The Whistle Just Keeps Blowing: Recent Developments in SOX Whistleblower Claims Connie N. Bertram 1 Proskauer Rose LLP Phone: (202) 416-6810 Email: cbertram@proskauer.com Whistleblower Blog: http://www.whistleblower-defense.com/ In recent years, there has been a proliferation of new and expanded federal and state whistleblower protection and reward laws. One of the most notable of these laws is section 806 of the Sarbanes-Oxley Act of 2002 ( SOX ). Fueled by employee-friendly procedures and standards, a growing plaintiffs bar and recent staggering awards, there has been a steady increase in the number of section 806 claims filed with the Occupational Safety and Health Administration ( OSHA ), the agency in the Department of Labor responsible for investigating and adjudicating SOX claims. It is more important than ever that the many employers covered by section 806 develop robust whistleblower policies and take SOX claims seriously. This article provides a summary of the most significant developments over the past twelve months concerning whistleblower claims under SOX. Supreme Court Holds that SOX Protects Employees of Privately-Held Contractors of Publicly-Traded Companies Section 806 of SOX, codified at 18 U.S.C. 1514A, prohibits retaliation against employees of public companies who report specified categories of unlawful conduct. Section 1514A(a) provides that a public company or officer, employee, contractor, subcontractor, or agent... of such company may not discriminate against an employee for engaging in a protected activity. A public company is defined in the statute as a company that registers securities under Section 12 or is required to file reports under Section 15(d) of the Securities Exchange Act of 1934. In its March 2014 decision in Lawson v. FMR LLC, 134 S. Ct. 1158 (2014) the Supreme Court extended Sarbanes-Oxley s whistleblower protections to cover not 1 Ms. Bertram is head of Proskauer s DC Labor & Employment practice, and co-head of the firm s Whistleblowing & Retaliation and Government Contractor Compliance Groups. Ms. Bertram concentrates her practice on whistleblower, government contracts, executive-level and employee mobility counseling, investigations and litigation. Ms. Bertram is co-editor of Proskauer s Whistleblower Defense blog, which provides the latest insights on whistleblower litigation and legislation. Ms. Bertram is the co-author of the ABA s Annual Update Concerning Sarbanes-Oxley Whistleblower Claims, and presented at the ABA s 2014 Mid-Winter Program on SOX whistleblower issues. Ms. Bertram recently served on a panel discussing OSHA whistleblower developments with the Solicitor of Labor sponsored by the ABA. Beijing Boca Raton Boston Chicago Hong Kong London Los Angeles New Orleans New York Newark Paris São Paulo Washington, D.C.
only employees of publicly traded companies, but also employees of those companies contractors. In a 6-3 decision delivered by Justice Ginsburg, the Court held that SOX s whistleblower protection extends to employees of public companies contractors and subcontractors. Lawson v. FMR LLC, No. 12-3, slip op. at 2 (U.S. Mar. 4, 2014). Relying on the text of SOX s whistleblower provision, a majority of the Court ruled that to address the mischief to which Congress was responding, and earlier legislation Congress drew upon... the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors. The majority asserted that its reading of the SOX whistleblower provision was consistent with the purpose of SOX, i.e., the protection of the investing public from fraud by public companies and preventing another Enron debacle. In its sweeping decision, the majority summarily cast aside any concerns regarding potentially limitless application of the statue. For example, the parties (as well as the Department of Labor) recognized a glaring inconsistency in the statute s application if employees of private contractors were covered. The parties and the Department of Labor agreed that employees of public company employees and officers should not be covered by the statute. As FMR pointed out, given that terms contractor and subcontractor appear in a series with the terms officer and employee, the various terms should be given consistent interpretations. The majority s answer to this conundrum was simply to eliminate it by taking the position that employees of public company employees and officers are also covered by the statute. The Court deflected concerns about its ruling back to Congress, noting that if the ruling opens the floodgates for such claims, Congress can easily fix the problem by amending 1514A to remove personal employees of public company officers and employees from the provision s reach. With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from roughly 5,000 public companies to potentially 6 million private ones, including even the smallest Mom and Pop businesses. Indeed, the majority opinion even swept personal employees of public company officers and employees within the reach of SOX. The Court declined to adopt any of the various middle ground approaches that were presented to it during briefing and oral argument. This dramatic expansion of the statute s coverage is arguably contrary to the intended scope of SOX. Employers of every size and type will have to prepare themselves for potential SOX whistleblower retaliation claims, merely because they are a contractor or subcontractor of a publicly traded company. 2
The Second Circuit Adopts the ARB s Broad Interpretation of SOX Protected Conduct In May of 2011, the Administrative Review Board ( ARB ) issued a seminal decision in Sylvester v. Parexel, ARB 07-123, 2007-SOX-039, 2007-SOX-042 (ARB May 25, 2011), broadly construing SOX protected conduct. In Sylvester, the ARB reversed the Administrative Law Judge s ( ALJ ) dismissal of a complaint on grounds that complainants failed to allege that they had engaged in conduct protected by SOX. The ARB held that where the activity involves providing information to one s employer, the complainant need only show that he or she reasonably believes that the conduct complained of constitutes a violation of the laws listed in Section 1514. Further, the Board concluded that a whistleblower need not wait until the illegal conduct occurs to make a complaint, so long as the employee reasonably believes that the violation is likely to happen. Finally, the ARB clarified that a complaint does not have to allege shareholder fraud in order to be protected by SOX. The ARB stated that the legislative history of the law indicates that it was enacted not solely to address securities fraud, but corporate fraud generally. In issuing this decision, the ARB overruled prior authority that had required a complainant to establish that the activity or conduct for which protection is claimed definitively and specifically related to one or more of the laws listed under Section 806(a). Post-Sylvester, a number of federal courts have adopted the ARB s new standard. On August 8, 2014, for example, the Second Circuit applied the Sylvester standard, holding that the ARB s revised interpretation of Section 806, which focuses on the reasonable belief of the whistleblower, more closely aligns with the text of the statute and is persuasive. Nielsen v. AECOM Tech. Corp., 2014 WL 3882488 (2d Cir. Aug. 8, 2014). See also Lockheed Martin Corp. v. Administrative Review Bd., 717 F.3d 1121, 1132 n.7 (10th Cir. 2013) (noting that the ARB explicitly disavowed the definitive and specific evidentiary standard for Sarbanes Oxley complainants ); Wiest v. Lynch, 710 F.3d 121 (3d Cir. 2013) (holding that Sylvester is entitled to Chevron deference). Other Circuits, however, have continued to apply the pre-sylvester definitive and specific standard. In Riddle v. First Tennessee Bank, Nat. Ass n, 497 Fed. App x 588 (6th Cir. 2012) and Tides v. Boeing Co., 644 F.3d 809 (9th Cir. 2011), the 6th Circuit and the 9th Circuit, respectfully, have both applied the definitive and specific standard without any mention of the Sylvester decision. Combining the Lawson decision with the ARB s expansive view of protected activity divorces completely a SOX whistleblower claim from SOX s stated purpose of encourag[ing] and protect[ing] employees who report fraudulent activity that can damage innocent investors in publicly traded companies. If the protected activity question ever reaches the Supreme Court, employers can only hope that the Court will recognize the need for some reasonable limitation on the applicability of the statute. 3
The Fifth Circuit Expands the Definition of Adverse Action On November 12, 2014, in Halliburton, Inc. v. Administrative Review Bd., 771 F.3d 254 (5th Cir. 2014), the Fifth Circuit affirmed an ARB s decision that disclosing the identity of a whistleblower may constitute an adverse action under Section 806 of SOX. The decision presents a number of risks for employers even when they are acting conscientiously and in good faith and is mandatory reading for in-house employment counsel and compliance professionals. Menendez filed a complaint with OSHA, alleging that Halliburton retaliated against him in violation of Section 806 by disclosing his identity as the whistleblower to his colleagues. An ALJ dismissed his complaint, reasoning that the disclosure was not an actionable adverse employment action. On appeal, the ARB ruled that the ALJ erred in determining that the disclosure was not an adverse action and remanded the action for additional findings. On remand, the ALJ ruled that Halliburton established its affirmative defense and demonstrated a legitimate business reason for disclosing Menendez s identity as a whistleblower. The ARB again reversed, ruling that Halliburton failed to prove by clear and convincing evidence that Halliburton s disclosure of Menendez s identity was dictated by a legitimate, nondiscriminatory business reason unrelated to his protected activity. The Fifth Circuit upheld the ARB s ruling, finding that [i]t is inevitable that such a disclosure would result in ostracism. It noted that when the identity of a whistleblower is identified, the boss could be read as sending a warning, granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high. In its ruling, the Fifth Circuit embraced non-sox precedent recognizing that a whistleblower need not show that the employer s challenged action was driven by an improper motive. The Halliburton decision creates a Catch-22 for employers seeking in good faith to preserve evidence relevant to anticipated claims. In order to identify and preserve all evidence relevant to the whistleblower s underlying claims of fraud and his or her own retaliation claims, it is often necessary to identify the name of (or, in some instances, details concerning) the whistleblower and his claims. Given the risk this decision creates, employers need to be closely familiar with this ruling when crafting litigation holds for anticipated and pending claims, particular concerning current employees. Furthermore, the conclusion that a whistleblower need not show a retaliatory motive to establish a whistleblower retaliation claim is curious indeed. By definition, retaliation means a desire to exact retribution for particular conduct. The Fourth Circuit Hands Employers a Significant Victory on Their Causation Defense On May 12, 2014, the Fourth Circuit affirmed summary judgment on a SOX whistleblower claim in the former employer s favor, concluding that the alleged protected activity was not a contributing factor in the adverse action. Feldman v. Law Enforcement Assoc. Corp., 752 F.3d 339 (4th Cir. 2014). The plaintiffs filed suit under Section 806 of SOX 4
alleging they were discharged in retaliation for: (1) reporting to the board and the government about potentially illegal exports; (2) objecting to allegedly falsified board meeting minutes; (3) objecting to alleged leaks of information by outside directors; (4) objecting to and refusing to pay legal bills; and (5) notifying the government of suspected insider trading. The district court granted the company summary judgment, finding that plaintiffs failed to prove their alleged protected activities were a contributing factor in the decision to terminate them. In affirming the district court s decision, the Fourth Circuit concluded that there was insufficient evidence for the plaintiffs to establish that their protected conduct was a contributing factor. First, the court noted that there was an appreciable temporal gap between the alleged protected activity and terminations. Second, one of the plaintiffs engaged in conduct (described in the opinion as throw[ing] colleagues under the bus ) that constituted an intervening event that barred a finding of causation. Third, one of the plaintiffs could not establish causation because he was asked to stay at the company after he participated in the same alleged protected activities as the other plaintiffs. Finally, the court found that the plaintiffs opinions regarding their own performance were not sufficient to create disputed issues of material fact, noting that the court cannot sit as a super-personnel department challenging the decisions of employers. This ruling is one of the few bright lights for covered employers in the recent rulings applying section 806. Experienced EEO counselors and litigators will note language in the decision consistent with the business judgment rule, a standard often used by employers to prevail on summary judgment in employment litigation. Although the stated legal standards may sound insurmountable, employers should continue to raise and support traditional theories and defenses in litigation before the ARB and federal courts. As this decision demonstrates, judges should be willing to grant summary judgment in situations where an employer can prove that it made a good faith, justified employment decision. Courts Expand the Scope of Damages Available Under SOX A prevailing SOX whistleblower can recover all relief necessary to make the employee whole, including reinstatement, back pay, attorney s fees, and costs. 18 U.S.C. 1514A(c). Although reinstatement is the preferred and presumptive remedy to make an employee whole, some ALJs have awarded front pay in lieu of reinstatement. See, e.g., Hagman v. Washington Mutual Bank, Inc., 2005-SOX-00073, at 26-30 (ALJ Dec. 19, 2006). But, until recently, it was unclear whether federal district courts would be willing to award front pay. In Jones v. SouthPeak Interactive Corp., 986 F. Supp. 2d 680 (E.D. Va. Nov. 19, 2013), the U.S. District Court for the Eastern District of Virginia ruled that front pay may be ordered in lieu of reinstatement, finding support for a front pay award under section 806 from the Department of Labor s November 3, 2011 Interim Final Rule. However, the court ultimately determined that front pay was not warranted under the facts of this case. The District Court also ruled that the plaintiff was entitled to emotional distress damages. On appeal, the Fourth Circuit joined the Fifth Circuit and Tenth Circuit, holding that emotional distress damages are available under SOX. Jones v. SouthPeak Interactive Corp. of Del., 777 5
F.3d 658 (4th Cir. 2015). The Court reasoned that SOX provides for all relief necessary to make the employee whole, including remedies not specifically enumerated in the statute. As with Title VII retaliation claims, there are ways an employer can mitigate emotional distress damages. The keys are to take the investigation seriously, maintain the confidentiality of the investigation wherever possible, and to make sure the process is transparent for the whistleblower. 2 2 Jones is also the first federal Circuit Court decision to find that a four-year statute of limitations applies to SOX whistleblower retaliation claims. As a consequence of this ruling, it is advisable for employers to collect and retain all evidence relevant to anticipated whistleblower claims for at least four years. In addition, employers should take steps to preserve the statements of and accessibility to key witnesses to any anticipated claim. 6