THE DEVELOPING LAW PROTECTING SARBANES-OXLEY WHISTLEBLOWERS August 2008 Stewart S. Manela Arent Fox Washington, D.C. INTRODUCTION In the Sarbanes-Oxley Act of 2002 1 ( SOX ), in order to improve the integrity of corporate accounting and financial reports, Congress commanded covered companies to implement corporate codes of ethics and to obtain disinterested advice in matters affecting corporate securities. SOX requires corporate boards to establish independent audit committees, which must implement complaint procedures and accept anonymous complaints. See 15 U.S.C. 78f. The law provides for financial disclosures and addresses auditor independence and certification of financial statements by corporate officers. Section 406 of SOX and related SEC rules require covered companies to disclose in their annual reports whether they have a code of ethics applicable to executive officers, financial officers, accounting officers, and persons performing similar functions. A code of ethics must be in writing and prescribe standards that are reasonably necessary to deter wrongdoing and to promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and understandable disclosure in reports and documents submitted to the SEC and in other public communications; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of code violations to an 1 The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), Public Law No. 107-204, was enacted on July 30, 2002.
appropriate person identified in the code; and accountability for adherence to the code. Changes to, or waivers of, the code of ethics for company executive officers or senior financial officers must be disclosed within five business days on a Form 8-K or on the company s Web site. The code of ethics must be filed as an exhibit to company annual reports, provided on the company Web sites, or made available by other means set forth in the rule. In response to SOX, publicly traded companies have adopted accountability policies and implementation procedures. Although not technically covered by SOX, many private companies and non-profit organizations have responded to the public policy goals of SOX and established policies to promote accountability. SOX also created protections for employee whistleblowers who report securities or accounting fraud. SOX prohibits not only retaliatory actions by corporate employers, but also such actions by officers, employees, contractors, subcontractors, or agents of covered companies. Officers, agents, and employees may face civil suits in their individual capacities and even prison time for SOX violations. These whistleblower protections are the focus of this article. 2 SOX whistleblower complaints are filed with the Secretary of Labor, who has delegated authority to the Occupational Safety and Health Administration (OSHA) to investigate and adjudicate such matters under the rules and procedures found in the statutory AIR21 whistleblower provision. The SOX whistleblower procedure differs from AIR21 and all other whistleblower cases administered by DOL, however, because if OSHA has not issued a final decision within 180 days of the filing of the complaint, and there is no showing that such delay is due to the bad faith 2 Section 306(a) of the Act also prohibits officers and directors from acquiring or transferring any security of the company during periods when a pension plan s participants and beneficiaries are prevented from engaging in transactions involving the company's equity securities held in their plan accounts. The SEC has adopted complex rules that clarify the persons, securities, and transactions subject to this provision, and which further define what constitutes a blackout period.
of the claimant, the claimant may bring an action at law or equity for de novo review in the appropriate district court of the United States. LEGISLATIVE PURPOSE BEHIND ANTI-RETALIATION PROTECTION FOR WHISTLEBLOWERS The whistleblower actions provided by SOX are more than a vehicle for vindicating individual employee rights. In structuring the statute, Congress recognized that employees can detect statutory violations, but their fear of retaliation may deter cooperation with enforcement agencies. Therefore, an instrumental part of the strategy for achieving the regulatory objectives of SOX is the role of the U.S. Department of Labor and federal courts in enforcing the congressional determination to protect whistleblowers against retaliation for reporting violations. In an analogous context, the Supreme Court ruled that Congress recognized that employees... are often best able to detect... violations and yet, because they may be threatened with discharge for cooperating with enforcement agencies, they need express protection against retaliation for reporting these violations. Brock v. Roadway Express, Inc., 481 U.S. 252, 258 (1987) (discussing comparable whistleblower provision of the Surface Transportation Assistance Act). Thus, The Department of Labor does not simply provide a forum for private parties to litigate their private employment discrimination suits. Protected whistle-blowing under the ERA may expose not just private harms but health and safety hazards to the public. Beliveau v. United States Dep t of Labor, 170 F.3d 83, 88 (1st Cir. 1999). Such whistle-blower provisions are intended to promote a working environment in which employees are relatively free from the debilitating threat of employment reprisals for publicly asserting company violations of statutes protecting the environment, such as the Clean Water Act and nuclear safety statutes. They are intended to encourage employees to aid in the enforcement of these statutes by raising substantiated claims through protected procedural channels. * * * The whistleblower provision was enacted for the broad remedial purpose of shielding employees from retaliatory actions taken against them by management to discourage or punish employee efforts to bring the corporation into compliance with the Clean Water Act's safety and quality standards. If
the regulatory scheme is to effectuate its substantial goals, employees must be free from threats to their job security in retaliation for their good faith assertions of corporate violations of the statute. Passaic Valley Sewerage Comm'rs v. United States Dep't of Labor, 992 F.2d 474, 478 (1993), cert. denied 510 U.S. 964 (1993). Thus, Labor Department administrative investigations do not simply provide a forum for private parties to litigate their private employment discrimination suits, but also provide a vehicle for exposing perils to the public. Whistleblower protections promote a workplace environment in which employees can be free from threats of reprisals for disclosing statutory violations, augmenting statutory enforcement by raising claims through protected procedural channels. SOX COVERAGE Non- Profit Organizations In Paz v. Mary's Center for Maternal & Child Care, ARB No. 06-031, ALJ No. 2006-SOX-7 (ARB Nov. 30, 2007), the Department of Labor s Administrative Review Board (ARB) reaffirmed that the SOX whistleblower provision does not cover a non-profit, non-publicly traded company. See also Fleszar v. American Medical Association, 2007-SOX-30 (ALJ June 13, 2007) (AMA not subject to SOX though it had filed reports to the SEC relating to defined benefits plans that did not involve the issuance of securities, and even though it had contractual relationships with publicly traded companies and governmental entities and engaged in real estate transactions or mutual fund activities). Non-Public Subsidiaries The ARB has ruled that SOX coverage may extend to non-public subsidiaries of public companies. Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149 (May 31, 2006). The complaint in Klopfenstein was filed by an employee of Flow Products, Inc. ( Flow
Products ). Flow Products is a non-publicly traded subsidiary of PCC Flow Technology Holdings, Inc. ( Holdings ), which is also a non-publicly traded company. Holdings is a whollyowned subsidiary of Precision Castparts Corp. ( PCC ), a company that is registered under Section 12 of the Securities and Exchange Act of 1934. After Klopfenstein reported discrepancies in inventory balances that he alleged would materially affect Flow Products financial statements, the company found Klopfenstein responsible for improper recording of company revenues. The president of Holdings and executive vice president of PCC decided to terminate Klopfenstein. Klopfenstein filed a SOX complaint against Holdings, alleging that he was terminated in retaliation for reporting the inventory discrepancies. OSHA and an ALJ rejected his claim on the basis that SOX did not cover the respondent, non-public subsidiary that employed Klopfenstein. On appeal, the ARB held that SOX does not require a complaint to name a publicly traded corporate respondent so long as the complainant identifies at least one respondent who is covered under the Act as an officer, employee, contractor, subcontractor, or agent of such a company. Under the reasoning of Klopfenstein, private companies may be found covered under SOX by virtue of their relationships to publicly traded entities. In Rao v. Daimler Chrysler Corp., No. 2:06-CV-13723, 2007 WL 1424220 (E.D. Mich. May 14, 2007) (case below 2006-SOX-78), the court granted summary judgment against the plaintiff in a SOX whistleblower suit where the defendant was a subsidiary of its publicly traded parent, and the publicly traded parent had not been named in the complaint. The court reviewed ALJ decisions on this issue, and noted that the statutory text of section 1514A only lists employees of public companies as protected individuals. The court stated it was not its job to rewrite the statute, especially in light of the corporate law principle that parent companies are not ipso facto liable for the actions of their subsidiaries, and that Congress had specifically
overridden this principle in other portions of SOX. The court also considered whether the subsidiary was acting as an agent for its parent company in its actions towards the plaintiff, but granted summary judgment because the complaint only mentioned employees of the subsidiary as being aware of his complaints, and did not assert that anyone at the parent company had such knowledge. Compare Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365, 1368 (D. Ga. 2004) (subsidiary of publicly-traded company subject to SOX jurisdiction); Gale v. World Financial Group, ARB No. 06-083, 2008 WL 2548811 (May 29, 2008) (agent of publicly traded company is covered employer); Savastano v. WPP Group, PLC, 2007-SOX-34 (ALJ July 18, 2007) ( for an employee of a nonpublic subsidiary to be covered under Section 806, the nonpublic subsidiary must act as an agent of its publicly held parent, and the agency must relate to employment matters. ); Neuer v Bessellieu, 2006-SOX 132 (December 5, 2006) (SOX applies when corporate entities intertwined and public company controlled termination decision); Morefield v. Exelon Servs., Inc., 2004-SOX-2 (ALJ Jan. 28, 2004) (a covered corporation is the sum of its constituent units; and Congress insisted upon accuracy and integrity in financial reporting at all levels of the corporate structure, including the non-publicly traded subsidiaries ), with Personalized Brokerage Services, LLC v. Lucius, 2006 WL 2975308 (D. Minn. 2006) (no allegation that parent hired, supervised, controlled, or terminated complainant); Brady v. Calyon Securities, 406 F. Supp.2d 307 (S.D.N.Y. 2005) (no coverage of non-public employer that has investment banking relationship with publicly traded company, though company that acts as agent of publicly traded company in employment matters could be covered); Teutsch v ING Group, N.V., 2005-SOX-101 (Sept. 25, 2006) (no control of management or hiring, discipline, or termination of complainant); Dawkins v. Shell Chem., LP, 2005-SOX-41 (ALJ May 16, 2005) (non-publicly traded subsidiary not covered by SOX absent evidence that publicly traded
parent s involvement non-public subsidiary justified piercing corporate veil). Cf. Goodman v. Decisive Analytics Corp., 2006-SOX-11 (ALJ Jan. 10, 2006) (employee of a non-public company that provided consulting services to publicly traded companies not afforded SOX protection merely because employer had contractual relationship with a publicly traded company); Kalkunte v. DVI Financial Servs. Inc., No. 2004-SOX-00056 (ALJ July 18, 2005) (non-public turnaround company that advised bankrupt companies during reorganization acted as agent of public company and therefore could be held liable under SOX); Roulett v. American Capital Access, No. 2004-SOX-00078, (ALJ Dec. 22, 2004) (no SOX coverage though employer had planned but withdrawn SEC registration and had worked for SEC-registered companies); Flake v. New World Pasta Co., 2003-SOX-18 (ALJ July 7, 2003) (SOX did not cover employer that filed reports with SEC pursuant to a contractual agreement with lenders rather than regulatory mandate); Stevenson v. Neighborhood House Charter Sch., No. 2005-SOX-00087 (ALJ September 7, 2005) (employer s payment to ERISA-qualified plan did not result in SOX coverage). See also Stephenson v. NASA, ARB No. 96-080, ALJ No. 1994-TSC-5 (ARB Apr. 7, 1997) ( a respondent may be liable for its contractor s or subcontractor s adverse action against an employee in situations where the respondent acted as an employer with regard to the employee of the contractor or subcontractor by exercising control of the work product or by establishing, modifying, or interfering with the terms, conditions, or privileges of employment. ) cited in PREAMBLE TO SOX REGULATIONS, 69 Fed. Reg. at 52107. International Applicability The SOX whistleblower provisions do not have extraterritorial reach. SOX does not provide protection to non-u.s. employees who report SOX whistleblower violations. Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006) (case below 2004-SOX-18). The court ruled
that the SOX whistleblower provision does not reflect the necessary clear expression of congressional intent to extend its reach beyond our nation s borders. See also Ede v. The Swatch Group Ltd., ARB No. 05-053, ALJ Nos. 2004-SOX-68 and 69 (ARB June 27, 2007) (complainants worked solely for foreign subsidiaries of respondent, never worked in United States, and SOX complaint was grounded in adverse actions that occurred outside USA following decision in Carnero in denying complaint). SOX has been applied to Americans working abroad. In a recent decision, the plaintiff had previously worked for the employer in the United States; the complaint alleged that the American subsidiary committed fraud in the USA; the employer did not treat the plaintiff as a foreign national i.e., foreign payroll taxes were not withheld; and the court concluded that applying SOX would not affect a foreign employer s employment relations with a foreign employee. O Mahony v. Accenture Ltd, 537 F. Supp.2d 506 (S.D.N.Y. 2008). See also Penesso v. LLC International, Inc., 2005-SOX-16 (ALJ Mar. 4, 2005) (coverage found where complainant employed in Italy by Italian subsidiary of U.S. corporation headquartered in Virginia, complainant was U.S. citizen, much of protected activity and alleged retaliatory action occurred in U.S, so case had substantial nexus to United States). No Retroactivity SOX is not retroactive. See Gilmore v. Parametric Tech., 2003-SOX-1 (ALJ Feb. 6, 2003) ( Sarbanes-Oxley confers new and increased liability upon employers, the application of Sarbanes-Oxley to conduct occurring prior to enactment would be retroactive, and therefore, improper. ); Kunkler v. Global Futures & Forex, Ltd., 2003-SOX-6 (ALJ Apr. 24, 2003) (employment terminated 60 days prior to the effective date of SOX; complaint dismissed because SOX does not apply retroactively); McIntyre v. Merrill, Lynch, Pierce, Fenner & Smith,
Inc., 2003-SOX-23 (ALJ Jan. 16, 2004). See generally Landgraf v. USI Film Products, 511 U.S. 244 (1994) (presumption against retroactivity unless Congress manifests clear contrary intent). In Harvey v. Home Depot U.S.A., Inc., ARB Nos. 04-114 and 115, ALJ Nos. 2004-SOX- 20 and 36 (ARB June 2, 2006), however, the complainant s protected activity occurred prior to the effective date of the SOX whistleblower provision, but the adverse action occurred after the effective date. The ARB ruled that SOX whistleblower protection may apply so long as the complainant proves that the protected activity was a contributing factor and the adverse action occurred after the effective date of the SOX. See Lerbs v. Buca Di Beppo, Inc., 2004-SOX-8 (ALJ June 15, 2004) (date of the alleged retaliatory action rather than date of protected activity determines whether SOX applies). SCOPE OF WHISTLEBLOWER PROTECTION Title VIII of SOX is the Corporate and Criminal Fraud Accountability Act. Section 806, 18 U.S.C. 1514A. SOX requires employers to establish procedures that enable employees to make confidential reports about accounting or auditing matters they find suspicious. Employees who report questionable conduct to a supervisor, or a person with authority to investigate, discover, or terminate misconduct are protected against retaliation. 18 U.S.C. 1514A(a)(1)(C). See Mahoney v. Keyspan Corp., 2007 WL 805813 (E.D.N.Y. March 12, 2007) (expressing support for whistleblower not protected activity, but urging officers to meet with whistleblower regarding fraud covered: SOX protects those who blow the whistle [and those who] make the whistle audible. SOX creates a civil action for employees of covered employers who are subjected to retaliation for disclosing suspected fraud, including violations of accounting and Securities and Exchange Commission (SEC) rules. SOX protects employee disclosures to federal agencies,
members or committees of Congress, 3 or supervisors, agents, employees, or representatives of an employer with authority to investigate or terminate misconduct; or employees who caused information to be provided; or who otherwise assisted in an investigation regarding any conduct which the employee reasonably believed was a violation of any rule or regulation of the SEC or any Federal law relating to fraud against shareholders; or because they have filed, participated, or assisted in a proceeding relating to an alleged violation. The protection extends to discharge, demotion, suspension, threats, harassment, or discrimination motivated by an employee s (1) disclosure or assistance in an investigation of an alleged violation of federal securities fraud laws, or (2) filing, participating in, or assisting with a federal proceeding involving fraud against shareholders. Reasonable Belief that Fraud Occurred In order to be entitled to protection, a whistleblower must reasonably believe employer conduct violates any of the following: 18 U.S.C. 1341 (mail fraud); 18 U.S.C. 1343 (wire fraud); 18 U.S.C. 1344 (bank fraud); 18 U.S.C. 1348 (securities fraud); SEC rules or regulations; or federal laws prohibiting fraud against shareholders. A complainant must prove by a preponderance of the evidence that he provided information to [his employer] that he 3 In his statement at the signing of the Sarbanes-Oxley Act on July 30, 2002, President Bush stated that Sarbanes-Oxley is intended to protect against company retaliation for lawful cooperation with investigations and not to define the scope of investigative authority or to grant new investigative authority, [therefore] the Executive Branch shall construe [the section] as referring to investigations authorized by the rules of the Senate or the House of Representatives and conducted for a proper legislative purpose. But see 148 Cong. Rec. 7418 ( This section would provide whistleblower protection to employees of publicly traded companies. It specifically protects them, when they take lawful acts to disclose information or otherwise assist criminal investigators, federal regulators, Congress, supervisors (or other proper people within a corporation), or parties in a judicial proceeding in detecting and stopping fraud. )
reasonably believed constituted a violation of the cited provisions. Welch v. Cardinal Bankshares Corp., ARB, No. 05-064, May 31, 2007, aff d Welch v. Chao, (4 th Cir., 07-1684, 2008 WL 2971800 (Aug. 5, 2008). Thus, an employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders, though an employee s reasonable but mistaken belief that the employer violated some provision of Federal law relating to fraud against the shareholders is protected. Allen v. Admin. Review Bd., 514 F.3d 468 (5th Cir. 2008) (employees lacked objective reasonableness necessary to show they believed financial fraud on shareholders occurred). To establish that he engaged in protected activity, an employee must show that he had both a subjective belief and an objectively reasonable belief that the conduct he complained of constituted a violation of relevant law. Welch v. Chao, (4 th Cir., 07-1684, 2008 WL 2971800 (Aug. 5, 2008). When a whistleblower proves that he reasonably believed a violation of federal law had occurred, SOX protection applies whether or not there was actual fraud. Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365, 1376 (D. Ga. 2004) (no requirement to show actual violation, only reasonable belief that violation occurred). 4 The Fifth Circuit recently ruled that the objective reasonableness of a complainant s belief that fraud has been committed must be evaluated from the perspective of the complainant. A licensed certified public accountant is an accounting expert who would understand that certain financial records were not to be submitted to the SEC, and that interest miscalculations made by 4 Cf. Neal v. Honeywell, Inc., 33 F.3d 860, 864 (7th Cir. 1994) (Under Federal False Claims Act whistleblower protections whistleblowers protected while gathering information about possible FCA violation); U.S. ex rel Yesudian v. Howard University, 153 F. 3d 731, 739-40 (D.C. Cir. 1998) (whistleblower protected though still gathering evidence when retaliation occurred). There is no requirement for a complainant to identify particular securities laws violated. Hendrix v. American Airlines, Inc., 2004- SOX-23 (ALJ December 9, 2004).
a computer program would not be considered fraud. Allen v. Admin. Review Bd., 514 F.3d 468 (5th Cir. 2008) (reasonable person could not believe there was violation of federal law relating to fraud against shareholders where employer did not intentionally cause computer problem, did not conceal it, and attempted to correct it). Similarly, the ARB recently ruled that a bank executive who complained about his employer s financial reporting was not engaged in activity protected by the Sarbanes-Oxley Act because the employee could not have reasonably believed the company violated federal securities laws. Welch v. Cardinal Bankshares Corp., DOL ARB, No. 05-064, 5/31/07) (experienced financial executive could not reasonably believe that including loan recoveries in income totals gave misleading picture of company financial condition). A complainant s reasonable belief that his employer violated the law has two elements: (1) that he actually believed that the employer acted improperly, and (2) that a person with his expertise and knowledge would have reasonably believed that as well. In Bishop v. PCS Administration (USA), Inc., No. 1:05-CV-05683, 2006 WL 1460032 (N.D.Ill. May 23, 2006), the court described protected activity under SOX: An employee can engage in 1514A protected activity even if the reported conduct did not actually constitute a violation of one of the laws or regulations enumerated in 1514A(a)(1). It is sufficient that the employee reasonably believes the conduct constituted such a violation. This reasonableness test is intended to impose the normal reasonable person standard used and interpreted in a wide variety of legal contexts. The threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence. The reasonable belief must be both subjectively believed and objectively reasonable. The employee s access to information, experience, and background are considerations in determining whether he or she had a reasonable belief. Slip op. at 14-15.
Definitive and Specific Report of Fraud SOX requires that an employee s communications to his employer definitively and specifically relate to one of the listed laws for communications to constitute protected activity. Welch v. Chao, (4 th Cir., 07-1684, 2008 WL 2971800 (Aug. 5, 2008). This requirement ensures that an employee s communications to his employer are factually specific. An employee need not cite a code section he believes was violated in his communications to his employer, but the employee s communications must identify the specific conduct that the employee believes to be illegal. In Fraser v. Fiduciary Trust Co., 417 F.Supp.2d 310 (S.D.N.Y. 2006), the court described protected activity under SOX as follows: Slip op. at 17. SOX protects employees who provide information, which the employee reasonably believes constitutes a violation of any SEC rule or regulation or Federal law relating to fraud against shareholders. Id. (citing 18 U.S.C. 1514A(a)(1)). While a plaintiff need not show an actual violation of law, id., or cite a code section he believes was violated (June 23, 2005 Decision and Order, at 16), general inquiries... do not constitute protected activity. Id. (citing cases); see also Lerbs v. Buca Di Beppo, Inc., 2004-SOX-8, 2004 DOLSOX LEXIS 65, at **33-34 (Dep t Labor June 15, 2004) ( [I]n order for the whistleblower to be protected by [SOX], the reported information must have a certain degree of specificity [and] must state particular concerns which, at the very least, reasonably identify a respondent s conduct that the complainant believes to be illegal. (citation omitted). Thus, [p]rotected activity must implicate the substantive law protected in Sarbanes-Oxley definitively and specifically (June 23, 2005 Decision and Order, at 16 (citation omitted)). Where a complaint contains merely a chain of speculation, and the record is devoid of wrongdoing by the employer, the allegation is too weak to support a claim that an employee reasonably believed there was a violation of the securities laws. Livingston v. Wyeth, Inc., 520 F.3d 344, 351 (4th Cir.2008). See Getman v. Southwest Securities, 265 Fed.Appx. 317
(unpublished), 2008 WL 400232 (5th Cir. 2008) (no allegation that employee told supervisor challenged conduct would violate securities laws). The fact that an employee s concerns somehow involve accounting and finances, does not automatically mean that fraud has been alleged. See Welch v. Chao, (4 th Cir., 07-1684, 2008 WL 2971800 (Aug. 5, 2008) (complaint utterly failed to explain how alleged conduct could reasonably be regarded as violating any of the laws listed in 1514A); see also Livingston v. Wyeth, Inc., 520 F.3d 344, 351 (4th Cir.2008) (employee must show he believed conduct was unlawful and that a reasonable person in his position would have believed conduct was unlawful); Marshall v. Northrop Grumman Synoptics, 2005-SOX-0008 (ALJ June 22, 2005), citing Grant v. Dominion East Ohio, 2004-SOX-00063 (accounting error was not fraud under SOX; raising questions and complainants without suspicion of fraud against shareholders not protected). Raising a complaint about internal policy is not considered protected activity. See also Reddy v. Medquest, Inc., 2004-SOX-35 (ALJ June 10, 2004) (no SOX coverage absent violation of federal law); Hopkins v. ATK Tactical Systems, 2004-SOX-19 (ALJ May 27, 2004) (disclosure of allegedly illegal release of sludge into groundwater not protected without fraud on shareholders); Minkina v. Affiliated Physicians Group, 2005-SOX-19 (ALJ February 22, 2005) (no implication of shareholder fraud in indoor air quality complaint). But see O Mahony v. Accenture Ltd, 537 F. Supp.2d 506 (E.D.N.Y. 2008) (employee protected against retaliation for reporting of fraud under enumerated statutes whether or not alleged misconduct related to shareholder fraud); Reyna v. Con Agra Foods, Inc., 506 F. Supp.2d 1363 (M.D. Ga. 2007 (report of mail or wire fraud protected though unrelated to shareholder fraud). 5 5 Section 1107 of SOX protects employees of public and private companies who make truthful reports to a law enforcement officer, where such disclosures relate to the possible commission of a federal offense. SOX also establishes document retention
Materiality The materiality or lack thereof of the potential loss is important. Materiality is a basic element in defining securities fraud. SOX does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills. Platone v. FLYi, ARB Case No. 04-153 (September 29, 2006). Rather, under the SOX, the employee s complaint must definitively and specifically relate to any of the listed categories of fraud or securities violations. An employee's disclosure that the company is materially misstating its financial condition to investors is entitled to protection under the Act. Id. See Hunter v. Northrop Grumman Synoptics, 2005-SOX-8 (ALJ June 22, 2005) (false report insufficiently material to constitute fraud on shareholders); Harvey v. The Home Depot, Inc., 2004-SOX-20 (ALJ May 28, 2004) (SOX complaint barred because alleged violations were insufficiently material to permit reasonable belief that shareholder fraud occurred). The Fourth Circuit has observed that for a statement or omission to be actionable under 10(b) of the Securities Exchange Act and Rule 10b-5, it must concern a material fact. The Supreme Court has noted that to fulfill the materiality requirement, 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. Livingston v. Wyeth, Inc., 520 F.3d 344, 351 (4th Cir.2008), quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). But see Welch v. Chao, (4 th Cir., 07-1684, 2008 WL 2971800 (Aug. 5, 2008) (while statement or omission must concern material fact to violate 10(b) of the requirements prohibiting destruction of evidence, and provides criminal penalties for anyone who alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States. Whistleblowers who report destruction of evidence would be protected from retaliation by criminal sanctions. Cf. Miles v. Wal- Mart Stores Inc., W.D. Ark., No. 06-5162, January 25, 2008) (SOX claim by employee who refused to shred documents that were the subject of criminal probe).
Securities Exchange Act and SEC Rule 10b-5, and many laws listed in 1514A of SOX contain materiality requirements, nothing in 1514A indicates that 1514A contains materiality requirement). DEPARTMENT OF LABOR ENFORCEMENT REGULATIONS AND ADMINISTRATIVE RULINGS OSHA Complaint Handling Procedures The Secretary of Labor adopted the final Sarbanes-Oxley regulations on August 24, 2004, and the regulations took effect that day. Procedures for the Handling of Discrimination Complaints under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002. The regulations delegate authority for investigation of SOX whistleblower complaints to the Occupational Safety and Health Administration. 29 C.F.R. Part 1980. See 69 Federal Register 52104 (August 24, 2004). Proceedings are governed by the procedures and burdens of proof of AIR21, 6 which along with other types of whistleblower complaints are also investigated by OSHA. 7 6 AIR21 protects workers against retaliation for reporting violations of any order, regulation or standard of the Federal Aviation Administration, or any other provision of federal law relating to air carrier safety. AIR21 also protects workers against retaliation for filing, causing to be filed, participating in, or assisting in a proceeding related to any violation of airline safety laws. Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, Sec. 519. 49 U.S.C. Sec. 42121(b). See 29 C.F.R. Part 1979 (Labor Department regulations covering AIR21whistleblower complaints). AIR21 had incorporated elements previously contained in the Energy Reorganization Act (ERA) and the Surface Transportation Assistance Act (STAA). 7 Since 1972 the U.S. Department of Labor has enforced eight whistleblower statutes in addition to Sarbanes-Oxley. OSHA has jurisdiction over whistleblower cases under environmental protection, transportation, and nuclear safety laws, including the Clean Air Act (42 U.S.C. 7622); Clean Water Act (33 U.S.C. 1367); Safe Drinking Water Act (42 U.S.C. 300j-9(i)); Toxic Substances Control Act (15 U.S.C. 2622); Resource Conservation and Recovery Act (42 U.S.C. 6971); Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, or Superfund law) (42 U.S.C. 9610); Surface Transportation Assistance Act (49 U.S.C. 31105); Wendell H. Ford Aviation & Reform Act for the 21st Century ( AIR 21") (49 U.S.C. 42121); and Energy Reorganization Act (42 U.S.C. 5851).
Under the SOX whistleblowers complaint procedures, a charging party may file a complaint with the Secretary of Labor within 90 days of the alleged discrimination. The 90 day period begins to run when an employee receives final, definitive, and unequivocal notice of an adverse action. Halpern v. XL Capital Ltd., No. 04-120 (ARB August 31, 2005). Ignorance of SOX whistleblower protections is insufficient reason for tolling the 90-day deadline for filing discrimination complaints. Moldauer v. Canandaigua Wine Co., No. 2003-SOX-26 (ALJ Nov. 14, 2003). Retaliatory acts more than 90 days before a charge is filed will be deemed part of a continuing violation only if they fall within the definition of such a violation under the Supreme Court s decision in National Railroad Passenger Corp. v. Morgan, 536 U.S. 101 (2002). See Willis v. Vie Fin. Group Inc., E.D. Pa., No. 04-435, 8/6/04); Dolan v. EMC Corp., No. 2004-SOX-1 (ALJ March 24, 2004). Burdens of Proof To warrant investigation, the complaint must allege that: (1) the employee engaged in protected activity. The complainant must offer proof that he was indeed a whistleblower. An employee who suspects his employer of committing fraud against its shareholders and the SEC, but who never blows the whistle fails to state a prima facie case under a statute designed to protect employees who do blow the whistle. Trodden v Overnite Transportation Co., No. 2004-SOX-00064 (ALJ March 29, 2005). (2) the employer knew of the protected activity; (3) the employee suffered an adverse action; and (4) the protected activity was a motivating factor in the adverse action.
See 29 C.F.R. 1980.104(b). See Reddy v. Medquist, Inc., ARB No. 04-123, ALJ No. 2004- SOX-35 (ARB Sept. 30, 2005). 8 OSHA must notify the employer of the allegations of the complaint, as well as the substance of the evidence supporting the complaint. 29 C.F.R. 1980.104. Even if the complaint makes a prima facie case, the employer would prevail if it demonstrates by clear and convincing evidence that the same adverse action would have been taken even absent the protected activity. 29 C.F.R. 1980.104(c). See Fredrickson v. The Home Depot U.S.A. Inc., DOL ALJ, No. 2007-SOX-13, 07/10/07) (complainant not protected by SOX whistleblower provisions because employer established he would have been discharged absent the alleged protected conduct; employer proved complainant was terminated because of incident in which he touched groin area of vendor representative). 9 After the Secretary receives a complaint, as long as the complaint states a prima facie case that protected activity contributed to an adverse action, the respondent must receive notice of the allegations contained in the complaint and the substance of the supporting evidence. Even when a complaint states a prima facie case, the charge must be dismissed if the employer presents clear and convincing evidence that the same adverse action would have been taken 8 An attorney who charges retaliation may be barred by the attorney-client privilege from introducing privileged material into evidence, even when the effect is that the attorney cannot prove a prima facie case. See Willy v. The Coastal Corp., DOL ARB, No. 98-060 (February 27, 2004) (environmental whistleblower claim). 9 Employer submissions to the Department of Labor in response to SOX complaints are privileged. In Morlan v. Qwest Dex, Inc., 2004 WL 1900368 (D.Or. Aug. 25, 2004), the court dismissed an action against an employer under state law action alleging defamatory statements by the company during the DOL investigation of a Sarbanes-Oxley whistleblower complaint. The court held these statements were protected by an absolute privilege applicable to statements made to administrative agencies acting in a quasijudicial capacity.
regardless of the employee s alleged protected activity. 29 C.F.R. 1980.104(c), 1980.109(a). The employer may submit a response and present statements from witnesses, and the secretary must investigate the complaint and make a determination. Thus, applying the AIR 21 (and Energy Reorganization Act) burden of proof scheme, under SOX, a whistleblower prevails by showing that retaliation was a contributing factor in an adverse action, and employers are liable unless clear and convincing evidence demonstrates that they would have taken the same action even in the absence of whistleblowing activity. In dual motive cases, there may be evidence of both legitimate and improper motives for the adverse action. In such cases, the employer bears the risk that the influence of legal and illegal motives cannot be separated. The employer must show by clear and convincing evidence that it would have taken the same action on the basis of the lawful reason alone. Under the SOX, the correct standard is whether protected activity was a contributing factor in Klopfenstein s termination. A contributing factor is any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision. Marano v. Department of Justice, 2 F.3d 1137, 1140 (Fed. Cir. 1993) (interpreting the Whistleblower Protection Act, 5 U.S.C.A. 1221(e)(1)). As Marano explains, the contributing factor standard was intended to overrule existing case law, which requires a whistleblower to prove that his protected conduct was a significant, motivating, substantial, or predominant factor in a personnel action in order to overturn that action. Because, in examining causation, the ultimate question is whether the complainant has proven that protected activity was a contributing factor in his termination, a complainant need not necessarily prove that the respondent s articulated reason was a pretext in order to prevail. Of course, most complainants will likely attempt to prove pretext, because successfully doing so provides a highly useful piece of circumstantial evidence. But a complainant is not required to prove pretext, because a complainant alternatively can prevail by showing that the defendant s reason, while true, is only one of the reasons for its conduct, and another motivating factor is the plaintiff s protected characteristic. Rachid v. Jack in the Box, Inc., 376 F.3d 305, 312 (5th Cir. 2004).
Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149 (May 31, 2006) (citations omitted). When a sufficient complaint has been filed and the employer cannot present a dispositive affirmative defense, OSHA must investigate to determine whether the alleged protected activity was a contributing factor in an unfavorable personnel action taken against the complainant. The complainant has the burden to prove by a preponderance of the evidence that the protected activity was a contributing factor. See Collins v. Beazer Homes USA, Inc., 2004 WL 2023716 at *7 (N.D. Ga. Sept. 2, 2004), citing Marano v. Dep t of Justice, 2 F.3d 1137, 1140 (Fed. Cir. 1993) (Federal Whistleblower Protection Act case ruling that a contributing factor means any factor which, alone or in connection with other factors, tends to affect the outcome of the decision; without needing to show that protected conduct was a significant, motivating, substantial, or predominant factor in a personnel action in order to overturn that action). Where the evidence shows that protected activity was a contributing factor in an adverse employment action, an employer may still prevail by offering clear and convincing evidence that it would have imposed the same adverse action for legitimate reasons regardless of the protected activity. See Platone v. Atlantic Coast Airlines, 2003-SOX-27 (ALJ Apr. 30, 2004). 10 Adverse Action Against Complainant An adverse employment action must have some tangible job consequences, and a negative performance evaluation, that does not result in a lower salary, jeopardize job security, or cause any tangible job detriment, by itself is not an adverse employment action in violation of 10 Recently, the Supreme Court held in Garcetti v. Ceballos that statements made by public employees in the course of performing their job duties are not protected by the First Amendment and may be the basis for discipline. The Garcetti approach might narrow protections provided under SOX if it is read to mean that employees who complain while performing their regular duties are not whistleblowers they are just doing their job.
SOX. Dolan v. EMC Corp., No. 2004-SOX-1 (ALJ March 24, 2004). SOX prohibits constructive discharge as well as actual termination when an employer creates working conditions so intolerable that a reasonable employee would feel compelled to resign. Harvey v. Safeway, Inc., 2004-SOX-21 (February 11, 2005). In Hirst v. Southeast Airlines, Inc., ARB Nos. 04-116, 04-160, ALJ No. 2003-AIR-47 (ARB Jan. 31, 2007), a STAA whistleblower case, the ARB applied the Supreme Court decision in Burlington Northern & Santa Fe Ry. Co. v. White, 126 S. Ct. 2405 (June 22, 2006) (Title VII), and ruled that a complainant must show that a reasonable employee or job applicant would find the employer s action materially adverse, i.e., 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. quoting 126 S. Ct. at 2409. OSHA Determinations and Remedies OSHA must determine within 60 days after the filing of the complaint whether reasonable cause exists to believe that employer unlawfully retaliated against the complainant. 29 C.F.R. 1980.105. Relief available under SOX includes reinstatement, back seniority, back pay with interest, special damages, plus reasonable attorney s fees, expert witness fees, and litigation costs. 18 U.S.C. Sec. 1514A(c). Special damages may include damages for reputational injury that reduces future earning capacity. See Mahoney v. Keyspan Corp., 2007 WL 805813 (E.D.N.Y. March 12, 2007); Hanna v. WCI Communities, Inc., 348 F.Supp.2d 1332 (S.D. Fl. 2004) (full relief requires compensation for damage to reputation that diminishes plaintiff s future earning capacity). Upon a determination that a complaint has merit, OSHA issues a preliminary order providing make-whole relief. 29 C.F.R. 1980.105(a)(1). Awards of front pay may be made
under SOX for lost future earnings, but SOX complainants must mitigate their damages. Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (July 18, 2005). A complainant s rejection of an offer of reinstatement could be objectively reasonable, however, where the employer s hostility and continued defense that the employee was fired for cause warranted concern that there would be a dysfunctional work environment following reinstatement. See Hagman v. Washington Mut. Bank Inc., ALJ No. 2005-SOX-00073 (12/19/06). Punitive damages are not available under SOX, but SOX expressly does not preempt other state and federal laws. In civil actions asserting SOX claims, other claims, such as state statutory claims and public policy wrongful discharge claims which may allow recovery of punitive damages may be joined in a single action. 11 If an employer proves a complaint was frivolous or brought in bad faith, up to $1,000 in attorney s fees may be awarded to the employer. 29 C.F.R. 1980.109(b). Labor Department procedures make no provision for redressing employer losses when a preliminary order finding retaliation and requiring a complainant s reinstatement is not upheld in a final decision. 69 Fed. Reg. 52109. OSHA Preliminary Order When the Secretary finds reasonable cause to believe retaliation has occurred, the Secretary issues a preliminary order. If OSHA determines that preliminary relief is warranted, in order to ensure the employer s right to due process is protected and there has been ample notice and opportunity to respond, see Brock v. Roadway Express, Inc., 481 U.S. 252 (1987), the employer is notified of this determination, provided with the substance of the relevant evidence 11 In administrative proceedings, the Department of Labor does not have jurisdiction to hear retaliation claims other than SOX. Paz v. Mary's Center for Maternal & Child Care, ARB No. 06-031, ALJ No. 2006-SOX-7 (ARB Nov. 30, 2007) (complaint alleged retaliation under SOX and False Claims Act, 31 U.S.C.A. 3730(h)).
upon which that determination is based, and allowed ten business days to respond to the evidence, meet with investigators, and present legal and factual arguments why preliminary relief is not warranted. 29 CFR Sec. 1980.104(e). Within 30 days, objections to the preliminary order may be filed, along with a request for an administrative law judge hearing. 12 Preliminary Reinstatement Filing of objections suspends the preliminary order except preliminary reinstatement takes effect immediately. See Windhauser v. Trane, Case No. 2005-SOX-17 (ALJ Feb. 11, 2005) (motion to stay reinstatement order denied and ALJ fined employer for refusal to reinstate complainant despite OSHA preliminary reinstatement order). The power of OSHA to order reinstatement of a complainant before a full hearing on the merits of a complaint comes directly from Congress, which mandated that Sarbanes Oxley whistleblower cases shall be governed under the rules and procedures contained in section 42121(b) of title 49 of the United States Code a statute prohibiting retaliation against employees who provide air safety information. Section 42421(b)(2)(A) provides that if the Secretary concludes there is a reasonable cause to believe a violation has occurred, a preliminary order must issue providing reinstatement, among other things, and while an employer may file objections to the preliminary order and request a hearing, the filing of objections does not suspend any reinstatement required by the preliminary order. A stay of a preliminary reinstatement order would be appropriate only in the exceptional case where the employer can establish the necessary criteria for equitable injunctive relief, i.e., irreparable injury, likelihood of success on the merits, and a balancing of possible harms to the 12 An attorney s failure to timely appeal or to send a copy of OSHA s determination to the Complainant so that she could file a timely appeal did not support equitable tolling. Lotspeich v. Starke Memorial Hospital, ARB No. 05-072, 2005-SOX-14 (ARB July 31, 2006).
parties and the public. 69 Fed. Reg. 52109. Also, a preliminary order of reinstatement would not be appropriate where the employer can establish that reinstating the complainant would pose a security risk. 29 CFR 1980.105(a)(1). The regulations explain that the exception is not intended to be broadly construed. Rather, it would apply only in situations where an employer can clearly establish that the reinstatement of an employee might result in physical violence against persons or property. The regulation relies upon a recent decision of the Supreme Court for this position, where the Court held that an employee s own misconduct resulting in an adverse action is relevant in determining remedies because an employer has legitimate concerns about the operation of its business and workplace, and Congress has not sanctioned a general regulation of the workplace, but only a law prohibiting retaliation. Citing McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 360-62 (1995) (reinstatement not appropriate remedy for age discrimination violation where employer would have terminated employee upon lawful grounds). Also, in appropriate circumstances, in lieu of preliminary reinstatement, OSHA may order that a complainant receive the same pay and benefits that he received prior to his termination, but not actually return to work. Such economic reinstatement is used in cases arising under the Federal Mine Safety and Health Act. See, e.g., Secretary of Labor on behalf of York v. BR&D Enters., Inc., 23 FMSHRC 697, 2001 WL 1806020 **1 (June 26, 2001). Economic reinstatement is designed to accommodate an employer that establishes that reinstatement is inadvisable for some reason, notwithstanding a retaliatory discharge. In such circumstances, reinstatement might be delayed until administrative adjudication ends if the complainant receives pay and benefits. In cases of economic reinstatement, there is no statutory