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Frequently Asked Questions About the Sarbanes-Oxley Corporate Whistleblower Protection Law from Experienced SOX Whistleblower Lawyers
Scope of Sarbanes-Oxley Corporate Whistleblower Protection
The whistleblower protection provision of SOX protects:
- employees, officers, and agents of publicly traded companies (companies issuing securities registered under section 12 of the Securities Exchange Act of 1934 or required to file reports under section 15(d) of the Securities Exchange Act of 1934);
- employees of any subsidiary or affiliate of a publicly-traded company whose financial information is included in the consolidated financial statements of such company;
- employees of contractors or subcontractors of public companies, including the attorneys and accountants who prepare public companies’ SEC filings;[i] and
- employees of nationally recognized statistical rating organizations (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c).
Employees not protected by SOX may have a remedy under other whistleblower protection laws.
Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation regarding any conduct that they reasonably believe violates:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders
when the information or assistance is provided to or the investigation is conducted by:
- a federal regulatory or law enforcement agency;
- any Member of Congress or any committee of Congress; or
- a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).
Significantly, SOX protects internal disclosures, such as an employee raising a concern to a supervisor about misleading financial data in an SEC filing.
The SOX whistleblower protection law also prohibits retaliation for filing, causing to be filed, or otherwise assisting in a proceeding filed or about to be filed relating to:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders.
SOX does not limit its application to reported misconduct of the employer or any other particular perpetrator. Disclosure of third-party fraud may be covered under SOX. See Funke v. Fed. Express Corp., ARB No. 09–004 (July 8, 2011)
For more information about protections and remedies for SOX whistleblowers, download our guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.
Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation regarding any conduct disclosing conduct that they reasonably believe violates:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders
when the information or assistance is provided to or the investigation is conducted by:
- a federal regulatory or law enforcement agency;
- any Member of Congress or any committee of Congress; or
- a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).
Examples of SOX protected activity (SOX protected whistleblowing) include disclosures concerning:
- Circumventing internal controls or failing to maintain adequate internal controls over financial reporting.
- Submitting false internal control certifications. Section 906 of SOX mandates that the chief executive officer and chief financial officer of any issuer to certify that the periodic reports fully comply with the requirements of section 13(a) or 15(d) of the Securities Exchange Act and that the information contained therein fairly present the financial condition of the issuer.
- Failing to prepare financial statements in accordance with generally accepted accounting principles (GAAP). See 17 C.F.R. §§ 244.100(c).
- Concealing material off-balance sheet transactions, which is required by Section 401(a)(ii) of SOX.
- Inaccurately recording personal use of corporate funds as business expenses in a company’s books and records.
- Failing to disclose Section 403 transactions involving management and principal stockholders. See 17 C.F.R. § 229.404.
- Falsifying corporate accounting to underreport corporate expenses.
- Wire fraud, i.e., a deceptive scheme to deprive the victim of money or property carried out using a wire transmission.
A SOX retaliation plaintiff need not demonstrate that they disclosed an actual violation of securities law; only that they reasonably believed that their employer was defrauding shareholders or violating an SEC rule.[i] Indeed, a reasonable but mistaken belief is protected under SOX. “To demonstrate that a plaintiff engaged in a protected activity, a plaintiff must show that [s]he had both a subjective belief and an objectively reasonable belief that the conduct [s]he complained of constituted a violation of relevant law.”[ii]
Requiring a SOX complainant to demonstrate that they disclosed an actual violation is contrary to Congressional intent in that the legislative history of Section 806 specifically states that the reasonableness test “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.”[iii]
“A whistleblower complaint concerning a violation about to be committed is protected as long as the employee believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern.”[i]
As a New York federal judge recently pointed out, limiting SOX whistleblower protection to disclosures of actual fraud “would lead to absurd results” by encouraging an employee to delay blowing the whistle until a potential violation has ripened to an actual violation.[ii] Section 806 was “designed to encourage insiders to come forward without fear of retribution,” and therefore “[i]t would frustrate the purpose of Sarbanes-Oxley to require an employee, who knows that a violation is imminent, to wait for the actual violation to occur when an earlier report possibly could have prevented it.”[iii] As the purpose of SOX is to protect and encourage greater disclosure, only providing whistleblower protection to individuals exposing existing fraud would be counterproductive, as the harm SOX seeks to deter would need to be occurring for the protection to attach. Stewart v. Doral Financial Corp., 997 F.Supp.2d 129 (2014). See also Ronnie v. Office Depot, Inc., ARB No. 2019-0020, slip op. at 4 (ARB Sept. 29, 2020)(A complainant does not need to show that he reported an actual violation, but “can engage in protected activity when he reports a belief of a violation that is about to occur or is in the stages of occurring.”).
The ARB has held that where a government investigation failed to substantiate a whistleblower’s disclosure, the whistleblower can still demonstrate that they had an objectively reasonable belief that there was a violation. In Menendez v. Halliburton, Inc., ARB No. 09-002-003, ALJ No. 2007-SOX-5, at 13-14 (ARB Sept. 13, 2011), the complainant believed that his employer Halliburton was not complying with accounting standards related to revenue recognition. His disclosures prompted two internal investigations and an SEC investigation. The SEC ultimately approved of the accounting methods. The ARB upheld the ALJ’s finding that Menendez’s belief was both subjectively and objectively reasonable, cautioning that the fact that an agency found there was no violation of the relevant law does “not necessarily” undermine the reasonableness of the belief. Id. at 13-14.
In Sylvester, the ARB clarified the low bar to establish protected conduct:
Notwithstanding the above, a violation of a law cited in Section 1514A need not actually occur for a complainant’s report to be SOX-protected activity. A whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern. See, e.g., Melendez, ARB No. 96-051, slip op. at 21 (“It is also well established that the protection afforded whistleblowers who raise concerns regarding statutory violations is contingent on meeting the aforementioned ‘reasonable belief’ standard rather than proving that actual violations have occurred.”); Crosby v. Hughes Aircraft Co., 1985-TSC-002, slip op. at 14 (Sec’y Aug. 17, 1993) (required reasonable belief that the employer “was violating or about to violate the environmental acts”). Accord Yellow Freight Sys., Inc. v. Martin, 954 F.2d 353, 357 (6th Cir. 1992) (protection under Surface Transportation Assistance Act not dependent upon whether complainant proves a safety violation); Collins, 334 F. Supp. 2d at 1376. Consistent with this line of authority, the ARB has held that an employee’s whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer’s conduct constitutes a violation of one of the six enumerated categories of law under Section 806. See, e.g., Halloum v. Intel Corp., ARB No. 04-068, ALJ No. 2003-SOX-007, slip op. at 6 (ARB Jan. 31, 2006).
Similarly, the Third Circuit concluded in In Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013):
To hold that an employer could not have suspected that the plaintiff was engaged in protected activity because the communication did not recite facts showing an objectively reasonable belief in the satisfaction of each element of one of the listed anti-fraud provisions would eviscerate § 806. An employee may not have access to information necessary to form a judgment on certain elements of a generic fraud claim, such as scienter or materiality, and yet have knowledge of facts sufficient to alert the employer to fraudulent conduct. When an employee communicates these facts to a supervisor, the employer has a sufficient basis to suspect that the employee is protected against reprisal for communicating that information.
[i] Sylvester v. Parexel, ARB Case No. 07-123, 2011 WL 2165854 at *13 (DOL May 25, 2011).
[ii] Murray v. UBS Securities, LLC, 2017 WL 1498051 (S.D.N.Y. Apr. 25, 2017). See also Gladitsch v. [email protected], Ogilvy, Mather WPP Group USA Inc., 2012 U.S. Dist. LEXIS 41904 at *22-23 (S.D.N.Y. 2011) (“The employee’s protected activity need not describe an actual violation of the law, as long as it is based on a reasonable, even if mistaken, belief that the employer violated one of these enumerated categories.”).
[iii] Id. (citations omitted).
[i] Wiest v. Lynch, 710 F.3d 121, 132 (3d Cir. 2013)
[ii] Leshinsky v. Telvent GIT, S.A., 942 F.Supp.2d 432, 444 (S.D.N.Y.2013) (internal quotation marks and citations omitted).
[iii] Legislative History of Title VIII of HR 2673: The Sarbanes-Oxley Act of 2002, Cong. Rec. S7418, S7420 (daily ed. July 26, 2002), available at 2002 WL 32054527.
And as noted in Van Elswyk v. RBS Securities, Inc., (D. Conn. Aug. 9, 2017):
“The objective prong of the reasonable belief test focuses on the `basis of knowledge available to a reasonable person in the circumstances with the employee’s training and experience.'” Nielsen, 762 F.3d at 221 (quoting Sharkey v. J.P. Morgan Chase & Co., 805 F. Supp. 2d 45, 55 (S.D.N.Y. 2011)). Of course, “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers.” Id. As several circuit courts have made clear, “[i]f reasonable minds could disagree on this issue, the objective reasonableness of an employee’s belief should not be decided as a matter of law. . . .” Allen v. Admin. Rev. Bd., 514 F.3d 468, 477-78 (5th Cir. 2008) (citing Lipphardt v. Durango Steakhouse of Brandon, Inc., 267 F.3d 1183, 1188 (11th Cir. 2001); Fine v. Ryan Int’l Airlines, 305 F.3d 746, 752-53 (7th Cir. 2002)).
Finally, as the Sixth Circuit has held, “[t]he well-established intent of Congress supports abroad reading of the statute’s protections.” Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797, 810 (6th Cir. 2015); Rather, “[t]he well-established intent of Congress supports abroad reading of the statute’s protections.” Id. Accordingly, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines [Sarbanes-Oxley’s] purpose and conflicts with the statutory design, which turns on employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Id.
As the 10th Circuit held in Reznik v. inContact, Inc., — F.4th —-2021 WL 5625781 (10th Cir. Dec 1, 2021), objective reasonableness does not require a showing of an actual violation:
Other circuits have also considered attendant circumstances alongside the law in evaluating objective reasonableness in Title VII retaliation cases. See E.E.O.C. v. Rite Way Serv., Inc., 819 F.3d 235, 240 (5th Cir. 2016); Boyer-Liberto v. Fontainebleau Corp., 786 F.3d 264, 282–83 (4th Cir. 2015) (en banc) (majority opinion); Kelly v. Howard I. Shapiro & Assocs. Consulting Eng’rs, P.C., 716 F.3d 10, 14–17 (2d Cir. 2013) (per curiam). We find those decisions instructive.In Boyer-Liberto v. Fontainebleau Corp., the Fourth Circuit evaluated a Title VII retaliation claim where a white employee had twice called a night club server a “porch monkey.” 786 F.3d at 269–70. “[W]ith guidance from the Supreme Court [in Breeden],” the court considered what standard should determine when an employee’s belief that certain conduct violates Title VII is reasonable. Id. at 284. The court required a “lesser showing” than necessary to meet the legal standard of establishing an actual hostile work environment claim. Id. at 285. As in Breeden, the plaintiff’s belief was “based on an isolated incident.” Id. at 284. Thus, the court considered the severity of the harassment, which involved factors relevant to the legal standard “used to judge whether a workplace is sufficiently hostile or abusive for purposes of a hostile environment claim — specifically, whether the discriminatory conduct ‘is physically threatening or humiliating, or a mere offensive utterance.’ ” Id. at 284 (quoting Harris v. Forklift Sys., Inc., 510 U.S. 17, 23, 114 S.Ct. 367, 126 L.Ed.2d 295 (1993)). The court decided that the plaintiff’s belief was objectively reasonable because “ ‘porch monkey’ is a racial epithet that is not just humiliating, but is degrading and humiliating in the extreme.” Id. at 285 (quotation and citation omitted).In E.E.O.C. v. Rite Way Serv., Inc., the Fifth Circuit also applied a test for determining the objective reasonableness of a plaintiff’s belief that accounted for the “zone of conduct that falls short of an actual violation but could be reasonably perceived to violate Title VII.” 819 F.3d at 242. The court considered several factors: (1) whether the harasser directed conduct at a specific employee; (2) whether a supervisor’s conduct is involved; (3) the context of the conduct, such as understanding multiple incidents in light of one another; and (4) “the setting in which [the plaintiff] voiced her complaint,” that is, whether the employer informed the plaintiff of its sexual harassment policies and what those policies included. See id. at 243–44. These factors were relevant because they drew upon conceptions (from caselaw) about what influences people’s reasonable beliefs in the workplace. See id. at 242–44.
SOX Whistleblowers are not required to show that their disclosures relate “definitively and specifically” to a federal securities law
To be protected under the SOX whistleblower protection law, an employee’s report “need not ‘definitively and specifically’ relate to one of the listed categories of fraud or securities violations in § 1514A.”[i]
SOX whistleblowers are protected if they show that they reasonably believed that the conduct they complained of violated one of the enumerated violations in Section 806. Whistleblowers are not required, however, to tell management or the authorities why their beliefs are reasonable. Nor must their disclosures allege, prove, or approximate the elements of fraud. The employee “need not cite a code section he believes was violated in his communication to his employer, but [his]communication must identify the specific conduct that [he] believes to be illegal.” Starkey v. J.P. Morgan Chase & Co., 805 F.Supp. 2d 45, 57 (S.D.N.Y. 2011).
All that SOX requires an employee to do is prove that they “reasonably believed” that their employer violated or is about to violate federal law.[ii] The focus here is “on the plaintiff’s state of mind rather than on the defendant’s conduct.”[iii] This rule is informed by the court’s recognition that, because “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers,” an employee’s “belief” in their employer’s wrongdoing is “central” to the analysis of SOX-protected conduct.[iv]
A Sixth Circuit opinion in a SOX case demonstrates the importance of broadly construing SOX-protected conduct. In Rhinehimer v. U.S. Bancorp Investments, Inc,.[v] the plaintiff Michael Rhinehimer alerted one of his superiors to unsuitable trades that a coworker made to the detriment of an elderly client. In response, Mr. Rhinehimer’s manager gave him a written warning. The manager admitted that the warning was motivated by the fact that Mr. Rhinehimer’s complaint “prompted a FINRA investigation . . . and anybody associated with this was really feeling the heat.” According to Mr. Rhinehimer, the manager then admonished Mr. Rhinehimer that if he sued the bank, then his career in the city would be over. U.S. Bancorp Investments (“USBII”) placed Mr. Rhinehimer on a performance-improvement plan requiring him to increase his monthly revenue to $40,000. Shortly thereafter, the bank fired him.
At trial, a jury found that USBII disciplined and fired Mr. Rhinehimer in deliberate retaliation for raising his concerns about the unsuitable trades. On appeal, USBII argued, that Mr. Rhinehimer was required to establish facts from which a reasonable person could infer each of the elements of an unsuitability-fraud claim. These elements include the misrepresentation or omission of material facts, and that the broker acted with intent or reckless disregard for the client’s needs.
The Sixth Circuit, however, held that SOX protects “all good faith and reasonable reporting of fraud,” with a focus on “employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Therefore, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines this purpose and conflicts with the statutory design.” The Sixth Circuit affirmed the jury verdict because there was sufficient evidence to sustain the jury’s finding that Mr. Rhinehimer reasonably believed that certain trades constituted unsuitability fraud. A contrary result would have resulted in employees—due to lack of tangible evidence—refraining from reporting fraud until after investors have already been harmed.
In Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013), the Third Circuit confirmed that a SOX whistleblower need not be an expert in securities law to engage in SOX protected conduct: “[An]t employee should not be unprotected from reprisal because she did not have access to information sufficient to form an objectively reasonable belief that there was an intent to defraud or the information communicated to her supervisor was material to a shareholder’s investment decision. “Congress chose statutory language which ensures that ‘an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories [set forth in § 806] is protected.’ ” Van Asdale, 577 F.3d at 1001 (quoting Allen, 514 F.3d at 477). An employee’s lack of knowledge of certain facts that pertain to an element of one of the anti-fraud laws would be relevant to, but not dispositive of, whether the employee did have an objectively reasonable belief that a listed anti-fraud law had been violated. Indeed, whether an employee has an objectively reasonable belief may not always be decided as a matter of law. See Allen, 514 F.3d at 477–78.”
[i] Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 224 (2d Cir. 2014)
[ii] Murray, 2017 WL 1498051, at *10.
[iii] Id., at *10 (quoting Guyden v. Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008), superseded on other grounds by statute).
[iv] Id., at *9 (quoting Nielsen, 762 F.3d at 221 (alterations in original)).
[v] Rhinehimer v. U.S. Bancorp Invs., Inc., 787 F.3d 797 (6th Cir. 2015).
Yes. The whistleblower protection provision of the Sarbanes-Oxley Act protects an employee filing, testifying, participating in, or otherwise assisting in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of federal securities law. Also, the Supreme Court’s decision in Crawford v. Metropolitan Government of Nashville and Davidson County, Tennessee, 129 S.Ct. 846 (2009), construing an analogous anti-retaliation provision suggests that an employee’s disclosures during an internal investigation are protected.
The Court held in Crawford that”‘[w]hen an employee communicates to her employer a belief that the employer has engaged in . . . a form of employment discrimination, that communication’ virtually always ‘constitutes the employee’s opposition to the activity.'” Examples of protected opposition include:
- accompanying a coworker to the human resources office in order to file an internal EEO complaint;
- complaining to management about discrimination against oneself or coworkers;
- taking a stand against an employer’s discriminatory practices not by refusing to follow a supervisor’s order to fire a junior worker for discriminatory reasons; or
- an employee who did not initiate a complaint answers an employer’s questions about potential discrimination.
EEOC Enforcement Guidance on Retaliation and Related Issues
In a leading case defining the scope of SOX protected conduct, the ARB held:
SOX protection applies to the provision of information regarding not just fraud, but also “violation of . . . any rule or regulation of the Securities and Exchange Commission.” 18 U.S.C.A. § 1514A(a)(1). . . . A complainant need not express a concern in every possible way or at every possible time in order to receive protection, so long as the complainant’s actual communications “provide information, cause information to be provided, or otherwise assist in an investigation” regarding a covered violation. 18 U.S.C.A. § 1514A(a)(1).
Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB Case No. 04-149, 2004-SOX-11 (May 31, 2006) (emphasis added).
Some of the options to prove that a disclosure was objectively reasonable include 1) showing that the SEC took enforcement action to penalize similar conduct; 2) offering testimony from co-workers to prove that other employees shared similar concerns about the unlawful conduct; and 3) offering expert witness testimony.
A 2016 unpublished Fourth Circuit decision in Deltek, Inc. v. Dep’t of Labor underscores the importance of coworker testimony in proving the objective reasonableness of a disclosure.[i] In this case, soon after starting a new job in the IT department of Deltek Inc., Ms. Gunther noticed a lack of clear procedure and documentation for Deltek’s billing disputes with Verizon Business. Ms. Gunther suspected that Deltek employees were subjecting Verizon to unfounded billing disputes in order to conceal a shortfall in Deltek’s telecommunications budget.
Ms. Gunther’s coworker, who was responsible for managing the billing relationship between Deltek and Verizon, agreed with her concerns, after which Ms. Gunther then reported to her immediate supervisor. Soon thereafter, Ms. Gunther began to experience hostility at work. She then escalated her concerns of ongoing fraud in a letter to Deltek’s general counsel, which she copied to the SEC. Deltek’s general counsel met with Ms. Gunther and asked her to gather information about her concerns. The general counsel then investigated Ms. Gunther’s report and found that no improper activity had occurred. Despite this, Ms. Gunther witnessed her coworkers shredding documents.
Eventually, Ms. Gunther was fired for being “confrontational and disruptive.” Deltek argued that Ms. Gunther’s belief that Deltek was violating securities laws was not objectively reasonable because she lacked the education and experience necessary to recognize securities fraud; she, in fact, did not have a college degree. The Fourth Circuit rejected this argument, stating that a determination of the reasonableness of Ms. Gunther’s belief warranted consideration of the “factual circumstances,” including information that Ms. Gunther learned from coworkers. The court agreed with the administrative law judge’s (ALJ’s) determination that “in forming her belief Gunther reasonably relied on her close dealings with [her coworker], who did have extensive experience in Verizon invoicing . . . [and] who was himself a ‘credible, convincing witness at the hearing.’” Therefore, the Fourth Circuit held Ms. Gunther’s belief that Deltek was violating securities laws as reasonable.
[i] See Deltek, Inc. v. Dep’t of Labor, Admin. Review Bd., No. 14-2415, 2016 WL 2946570 (4th Cir. May 20, 2016).
A whistleblower’s motive for engaging in protected conduct is irrelevant. See Henderson v. Wheeling & Lake Erie Ry., ARB No. 11-013, ALJ No. 2010-FRS-012, slip op. at 14 (ARB Oct. 26, 2012); Malmanger v. Air Evac EMS, Inc., ARB No. 08-071, slip op. at 10-11, ALJ No. 2007-AIR-8 (ARB July 2, 2009). The law does not require a noble or altruistic motive for blowing the whistle.
To engage in protected whistleblower under the SOX whistleblower protection law, a whistleblower need only have a reasonable belief that the conduct violates federal securities laws or the other categories of protected conduct under Section 806 of SOX (disclosing (1) federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud; (2) a potential violation of any rule or regulation of the SEC; or (3) any provision of federal law relating to fraud against shareholders.
In a March 2019 ARB opinion in Hernandez v. Metro-North Commuter Railroad Co., Inc., ARB No. 17-016, ALJ No. 2016-FRS-23, the ARB noted that “a complainant’s motive in making a protected complaint is irrelevant,” citing Guay v. Burford’s Tree Surgeons, Inc., ARB No. 2006-0131, ALJ No. 2005- STA-00045, slip op. at 7 (ARB Jun. 30, 2008) ((“However, ‘where the complainant has a reasonable belief that the respondent is violating the law, other motives he may have for engaging in protected activity are irrelevant.”‘) (quoting Diaz-Robainas v. Florida Light & Power Co., 1992-ERA-00010 (Sec’y Jan. 19, I996))).
Sarbanes Oxley Protected Conduct Does Not Require a Showing of Materiality
The great weight of authority holds that there is no independent materiality element to establish protected whistleblowing under Section 806 of SOX.
Most recently, Judge Brantley Starr soundly rejected an employer’s argument that SOX protects only disclosures about material violations: “Materiality isn’t in the Sarbanes-Oxley whistleblower law. It isn’t in the four of the six specifically defined trigger laws.” Seybold v. Charter Communications Inc., 2022 WL 675804 (N.D.Tx. Mar. 7, 2022) (citing 18 U.S.C. §§ 1341, 1343, 1344, 1348).
In Donaldson v. Severn Sav. Bank, F.S.B.,[i] Vanessa L. Donaldson brought a SOX whistleblower action against her former employer, Severn Savings Bank (“Severn”), claiming she was unlawfully terminated after she reported to her supervisor her suspicions about an inaccurate bank report. Specifically, Ms. Donaldson alleged that she informed her supervisor about a scheme in which the commercial/retail manager for Ms. Donaldson’s branch falsified the retail production report for the third quarter of 2013, in order to collect unearned bonus pay.
Severn argued that Ms. Donaldson failed to allege she engaged in protected activity because she failed “to allege any facts whatsoever that would indicate any material misrepresentations (or omissions) were reported to Severn’s shareholders,” and so she lacked an objectively reasonable belief that she was disclosing shareholder fraud. The court rejected Severn’s narrow construction of SOX:
[T]he federal criminal fraud statutes . . . prohibit the scheme to defraud, not a completed fraud. . . .Materiality of falsehood . . . was a common-law element of actionable fraud at the time these fraud statutes were enacted and is an incorporated element of the mail fraud, wire fraud, and bank fraud statutes. . . . But § 1514A carries no independent materiality element. Consequently, Donaldson’s objective belief need not be about a material matter, as Severn has argued. Rather, her objective belief must be based on facts permitting an inference that [the manager’s] allegedly false representation was material to Severn’s course of conduct.[ii]
The court found that Ms. Donaldson met this standard because the manager’s alleged inflation of the retail production figures was intended to, and likely would, affect the size of a bonus awarded him by Severn. Therefore, the court concluded, “it may be inferred from Donaldson’s complaint that she had an objectively reasonable belief that [the manager was] engaged in a scheme to defraud Severn.”[iii]
Similarly, the Third Circuit held in Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013) that a SOX whistleblower need not prove materiality: “[R]equiring a complainant to prove or approximate the specific elements of a securities law violation contradicts the statute’s requirement that an employee have a reasonable belief of a violation of the enumerated statutes.” Sylvester, 2011 WL 2165854, at *18. The ARB further explained, “a complainant can engage in protected activity under Section 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation.” Id. We find this interpretation to be reasonable because there is nothing in the statutory text that suggests that a complainant’s communications must assert the elements of fraud in order to express a reasonable belief that his or her employer is violating a provision listed in Section 806. Therefore, the District Court erred by requiring that an employee’s communication reveal the elements of securities fraud, including intentional misrepresentation and materiality.”
Per SEC Staff Accounting Bulletin No. 99 (SAB 99) and well-established precedent, exclusive reliance on quantitative benchmarks to assess materiality in preparing financial statements and performing audits of those financial statements is inappropriate; misstatements are not immaterial simply because they fall beneath a numerical threshold. In Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8th Cir. 2003), the Eighth Circuit relied on the following principles to assess materiality:
- A fact is deemed material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as substantially altering the mix of information available to the investor.
- Information can be material because a reasonable investor would be interested in knowing that the senior managers of a company were oblivious to their underlings’ malfeasance. Management’s integrity is important to investors.
- In order to take the decision about materiality away from the jury, the circumstances must make it obvious why a reasonable investor would not be concerned about the facts misrepresented
- The importance of the misrepresented facts should not be judged with the advantage of hindsight. The test is whether there is “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.” Rodney v. KPMG Peat Marwick, 143 F.3d 1140, 1144 (8th Cir. 1998) (quotations omitted) (emphasis added). This requires the factfinder to look at the information from the perspective of a reasonable investor at the time of the misrepresentation, not from the perspective of a reasonable investor looking back on how events unfolded.
Pursuant to SAB 99, “among the considerations that may well render material a quantitatively small misstatement of a financial statement item are –
- whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate14
- whether the misstatement masks a change in earnings or other trends
- whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise
- whether the misstatement changes a loss into income or vice versa
- whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability
- whether the misstatement affects the registrant’s compliance with regulatory requirements
- whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements
- whether the misstatement has the effect of increasing management’s compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation
- whether the misstatement involves concealment of an unlawful transaction.”
[i] No. JKB-15-901, 2015 WL 7294362, at *3 (D. Md. Nov. 18, 2015).
[ii] Id. at *3 (citations omitted).
A SOX complainant need not allege or prove shareholder fraud to receive SOX’s protection. SOX was enacted to address “corporate fraud generally,” and so a reasonable belief that a violation of “any rule or regulation of the Securities and Exchange Commission” could lead to fraud is protected, even if the violation itself is not fraudulent.
For example, SOX protects a disclosure about deficient internal controls over financial reporting, even though there is no allegation of actual fraud.[i] In Sylvester, the ARB emphasized the purpose of Section 806 of SOX is “to protect and encourage greater disclosure” by exposing existing fraud as well as potentially fraudulent behavior, expressing a concern that “the purposes of the whistleblower protection provision will be thwarted if a complainant must, to engage in protected activity, allege, prove, or approximate” the substantive elements of a given category of fraud.
As the Third Circuit held, SOX is meant to “protect people who have the courage to stand against institutional pressures and say plainly, ‘what you are doing here is wrong’ . . . in the particular way identified in the statue at issue.”[ii] An employee has fulfilled that purpose if they disclose conduct that is within the “ample bounds” of the anti-fraud statutes. Such an employee is therefore protected even if they lacked “access to information sufficient to form an objectively reasonable belief” as to the specific elements of fraud. And they are similarly protected even if their belief is “reasonable but mistaken.”
Finally, the plain meaning of Section 806 unambiguously covers more than just disclosures concerning shareholder fraud:
Section 1514A states, in pertinent part, that a publicly traded company may not retaliate against an employee who provides information that the employee “reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” 18 U.S.C. § 1514A(a)(1). Section 1514A contains six provisions that enumerate six specific forms of misconduct which, if reported by an employee, protect the whistleblower from employer retaliation: (1) § 1341 (mail fraud); (2) § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. The first four provisions are statutes that, as written by Congress, are not limited to types of fraud related to SOX. By listing certain specific fraud statutes to which § 1514A applies, and then separately, as indicated by the disjunctive “or”, extending the reach of the whistleblower protection to violations of any provision of federal law relating to fraud against securities shareholders, § 1514A clearly protects an employee against retaliation based upon the whistleblower’s reporting of fraud under any of the enumerated statutes regardless of whether the misconduct relates to “shareholder” fraud.
O’Mahony v. Accenture Ltd and Accenture LLP, 07 Civ. 7916 (S.D.N.Y. Feb. 5, 2008).
A complainant need not establish the elements required in a securities fraud action or describe an actual violation of law to demonstrate a reasonable belief that an employer committed SOX-related misconduct. See Zinn v. American Commercial Lines, ARB No. 10-029, ALJ No. 2009-SOX-025, slip. op. at 8 (ARB May 28, 2012). A clear and reasonable belief about a violation of any SEC rule or regulation, even if devoid of any accusation of securities fraud, could constitute an objective belief. Id.
Courts have recognized that it would it be unfair to expect a plaintiff seeking to inform his boss of financial misbehavior to have a working knowledge of the United States Code. See, e.g., Sharkey v. J.P. Morgan Chase & Co., No. 10 Civ. 3824, 2011 WL 135026, at *6 (S.D.N.Y. Jan. 14, 2011) (explaining that, while “the employee’s communications must identify the specific conduct that the employee believes to be illegal,” a whistleblower “need not cite to a code section he believes was violated in his communications to his employer ….” (quoting Welch v. Chao, 536 F.3d 269, 275 (4th Cir.2008))); see also Fraser v. Fiduciary Trust Co. Intern., 417 F.Supp.2d 310, 322 (S.D.N.Y.2006) (holding that, “[w]hile general inquiries … do not constitute protected activity, a plaintiff “need not … cite a code section he believes was violated ….” (internal quotation marks and citation omitted)); Ashmore v. CGI Grp. Inc., No. 11 Civ. 8611(LBS), 2012 WL 2148899, at *6 (S.D.N.Y. June 12, 2012) (same); Gladitsch v. [email protected], No. 11 Civ. 919(DAB), 2012 WL 1003513, at *3, *7–8 (S.D.N.Y. Mar. 21, 2012) (plaintiff’s report that the defendant was “potentially defrauding the stockholders of the parent company” constitutes protected activity); Harp v. Charter Communications, Inc., 558 F.3d 722, 725 (7th Cir.2009) (“If the specific conduct reported was violative of federal law, the report would be sufficient to trigger Sarbanes–Oxley protection even if the employee did not identify the appropriate federal law by name.” (citation omitted)). Here, Plaintiff told his supervisor that he was concerned about the morality of the two overhead scheme, and added that it “may even be illegal but I wasn’t sure since I’m not a lawyer.” This statement sufficiently alerted Defendant as to the possibility that there was possibly illicit conduct afoot. Plaintiff therefore sufficiently “provided information” under § 1514A.
In a briief to the ARB in Thibodeau v WalMart, the DOL Solicitor argues: “The SOX whistleblower provision does not require the complainant to prove an actual violation by alleging or proving that each of the elements of fraud or of a violation of an SEC rule were satisfied. Beacom v. Oracle Am., 825 F.3d 376, 380 (8th Cir. 2016) (noting that “an employee’s belief may still be objectively reasonable”); Jones v. Southpeak Interactive Corp. of Del., 777 F.3d 658, 668 (4th Cir. 2015) (noting that to be protected under SOX, the employee does not need to prove “that the employer’s conduct was, in fact, a legally actionable fraud. The whistleblower need only show that she ‘had both a subjective belief and an objectively reasonable belief that the conduct’ violated relevant law) (internal citations omitted); Allen v. Admin. Review Bd., 514 F.3d 468, 477 (5th Cir. 2008) (“Importantly, an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected”). Also, because complainants may not have access to complete information, the complainant’s communication to the employer does not need to include information relevant to each element of a violation. Wiest v. Lynch, 710 F.3d 121, 134 (3rd Cir. 2013) (a whistleblower’s report of a potential violation need not “ring the bell on each element” of the relevant violation at issue to be protected because “an employee may not have access to information necessary to form a judgement on certain elements, such as scienter or materiality…”). Nor does the SOX whistleblower provision include an independent materiality requirement.”
[i] Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123, at 19 (ARB May 25, 2011).
[ii] Wiest, 710 F.3d at 132.
Disclosures made in the course of performing one’s job duties are protected under the SOX whistleblower law
A consensus is emerging that the duty speech doctrine does not apply to SOX whistleblower claims.[i] The duty speech defense asserts that disclosures made while performing routine job duties are outside the ambit of protected conduct. The defense became increasingly popular in the wake of the Supreme Court’s 2006 decision in Garcetti v. Ceballos, which held that government employees cannot bring First Amendment whistleblower retaliation claims based on work-related speech if the speech is part of their job duties.[ii]
Most Department of Labor (DOL) ALJs addressing this issue have declined to apply Garcetti to SOX claims. For example, Judge Lee Romero Jr. concluded that “one’s job duties may broadly encompass reporting of illegal conduct, for which retaliation results. Therefore, restricting protected activity to place one’s job duties beyond the reach of the Act would be contrary to congressional intent.”[iii]
Recently, a New York district court held in Yang v. Navigators Grp., Inc. that the duty speech defense is inapplicable to SOX claims.[iv] Jennifer Yang worked as the chief risk officer for Navigators Group (“Navigators”), an insurance company. Ms. Yang alleged that Navigators terminated her employment for disclosing to her supervisor deficient risk management and control practices. Navigators moved to dismiss Ms. Yang’s SOX claim in part on the basis that Yang’s disclosures about risk issues were “part and parcel of her job.”[v] The court rejected this duty speech argument, relying on a 2012 district court decision holding that “whether plaintiff’s activity was required by job description is irrelevant.”[vi]
[i] See, e.g., Robinson v. Morgan Stanley, ARB Case No. 07-070, 2010 WL 348303, at *8 (Jan. 10, 2010) (“[Section 1514A] does not indicate that an employee’s report or complaint about a potential violation must involve actions outside the complainant’s assigned duties.”).
[ii] See Garcetti v. Ceballos, 547 U.S. 410, 422 (2006).
[iii] Deremer v. Gulfmark Offshore, Inc., ALJ Case No. 2006-SOX-2, 2007 WL 6888110, at *42 (June 29, 2007).
[iv] See Yang v. Navigators Grp., Inc., 18 F. Supp. 3d 519, 530 (S.D.N.Y. May 8, 2014).
[vi] See id. at 531 (citing Barker v. UBS AG, 888 F. Supp. 2d 291, 297 (D. Conn. 2012)).
Recent cases also suggest that the “duty speech” doctrine does not apply to False Claims Act protected conduct.
Establishing Knowledge of SOX Protected Conduct
The second element of a SOX claim is knowledge of protected conduct. A whistleblower may establish employer knowledge by demonstrating that a supervisor or senior executive knew of the activity (actual knowledge) or that a person with knowledge of the disclosure influenced the official who decided to take the retaliatory action (constructive knowledge).
In a SOX retaliation suit against an employer, a whistleblower need only make a protected disclosure to someone who has either supervisory authority over them or authority to investigate and address misconduct. The supervisor’s knowledge is imputed to the final decision maker.[i]
SOX whistleblowers can demonstrate knowledge of protected conduct using the cat’s paw theory, i.e., by showing that the decision-maker followed the biased recommendation of a subordinate without independently investigating the reason or justification for the proposed adverse personnel action.
In Jayaraj v. Pro-Pharmaceuticals, Inc.,[ii] the employer was a start-up biotechnology company whose primary executives were a chief executive officer (“CEO”) and a chief operating officer (“COO”). The CEO testified that when he decided to terminate the complainant’s employment, he was unaware that she had engaged in protected activities. However, based on evidence that the CEO and COO worked closely together since the founding of the company, the ALJ found that the COO had likely told the CEO about the complainant’s protected activity.
The Supreme Court has held that a “cat’s paw” theory of causation can apply in retaliation cases. Staub v. Proctor Hosp., 562 U.S. 411, 419-22 (2011). A “cat’s paw” theory of causation applies when the protected activity has no bearing on the decision-maker, but does bear on the actions of a lower-level supervisor, who in turns influences or causes the decision-maker to take the adverse action. Id. at 415; see also Bobreski v. J. Givoo Consultants, Inc., ARB No. 09-057, ALJ No. 2008-ERA-003, slip op. at 16 (ARB June 24, 2011); Zinn v. American Commercial Lines, 2009-SOX-25, slip. op. 18 (Nov, 19, 2012) (“A complainant is not required to prove direct knowledge on the part of the employer’s final decision maker because the law will not permit itself to insulate it by creating layers of bureaucratic ignorance between a whistleblower’s direct line of management and the final decision maker.”).
“A complainant may show contribution via a cat’s paw theory. See Kuduk, 768 F.3d at 790–91. This theory applies when the impermissible consideration has no bearing on the decision–maker, suggesting no discrimination, but does bear on the actions of another supervisor who in turns acts to bring about the ultimate adverse action in some way. See Staub v. Proctor Hosp., 562 U.S. 411, 422–23 (2011). If the impermissible factor contributed to actions of one supervisor, and those actions contributed to the ultimate decision resulting in the adverse action, then the impermissible factor was a contributing factor in the adverse action. The complainant need only show that one individual among multiple decision makers influenced the final decision and acted, in part, because of the protected activity. Rudolph, ARB No. 11–037 at 16–17 (citing Bobreski v. J. Givoo Consultants, Inc, ARB No. 09–057, ALJ No. 2008–ERA–3, slip op. at 13–14 (ARB June 24, 2011).” Klinger v. BNSF Railroad Co., ALJ No. 2016-FRS-00062, at 16 (ALJ Sept. 29, 2022).
Some courts have held that SOX whistleblower protection does not apply extraterritorially, but in certain circumstances, the whistleblower protection provision of SOX can apply to covered employees working outside the United States. One of our attorneys prevailed in defeating a dispositive motion in a SOX case on the issue of extraterritoriality where the employee of a US public company worked abroad but 1) blew the whistle to senior management working in the US headquarters and 2) management in the US office played a role in the decision to terminate the whistleblower’s employment.
Recently the ARB held in Perez v. Citigroup, Inc., ARB No. 2017-0031, ALJ No. 2015-SOX-00014 (ARB Sept. 30, 2019) (per curiam) that Section 806 does not apply extraterritorially and that applying Section 806 outside the United States could lead to conflict with the laws of foreign nations and potentially inconsistent results for employees. According to the current ARB, the key factor to consider is the location of the employee’s permanent or principal worksite.
However, the ARB that served during the Obama Administration took a broader view of SOX extraterritorial jurisdiction and interpreted the scope of SOX protection in light of the purpose of the statute. In particular, the Obama-era ARB held in Blanchard v. Exelis Systems Corp., ARB No. 15-031, ALJ No. 2014-SOX-20 (ARB Aug. 29, 2017) that Section 806 of SOX is a securities statute (not just an employment statute) and therefore there is no presumption limiting its application to U.S. territory. Judge Brown concluded: “It is by analyzing the Sarbanes-Oxley Act as a whole that one finds Congress’s intent to protect both domestic and foreign-based employees of U.S. domestic or foreign publicly traded companies who ‘blow the whistle’ on activity the employee reasonably believes violates one or more of the ‘predicate’ acts or provisions of Section 806, provided the alleged wrongdoing of which the employee complains involves U.S. domestic violations of the ‘predicate’ act or provision unless the ‘predicate’ act/provision itself extends its reach extraterritorially.”
In January 2018, the Second Circuit affirmed the dismissal of a SOX whistleblower case where the plaintiff Paul Ulrich, a United States citizen who sometimes interacted with Moody’s United States managers, was an overseas permanent resident working for a foreign subsidiary of Moody’s, and the alleged wrongdoing and protected activity took place outside the United States. The non-precedential order in Ulrich v. Moody’s Corp. is available here.
In a SOX case litigated in the Southern District of New York, the court permitted an employee of Accenture working in France to proceed with her claim. O’Mahony v. Accenture Ltd and Accenture LLP, 07 Civ. 7916 (S.D.N.Y. Feb. 5, 2008). The plaintiff alleged that the retaliation against her occurred in the United States and the conduct about which she complained, a scheme to evade social security taxes owed to France, also occurred in the United States. Weighing the pertinent material acts (the commission of the alleged fraud and the decision by Accenture LLP to retaliate against O’Mahon) against the fact that O’Mahony was employed in France and that Accenture SAS allegedly carried out the retaliation against O’Mahony at the command of Accenture LLP, the court found that “the center of gravity of the alleged misconduct was located within the United States.”
Prohibited Whistleblower Retaliation Under the SOX Whistleblower Law
The Sarbanes-Oxley whistleblower protection law prohibits a broad range of retaliatory acts, including:
- harassment; and
- any other form of discrimination that might dissuade a reasonable employee from whistleblowing.
The final catch-all category includes non-tangible employment actions, such as “outing” a whistleblower in a manner that causes the whistleblower to suffer alienation and isolation from work colleagues. SOX also proscribes a threat to retaliate.
By explicitly proscribing non-tangible activity, the language of SOX demonstrates a clear congressional intent to prohibit a very broad spectrum of retaliatory acts against SOX whistleblowers. Menendez v. Halliburton, Inc., ARB Nos. 09-002, -003, ALJ No. 2007- SOX- 5 (ARB Sept 13, 2011).
An employment action is actionable if it “would deter a reasonable employee from engaging in protected activity.” Id. at 20. “[T]he list of prohibited activities…as quite broad and intended to include, as a matter law, reprimands (written or verbal), as well as counseling sessions…which are coupled with a reference of potential discipline.” Williams v. American Airlines Inc., ARB No. 09-018, ALJ No. 2007-AIR- 004, slip op. at 10-11 (ARB Dec. 29, 2010).
An adverse employment action need not stem from a retaliatory or illegal motive. It must simply constitute an unfavorable employment action. See Vannoy v. Celanese Corp., ARB No. 09-118, ALJ No. 2008-SOX-064, slip op. at 13-14 (Sept. 28, 2011)(holding that complainant suffered an adverse action when the employer terminated his employment irrespective of motive).
Retaliatory termination goes beyond “You’re fired!” Under the SOX whistleblower protection law, constructive discharge is an adverse employment action. Constructive discharge occurs where an employer has created “working conditions so intolerable that a reasonable person in the employee’s position would feel forced to resign,” or where the employer “acts in a manner so as to have communicated to a reasonable employee that [s/he] will be terminated, and the . . . employee resigns.” Under the latter standard, an employee facing “imminent discharge” may establish constructive discharge.[i]
And an employer’s refusal to remedy the violations that a whistleblower reports can constitute a constructive discharge. See, e.g.,United States, ex rel. DRC, Inc. v. Custer Battles, LLC,444 F.Supp.2d 678, 691 (E.D.Va. 2006), rev’d on other grounds, 562 F.3d 295 (4th Cir.2009). In Custer Battles, the court found that the plaintiff’s resignation following defendant’s alleged repeated refusals to correct and cease violations could support a whistleblower retaliation claim of constructive discharge under the False Claims Act’s anti-retaliation provision. Id. The court reasoned, “faced with the specter of…entangling himself in his employer’s fraudulent practices, [the plaintiff] chose to resign…these facts are sufficient to allow a jury to find that [the plaintiff] was constructively discharged.” Id.
[i] Dietz v. Cypress Semiconductor Corp., ARB Case No. 15-017, 2016 WL 1389927, at *7(ARB Mar. 30, 2016).
SOX prohibits employers from “outing” confidential whistleblowers
Disclosing a whistleblower’s identity may constitute an adverse employment action. The U.S. Court of Appeals for the Fifth Circuit reached this conclusion in a SOX case brought by Anthony Menendez, a former director in Halliburton Inc.’s finance and accounting department.[i]
About four months after Mr. Menendez joined Halliburton, he noticed that the company’s accounting practices that involved revenue recognition did not appear to conform to generally accepted accounting principles (“GAAP”). Mr. Menendez circulated a memo in his department about the issue. In response, his supervisor, who also received the memo, said that Mr. Menendez was not a “team player” and should work more closely with his colleagues to resolve accounting issues. Halliburton nonetheless studied the issue and, a couple of months later, determined that the accounting practices were proper.
After his supervisor refused a second meeting with him about the issue, Mr. Menendez filed a confidential disclosure with the SEC about Halliburton’s accounting practices. Mr. Menendez later raised the same issues in a memo to Halliburton’s board of directors. The memo was forwarded to Halliburton’s general counsel.
When Halliburton received a notice of investigation from the SEC requiring Halliburton to retain documents, Halliburton’s general counsel inferred from Mr. Menendez’s internal disclosures that he was the source of the SEC inquiry. The general counsel then sent an email to Mr. Menendez’s colleagues instructing them to retain certain documents because “the SEC has opened an inquiry into the allegations of Mr. Menendez,” effectively “outing” Mr. Menendez as a whistleblower.
Thereafter, Mr. Menendez’s colleagues began to treat him differently, refusing to work or associate with him. He resigned within a year. Applying the Burlington Northern material-adversity standard,[ii] the Fifth Circuit concluded that “outing” Mr. Menendez was an actionable adverse action:
It is inevitable that such a disclosure would result in ostracism, and, unsurprisingly, that is exactly what happened to Menendez following the disclosure. Furthermore, when it is the boss that identifies one of his employees as the whistleblower who has brought an official investigation upon the department, as happened here, 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 an environment where insufficient collaboration constitutes deficient performance, the employer’s disclosure of the whistleblower’s identity and thus targeted creation of an environment in which the whistleblower is ostracized is not merely a matter of social concern, but is, in effect, a potential deprivation of opportunities for future advancement.[iii]
When Halliburton outed Mr. Menendez to his colleagues as the whistleblower responsible for the SEC investigation, the company inevitably “creat[ed] an environment of ostracism,” which “well might dissuade a reasonable employee from whistleblowing.” This ruling underscores the broad scope of actionable retaliation under SOX.
[i] See Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254 (5th Cir. 2014).
[ii] Burlington N. & Santa Fe Ry. Co. v. White, 548 U.S. 53 (2006).
[iii] Halliburton, Inc. v. Admin. Review Bd., 771 F.3d at 262.
Yes, jumping on the first instance of poor performance or misconduct indicates pretext, especially where the employee has a record of strong performance prior to engaging in protected activity. Examples include:
- Colgan v. Fisher Scientific Co., 935 F.2d 1407 (3d Cir. 1991)(en banc), cert denied 502 U.S. 941, 112 S. Ct. 379 (1991) (after many years of service and consistently good evaluations, the employee was fired after a single bad review).
- Farrell v. Planters Lifesavers Co., 206 F.3d 271, 285 (3d Cir. 2000) (although the employer pointed to complaints about the employee’s performance, the decision to fire her for performance reasons came only three or four weeks after it praised her and asked her about her interest in a promotion).
- Hugh v. Butler County Family YMCA, 418 F.3d 265, 267-69 (3d Cir. 2006) (employer’s reason could be deemed pretext where employee fired for poor performance despite no warnings and policy requiring supervisors to attempt to resolve problems through counseling first).
The ARB and some district judges have held that SOX prohibits post-employment retaliation in certain circumstances. For example, in Kshetrapal v. Dish Network, LLC,[i] Mr. Kshetrapal, an associate director for Dish Network (“Dish”), disclosed that a marketing agency with which Dish had contracted was submitting fraudulent bills. When Mr. Kshetrapal disclosed the fraud, his supervisors initially ignored him. Mr. Kshetrapal continued to press the issue, and Dish conducted an investigation, which resulted in Dish firing Mr. Kshetrapal’s supervisor and terminating its contract with the marketing agency. One month after taking these corrective actions, Dish forced Mr. Kshetrapal to resign.
The marketing agency sued Dish for breach of contract, and Mr. Kshetrapal was deposed in that litigation. During his deposition, Mr. Kshetrapal testified about the marketing agency’s fraud and his belief that his supervisor received bribes from the marketing agency. Shortly after the deposition, Mr. Kshetrapal began working for a music streaming service on which Dish ran ads. Upon learning that Mr. Kshetrapal worked for the music streaming service, Dish pulled its ads. Soon thereafter, a prospective employer of Mr. Kshetrapal rescinded a job offer because Dish ordered it not to hire Mr. Kshetrapal.
Mr. Kshetrapal sued Dish for retaliation, and in denying Dish’s motion to dismiss, Judge Crotty held that Mr. Kshetrapal’s deposition testimony about the alleged fraud was protected under SOX even though the deposition took place when he no longer worked for Dish. According to Judge Crotty, “a contrary holding would discourage employees from exposing fraudulent activities of their former employers for fear of retaliation in the form of blacklisting or interference with subsequent employment. Such a result would contravene the purpose of SOX.”[ii] Some courts, however, have held that SOX does not proscribe post-termination retaliation.[iii]
A Supreme Court decision construing Title VII’s anti-retaliation provision also suggests that SOX proscribes post-termination retaliation. See Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). In Robinson, the Court held that the term “employees” in Title VII’s anti-retaliation provisions encompasses former employees.
There are, however, cases adopting a contrary position, such as Erhart v. Bofi Holding, Inc., No. 15-cv-02287, 2022 WL 119191 (S.D. Cal. Jan 12, 2022). But even if a retaliatory act post-employment is not actionable under SOX, it is relevant evidence that has the “tendency to make a fact more or less probable than it would be without the evidence” — whether the employer’s adverse employment action against the whistleblower was taken in retaliation for protected conduct. Although a SOX whistleblower need not prove an employer’s retaliatory motive to prevail, post-employment statements or actions by the employer are relevant to the employer’s motive for taking an adverse employment action.
[i] 90 F. Supp. 3d 108, 112–14 (S.D.N.Y. 2015).
[ii] Id. at 114.
[iii] See, e.g., Hughart v. Raymond James & Assocs., Inc., 2004 DOLSOX LEXIS 92, at* 129 (ALJ Dec. 17, 2004)
March 2021 Sixth Circuit Decision Construing FCA to Prohibit Post-Employment Retaliation
On March 31, 2021, the Sixth Circuit issued a well-reasoned opinion in United States ex rel. Felten v. William Beaumont Hospital holding that the False Claims Act whistleblower protection provision, which is similar to SOX, protects former employees alleging post-termination retaliation. The Sixth Circuit construed the FCA consistent with the roadmap for statutory interpretation laid out by the Supreme Court in Robinson v. Shell Oil Co., 519 U.S. 337 (1997), where the Court held that the Civil Rights Act of 1964 bars discrimination against current and former employees.
- First, there is no temporal qualifier accompanying “employee” in 3730(h) suggesting that it refers solely to current employees. Instead, the reference to “any employee” can apply to any employee who has ever been employed by a particular employer. Further, half of the retaliatory acts proscribed by the statute – “threatened,” “harassed,” and “discriminated” – are not restricted to a current employment relationship and can refer to former employees. And the FCA’s catch-all category of retaliation – discrimination in the “terms and conditions of employment” — does not limit actionable retaliation to personnel actions taken while the whistleblower works for the employer. Examples of terms and conditions of employment that can persist after an employee’s termination include non-competition and confidentiality restrictions and discontinuance of severance pay.
- Second, the statutory and dictionary definitions of “employee” reveal that the FCA’s anti-retaliation provision protects former employees. Although the FCA does not define the word employee, the term “employed” can refer to someone who “is employed” or “was employed.”
- Third, other aspects of the statutory framework suggest that it protects former employees. For example, one of the remedies authorized under the statute is reinstatement, which is available only to a former employee (only someone who has lost a job can be reinstated). Likewise, the FCA’s authorization of “special damages sustained as a result of the discrimination” provides a remedy for misconduct that is not dependent on whether the plaintiff is still an employee.
Finally, the Sixth Circuit assessed the FCA’s broader context and found that Congress intended to encourage employees to report fraud against the government and facilitate the government’s ability to stymie crime by protecting whistleblowers: “If employers can simply threaten, harass, and discriminate against employees without repercussion as long as they fire them first, potential whistleblowers could be dissuaded from reporting fraud against the government.”
The doctrine of preemptive retaliation permits a whistleblower to bring a claim where the employer retaliates against the whistleblower prior to the whistleblower engaging in a protected act (for the purpose of preventing the whistleblower from engaging in protected conduct). This doctrine recognizes that retaliatory action taken against an individual in anticipation of that person engaging in protected whistleblowing is no less retaliatory than action taken after the whistleblowing.
A 1995 Eleventh Circuit decision in a nuclear whistleblower case relied on the doctrine to conclude that internal disclosures are protected under the whistleblower protection provision of the Energy Reorganization Act. Bechtel Const. Co. v. Secretary of Labor, 50 F. 3d 926 (11th Cir. 1995) (“The Secretary’s interpretation promotes the remedial purposes of the statute and avoids the unwitting consequence of preemptive retaliation, which would allow the whistleblowers to be fired or otherwise discriminated against with impunity for internal complaints before they have a chance to bring them before an appropriate agency . . . This construction encourages safety concerns to be raised and resolved promptly and at the lowest possible level of bureaucracy, facilitating voluntary compliance with the ERA and avoiding the unnecessary expense and delay of formal investigations and litigation.”)
An example of preemptive retaliation is where an employer fires or otherwise retaliates against an employee based on the employer’s expectation that the employee will provide adverse testimony in a proceeding. In Steele v. Youthful Offender Parole Board, 2008 WL 2043197 (Cal.App. 3 Dist., May 13, 2008), the court found that an employer engaged in preemptive retaliation by constructively discharging an employee who was expected to testify in support of a co-worker’s retaliation lawsuit. The court’s reasoning provides a strong basis to apply the doctrine of preemptive retaliation to a broad range of anti-retaliation statutes:
In Lujan v. Minagar (2004) 124 Cal.App.4th 1040, 21 Cal.Rptr.3d 861 (Lujan ), a case involving retaliation under California’s Occupational Safety and Health Act, the court held Labor Code section 6310 “applies to employers who retaliate against employees whom they believe intend to file workplace safety complaints.” (Lujan, supra, at p. 1046, 21 Cal.Rptr.3d 861.) The court reasoned that “firing workers who are suspected of planning to file workplace safety complaints [could] effectively discourage the filing of those complaints” and “allowing such preemptive retaliation would be at odds with section 6310’s apparent intent-to encourage such complaints and to punish employers who retaliate against employees as a result . . . According to Lujan, “[t]o hold otherwise would create a perverse incentive for employers to retaliate against employees who they fear are about to file workplace safety complaints before the employees can do so, therefore avoiding liability under section 6310. We do not believe the Legislature could have possibly intended such an absurd result, which could be depicted by an image of an employer following an employee and firing him or her just before the employee reached the Cal-OSHA filing window, complaint in hand. [Citation.]” (Lujan, supra, at pp. 1045-1046, 21 Cal.Rptr.3d 861.)
Although Lujan involved interpretation of Labor Code section 6310, we are persuaded the same analysis is applicable to FEHA. “The legislative purpose underlying FEHA’s prohibition against retaliation is to prevent employers from deterring employees from asserting good faith discrimination complaints[.]” (Akers v. County of San Diego, supra, 95 Cal.App.4th at p. 1455, 116 Cal.Rptr.2d 602.) Employer retaliation against employees who are believed to be prospective complainants or witnesses for complainants undermines this legislative purpose just as effectively as retaliation after the filing of a complaint. To limit FEHA in such a way would be to condone “an absurd result” (Lujan, supra, 124 Cal.App.4th at p. 1045, 21 Cal.Rptr.3d 861) that is contrary to legislative intent. (See also Cal.Code Regs., tit. 2, § 7287.8, subd (a)(2)(B) [FEHA protects “[i]nvolvement as a potential witness which an employer ․ perceives as participation in an activity of the [DFEH] or [Fair Employment and Housing] Commission”].)
Proving Sarbanes-Oxley Whistleblower Retaliation
A SOX whistleblower must demonstrate that their protected activity was a contributing factor in the decision to take an adverse action, i.e., that it was “more likely than not” played “any role whatsoever” in the allegedly retaliatory action.[i] And “any role whatsoever” is no exaggeration—the protected activity need not amount to a “significant, motivating, substantial or predominant” factor in the adverse action.[ii]
A whistleblower may meet this burden by proffering circumstantial evidence, such as:
- Direct evidence of retaliatory motive, i.e., “statements or acts that point toward a discriminatory motive for the adverse employment action.”[iii]
- Shifting or contradictory explanations for the adverse employment action.[iv]
- Evidence of after-the-fact explanations for the adverse employment action. “[T]he credibility of an employer’s after-the-fact reasons for firing an employee is diminished if these reasons were not given at the time of the initial discharge decision.”[v]
- Animus or anger towards the employee for engaging in a protected activity.
- Significant, unexplained or systematic deviations from established policies or practices, such as failing to apply a progressive discipline policy to the whistleblower.[vi]
- Singling out the whistleblower for extraordinary or unusually harsh disciplinary action.[vii]
- Disparate treatment or proof that employees who are situated similarly to the plaintiff, but who did not engage in protected conduct, received better treatment.
- Close temporal proximity between the employee’s protected conduct and the decision to take an actionable adverse employment action.
- Evidence that the employer conducted a biased or inadequate investigation of the whistleblower’s disclosures, including evidence that the person accused of misconduct controlled or heavily influenced the investigation.
- The cost of taking corrective action necessary to address the whistleblower’s disclosures and the decision-maker’s incentive to suppress or conceal the whistleblower’s concerns.
- Corporate culture and evidence of a pattern or practice of retaliating against whistleblowers.
If the whistleblower proves “contributing factor” causation by a preponderance of the evidence, then the burden shifts to the employer to prove clearly and convincingly that it would have taken the same adverse action in the absence of the employee’s engagement in protected activity.
In a mixed-motive case (where there is evidence of both a lawful and unlawful motive for the adverse action), does the evidence of a legitimate justification for the adverse action negate the whistleblower’s evidence that whistleblowing partially influenced the decision to take the adverse action?
A SOX whistleblower will typically prevail in a mixed-motive case because the SOX whistleblower’s burden is merely to show that protected activity played “any role whatsoever”—i.e., that it was a “contributing factor”—in the adverse employment action. If the decision-maker placed any weight whatsoever on the protected activity, then the whistleblower will establish causation.
The ARB has instructed ALJs to apply the following analysis in mixed-motive cases:
If the ALJ believes that the protected activity and the employer’s non-retaliatory reasons both played a role, the analysis is over and the employee prevails on the contributing-factor question. Thus, consideration of the employer’s non-retaliatory reasons at step one will effectively be premised on the employer pressing the factual theory that nonretaliatory reasons were the only reasons for its adverse action. Since the employee need only show that the retaliation played some role, the employee necessarily prevails at step one if there was more than one reason and one of those reasons was the protected activity.[viii]
[i] Palmer v. Canadian National Railway, ARB No. 16-035 at 53 (citations omitted).
[ii] Allen v. Stewart Enters., Inc., ARB Case No. 06-081, slip op. at 17 (U.S. Dep’t of Labor July 27, 2006).
[iii] William Dorsey, An Overview of Whistleblower Protection Claims at the United States Department of Labor, 26 J. Nat’l Ass’n Admin. L. Judiciary 43, 66 (Spring 2006) (citing Griffith v. City of Des Moines, 387 F.3d 733 (8th Cir. 2004)).
[iv] Clemmons v. Ameristar Airways, Inc., ARB No. 08-067, at 9, ALJ No. 2004-AIR-11 (ARB May 26, 2010) (footnotes omitted).
[v] Id. at 9-10 (footnotes omitted).
[vi] Bobreski v. J. Givoo Consultants, Inc., ARB No. 13-001, ALJ No. 2008-ERA-3 (ARB Aug. 29, 2014).
[vii] See Overall v. TVA, ARB Nos. 98-111 and 128, slip op. at 16-17 (Apr. 30, 2001), aff’d TVA v. DOL, 59 F. App’x 732 (6th Cir. 2003).
[viii] Palmer v. Canadian National Railway, ARB No. 16-035 at 56-57 (citations omitted).
Circumstantial evidence of retaliation includes:
- temporal proximity;
- indications of pretext;
- inconsistent application of an employer’s policies;
- an employer’s shifting explanations for its actions;
- antagonism or hostility toward a complainant’s protected activity, the falsity of an employer’s explanation for the adverse action taken; and
- a change in the employer’s attitude toward the complainant after he or she engages in protected activity.
A SOX whistleblower need not demonstrate the existence of a retaliatory motive on the part of the employer to establish that protected activity was a contributing factor to the personnel action. But evidence of a retaliatory motive, e.g., statement of retaliatory animus or resentment of the complainant’s whistleblowing, is relevant circumstantial evidence to prove retaliation.
In Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254, 259-62 (5th Cir. 2014), the Fifth Circuit rejected the employer’s assertion that a SOX whistleblower must prove a “wrongfully-motivated causal connection,” holding that 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.” Id. (quoting Allen v. Admin. Review Bd., 514 F.3d at 476 n.3). In addition, the court relied on a Federal Circuit decision holding that “a whistleblower need not demonstrate the existence of a retaliatory motive on the part of the [employer] in order to establish that his [protected conduct] was a contributing factor to the personnel action.” Id. at 263 (emphasis added and alterations in original) (quoting Marano v. Dep’t of Justice, 2 F.3d 1137, 1141 (Fed. Cir. 1993)).
In a seminal decision construing “contributing factor” causation, the Department of Labor Administrative Review Board held:
We want to reemphasize how low the standard is for the employee to meet, how “broad and forgiving” it is. “Any” factor really means any factor. It need not be “significant, motivating, substantial or predominant”—it just needs to be a factor. The protected activity need only play some role, and even an “[in]significant” or “[in]substantial” role suffices.
Id. at 53 (citations omitted). Recognizing that “employees are likely to be at a severe disadvantage in access to relevant evidence,” the ARB noted that causation can be proven using circumstantial evidence. Such evidence can include “motive, bias, work pressures, past and current relationships of the involved parties, animus, temporal proximity, pretext, shifting explanations, and material changes in employer practices, among other types of evidence.” Bobreski v. J. Givoo Consultants, Inc., ARB No. 13-001, ALJ No. 2008-ERA-3 (ARB Aug. 29, 2014).
Similarly, the Ninth Circuit held in Tamosaitis v. URS Inc., a case construing an analogous whistleblower protection law for nuclear workers, that “contributing factor” causation does not require a showing of retaliatory motive:
Under this framework, the presence of an employer’s subjective retaliatory animus is irrelevant. All a plaintiff must show is that his “protected activity was a contributing factor in the adverse [employment] action.” 29 C.F.R. § 24.104(f)(1). The relevant causal connection is not between retaliatory animus and personnel action, but rather between protected activity and personnel action. As a result, there is no meaningful distinction between an employer who takes action based on its own retaliatory animus and one that acts to placate the retaliatory animus of a customer. Either way, the fact that the employee engaged in protected activity is the cause of the action taken against him.
The DOL ARB has held that “‘[t]he contributing factor that an employee must prove is intentional retaliation prompted by the employee engaging in protected activity.’” Thorstenson v. BNSF Ry. Co., ARB Nos. 2018-0059, 2018-0060, ALJ No. 2015-FRS-00052, slip op. at 8 (Nov. 25, 2019) (quoting Kuduk v. BNSF Ry. Co., 768 F.3d 786, 791 (8th Cir. 2014)). In satisfying this standard, the Board has held that “an employee need not prove retaliatory animus, or motivation or intent, to prove that this protected activity contributed to the adverse employment action at issue.” Rathburn v. The Belt Ry. Co. of Chicago, ARB No.16-036, ALJ No. 2014-FRS-35, PDF at 8 (ARB Dec. 8, 2017) (citing DeFrancesco v. Union R.R. Co., ARB No. 10-114, ALJ No. 2009-FRS-009, slip op. at 6 (ARB Feb. 29, 2012)); Riley v. Dakota, Minnesota & E. R.R. Corp., ARB Nos. 16-010, 16-052, ALJ No. 2014-FRS-044, 2019 WL 4170436, *4 (ARB Jul. 6, 2019) (declining to follow Kudak v. BNSF Ry. Co., 768 F.3d 786, 792 (8th Cir. 2014), which required a complainant to prove intentional retaliation); see Frost v. BNSF Ry. Co., 914 F.3d 1189, 1195 (9th Cir. 2019) (“the only proof of discriminatory intent that a plaintiff is required to show is that his or her protected activity was a ‘contributing factor’ in the resulting adverse employment action”); but see Armstrong v. BNSF Ry. Co., 880 F.3d 377, 382 (7th Cir. 2018) (“while a FRSA plaintiff need not show that retaliation was the sole motivating factor in the adverse decision, the statutory text requires a showing that retaliation was a motivating factor”).
Subjective standards are difficult for courts to evaluate and difficult for plaintiffs to rebut, and their use in employment decisions should be viewed with suspicion. See Hill v. Seaboard Coast Line R. Co., 885 F.2d 804, 808-09 (11th Cir. 1989); see also Watson v. Fort Worth Bank & Trust, 487 U.S. 977, 1009 (1988) (Blackmun J., concurring) ( “Allowing an employer to escape liability simply by articulating vague, inoffensive-sounding subjective criteria would disserve Title VII’s goal of eradicating discrimination in employment.”); Miles v. M.N.C. Corp., 750 F.2d 867, 871 (11th Cir. 1985) (“subjective evaluations . . . provide a ready mechanism for … discrimination.”). Moreover, “[s]ubjective criteria are ready mechanisms for discrimination.” Juaregui v. City of Glendale, 852 F.2d 1128, 1136 (9th Cir. 1988); accord Tomasso v. Boeing Co., 445 F.3d 702, 706 (3d Cir. Pa. 2006); see also, Henry v. Lennox Industs., Inc., 768 F.2d 746, 751 (6th Cir. 1985) (“The articulated reason for the employment decision is subject to particularly close scrutiny when the [employer’s] evaluation is subjective.”); Weldon v. Kraft, Inc., 896 F.2d 793, 798 (3d Cir. 1990).
Methods of proving that an employer’s reason for taking an adverse employment action is false include:
- A significant contradiction between yearly performance evaluations, and the proffered non-discriminatory reasons. Perfetti v. First Nat. Bank of Chicago, 950 F.2d 449, 456 (7th Cir.1991), cert. denied, 505 U.S. 1205, 112 S.Ct. 2995, 120 L.Ed.2d 871 (1992) (“If at the time of the adverse employment decision the decisionmaker gave one reason, but at the time of the trial gave a different reason which was unsupported by the documentary evidence the jury could reasonably conclude that the new reason was a pretextual after-the-fact justification.”
- An absence of contemporaneous evidence of the alleged basis for the adverse action. For example, the Seventh Circuit noted in Emmel v. Coca-Cola Bottling Co. of Chicago, 95 F.3d 627, 634-35 (7th Cir. 1996): “The jury apparently concluded from the total absence earlier of the justification Coca-Cola would later offer at trial that the justification had been concocted in preparation for trial to fit the available facts. In other words that it was pretextual.”
- Inconsistent or changing explanations for the adverse action. For example, in Jolly v. Northern Telecom Inc., 766 F. Supp. 480, 493-94 (E.D.Va. 1991) , the court held: “Although the defendant then offered a multiplicity of reasons to justify its action, the plaintiff had little trouble proving that none of these explanations was worthy of any credence. To be sure, Jolly did not have too onerous a task, as the defendant’s various personnel told so many stories, so totally inconsistent with each other, that they had lost all credibility by the conclusion of the proceedings. Put simply, NTI took more positions than a gymnast on a trampoline.” Additional case authorities about shifting explanations include:
- E.E.O.C. v. Sears Roebuck and Co., 243 F.3d 846, 852-53 (4th Cir. 2001)(“A factfinder could infer from the late appearance of Sears’s current justification that it is a post-hoc rationale, not a legitimate explanation of Sears’s decision not to hire” plaintiff.)
- Domiguez-Cruz v. Suttle Caribe, Inc., 202 F.3d 424, 432 (1st Cir. 2000) (A company may have several legitimate reasons to dismiss an employee. But when a company, at different times, gives different and arguably inconsistent explanations, a jury may infer that the articulated reasons are pretextual.”)
- Thurman v. Yellow Freight Sys., Inc., 90 F.3d 1160, 1167 (6th Cir. 1996) (“An employer’s changing rationale for making an adverse employment decision can be evidence of pretext.”)
- Perfetti v. First Nat. Bank of Chicago, 950 F.2d 449, 456 (7th Cir. 1991), cert. denied, 505 U.S. 1205 (1992) (“If at the time of the adverse employment decision the decision-maker gave one reason, but at the time of the trial gave a different reason which was unsupported by the documentary evidence the jury could reasonably conclude that the new reason was a pretextual after-the-fact justification.”)
- The falsity of the explanation can give rise to an inference that the employer is dissembling to cover up an ulterior purpose. Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 147 (2000); see St. Mary’s Honor Ctr. v. Hicks, 509 U.S. 502,511 (1993) (“The factfinder’s disbelief of the reasons put forward by the defendant (particularly if disbelief is accompanied by a suspicion of mendacity) may … suffice to show intentional discrimination.”); Stratton v. Dep’t for the Aging for New York, 132 F.3d 869, 880-81 (2d Cir. 1997) (holding that evidence of an employer’s false explanation for employment action supported the jury’s finding of unlawful pretext). In the criminal context, courts frequently refer to false exculpatory statements as evidence of consciousness of guilt. See, e.g., United States v. Reyes, 302 F.3d 48, 56 (2d Cir.2002) (“[I]t is reasonable to infer guilty knowledge from [the defendant’s] false exculpatory statement.”). These inferences are “consistent with the general principle of evidence law that the factfinder is entitled to consider a party’s dishonesty about a material fact as affirmative evidence of guilt.” Reeves, 530 U.S. at 147 (internal quotation marks omitted).
A SOX whistleblower is not required to disprove the employer’s allegedly legitimate, non-retaliatory reason for taking an adverse employment action.[i] But proof of pretext can prove causation. As the ARB observed in Palmer, “Indeed, at times, the factfinder’s belief that an employer’s claimed reasons are false can be precisely what makes the factfinder believe that protected activity was the real reason.”[ii]
[i] Zinn v. American Commercial Lines, Inc., ARB No. 10-029, ALJ No. 2009-SOX-025, 2012 WL 1143309, *7 (ARB Mar. 28, 2012); Warren v. Custom Organics, ARB No. 10-092, ALJ No. 2009-STA-030, 2012 WL 759335, *5 (ARB Feb. 29, 2012); Klopfenstein v. PCC Flow Tech., Inc., ARB No. 04-149, ALJ No. 04-SOX-11, 2006 WL 3246904, *13 (ARB May 31, 2006).
[ii] Palmer, ARB No. 16-035 at 54 (citations omitted).
Once a SOX whistleblower has proven that SOX protected conduct was a contributing factor in the decision to take an adverse action, an employer can avoid liability only if it proves clearly and convincingly that it would have taken the same adverse employment action even if the employee had not engaged in protected activity.[i] This is known as the same-decision or same-action defense.
The operative phrase here is “would have.” An employer fails to meet its burden if it establishes merely that it could have taken the same adverse action. “Clear and convincing” evidence can be quantified as establishing the probability of a fact at issue “in the order of above 70%.”[ii]
The employer bears this onerous burden only if an employee establishes that their protected activity contributed to the employer’s decision to take the adverse action against them.
An employer may rely on evidence that:
- the whistleblower recently performed poorly or otherwise gave the employer reason to take action;
- the employer’s reason for taking the adverse action materialized before the company allegedly engaged in misconduct or the employee blew the whistle; or
- the whistleblower’s personnel file supports the employer’s explanation and details the employer’s intent to take the adverse action.
A sham investigation of a whistleblower instigated in response to the whistleblowers’ protected conduct (also known as a retaliatory investigation) will not enable the employer to establish a same-decision defense. See, e.g., Genberg v. Porter, 882 F.3d 1249 (10th Cir. 2018).
“[W]here the protected activity is virtually inseparable from the basis for the imposition of discipline, the fact finder must be careful to assure that the employer has met the high clear and convincing affirmative defense standard.” Brousil v. BNSF Railway Co., ARB No. 16-025, -031, ALJ No. 2014-FRS-163 (ARB July 9, 2018) (citing Abdur-Rahman v. DeKalb Cnty, ARB Nos. 08-003, 10-074; ALJ Nos. 2006-WPC-002, -003 (ARB Feb. 16, 2011)(alleged insubordination included protected safety concerns); Smith v. Duke Energy Carolinas, LLC, ARB No. 11-003, ALJ No. 2009-ERA-007 (ARB June 20, 2012)(protected disclosures exclusively led to disciplinary investigation); Henderson Wheeling & Lake Erie Ry., ARB No. 11-013, ALJ No. 2010-FRS-012 (ARB Oct. 26, 2012)(termination letter referenced protected activity); see also Smith v. Duke, ARB No. 14-027, ALJ No. 2009-ERA-007 (ARB Feb. 25, 2015)(Royce, J. dissenting); Speegle v. Stone & Webster, ARB No. 11-029-A, ALJ No. 2005-ERA-006, slip op. at 15, n.97 (ARB Jan. 31, 2013).
“[B]ecause a respondent’s affirmative defense burden is high, and because ‘it is a fact intensive determination, involving questions of intent and motivation’ for taking adverse action, resolving this issue on summary decision is challenging.” Kao v. Areva Inc., ARB No. 16-090, ALJ No. 2014-ERA-00004 (ARB Apr. 30, 2018).
 Colorado v. New Mexico, 467 U.S. 310 (1984).
[ii] Palmer v. Canadian National Railway, ARB No. 16-035 at 57.
Subjecting an employee to heightened scrutiny evidences retaliation
Where an employer jumps on an employee’s first instance of misconduct or poor performance and subjects the employee to heightened scrutiny, the employer’s reliance on that alleged change in performance can be deemed a pretext for retaliation.
For example, in Colgan v. Fisher Scientific Co., an age-discrimination case, the Third Circuit held that Jack Colgan established pretext where Fisher Scientific terminated his employment shortly after Mr. Colgan declined an offer of early retirement, based on a single performance evaluation that was inconsistent with his thirty-year tenure at the company. Throughout his entire career as a machine operator with Fisher Scientific, Mr. Colgan regularly and consistently received positive performance evaluations. When he declined the company’s request that he retire, he was assigned substantial additional responsibilities and then the company gave him a surprise, premature evaluation, the worst he had received during his tenure at the company. The Third Circuit held that, in the context of Mr. Colgan’s long and well-rated service at Fisher Scientific, the single negative review was “compelling circumstantial evidence” that the company’s reliance on Mr. Colgan’s supposed performance issues was pretextual. Colgan v. Fisher Scientific Co., 935 F.2d 1407 (3d Cir. 1991) (en banc), cert denied 502 U.S. 941, 112 S. Ct. 379 (1991).
Relief or Damages for SOX Whistleblowers
A prevailing Sarbanes-Oxley whistleblower can recover “all relief necessary to make the employee whole,” which includes:
- back pay (lost wages and benefits);
- reinstatement with the same seniority that the employee would have had, were it not for the retaliation;
- special damages (damages for impairment of reputation, personal humiliation, mental anguish and suffering, and other noneconomic harm that results from retaliation); and
- attorney’s fees, and costs.[i]
Back pay includes promotions and salary increases that the whistleblower would have obtained but for the retaliation.
Uncapped special damages can be substantial where the retaliation has derailed the whistleblower’s career. “When reputational injury caused by an employer’s unlawful discrimination diminishes a plaintiff’s future earnings capacity, [they] cannot be made whole without compensation for the lost future earnings [they] would have received absent the employer’s unlawful activity.”[ii] Therefore, it is important to proffer specific evidence of the impact of the retaliation on the whistleblower’s career prospects and the value of lost future earnings.
[i] 18 U.S.C. § 1514A(c).
[ii] Mahony v. KeySpan Corp., No. 04 Civ. 554 (SJ), 2007 WL 805813, at *1 (E.D.N.Y. Mar. 12, 2007).
Compensatory Damages/Emotional Distress Damages Under the SOX Whistleblower Law
Yes. The Sarbanes-Oxley whistleblower protection law authorizes an award of special damages, i.e., compensation for emotional distress and reputational harm. There is no cap on special damages under SOX, and some whistleblowers have obtained more than one million dollars in special damages at trial:
- Sarbanes-Oxley Whistleblower Recovers Nearly $5 Million
- JP Morgan SOX Whistleblower Wins $1.13M at Trial
Click here for examples of substantial verdicts and settlements in whistleblower retaliation cases.
Many anti-discrimination and anti-retaliation statutes authorize reinstatement as an element of damages. If restatement is not feasible, a court may award front pay in lieu of reinstatement. There is no precise formula to determine the amount of front pay. A front pay award is intended to provide compensation for a period of time sufficient to allow the wronged employee an opportunity to obtain similar employment. As front pay is an equitable remedy, the judge usually determines front pay.
A prevailing plaintiff can also recover lost future earnings, which compensates the plaintiff for the effects of an unlawful termination. Lost future earnings “encompass reputational harms, loss of experience, and other forward-looking aspects of the injury caused by the discriminatory conduct.” Teutscher v. Woodson, 835 F.3d 936, 959 (9th Cir. 2016). Because lost future earnings is a component of compensatory damages, such damages should be decided by the jury.
In some cases, front pay damages can be substantial. For example, in a Title VII retaliation case, a judge awarded the prevailing plaintiff 32 years of front pay. Warren v. Cty. Comm’n of Lawrence Cty., Ala., 826 F. Supp. 2d 1299, 1314 (N.D. Ala. 2011) (citing Tyler v. Bethlehem Steel Corp., 958 F.2d 1176 (2d Cir.), cert. denied, 506 U.S. 826, 113 S.Ct. 82, 121 L.Ed.2d 46 (1992) (upholding district court award of 17 years of front pay ($667,000) in ADEA case until employee reached retirement age); Passantino v. Johnson & Johnson Consumer Products, Inc., 212 F.3d 493 (9th Cir.2000)(upholding district court award of 22 years of front pay ($2,000,000) to 43–year–old employee terminated for retaliation); Gotthardt v. Nat’l R.R. Passenger Corp., 191 F.3d 1148 (9th Cir.1999) (Kravitch, J., sitting by designation) (upholding district court award of front pay ($603,928.37) to employee for payment until mandatory retirement age of 70); Padilla v. Metro–North Commuter R.R., 92 F.3d 117 (2d Cir.1996) (upholding front pay award of over 20 years until retirement age of 67); Picinich v. United Parcel Service, 583 F.Supp.2d 336 (N.D.N.Y.2008), aff’d, 318 Fed.Appx. 34 (2d Cir.2009) (awarding front pay ($1,218,314.99) until plaintiff reached age 65). (Doc. 206 at 15–16)).
If OSHA determines there is reasonable cause to believe the complaint has merit, with limited exceptions “it shall issue” a preliminary order restoring the complainant to his or her employment status and requiring the employer to take affirmative action to abate the violation. 49 U.S.C. § 42121(b)(3)(B); 29 CFR § 1980.105(a)(1). Reinstatement orders are immediately effective and are not stayed pending the resolution of any objections or appeal. See 49 U.S.C. § 4212 (b)(2)(A).
Although reinstatement is the preferred and presumptive remedy to make an employee whole, some SOX whistleblowers have recovered front pay in lieu of reinstatement. In Hagman v. Washington Mutual Bank, Inc., an ALJ awarded $640,000 in front pay to a banker whose supervisor became verbally and physically threatening when the banker disclosed concerns about the short funding of construction loans.[i]
In Deltek, the Fourth Circuit affirmed an award of approximately three and a half years of back pay (lost wages and benefits from the date of the termination of Ms. Gunther’s employment through the date of the hearing), plus four years of front pay and tuition benefits. The ALJ found that Ms. Gunther worked in administrative positions prior to working at Deltek and had been unable to obtain a finance position before and after her tenure at Deltek because she lacked a college degree. And since the ALJ found that Ms. Gunther was unlikely to find a comparable financial analyst position without a degree, the ALJ concluded that Ms. Gunther would need four years of front pay to account for the time Gunter would need to obtain a college degree, especially in the absence of the tuition-reimbursement benefits that Ms. Gunther was receiving while employed at Deltek.
On appeal, Deltek vigorously contested the front-pay award, contending that four years of front pay is unduly speculative. Noting that “some speculation about future earnings [was] necessary,” the court agreed with the ALJ’s finding that it would take Gunther four years to find comparable work. The court concluded that the ALJ and ARB “made the reasonable choice to assume that Gunther would have continued to earn the same salary and benefits at Deltek had she not been unlawfully terminated.”
[i] ALJ Case No. 2005-SOX-00073, at 26–30 (ARB Dec. 19, 2006), appeal dismissed, ARB Case No. 07-039 (ARB May 23, 2007).
The SOX whistleblower protection law does not authorize punitive damages, but it does authorize uncapped special damages, which includes emotional distress, impairment of reputation, personal humiliation, and other non-economic harm resulting from retaliation.
Also, a Sarbanes-Oxley whistleblower can potentially recover punitive damages by removing a SOX whistleblower claim to federal court and adding claims under state law under which a prevailing party can recover punitive damages. For example, Mr. Sanford Wadler, a former in-house counsel at Bio-Rad, recovered $5 million in punitive damages in a retaliation action brought under SOX and under the California common law tort of wrongful discharge in violation of public policy. Mr. Wadler alleged that Bio-Rad terminated his employment because he raised concerns about potential violations of the Foreign Corrupt Practices Act.
The large award of punitive damages appears to have been motivated by the company’s Chief Executive Officer (CEO) backdating a negative performance review of Mr. Wadler that the CEO drafted after firing Wadler. That review was an aberration from the positive reviews that Mr. Wadler received during his 25-year tenure at Bio-Rad. The company’s apparent attempt to create a post-hoc justification for the termination of Mr. Wadler’s employment may have backfired by enabling Mr. Wadler to prove malice and thereby recover punitive damages.
Litigating Sarbanes-Oxley Whistleblower Retaliation Cases
Yes, a whistleblower can bring a SOX retaliation claim against an individual who has the functional ability to retaliate against the whistleblower, and is aware of the whistleblower’s protected conduct (or influenced by a person with knowledge of the protected conduct).
The Fourth Circuit and a California district court have held that directors may be held individually liable under SOX as agents of a publicly-traded company. See Jones v. Southpeak Interactive Corp. of Delaware, 777 F.3d 658, 675 (4th Cir.2015); Wadler v. Bio-Rad Labs, Inc., No. 15-cv-02356-JCS, 2015 WL 6438670 (N.D. Cal. Oct. 23, 2015). But in Zornoa v. Terraform Global, Inc., a federal judge in the Southern District of New York held that corporate directors are not liable under SOX because they are not understood to function as agents and the statute omits directors from its list of potentially liable persons.
180-Day Sarbanes-Oxley Statute of Limitations
The deadline for a SOX whistleblower to file a complaint is 180 days after the whistleblower first experiences or becomes aware of the unlawful retaliation.[i] The clock starts ticking once “the discriminatory decision has been both made and communicated to the complainant.”[ii]
The 180-day clock starts to run on the date of each discrete retaliatory act, e.g., the date on which the whistleblower is informed of a demotion, suspension, termination, change in job duties, etc. However, in an action alleging a hostile work environment, retaliatory acts outside the statute of limitations period are actionable where there is an ongoing hostile work environment and at least one of the acts occurred within the 180-day statute of limitations.
A SOX retaliation complaint is considered filed once the Department of Labor receives it. A complaint sent by mail, however, is considered filed on the date of its postmark.
The 180-day period is not jurisdictional and may be equitably tolled when (1) the respondent actively misled the complainant respecting the cause of action, (2) extraordinary circumstances prevented the complainant from asserting his rights, (3) complainant raised the precise statutory claim in issue but mistakenly did so in the wrong forum, or (4) the respondent did not actively mislead the complainant, but instead through its acts or omissions lulled the complainant into foregoing prompt action to vindicate his rights.
“[A]lthough recovery for any action outside the 180-day period is barred, an employee may still use ‘the prior acts as background evidence in support of a timely claim.’” Roop v. Kan. City S. Ry., No. CIV-16-413-SPS, 2017 U.S. Dist. LEXIS 177646 (E.D. Okla. Oct. 26, 2017) citing Dunn v. BNSF Ry. Co., 2017 U.S. Dist. LEXIS 137109, 2017 WL 3670559, at *8 (W.D. Wash. Aug. 25, 2017), quoting Nat’l R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 105, 110, 113 (2002).
If your SOX claim is no longer timely, you may have a claim under other federal or state whistleblower protection laws or a potential common law claim of wrongful discharge in violation of public policy.
Contact us today to find out if you have a SOX retaliation claim. And see our tips to get the maximum recovery in your whistleblower retaliation case.
[i] 18 U.S.C. §1514A(b)(2)(D).
[ii] 29 CFR § 1980.103(d).
The U.S. Department of Labor Occupational Safety and Health Administration (“OSHA”) administers the anti-retaliation provision of SOX. A SOX whistleblower claim must be filed initially with OSHA. OSHA will then investigate the complaint and may order preliminary reinstatement of the whistleblowers if it finds “reasonable cause” to believe that retaliation occurred.
OSHA finds “reasonable cause” when it determines that a reasonable judge could rule for the whistleblower. And a reasonable judge could rule so only where there is evidence supporting each element of a SOX retaliation claim. Generally, though, less evidence is required to establish “reasonable cause” at this stage than to prevail at trial. “OSHA’s responsibility to determine whether there is reasonable cause to believe a violation occurred is greater than the complainant’s initial burden to demonstrate a prima facie allegation that is enough to trigger the investigation.”[i] But OSHA need not “resolve all possible conflicts in the evidence or make conclusive credibility determinations to find reasonable cause to believe that a violation occurred.” In practice, however, OSHA rules for SOX complainants only in the strongest cases, which is due in part to the burden that OSHA must bear to order preliminary reinstatement of a whistleblower.
A SOX complaint filed at OSHA need not plead every element of the claim in detail, but it must provide “fair notice” of the claim, which entails a showing of: 1) some facts about the protected activity; 2) some facts about the adverse action; 3) an assertion of causation, and 4) a description of the relief or damages sought by the whistleblower.[i]
SOX whistleblower complaints filed at OSHA require less detail than claims filed in federal court. In other words, a SOX whistleblower need not meet the plausibility pleading standard that applies to actions filed in federal court.[ii] But if the whistleblower anticipates removing the SOX claim to federal court, it may be advisable to file a detailed complaint. In particular, the complaint should plead every adverse action and each distinct category of protected activity. An amended SOX complaint filed in federal court can include “more specific allegations naturally originating from those” in the original OSHA complaint. Sharkey v. J.P. Morgan Chase & Co., 805 F. Supp. 2d 45, 53 (S.D.N.Y. 2011).
A Sarbanes-Oxley whistleblower case must be filed initially with OSHA. If the Department of Labor has not issued a final decision within 180 days of the filing of the complaint and the delay is not a result of the complainant’s bad faith, the complainant may file an action for de novo review in federal district court. 18 U.S.C. § 1514A(b)(1)(B).
The scope of a SOX whistleblower lawsuit in federal court covers “any charges of [retaliation] that are `like or reasonably related’ to the allegations in the [OSHA Complaint], or that fall within the `[OSHA] investigation which can reasonably be expected to grow out of the charge of [retaliation].” Erhart v. BOFI Holding, Inc., No. 15-cv-02287-BAS-NLS (SD California March 31, 2020). See also Jones v. Southpeak Interactive Corp. of Del., 777 F.3d 658, 669 (4th Cir. 2015) (“the litigation may encompass claims `reasonably related to the original [administrative] complaint, and those developed by reasonable investigation of the original complaint.'”).
In Liu v. Frontier–Kemper Constructors Inc., 2021-SOX-00031 (March 31, 2022), Judge Berlin held that SOX “places no limit on how soon after the 180 days have run before a complainant may file in the district court so long as any delay is not in bad faith.” Judge Berlin also compared OALJ and district court adjudication of SOX claims and found that “it is likely that the process through the Department of Labor will take about two years longer than the process through the district court.”
There is no cap on special damages under SOX, and some state whistleblower protection laws enable whistleblowers to recover punitive damages. Recently corporate whistleblowers have obtained substantial recoveries in SOX whistleblower cases:
The Dodd-Frank Act (“Dodd-Frank”) amendments to Section 806 of SOX clarify the right to try a SOX whistleblower claim before a jury. See 18 U.S.C. 1514A(b)(2)(E) (“A party to an action brought under [Section 806] shall be entitled to trial by jury.”). Some recent verdicts suggest that SOX whistleblowers can obtain substantial damages. There is no cap on special damages under SOX.
A claim under the anti-retaliation provision of the Sarbanes-Oxley Act must be filed initially at the Occupational Safety and Health Administration at the U.S. Department of Labor. They will perform an investigation and if they conclude that the employer violated SOX, OSHA can order preliminary reinstatement.
After the process at OSHA is complete, SOX retaliation claims are litigated before the Department of Labor Office of Administrative Law Judges or in federal court. SOX provides a right to de novo review in federal court after a complaint has been pending before the DOL for more than 180 days without a final decision. “De novo” review essentially means that a SOX whistleblower has an unwavering right to start afresh in district court, and the presiding judge should not defer to OSHA’s findings or to the ALJ’s rulings. Stone v. Instrumentation Lab. Co., 591 F.3d 239 (4th Cir. 2009).
Once OSHA completes its investigation, the whistleblower or the respondent (the former employer) may request a hearing before an ALJ at the Department of Labor. The hearing before the ALJ is de novo, i.e., the ALJ does not defer to OSHA’s findings.
Once the ALJ has issued an opinion, either party can request an appeal before the Administrative Review Board. And an ARB decision can be appealed to a federal court of appeals.
Recent SOX jury verdicts suggest that SOX is a robust remedy to combat retaliation:
There is no cap on special damages under SOX, and some state whistleblower protection laws enable whistleblowers to recover punitive damages. Recently corporate whistleblowers have obtained substantial recoveries in SOX whistleblower cases:
- Jury Awards Former Bio-Rad Counsel $11M in Sarbanes-Oxley Whistleblower Case
- Jury Awards Six Million Dollars to Whistleblower in Sarbanes-Oxley Case
- Sarbanes-Oxley Whistleblower Recovers Nearly $5 Million
- JP Morgan SOX Whistleblower Wins $1.13M at Trial
SOX “Kick-Out” Provision
Commonly referred to as the “kick out” provision, SOX allows a
complainant to seek relief from a U.S. District Court only when the DOL has not issued a final decision within 180 days after the filing of an administrative complaint. The statute states that “if the Secretary 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 of the claimant, bringing an action at law or equity for de novo review in the appropriate district court of the United States, which shall have jurisdiction over such an action without regard to the amount in controversy.” 18 U.S.C. § 1514A(b)(1).
Only after the 180–day waiting period do federal courts have jurisdiction over SOX whistleblower claims. See Candler v. URS Corp., 2013 U.S. Dist. LEXIS 137757, at *7 (N.D. Tex. Sept. 25, 2012) (explaining the plain language of the kick–out provision “reveals that a federal court can assert jurisdiction under SOX only ‘if’ two pre–conditions are met,” namely that OSHA has not issued a final decision within 180 days of the filing of the administrative complaint and that the delay was not caused by the complainant’s bad faith).
Formal rules of evidence do not apply in SOX whistleblower cases litigated before a DOL ALJ. Evidentiary rules substantially similar to the Federal Rules of Evidence, however, apply.[i] The Office of ALJ, within the Department of Labor, has adopted those rules to ensure that the most probative evidence is produced.[ii] Evidence that is immaterial, irrelevant, or unduly repetitious may be excluded.[iii]
In Leznik v. Nektar Therapeutics, Inc., 2006-SOX-93 (ALJ Feb. 9, 2007) (Order Granting Motion to Compel), the ALJ noted that “[u]nlike matters that may ultimately proceed to a jury trial, evidence is broadly admissible at Sarbanes-Oxley hearings under the Secretary’s aegis, where formal rules of evidence play no role. The presiding administrative law judge may exclude only what is ‘immaterial, irrelevant, or unduly repetitious,’ taking care to see that ‘the most probative evidence’ is produced.” Id. at 5 (citing 29 C.F.R. § 1980.107(d))
[i] See 29 CFR § 18.101 et seq.
[ii] 29 CFR § 1980.107(d).
[iii] Leznik v. Nektar Therapeutics, Inc., 2006-SOX-93 (ALJ Feb. 9, 2007).
The scope of discovery in Sarbanes-Oxley whistleblower cases is broad. In an order granting a motion to compel discovery in a Sarbanes-Oxley whistleblower case, an ALJ held that “[u]nless it is clear that the information sought can have no possible bearing on a party’s claims or defenses, requests for discovery should be permitted.” Leznik v. Nektar Therapuetics, Inc., 2006-SOX-93 (ALJ Feb. 9, 2007).
Sanctions, including dismissal of the complaint, are available for failure to participate in discovery. See Butler v. Anadarko Petroleum Corp., ARB No. 12-041, ALJ No. 2009-SOX-1 (ARB June 15, 2012) (dismissing complaint due to complainant’s failure to comply with discovery orders and refusal to appear for a deposition); Powers v. Pinnacle Airlines, Inc., 2003-AIR-12 (ALJ Apr. 23, 2003) (ordering complainant to show cause why her complaint should not be dismissed for her failure to cooperate in discovery); Powers v. Pinnacle Airlines, Inc., 2003-AIR-12 (ALJ May 21, 2003) (disqualifying counsel based on conduct before the ALJ).
In Leznik, 2006-SOX-93 (ALJ Nov. 16, 2007), the ALJ imposed an adverse inference instruction concerning the results of any investigation conducted by the employer regarding the complainant’s allegations. After the ALJ granted complainant’s motion to compel a response to an interrogatory concerning the employer’s investigation, the employer failed to respond to the interrogatory and did not explain with specificity why the information requested was protected by the work product doctrine.
In whistleblower cases like this one, the contributing factor element in particular may be established by circumstantial evidence, which encompasses a wide variety of evidence. This may involve evidence regarding more than the specific individuals involved in the incident at issues, such as evidence of work pressures, inconsistent application of an employer’s policies, or employer hostility to protected activity. See, e.g., Bechtel v. Competitive Techs., Inc., ARB No. 09-052, ALJ No. 2005-SOX-033, slip op. at 13 (ARB Sept. 30, 2011); Bobreski v. J. Givoo Consultants, Inc, ARB No. 09-057, ALJ No. 2008-ERA-003, slip op at 13 (ARB June 24, 2011). As the scope of admissible evidence on these issues is broad, the scope of discovery – which is only required to be reasonably calculated to lead to the discovery of admissible evidence – must be broader. 29 C.F.R. § 18.51(a); see Migliore v. Rhode Island Dep’t of Env. Mgmt, ALJ No. 98-SWD-00003, slip op. at 3-4 (ALJ Nov. 10, 1998).
Standard Governing OSHA Whistleblower Investigations
In spring 2015, OSHA issued a memo clarifying the investigative standard for OSHA whistleblower investigations. OSHA enforces more than twenty whistleblower protection laws, investigating reprisal complaints and issuing merit findings where there is reasonable cause to believe that retaliation has occurred. Under most of these laws, a merit finding typically includes a preliminary order of relief to make the employee whole. Such relief can include reinstatement, lost wages, compensatory damages, and attorney’s fees. Some statutes also provide for punitive damages.
The memo’s essential message was that “the reasonable cause standard is somewhat lower than the preponderance of the evidence standard that applies following a hearing,” and that OSHA can issue a merit finding where an investigation reveals that the complainant could succeed in proving a violation.
Definition of “Reasonable Cause” Standard in Whistleblower Investigations
The memo provides the following clarification of the “reasonable cause” standard:
- “The threshold OSHA must meet to find reasonable cause that a complaint has merit requires evidence in support of each element of a violation and consideration of the evidence provided by both sides during the investigation, but does not generally require as much evidence as would be required at trial. Thus, after evaluating all of the evidence provided by the employer and the complainant, OSHA must believe that a reasonable judge could rule in favor of the complainant.”
- “OSHA’s investigation must reach an objective conclusion – after consideration of the relevant law and facts – that a reasonable judge could believe a violation occurred. The evidence does not need to establish conclusively that a violation did occur.”
- “OSHA’s responsibility to determine whether there is reasonable cause to believe a violation occurred is greater than the complainant’s initial burden to demonstrate a prima facie allegation that is enough to trigger the investigation.”
- “Although OSHA will need to make some credibility determinations to evaluate whether a reasonable judge could find in the complainant’s favor, OSHA does not necessarily need to resolve all possible conflicts in the evidence or make conclusive credibility determinations to find reasonable cause to believe that a violation occurred.”
OSHA’s clarification of the reasonable cause standard is consistent with the ARB’s precedent. And though the memo does not alter the law, it may increase the number of merit findings because investigators will understand that they need not obtain “smoking gun” evidence of retaliation to issue a merit finding.
A SOX whistleblower can file a petition for review with the ARB within 10 days after the ALJ renders a decision. The petition must identify every part of the ALJ’s decision that the whistleblower seeks to challenge.[i] The ARB will then decide whether to review the case. An ALJ’s decision becomes final after 10 days if no petition for review has been filed, or after 30 business days if the ARB has not issued an order accepting a timely filed petition for review.[ii] If the ARB accepts the case for review, the ALJ’s decision is inoperative, but a reinstatement order becomes effective while the appeal is pending.[iii]
The ARB reviews conclusions of law de novo and reviews the ALJ’s findings of facts under a substantial evidence standard.[iv] A finding is supported by “substantial evidence” if evidence in the record logically supports the finding, and the record as a whole does not countervail that evidence.[v]
Note that the failure to appeal an ALJ decision can have a preclusive effect on other claims. For example, in Tice v. Bristol-Myers Squibb, the Third Circuit affirmed summary judgment for the employer, holding that a DOL ALJ’s determination that the employer had a legitimate reason for terminating SOX plaintiff Carol Tice’s employment should be accorded preclusive effect in related employment actions.[vi] Ms. Tice had initially filed a SOX retaliation claim with OSHA, alleging that her employment was terminated in violation of SOX because she opposed management’s direction to employees to falsify sales call reports. A SOX ALJ dismissed Ms. Tice’s claim, concluding that the employer demonstrated that it would have terminated Ms. Tice absent her disclosure because Ms. Tice herself falsified sales call reports. Ms. Tice did not appeal the ALJ’s order and subsequently brought a separate action against her former employer in federal court alleging age discrimination and gender discrimination. The summary judgment dismissal of Ms. Tice’s discrimination claims likely could have been avoided if Ms. Tice had appealed the DOL ALJ’s order.
[i] 29 C.F.R. § 1980.110(a).
[ii] 29 CFR § 1980.110(b).
[iii] 29 CFR § 1980.110(b).
[iv] Clark v. Hamilton Hauling, LLC, ARB No. 13-023, ALJ No. 2011-STA-7, at 4-5 (ARB May 29, 2014).
[v] Bobreski v. J. Givoo Consultants, Inc., ARB No. 13-001, ALJ No. 2008-ERA-3, at 13-14 (ARB Aug. 29, 2014).
[vi] Tice, 325 F. App’x 114 (3d Cir. 2009).
A SOX whistleblower may, within 60 days of the ARB’s issuing its final decision, file a petition for review to the U.S. Court of Appeals in the circuit in which the alleged SOX violation occurred, or in the circuit in which the complainant resided on the date of the alleged violation.
SOX does not specify a standard of review for appeals to the federal courts of appeals. Under the Administrative Procedure Act, a court of appeals will uphold an ALJ’s findings of fact if supported by “substantial evidence.” The court reviews questions of law de novo, deferring to the ARB’s interpretation of statutes administered by the Department of Labor.
Sarbanes-Oxley Whistleblower Claims Not Subject to Mandatory Arbitration
Sarbanes-Oxley retaliation claims are exempt from mandatory arbitration agreements. The whistleblower protection provision of SOX states: “No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”
A SOX Claim Should Not Be Stayed While Related Claims Are Arbitrated
A recent decision by Magistrate Judge Rutherford in Vuoncino v Forterra Inc et al., No. 3:21-cv-01046-K, 2022 WL 868274 (N.D. Texas Feb. 28, 2022) concludes that the statutory text of SOX and the great weight of authority compels a finding that a SOX claim should not be stayed while related claims are arbitrated:
At least two courts have found SOX’s express disapproval of predispute arbitration agreements grounds to allow SOX litigation to continue while a plaintiff’s related state-law claims were arbitrated. In Murray, the Southern District of New York refused to stay a plaintiff’s SOX claim while his related claims were going to arbitration, arguing: “It would be curious to allow an arbitration award to preclude remedies under a statutory scheme for which arbitration has been deemed inappropriate by Congress; it would be equally curious to stay litigation of such a statutory claim so that arbitration might proceed unimpeded on a different claim.” Id. Similarly, in Wusow v. Bruker Corp., the Western District of Wisconsin refused to stay a plaintiff’s SOX claim while his related claims were arbitrated. Wussow v. Bruker Corp., 2017 WL 2805016, at *8-9 (W.D. Wis. June 28, 2017). The court did this in spite of the fact that it was “likely, if not unavoidable” that concurrent litigation and arbitration may have resulted in “conflicting factual or legal determinations.” Id. at *8. Indeed, while noting that it would normally be efficient to stay the entire case pending arbitration, the court found that staying “the SOX claim pending arbitration … would effectively negate the anti-arbitration provision set forth in § 1514A(e)(2).” Id. Moreover, the court held that staying the SOX claim would result in “effectively denying plaintiff the right to a federal forum” guaranteed by Congress when it enacted SOX. Id. at *9.*8 However, two other courts have exercised their discretion in the opposite way based mostly on the existence of overlapping facts. In Anderson v. Salesforce.com. Inc., the Northern District of California stayed a plaintiff’s SOX claim because it was based on “the same conduct” as his arbitrable state-law claims, “and because allowing the arbitration to resolve [would] simplify issues of law or questions of fact in future proceedings.” Anderson v. Salesforce.com, Inc., 2018 WL 6728015, at *3 (N.D. Cal. Dec. 21, 2018). Similarly, in Hansen v. Musk the District of Nevada stayed a plaintiff’s SOX claim because it arose “from the same conduct” as his arbitrable claims. Hansen v. Musk, 2020 WL 4004800, at *8 (D. Nev. July 15, 2020).Taken together, the Fifth Circuit precedent regarding nonsignatory stays, the nonbinding precedent favoring concurrent litigation of a SOX claim, and the nonbinding precedent favoring the stay of a SOX claim pending arbitration all point to two competing interests in cases like the one currently before the Court. Namely, the interest of a SOX plaintiff to have immediate access to a federal forum, as guaranteed in § 1514A(e)(2), and the interest of an arbitrating party in its “right to a meaningful arbitration,” as expressed by the Fifth Circuit and embodied in the FAA.In the context presented here, the Court finds Vuoncino’s interest in having a direct path to a federal forum for his SOX claim outweighs Defendants’ interest in enforcing its contractual right to arbitrate Vuoncino’s other claims. In crafting SOX, Congress included an explicit carve-out of predispute arbitration agreements. And in so doing, Congress evinced a clear “intention to preclude a waiver of judicial remedies for the statutory rights at issue.” Wussow, 2017 WL 2805016, at *8 (quoting Gilmer v. Interstate Johnson Lane Corp., 500 U.S. 20, 26 (1991)). If the Court were to stay Vuoncino’s SOX claim while the rest of his claims are arbitrated, it would essentially disregard that intention. While the Defendants’ contractual rights to arbitration may be somewhat diminished by the concurrent litigation, Defendants are at least assured that the arbitrable claims will proceed to arbitration. Defendants also may avail themselves of the opportunity to have the Court resolve legal issues related to the SOX claim. Indeed, Defendants have represented that they believe Vuoncino’s SOX claim fails as a matter of law and they intend to renew their motion to dismiss the SOX claim if the Court declines to stay it pending the arbitration of his other claims.Accordingly, the Court should exercise its discretion to allow Vuoncino’s claims to proceed concurrently, “each in its appropriate forum as determined by Congressional intent and the agreement of the parties.” Id. at *9; see also Landis v. N. Am. Co., 299 U.S. 248, 254 (1936)(“[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.”); Qualls v. EOG Res., Inc., 2018 WL 2317718, at *2 (S.D. Tex. May 22, 2018) (“[A]lthough inherent power should not be abused, it is discretionary and largely unreviewable.” (internal quotation marks omitted) (quoting Coastal (Bermuda) Ltd. v. E.W. Saybolt & Co., 761 F.2d 198, 203n.6 (5th Cir. 1985))).
OSHA Prohibits Gag Clauses in Settlement Agreements
When a whistleblower retaliation case is resolved before OSHA, the agency will evaluate the proposed settlement to ensure that it does not impede or restrict the whistleblowers’ right to engage in certain forms of protected conduct, such as reporting fraud to the SEC.
OSHA’s Directorate of Whistleblower Protection Programs has issued policy guidelines on provisions in settlement agreements that restrict whistleblowing. The policy guidance states that “OSHA will not approve a ‘gag’ provision that prohibits, restricts, or otherwise discourages a complainant from participating in protected activity,” and defines “protected activity” to include “filing a complaint with a government agency, participating in an investigation, testifying in proceedings, or otherwise providing information to the government.”
The policy guidance clarifies that unlawful “gag clauses” encompass not only express prohibitions on providing information to government agencies, but also indirect restrictions on protected conduct that could dissuade whistleblowing, including broad confidentiality or non-disparagement clauses. In particular, the policy guidance, which will be added to OSHA’s Whistleblower Investigations Manual, identifies four types of settlement provisions that can constrain whistleblowing:
- “A provision that restricts the complainant’s ability to provide information to the government, participate in investigations, file a complaint, or testify in proceedings based on a respondent’s past or future conduct. For example, OSHA will not approve a provision that restricts a complainant’s right to provide information to the government related to an occupational injury or exposure.
- A provision that requires a complainant to notify his or her employer before filing a complaint or voluntarily communicating with the government regarding the employer’s past or future conduct.
- A provision that requires a complainant to affirm that he or she has not previously provided information to the government or engaged in other protected activity, or to disclaim any knowledge that the employer has violated the law. Such requirements may compromise statutory and regulatory mechanisms for allowing individuals to provide information confidentially to the government, and thereby discourage complainants from engaging in protected activity.
- A provision that requires a complainant to waive his or her right to receive a monetary award (sometimes referred to in settlement agreements as a “reward”) from a government-administered whistleblower award program for providing information to a government agency. For example, OSHA will not approve a provision that requires a complainant to waive his or her right to receive a monetary award from the Securities and Exchange Commission, under Section 21F of the Securities Exchange Act, for providing information to the government related to a potential violation of securities laws.[ ]Such an award waiver may discourage a complainant from engaging in protected activity under the SarbanesOxley Act, such as providing information to the Commission about a possible securities law violation. For the same reason, OSHA will also not approve a provision that requires a complainant to remit any portion of such an award to respondent. For example, OSHA will not approve a provision that requires a complainant to transfer award funds to respondent to offset payments made to the complainant under the settlement agreement.”
Section 806 of SOX whistleblower protection law does not preempt other remedies
Section 806 of SOX specifically provides that “[n]othing in this section shall be deemed to diminish the rights, privileges, or remedies of any employee under any Federal or State law, or under any collective bargaining agreement.” 18 U.S.C. § 1514A(d). A whistleblower who is fired for refusing to commit an illegal act could bring both a SOX claim and a common-law wrongful discharge claim. Bringing the latter claim could potentially result in an award of punitive damages. But note that in some states, where there is an adequate statutory remedy to vindicate the public policy objectives, the employee can pursue a retaliation action only through the statute. Click here to learn more about SOX whistleblower protection.
Additional FAQs About the Sarbanes-Oxley Whistleblower Protection Law
When Congress enacted the Sarbanes-Oxley Act (SOX) in 2002, it included a whistleblower protection provision to combat a “corporate code of silence,” a code that “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the Federal Bureau of Investigation and the SEC, but even internally.” S. Rep. No. 107-146, at 4–5 (2002). Congress sought to empower whistleblowers to serve as an effective early warning system and help prevent corporate scandals and to “encourage and protect [employees] who report fraudulent activity that can damage innocent investors in publicly traded companies.” S.Rep. No. 107-146, at 19 (2002)
Congress enacted SOX “to safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation.” Lawson v. FMR LLC, 571 U.S. 429, 432 (2014); see also S. Rep. No. 107-146, pp. 2-11 (2002). Enron employees who attempted to report corporate misconduct had faced retaliation. “Congress therefore identified the lack of whistleblower protection as ‘a significant deficiency’ in the law, for in complex securities fraud investigations, employees ‘are [often] the only firsthand witnesses to the fraud.’” Lawson, 571 U.S. at 435 (quoting S. Rep. No. 107-146 at 10).
Congressional hearings about the Enron scandal probed why such a massive fraud was not detected earlier. The testimony and documents revealed that when “employees of Enron and its accounting firm, Arthur Andersen, attempted to report corporate misconduct, Congress learned, they faced retaliation, including discharge.” Lawson v FMR LLC, 134 S.Ct. 1158, 1162 (2014). And there was essentially no legal protection for whistleblowers, such as Sherron Watkins, who tried to stop the fraud.
Courageous Enron whistleblower Sherron Watkins blew the whistle to Enron executives and suffered retaliation for her whistleblowing. Her riveting Congressional testimony helped spur Congress to enact the robust corporate whistleblower protection provision in the Sarbanes Oxley Act.
Under the Dodd-Frank SEC Whistleblower Reward Program, a whistleblower who provides original information to the SEC that results in monetary sanctions exceeding $1 million shall be paid an award of ten to thirty percent of the amount recouped. See 15 U.S.C. § 78u-6.
An employer’s breach of an anti-retaliation policy in a Code of Ethics can potentially give rise to a breach of contract claim. And depending upon the whistleblower’s specific disclosure to their employer, the whistleblower may have a claim under federal or state whistleblower protections laws.
In early 2015, a federal district court held that an employer’s anti-retaliation policy created legally enforceable rights. See Leyden v. Am. Accreditation Healthcare Comm’n, 83 F. Supp. 3d 241, 247–48 (D.D.C. 2015). In Leyden, the trial court held that the plaintiff had a valid claim based on the employer’s alleged violation of its internal anti-retaliation policy. The court relied on law construing whether employee handbooks created implied contractual rights.
In Leyden, the plaintiff was the Chief Accreditation Officer at the American Accreditation Healthcare Commission, a nonprofit offering accreditation and certification programs to healthcare entities. The defendant had an anti-retaliation policy, which stated: “No URAC employee who in good faith reports any Improper Activities in accordance with this policy shall suffer, and shall be protected from threats of harassment, retaliation, discharge, or other types of discrimination.” The plaintiff voiced concerns that new management was mistreating female executives and that two board members were engaged in conduct that she thought jeopardized the organization’s independence. The defendant then terminated the plaintiff’s employment.
The defendant moved to dismiss the complaint, arguing in relevant part that the anti-retaliation policy did not create contractual rights. Even if it did, the defendant contended, it had disclaimed any such rights in its employee handbook.
However, the court held that the anti-retaliation policy created an implied contract. Id. The court began by reviewing Strass v. Kaiser Foundation Health Plan, a case holding that an employee handbook created an implied contract. Id. at 247 (citing Strass v. Kaiser Found. Health Plan, 744 A.2d 1000 (D.C. 2000)). The court discussed how a manual could create rights, and how an employer could effectively disclaim those rights. Id. The court also rejected the defendant’s argument about the disclaimer, noting that a disclaimer that was “rationally at odds” with the other language in the document may not cut off an implied contract. Id.
In finding an implied contract, the court focused on the employer’s invitation to report “Improper Activities” internally and on the language of the anti-retaliation policy. Id. The court also concluded that the employer’s disclaimer, which was found in a different document, was rationally at odds with the anti-retaliation policy. Id. The reasoning in Leyden may be persuasive in other jurisdictions and provide an important remedy to whistleblowers that are not covered under federal or state whistleblower protection statutes.
However, at least one district court rejected Leyden’s reasoning. On June 22, 2016, the U.S. District Court for the Southern District of New York held that an employer’s code of conduct was not a contract because it “states that it is ‘not a contract of employment’ and that nothing in the company’s policies ‘should be construed as a promise of any kind, or creating a contract regarding wages or other working conditions.’” Diaz v. Transatlantic Reinsurance Co., No. 1:16-cv-01355, slip op. at 12–13. The court held that the employer’s senior officer code of conduct, by extension, was not a contract because the code of conduct, which included an adequate disclaimer, applied to the entire “Corporation and its subsidiaries worldwide.” Id.
In Diaz, similar to Leyden, the defendant’s manuals contained anti-retaliation provisions. Specifically, its code of conduct stated that the company was obligated to “prevent retaliation against any employee who, in good faith, voices concerns, reports violations, or participates in an investigation,” and its senior officer code stated that the company “will not tolerate retaliation for violations of this Code made in good faith.” Id. at 11. Furthermore, according to the plaintiff, the senior officer code “encourage[d] employees to report potential violations, including conflicts of interest.” Id. at 5.
As discussed above, Ileana Diaz reported a potential conflict of interest involving the executive vice president. Diaz alleged that she suffered harassment and adverse actions after making this report. Id. at 5–6.
In addition to alleging retaliation under SOX, Diaz alleged a breach of contract based on Transatlantic’s violations of the anti-retaliation provisions in its code of conduct and senior officer code. Transatlantic moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Diaz failed to state a claim. The district court agreed with Transatlantic, turning to New York precedent that “employment guides or codes of conducts [sic] may not provide the basis for breach of contract claims when they contain language of disclaimer.” Id. at 12 (citing Lobosco v. N.Y. Tel. Co./NYNEX, 751 N.E.2d 462 (N.Y. 2001)). The court accepted Transatlantic’s disclaimer and concluded that its code of conduct and senior officer code were not contracts. Therefore, those codes could not form the basis of Diaz’s breach of contract claim, and the court granted Transatlantic’s Rule 12(b)(6) motion. See id. at 12–13.
Regulation S-K Item 103 requires the corporation to briefly describe material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the corporation is a party and to “include similar information as to any such proceedings known to be contemplated by governmental authorities.” (Emphasis supplied). And registered corporations are required to disclose unlawful – but uncharged – conduct when such violations specifically threaten investors’ ability to receive a return.
Materiality cannot be determined exclusively based on quantitative metrics such as the percent of earnings or revenue affected by the misstatement. SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45,150, 45,151 (Aug. 19, 1999) (codified at 17 C.F.R. pt. 211). Rather, a corporation must consider qualitative factors that “may cause misstatements of quantitatively small amounts to be material.” Id. The Bulletin specifically contemplates “whether the misstatement involves concealment of an unlawful transaction.” Id.
A whistleblower achieved a significant win on a critical challenge that nearly all corporate whistleblowers often face – whether they can use confidential company documents to expose fraud and other illegality. Judge Bashant’s decision in Erhart v. Bofi Holdings clarifies that employer confidentiality agreements do not supersede federal whistleblower rights, and signals that retaliatory lawsuits against whistleblowers are unlikely to succeed. This post discusses the decision and provides guidance to corporate whistleblowers concerning precautions to take in using company documents to blow the whistle.
For more information about this topic, see De Facto Gag Clauses: The Legality of Employment Agreements That Undermine Dodd-Frank’s Whistleblower Provisions.
The SEC Office of the Whistleblower has taken decisive steps to protect whistleblowers who disclose fraud to the SEC through the SEC’s whistleblower reward program.
The SEC recently brought its first enforcement action ever to be based solely on retaliation against a whistleblower. On September 29, 2016, the SEC ordered International Game Technology (“IGT”) to pay a $500,000 penalty for terminating the employment of a whistleblower because he reported to senior management and to the SEC that the company’s financial statements might be distorted. See Exchange Act Release No. 78991 (Sept. 29, 2016). During an internal investigation into the whistleblower’s allegations, IGT removed him from opportunities that were integral to his ability to perform his job successfully. IGT then fired the whistleblower the same day as the internal investigation concluded that IGT’s cost-accounting model was appropriate and did not cause its financial statements to be distorted. The whistleblower was protected under the SEC whistleblower program, despite being mistaken, because he reasonably believed that IGT’s cost-accounting model constituted a violation of federal securities laws.
The action against IGT was the SEC’s first standalone retaliation case. However, it is consistent with a 2014 enforcement action that indicated, for the first time, that retaliating against a whistleblower can result not only in a private suit brought by the whistleblower but also in a unilateral SEC enforcement action. On June 16, 2014, the SEC announced that it was taking enforcement action against Paradigm Capital Management, Inc. (“Paradigm”), a hedge fund advisory firm, for engaging in prohibited principal transactions and for retaliating against the whistleblower who disclosed the unlawful trading activity to the SEC. See Exchange Act Release No. 72393 (June 16, 2014). This was the first case in which the SEC exercised its authority under Dodd-Frank to bring enforcement actions based on retaliation against whistleblowers.
According to the order, Paradigm retaliated against its head trader for disclosing, internally and to the SEC, prohibited principal transactions with an affiliated broker-dealer while trading on behalf of a hedge fund client. The transactions were a tax-avoidance strategy under which realized losses were used to offset the hedge fund’s realized gains.
When Paradigm learned that the head trader had disclosed the unlawful principal transactions to the SEC, it retaliated against him by removing him from his position as head trader, changing his job duties, placing him on administrative leave, and permitting him to return from administrative leave only in a compliance capacity, not as head trader. The whistleblower ultimately resigned his position.
Paradigm settled the SEC charges by consenting to the entry of an order finding that it violated the anti-retaliation provision of Dodd-Frank and committed other securities law violations; agreeing to pay more than $1 million to shareholders and to hire a compliance consultant to overhaul their internal procedures; and entering into a cease-and-desist order.
The SEC’s press release accompanying the order includes the following statement by Enforcement Director Andrew Ceresney: “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.” The Paradigm enforcement action suggests that whistleblower retaliation can result in liability far beyond the damages that a whistleblower can obtain in a retaliation action and that retaliation can invite or heighten SEC scrutiny.
When a corporation speaks through a public filing or informally, e.g., by issuing a press release, the half-truth doctrine requires the corporation to include all additional information necessary to make the statement not misleading. See 17 C.F.R. §§ 230.408, 240.12b-20 (public filings). See also Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 641 (3d Cir. 1989) (incorporating the requirement into the 10b-5 context).
The Supreme Court held in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 2000 (2016) that “half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.” Rule 10b-5 encompasses not only affirmative falsehoods, but also half-truths: It reaches the failure “to state a material fact necessary in order to make the statements made, in the light of the circum-stances under which they were made, not misleading.” 17 C.F.R. 240.10b-5(b).
A statement violates Rule 10b-5 if it would give reasonable shareholders a “false impression” of the relevant facts. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968).
Many cases have found that the duty to complete a half-truth exists even where the omitted information is unlawful – but uncharged – conduct. See, e.g., In re Marsh & McLennan Cos. Sec. Litig., 501 F. Supp. 2d 452, 469 (S.D.N.Y. 2006); In re Sotheby’s Holdings, Inc., No. 00 Civ. 1041(DLC), 2000 WL 1234601, at *4 (S.D.N.Y. Aug. 31, 2000); In re Par Pharm., Inc. Sec. Litig., 733 F. Supp. 668, 675 (S.D.N.Y. 1990) (“The illegality of corporate behavior is not a justification for withholding information that the corporation is otherwise obligated to disclose.”); Ballan v. Wilfred Amer. Educ. Corp., 720 F. Supp. 241, 249 (E.D.N.Y. 1989) (“The fact that a defendant’s act may be a crime does not justify its concealment.”).
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Whistleblower Protection Lawyers Representing SOX Whistleblowers Nationwide
Leading whistleblower firm Zuckerman Law represents senior professionals in high-stakes employment matters, including corporate officers, executives, managers, and partners at professional services firms. The firm’s seasoned whistleblower attorneys have obtained substantial recoveries for clients under the Sarbanes Oxley whistleblower protection law and under other whistleblower laws.
- U.S. News and Best Lawyers® have named Zuckerman Law a Tier 1 firm in Litigation – Labor and Employment in the Washington DC metropolitan area.
- Matt Stock is a Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. As an auditor, Stock developed expertise in financial statement analysis and internal controls testing and fraud recognition. He uses his auditing experience to help IRS, CFTC and SEC whistleblowers investigate and disclose complex financial frauds to the government and develop a roadmap for the SEC to take an enforcement action. Matt has been interviewed on CNBC, quoted extensively about whistleblower rewards in the media, and is the lead author of SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
- Dallas Hammer has extensive experience representing whistleblowers in retaliation and rewards claims and has written extensively about cybersecurity whistleblowing. He was selected by his peers to be included in The Best Lawyers in America® in the category of employment law in 2021 and 2022.
- Described by the National Law Journal as a “leading whistleblower attorney,” founding Principal Jason Zuckerman has established precedent under a wide range of whistleblower protection laws and obtained substantial compensation for his clients and recoveries for the government in whistleblower rewards and whistleblower retaliation cases. He served on the Department of Labor's Whistleblower Protection Advisory Committee, which makes recommendations to the Secretary of Labor to improve OSHA’s administration of federal whistleblower protection laws. Zuckerman also served as Senior Legal Advisor to the Special Counsel at the U.S. Office of Special Counsel, the federal agency charged with protecting whistleblowers in the federal government. At OSC, he oversaw investigations of whistleblower claims and obtained corrective action or relief for whistleblowers.
- Zuckerman was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” (2020, 2018, 2017, 2015, 2009, and 2007), selected by his peers to be included in The Best Lawyers in America® in the category of employment law (2011-2021) and in SuperLawyers in the category of labor and employment law (2012 and 2015-2021), is rated 10 out of 10 by Avvo, based largely on client reviews, and is rated AV Preeminent® by Martindale-Hubbell based on peer reviews
- We have published extensively on whistleblower rights and protections, and speak nationwide at seminars and continuing legal education conferences. We blog about new developments under whistleblower retaliation and rewards laws at the Whistleblower Protection Law and SEC Awards Blog, and in 2019, the National Law Review awarded Zuckerman its “Go-To Thought Leadership Award” for his analysis of developments in whistleblower law.
- Our attorneys have been quoted by and published articles in leading business, accounting, and legal periodicals, including The Wall Street Journal, Forbes, CNBC, MarketWatch, Vox, Accounting Today, Going Concern, Law360 – Expert Analysis, Investopedia, The National Law Review, inSecurities, Government Accountability Project, S&P Global Market Intelligence, Risk & Compliance Magazine, The D&O Diary, The Compliance and Ethics Blog, Compliance Week and other printed and electronic media.
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