NY Slip Op (NY App Div 17 June 2009). 99 Ibid. 100 Ibid. 101 N Y Lab Law Ibid, 741(3). 103 Ibid, 740(5).

18 Sarbanes-Oxley and Related Whistleblower Protections in the US 217 other contract, collective bargaining agreement, law, rule or regulation or under the common law. 104 In Bordan v North Shore Univ Hosp, 105 the plaintiff alleged that his employment was terminated unlawfully after raising concerns about the level of medical care given to two patients. The court dismissed the breach of contract claim against the hospital because the plaintiff also claimed damages under section 740(7) for the discharge. The court retained the tortious interference with contract claim that the plaintiff brought against the doctor because it arose from separate facts. A waiver is complete once the plaintiff brings a claim under section 740. In Hayes v Staten Is Univ Hosp, 106 the appellate court held that the plaintiff s subsequent attempt to amend the complaint to exclude its section 740 claim did not nullify the waiver of her other claims. Section 215 of the New York Labor Law also protects employees making complaints to their employers, or to the Labor Commissioner, concerning violation of any provision of the New York Labor Law (eg, minimum wage) or instituting a proceeding or testifying in a proceeding under the New York Labor Law. 107 An employer has a remedy in the event that an employee brings a frivolous claim. Specifically, the law provides that a court may, in its discretion, order the employee to pay the employer s reasonable attorneys fees and court costs if the court determines that the action was without basis in law or in fact. 108 Conclusion Sarbanes-Oxley, in conjunction with state whistleblower statutes, establishes a comprehensive structure to deter financial fraud by protecting from retaliation employees of public companies who report evidence of possible fraud. Significant uncertainties remain in interpreting and applying SOX whistleblower protection provisions, and the recent O Mahony decision has brought into question the extraterritorial applicability of SOX s whistleblower protection provisions. Amid these uncertainties, whistleblower protection claims under Sarbanes- Oxley are becoming an increasingly more significant issue for both US and multinational companies. US and international employers subject to SOX need to remain diligent in monitoring their domestic and overseas employment practices to ensure compliance with this comprehensive regulatory scheme. 104 Ibid, 740(7) AD 2d 335, 336 (2d Dep t 2000) AD 2d 593 (2d Dep t 2007). 107 N Y Lab Law Ibid, 740(6).