Portfolio Media, Inc. 648 Broadway, Suite 200 New York, NY 10012 www.law360.com Phone: +1 212 537 6331 Fax: +1 212 537 6371 customerservice@portfoliomedia.com The Scope Of Protected Activity Under SOX Friday, Aug 10, 2007 --- Section 806 of the Sarbanes-Oxley Act, 18 U.S.C 1514A, creates a civil cause of action to protect whistleblowing employees against retaliation for reporting securities law violations or fraud against the shareholders of a public corporation. The Department of Labor s interpretive regulations state that [a] determination that a violation has occurred may only be made if the complainant had demonstrated that protected behavior or conduct was a contributing factor in the unfavorable personnel action alleged in the complaint. Thus, to succeed under 806, a complainant must first establish that he has engaged in protected activity. One unsettled question about the scope of protected activity is whether it should include conduct that is already within the scope of an employee s normal job duties. Although such persons may, strictly speaking, provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes fraud, as the Act requires, there is a certain interpretive logic to the notion that employees should never automatically meet the protected activity requirement by virtue of doing their jobs. Instead, protected whistleblowing should be the act of going above and beyond, of sticking one s neck out for the good of the shareholders. Examined another way, because it is counterintuitive that an employer would discharge an employee for competently performing the very duties and responsibilities the employee was hired to perform for doing his job, rather than not doing his job it makes sense that Congress did not intend this special whistleblower cause of action to extend to employees who are essentially being paid to be whistleblowers. Some decisions have expressly held, and others have at least suggested, that complaints that occur within an employee s normal job duties do not constitute protected activity. Although some of this case law involved whistleblower provisions of federal statutes other than SOX, the same principle has been expressly adopted by at least one Administrative Law Judge in a SOX case. In Grant v. Dominion East Ohio Gas, 2004-SOX-63, 2005 DOLSOX LEXIS 79 (ALJ March 10, 2005), the complainant, an engineering technician for an All Content Copyright 2007, Portfolio Media, Inc. 1
energy utilities provider, alleged that he had been suspended by his employer for questioning his supervisors about accounting irregularities, namely, whether certain accounting entries and billing summaries were accurate. The company countered that he had been suspended for violating company policy concerning employee conduct. The complaint was dismissed because the utility was not a publicly traded company covered by SOX. Nevertheless, the Administrative Law Judge proceeded to rule on the merits of the claims as well, finding, among other things that Grant had not engaged in any protected activity, primarily because none of his complaints raised the specter or even hinted at the possibility of fraud on the shareholders. Significantly, however, the Administrative Law Judge also noted that because part of the claimant s duties as an engineering technician was to monitor project accounts for errors, complaints in this area arose within the context of his job and were not protected activity; otherwise, any time [Claimant] raised a question about the company s accounting programs or procedures or about anything else regarding the everyday functioning of the company, he would be engaging in protected activity. Id. at *112-13, *129 n.46. In Getman v. Southwest Securities, Inc., ARB No. 04 059, 2005 DOLSOX LEXIS 18 (ARB July 29, 2005), the Administrative Review Board overturned an Administrative Law Judge s decision in favor of a stock analyst who claimed that her manager had pressed her to make a more favorable rating on a stock than she had given it, and terminated her employment thereafter. As part of the normal course of her duties, the analysts ratings were subjected to examination by a review committee, which asked questions, requested further research, suggested additions, and tested the analyst s knowledge and conclusions. The Administrative Review Board held that [i]n the context of a review committee meeting..., where disagreement over a rating may be a normal part of the process, the analyst must communicate a concern that the employer s conduct constitutes a violation in order to have whistleblower protection. Id. at *18. (emphasis added). Thus, Getman suggests a conclusion similar to that in Grant, that employees who complain or object in the normal course of their job duties are not engaged in protected activity. Compelling support for the notion that complaints within the context of an employee s normal job duties should not be considered protected activity can also be found in cases decided under statutes other than SOX. In Sassé v. Dep t of Labor, 409 F.3d 773, 777 (6th Cir. 2005), the plaintiff was an Assistant United States Attorney ( AUSA ) whose job was to All Content Copyright 2007, Portfolio Media, Inc. 2
investigate and prosecute environmental crimes under the Clean Air Act, Solid Waste Disposal Act, and Water Pollution Control Act, each of which contain whistleblower protections that prohibit employers from discharging employees for engaging in protected activity, i.e., reporting environmental violations or instituting proceedings resulting from the administration or enforcement of the statutes. After a successful indictment against a particular polluter, Sassé determined that NASA might be engaged in illegal dumping of hazardous waste at a landfill adjacent to the site at issue in the indictment, and proceeded to investigate. Sassé claimed that the Department of Justice subsequently retaliated against him for these prosecutions and investigations by giving him less favorable performance ratings, a heavier case load, and a drunken secretary, and denying him training and office supplies. Sassé filed a claim with the Department of Labor, but an Administrative Law Judge dismissed the claim as pled, finding that because Sassé had a duty as an AUSA to prosecute and investigate environmental crimes, these activities were not protected by the whistleblower provisions of the pertinent statutes. Id. at 778. After an unsuccessful appeal to the Administrative Review Board, Sassé appealed to the Sixth Circuit, which held that he had not engaged in protected activity under the whistleblower provisions of the various environmental statutes because his activity was within the scope of his normal job duties. The court relied on precedent under the Whistleblower Protection Act ( WPA ), in which the Federal Circuit had held that the WPA is intended to protect government employees who risk their own personal job security for the advancement of the public good. Id. at 779-80 (quoting Willis v. Dep t of Agriculture, 141 F.3d 1139, 1145 (Fed. Cir. 1998)). Because Sassé had not risked his personal job security by performing the duties required of him as an AUSA employed to investigate and prosecute environmental crime, he could not use such conduct as the basis for a claim that he had been engaged in protected activity. See also Huffman v. Office of Personnel Mgmt, 263 F.3d 1341, 1352 (Fed. Cir. 2001) ( an employee who makes disclosures as part of his normal duties cannot claim the protection of the WPA ). One Administrative Law Judge has expressly adopted the Sixth Circuit s position. In Robinson v. Morgan Stanley/Discover Financial Servs., No. 2005-SOX-44 (March 26, 2007), the claimant was a senior internal auditor responsible for identifying significant financial and securities issues related to SOX. In the course of one of her audits, she submitted a report to audit management regarding, among other things, potentially fraudulent conduct with respect to a bankruptcy reporting problem. All Content Copyright 2007, Portfolio Media, Inc. 3
Dissatisfied with management s lack of responsiveness in taking corrective action, she proceeded to draft a memorandum to the President and CFO of Discover, describing the problems and management s failure to take corrective action. She was terminated several months later. Applying Sassé, the Administrative Law Judge found that, for someone in claimant s position, one of the components of establishing protected activity is showing that the report or complaint involved actions outside the complainant s assigned duties. Slip. Op. at 116. The Administrative Law Judge proceeded to hold that the presentation of her report to audit management was not protected activity because it came within the scope of her normal job duties. She bore no employment risk, the Judge noted, in reporting the deficiency as an auditor. Id. at 117. By elevating her complaint to the President / CFO, however, the claimant went well beyond her assigned duties, and thus, was engaged in protected activity, but only to that extent. Id. at 118. There is, however, some contrary precedent. In a recent case, another Administrative Law Judge found that activities that fall within one s job duties may constitute protected activity if other requisite factors are met for example, having an objectively and subjectively reasonable belief that a violation has been or is being committed, and reporting it to the correct persons or groups specified in the Act. Deremer v. Gulfmark Offshore, Inc., 2006-SOX-2, 2007 DOLSOX LEXIS 46, *93 (ALJ June 29, 2007). Observing that the passage of SOX itself was largely the result of a case of whistleblowing that was within the scope of the employee s normal duties the accountant Sherron Watkins and her internal complaints regarding, and ultimately testimony about, creative accounting procedures at Enron the Administrative Law Judge reasoned that to exclude conduct within the scope of an employee s normal job functions from the definition of protected activity would be contrary to Congressional intent. Id. at *94, 114. Nevertheless, there is a logical appeal to the distinction drawn by the Administrative Law Judge in Robinson between normal reporting duties and going above and beyond to bring a potential violation to the attention of those to whom one does not normally report. Further, even if those working directly in accounting or finance, areas arguably most fertile for fraud against the shareholders, were to be carved out of the exception, there is support for the argument that certain other types of employees who work in an oversight role internal auditors, compliance officers and certain types of in-house attorneys do not risk their personal job security by performing the duties required of them, but rather, are specifically employed to, among other things, prevent a company from violating the law by engaging in fraud on the shareholders. All Content Copyright 2007, Portfolio Media, Inc. 4
Such employees arguably should not be viewed as engaged in protected activity even when they report a reasonable belief that the company is engaged in fraud on the shareholders, at least absent special circumstances in which they have gone above and beyond the normal scope of their duties in the interest of shareholders and the public good. --By John F. Fullerton III, Sullivan & Cromwell LLP John Fullerton joined Sullivan & Cromwell in 2005 as Special Counsel in the Litigation Group, where he concentrates his practice on labor and employment law. All Content Copyright 2007, Portfolio Media, Inc. 5