Employee Whistleblower Claims Under SOX: Preparing for New OSHA Enforcement Avoiding and Defending Worker Retaliation Claims

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Sheila Boyd
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presents Employee Whistleblower Claims Under SOX: Preparing for New OSHA Enforcement Avoiding and Defending Worker Retaliation Claims A Live 90-Minute Teleconference/Webinar with Interactive Q&A

1 presents Employee Whistleblower Claims Under SOX: Preparing for New OSHA Enforcement Avoiding and Defending Worker Retaliation Claims A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Diana L. Hoover, Partner, Hoover Kernell, Houston Steve Kardell, Partner, Clouse Dunn Khoshbin, Dallas Courtney L. Anderson, Mayer Brown, Chicago Tuesday, June 8, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions ed to registrations.

2 For CLE purposes, please let us know how many people are listening at your location by closing the notification box and typing in the chat box your company name and the number of attendees. Then click the blue icon beside the box to send. For live event only.

3 If the sound quality is not satisfactory and you are listening via your computer speakers, please dial and enter your PIN when prompted. Otherwise,,please send us a chat or e- mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance.

4 Employee Whistleblower Claims Under SOX: Preparing for New OSHA Enforcement Avoiding and Defending Worker Retaliation Claims June 8, 2010 Diana L. Hoover Steve Kardell Courtney L. Anderson Hoover Kernell LLP Clouse Dunn Khoshbin LLP Mayer Brown Houston, Texas Dallas, Texas Chicago, Illinois i dhoover@hooverkernell.com steve@cdklawyers.com clanderson@mayerbrown.com 4

5 Covered Companies A company is covered by section 806 of the Sarbanes Oxley Act of 2002 (the Act) if it has a class of securities registered under Section 12 of the Securities Exchange Act, or is required to file reports under Section 15(d) of that Act. The company s contractors, subcontractors, or agents may also be covered. 5

6 Protected Activity If an employer is covered under the Act, it may not discharge or in any manner retaliate against an employee because the employee: provided information, caused information to be provided, or assisted in an investigation by: a federal regulatory or law enforcement agency; a member or committee of Congress, or an internal investigation by the company relating to an alleged violation of mail fraud, wire fraud, bank fraud, securities fraud, or violating SEC rules or regulations or federal laws relating to fraud against shareholders. Nor may an employer may discharge or in any manner retaliate against an employee because he or she filed, caused to be filed, participated in or assisted in a proceeding under one of these laws or regulations. 6

7 Retaliatory Job Actions A covered employer violates the Act if an employee s protected activity was a contributing factor in the employer s decision to take unfavorable employment action against the employee. Those adverse actions include: Discharge or layoff Blacklisting Demoting Denial of overtime or promotion Disciplining Denial of benefits Failure to hire or rehire Intimidation Reassignment affecting prospects for promotion Reduction in pay or hours 7

8 Remedies Back pay with interest Front pay Compensatory damages Reinstatement Expert witness fees Special damages Restoration of benefits Attorney's fees and costs Injunctive relief Sanctions (in limited instances) Although the Act does not provide for punitive damages, the Tennessee Commerce case illustrates that where highly paid executives are involved, compensatory awards can be significant ifi and the financial i limpact tto employers can be significant. ifi 8

9 Recent Legal Developments GAO 2009 Report on Whistleblower Protection Program Whistleblowers received a favorable outcome in about 21 % of complaints closed in fiscal year 2007, according to OSHA s data. Out of more than 1,800 complaints that were closed, roughly 66% were dismissed by OSHA and 14% were withdrawn by the whistleblower. When OSHA dismissed complaints, information from five regions suggests that it was often because the available evidence did not show that t the employer had violated the whistleblower provisions. Of the 21% of the complaints resulting in dispositions favorable to the whistleblower, 95% were settled. Of the remaining 5%, or 19 complaints, 12 were sent to the Solicitor s Office for litigation. None of these complaints were actually litigated. In the remaining 7 complaints, OSHA sent Secretary s findings and orders to the whistleblower and the employer describing the corrective action that the employer needed to take. 9

10 Recent Legal Developments Tennessee Commerce Bank; Preliminary Order Former CFO, George Fort, alleged he was fired in May 2008 after raising concerns about internal controls and insider trading with the bank s audit committee and the FDIC. OHSA investigated the complaint and ordered the bank to reinstate Fort to his previous position and to pay him more than $1 million in back wages, interest, attorneys fees, and compensatory damages. The DOL publicized its preliminary order in press releases. signed%20secretarys%20findings%20and%20order%20fort%20v%20tncc2.pdf 10

11 Recent Legal Developments Tennessee Commerce Bank; Subsequent Proceedings The bank appealed the investigator s preliminary order and refused to reinstate Fort. The Secretary of Labor filed an enforcement action seeking immediate reinstatement. The District Court for the Middle District of Tennessee issued a preliminary injunction in Fort s favor. On May 25, 2010, the Sixth Circuit granted the bank s motion for a stay of the district court s preliminary injunction. We find that the defendants motion for a stay raises a substantial question as to the authority of the district court to issue the preliminary injunction A balancing of the harms supports the issuance of the stay. Cf. Bechtel v. Competitive Techs., Inc., 448 F.3d 469 (2d Cir. 2006) 11

12 Recent Legal Developments E Smart Technologies Employee questioned accuracy of several statements made in SEC filings Job duties removed and paychecks delayed OSHA ordered: company to pay back wages and damages totaling $600,000 reinstatement post notices in workplace about whistleblower protection e Smart has filed an Objection to the Order the Company received on February 26, 2010 from the Occupational Safety and Health Administration (OSHA) related to a Complaint filed by a Complainant against the Company ( Respondent ). In brief, Complainant alleged that Respondent constructively discharged him in retaliation for Complainant s complaints regarding Respondent s draft 10K public filing. e Smart objected in entirety and categorically to the Order contained in the Letter and requested an immediate hearing on this matter before an Administrative Law Judge. Moreover, e Smart has requested attorneys fees incurred in connection with the entirety of this matter and as proved at hearing. 12

13 Recent Legal Developments Lawson v. FMR LLC, CA DPW (D. Ma. Mar. 31, 2010); Zang v. Fidelity Management & Research Co., CA DPW (Mar. 31, 2010). Memorandum and Order denying motions to dismissin in two cases alleging unlawful retaliation against employees of non public companies who complained of improper business activities Comprehensive analysis of: Preclusive effect of filing litigation while complaint is on appeal to the ARB Status as covered employees when employed by a non public subsidiary of a publicly traded l ddcompany Protected activities and reasonable belief 13

14 Best Practices to Avoid and Defend SOX Internal Complaint Procedures Whistleblower Claims A. Section 301 of SOX expressly requires the audit committees of publicly traded companies to implement mechanisms for the receipt, investigation, and tracking of anonymous employee complaints. Many companies use a hotline or helpline to receive reports of suspected violations, which can then be investigated. Complaints may also come in via calls to managers or human resources, or letters or s to upper management. The different methods by which employees may report suspected misconduct should be well publicized 14

15 Best Practices to Avoid and Defend SOX Internal Complaint Procedures B. Helplines Whistleblower Claims What employees are told about the helpline is important reporting of issues that could result in costly retaliation claims should be encouraged. Whether a helpline can be administered internally or requires the use of an outside vendor depends on the company s particular needs. Internal helplines: may help save costs, and give a company more control over the critical initial reporting process Outsourced helplines: have greater capacity to staff the lines with around the clock coverage, in various languages, and are more likely to be perceived as confidential and anonymous. Helpline policies need to address: the organization and prioritization of reports, and the initial intake team that will be notified of the report 15

16 Best Practices to Avoid and Defend SOX Internal Complaint Procedures Whistleblower Claims C. Investigation of Complaints Investigative teams are typically organized ad hoc based on the nature of the report, but should have no interest in the outcome of the investigation. Company personnel may be valuable investigators because they may have the necessary expertise and experience. Comprehensive training for employees who will be involved in whistleblower investigations is crucial Both attendance and substance of such training should be documented. Outside counsel or investigators may be necessary if internal resources are not adequate or appropriate to investigate whistleblower complaints. 16

17 Best Practices to Avoid and Defend SOX Internal Complaint Procedures Whistleblower Claims C. Investigation of Complaints (continued) Confidentiality All involved in the investigationshould should be instructed to take extreme care to maintain confidentiality Companies should also develop policies regarding when investigations will be reported to the Board of Directors. 17

18 Best Practices to Avoid and Defend SOX Internal Complaint Procedures D. Documentation of Investigations Whistleblower Claims Documentation of the course of the investigation can help defeat later claims the employer did not take the complaint seriously SOX also provides penalties for companies that cannot produce accurate and complete documentation during a SOX related court action. E. Geographic Considerations Multinational companies Outsourcing helpline services may help overcome potential language barriers Cultural considerations are also important Local laws may also affect investigations 18

19 Best Practices to Avoid and Defend SOX Whistleblower Claims Preventing and Managing Retaliation i Claims li A. To the extent possible, do not disclose the whistleblower s identity to his reporting chain Those managers should be shielded to the extent possible from the investigation. Documentation of these efforts help to show the company s good faith efforts to prevent any retaliatory conduct. B. If the employee s supervisors or other managers become aware of complaint: They should be instructed not to engage in any conduct that might be perceived as explicit or implicit retaliation HR should monitor the situation to ensure that the employee is not inadvertently or inappropriately demoted or disciplined. Consider separating the employee from his or her manager if the employee has accused the manager of wrongdoing. 19

20 Best Practices to Avoid and Defend SOX Whistleblower Claims Preventing and Managing Retaliation Claims C. Employees need to be made aware that every effort will be made to keep reports anonymous and retaliation will not be tolerated. This should be communicated directly to an informant if his or her identity is known, and documented accordingly. Since some employees may choose to report anonymously, the company should also notify all employees, in writing, that anyone who retaliates, harasses, or discriminates against another employee for raising concerns will be subject to disciplinary action, up to and including termination. 20

21 Best Practices to Avoid and Defend SOX Whistleblower Claims Preventing and Managing Retaliation i Claims li D. Disciplining whistleblowers: If discipline is necessary, the company s standard policies and procedures need to be followed Any disciplinary action should be comparable to discipline given to other employees in similar circumstances. The disciplinary decision should be carefully communicated to the employee so as to avoid a perception p of retaliation. Documentation is crucial Confirming that the disciplinary process was followed, and the decision was appropriately communicated to the employee Timely performance appraisals and contemporaneous documentation of performance deficiencies should be maintained Documentation any positive employment decisions or actions is also important Any reports of conduct that might be interpreted as retaliatory should be immediately investigated and appropriate remedial measures taken 21

22 Best Practices to Avoid and Defend SOX Whistleblower Claims Defending a SOX Whistleblower Claim A. When faced with defending a SOX claim, issues to consider include: (1) statute of limitations, (2) whether you re a covered employer, (3) whether the employee s activity was protected, and (4) whether theallegedlyprotectedactivitycaused activity caused theadverse action B. Statute of Limitations Time favors the employer claimants have only 90 day period to file claims Cii Critical question is when the employee become aware of the employment action at issue and did they file their complaint on a timely basis? (See, e.g. Levi v. Anheuser Busch Companies, Inc., ARB Nos , , , ALJ Nos., 2006 SOX 27 and 108, 2007 SOX 55 (ARB Apr. 30, 2008); Corbett v. Energy East Corp., ARB No , ALJ No SOX 65, 65 USDOL/OALJ Reporter at 4 (ARB Dec. 31, 2008)) 22

23 Best Practices to Avoid and Defend SOX Whistleblower Claims Defending a SOX Whistleblower Claim C. Covered employer If not a publicly traded company, carefully consider whether the claimant has alleged a claim against a covered employer Coverage of non publicly traded subsidiaries will depend on agency and the role that the publiclytraded parent plays in the employment relationship. (See Walters v. Deutsche Bank AG, 2008 SOX 70 (ALJMar Mar. 23, 2009); Johnsonv v. Siemens Building Technologies, ARB No , ALJ No SOX 15 (ARB Apr. 15, 2010)) Complaint does not have to name publicly traded company so long as the complainant names at least one respondent who is covered under the Act as an officer, employee, contractor, subcontractor, or agent' of such a company." (See Andrews v. ING North America InsuranceCorp., ARB No , ALJ Nos SOX 50 and 51 (ARB Aug. 29, 2008)) Foreign employees generally are not covered, although a federal district court has held that the SOX whistleblower protections applied to a U.S. employee working overseas for a U.S. subsidiary of a foreign based corporation (See O Mahony v. Accenture, Ltd., 537 F. Supp. 2d 506 (S.D.N.Y. 2008)) 23

24 Best Practices to Avoid and Defend SOX Whistleblower Claims Defending a SOX Whistleblower Claim D. Protected Activity What exactly did the employee report? Fraud against the shareholders or securities violation (See e.g. Platone v. United States Dep t of Labor, 548 F.3d 322 (4th Cir. 2008)) definitively and specifically (See e.g. Van Asdale v.international Game Technology, No (9th Cir. Aug. 13, 2009)) Complaint to employer v. OSHA complaint Reasonable belief Objective and subjective belief required (See eg e.g. Day v. Staples, Inc., 2009 US U.S. App. LEXIS 2266 (1st Cir. Feb. 9, 2009)) Belief regarding an existing violation required and potential violation insufficient (See e.g. Livingston v. Wyeth, Inc., 520 F.3d 344 (4th Cir. 2008); Walton v. Nova Information Systems, 2008 WL (E.D. Tenn. 2008); Godfrey v. Union Pacific Railroad Co., 2008 SOX 5 (A.L.J. April 30, 2008)). 24

25 Best Practices to Avoid and Defend SOX Whistleblower Claims Defending a SOX Whistleblower Claim D. Causation The protected activity must be a contributing factor in the adverse action. (See Harp v. Charter Communications, Inc., No (7th Cir. Mar. 16, 2009)) If the adverse action would have been taken for other reasons, namely a reduction in force or a performance issue, an essential element is missing from the employee s prima facie case. (See Robinson v. Morgan Stanley, ARB No , ALJ No SOX 44 (ARB Jan. 10, 2010)) Where a significant intervening event (e.g. violation of company policy warranting discipline) occurs after an employee blows thewhistle, causationfails fails. (See Fraser v. Fiduciary Trust Co., Int'l, No. 1:04 cv (S.D.N.Y. Aug. 25, 2009) (case below 2003 SOX 28)) A well managed termination processes, a business rationale, and supporting documentation are vital to these arguments. 25

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