There has been confusion to date about whether non-publicly traded subsidiaries of publicly traded companies are subject to the whistleblower provisions of the Sarbanes-Oxley Act.

That conclusion—by two lawyers with Wilmer Culter Pickering Hale and Dorr in Washington—is based on a comprehensive analysis of every administrative ruling and federal court decision under Section 806 of Sarbanes-Oxley through September 2005. The research by Carrie Wofford and Thomas W. White will be summarized in a chapter on whistleblowers in the upcoming third volume of the American Bar Association’s “Practitioner’s Guide to the Sarbanes-Oxley Act.”

Wofford

Wofford tells Compliance Week that she and White were not entirely surprised at the ALJs’ differences in interpretation of SOX. “After all, the Sarbanes-Oxley Act introduced a whole new set of significant legal requirements that the legal community is still grappling to understand,” she said. “Plus, it takes time for the cases to work their way up through the various levels of review where, presumably, binding rulings will ultimately be issued.”

In light of differing interpretations of the SOX whistleblower provisions by administrative judges at the Department of Labor, “companies that face a retaliation claim should work closely with attorneys who are familiar with these trends and differences and who can tailor their guidance to the jurisprudential leanings of the individual judge overseeing the case,” says Wofford.

Asked if inconsistencies in how SOX 806 has been applied suggests that the provision, or the statute as a whole, was sloppily or hastily drafted, White says “one might draw that conclusion.” He notes that it is “well-known that SOX was enacted on an extraordinarily fast-track, and many provisions of the law raise issues that might have been clarified if the process had proceeded more deliberately.”

Decisions Go Both Ways

One its face, the civil whistleblower provisions of Sarbanes-Oxley contained in Section 806 apply only to companies that file public reports with the Securities and Exchange Commission.

But what if the company has a non-publicly traded subsidiary?

According to Wofford, most administrative law judges ALJs who have reviewed SOX whistleblower cases will refuse to extend coverage to a private subsidiary if the complainant fails to name the parent company as a party in the complaint.

SOX 806

Protection For Employees Of Publicly Traded Companies Who Provide Evidence Of Fraud

(a) IN GENERAL- Chapter 73 of title 18, United States Code, is amended by inserting after section 1514 the following:

Sec. 1514A. Civil action to protect against retaliation in fraud cases

(a) WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES—No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 780(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee—(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which 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, when the information or assistance is provided to or the investigation is conducted by—(A) a Federal regulatory or law enforcement agency;(B) any Member of Congress or any committee of Congress; or(C) 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); or(2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged 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.(b) ENFORCEMENT ACTION—(1) IN GENERAL—A person who alleges discharge or other discrimination by any person in violation of subsection (a) may seek relief under subsection (c), by—(A) filing a complaint with the Secretary of Labor; or(B) 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.(2) PROCEDURE—(A) IN GENERAL—An action under paragraph (1)(A) shall be governed under the rules and procedures set forth in section 42121(b) of title 49, United States Code.(B) EXCEPTION—Notification made under section 42121(b)(1) of title 49, United States Code, shall be made to the person named in the complaint and to the employer.(C) BURDENS OF PROOF—An action brought under paragraph (1)(B) shall be governed by the legal burdens of proof set forth in section 42121(b) of title 49, United States Code.(D) STATUTE OF LIMITATIONS—An action under paragraph (1) shall be commenced not later than 90 days after the date on which the violation occurs.(c) REMEDIES— (1) IN GENERAL—An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole.(2) COMPENSATORY DAMAGES—Relief for any action under paragraph (1) shall include—(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;(B) the amount of back pay, with interest; and(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.(d) RIGHTS RETAINED BY EMPLOYEE—Nothing 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. (b) CLERICAL AMENDMENT—The table of sections at the beginning of chapter 73 of title 18, United States Code, is amended by inserting after the item relating to section 1514 the following new item:1514A. Civil action to protect against retaliation in fraud cases.

When the parent company is named as party, decisions vary as to the extent to which a strong tie must be shown between the parent and the subsidiary in order to cover retaliation by the subsidiary, Wofford notes. “Some ALJs—and one court—appear to find a subsidiary to be covered per se if the parent is publicly traded,” says Wofford, citing a decision in which an administrative judge found that a publicly traded company, for SOX purposes, is “the sum of its constituent units.”

Other cases approach the issue from the opposite end of the spectrum, requiring employees of a private subsidiary to “pierce the corporate veil” in order to recover under SOX 806. “For instance, one ALJ dismissed a claim because the complainant failed to name a publicly traded company and the ALJ found no indication that the parent companies were sufficiently involved in the management and employment relations of the subsidiary to justify piercing the corporate veil,” says Wofford.

A few administrative judges have taken an intermediate view, looking to whether the parent and subsidiary “are so intertwined as to represent one entity,” according to Wofford.

‘Act As If Covered’

White

White notes that the legislative history of SOX “does not shed much light” on the question of whether the whistleblower provisions apply to subsidiaries of publicly traded companies. However, this does not necessarily imply that Congress meant to exclude subsidiaries of those companies, he says. “Indeed, given the broad scope of SOX and Congress’ manifest intent to encourage internal reporting and to protect whistleblowers, one could conclude that Congress could not have meant to make a whistleblowing employee’s rights turn on the vagaries of a public company’s internal organizational structure.”

Because of the uncertainty, it may be advisable for subsidiaries to assume that they’re covered, Wofford notes.

“If a subsidiary retaliated against a whistleblower and happened to draw one of the ALJs who believe in broad coverage of subsidiaries, it would spell trouble for the subsidiary,” she says. “It is plainly in the company’s interest to act as if it is covered and respond appropriately to whistleblower complaints. In other words, don’t retaliate. As SOX intends, companies should take whistleblower complaints seriously and investigate them as appropriate. If there are other reasons to discipline the whistleblower, such as a history of poor performance or insubordination, then those reasons should be documented and addressed as a separate matter from the whistleblowing.”

White says there are some steps the subsidiary can take to decrease the possibility that an ALJ might find an employee of the subsidiary covered by the Act. “Maintaining strictly separate corporate identities should go a long way in the eyes of most ALJs, although there are some who seem to view a subsidiary as covered per se if the parent company is publicly traded. For other judges, it is significant if a subsidiary acts independently in employee relations, such as hiring, firing and supervising employees without input from the parent company. For others, the degree to which the corporate identities are intertwined is relevant.”

In addition, “avoiding interrelated operations and common management and boards may help,” says White. “The differences of opinion among ALJs may suggest the importance of consulting attorneys familiar with the views of individual ALJs should a subsidiary face a complaint. In light of the decisions to date there can be no assurance that any company can absolutely insulate itself from liability for actions by a subsidiary, except perhaps a fully autonomous operating subsidiary. And, of course, in many companies full insulation may not be feasible.”

Related coverage is available from the box above, right.

Next week, we will look at what Wofford and White have discovered about how ALJs and federal judges have interpreted the whisteblower provisions of SOX when it comes to foreign-based workers of companies that are subject to the Securities Exchange Act.

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