A federal appeals court has sounded the first sour note for overseas employees who blow the whistle on corporate fraud: The Sarbanes-Oxley Act does not protect them from retaliation.
Earlier this month, the 1st Circuit Court of Appeals ruled that a citizen of Argentina who worked for a subsidiary of U.S.-based Boston Scientific Corp. could not sue under SOX claiming that he was fired after reporting certain alleged improprieties in Latin American operations. Although certain provisions of SOX explicitly—and controversially—extend beyond U.S. borders, the court said, the whistleblower provision is not one of them.
“Whether to confer extraterritorial effect is a policy choice for Congress,” the court said, upholding the dismissal of the employee’s SOX claim. “[W]e see no indication that Congress entered into any such balancing. To the contrary, it made no reference to application abroad and tailored the relevant statute to purely domestic application.”
The only two other cases involving foreign whistleblowers have been decided by administrative law judges at the U.S. Labor Department, which enforces Section 806 of SOX, the whistleblower provision. Both judges ruled that the foreign worker was not protected by SOX 806 (see excerpt of the SOX provision, below, left).
Companies Shouldn’t ‘Relax Fully’
White
Despite these rulings, concluding that SOX will never protect foreign whistleblowers is premature, says Thomas White, a partner with Wilmer Cutler Pickering Hale and Dorr in Washington, D.C. “Certainly these decisions reduce a company’s potential legal exposure to claims by overseas employees,” he says, but “I would not say that companies should relax fully … More complicated questions are likely to arise.”
All three rulings so far, White notes, have involved foreign nationals working for foreign subsidiaries; the result might differ if a U.S.-based employee blew the whistle while on an overseas assignment. The 1st Circuit court itself acknowledged as much when it ruled against foreign workers at overseas subsidiaries, he says.
Kaufman
David Kaufman, a partner with Duane Morris in Chicago, notes that the Securities and Exchange Commission has made clear that “one size doesn’t fit all” regarding SOX issues, and that the refusal to apply the SOX whistleblower provision to foreign workers may be an example of that. Kaufman does agree that a U.S. worker in a foreign country would “have more of an expectation” that SOX would cover his conduct, and that courts might be more inclined to allow a suit to go forward in such circumstances.
Presumption Against Extraterritorial Application
The 1st Circuit case, Carnero v. Boston Scientific Corp., was filed by Ruben Carnero, an Argentine who lived in Brazil and worked for two Boston Scientific subsidiaries in Latin America. Carnero was employed and paid by Boston Scientific’s Argentinean and Brazilian subsidiaries, not by Boston Scientific itself.
SOX 806
The excerpt below from Section 806 of The Sarbanes-Oxley Act of 2002, "Protection For Employees Of Publicly Traded Companies Who Provide Evidence Of Fraud":
(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. 78o(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.
Source: Section 806 of The Sarbanes-Oxley Act of 2002.
Carnero filed suit against Boston Scientific in a federal court in Massachusetts, claiming that he informed Boston Scientific its Latin American subsidiaries had created false invoices and had inflated sales figures. After making these reports, Carnero alleged, he was fired.
The trial judge dismissed Carnero’s complaint. His lawyers then argued to appellate judges that although the alleged fraud reported by Carnero happened in South America, he had an overarching employment relationship with the U.S.-based parent company. Carnero cited the “extensive and continuous control” Boston Scientific’s Massachusetts-based employees “exercised over his work and duties in Latin America” as evidence of that relationship.
The 1st Circuit agreed that Carnero’s claim would generally fit within SOX’s whistleblower provisions, and that he might be a protected employee even though he worked for Boston Scientific’s foreign subsidiaries. But, the court said, Carnero could not overcome the “well-established presumption against the extraterritorial application of Congressional statutes … While the Sarbanes-Oxley purpose to protect investors and build confidence in U.S. securities markets may be a factor supporting extraterritorial application of the instant whistleblower protection provision, the other pertinent factors run strongly counter to finding an extraterritorial legislative intent.”
Stopping At Water’s Edge
Wofford
Carrie Wofford, a lawyer with Wilmer Hale in Washington, D.C., notes that multinational corporations subject to overlapping employment laws “naturally are concerned about U.S. laws that purport to regulate their relations with their overseas employees. Foreign governments also are sensitive about protecting their sovereignty when they perceive U.S. efforts to extend its laws outside its boundaries.”
But, Wofford says, “whistleblowers [have been] viewed as major actors in exposing the corporate scandals in the media in recent years, and SOX reflects a policy to encourage and protect blowing the whistle on corporate wrongdoing. To say that SOX's protections stop at the water’s edge might be viewed as undermining this policy.”
Although discrepancies in legal protections for American and foreign-based employees “always create difficulties for companies,” Wofford adds, multinational companies are somewhat accustomed to differences in local employment law across various nations where they operate. “So this new ruling is not likely to be insurmountable from an administrative viewpoint,” she says.
Wofford also notes that criminal whistleblower laws expressly do allow extraterritorial protection—so U.S. prosecutors could file charges for retaliations overseas if they chose, although no such cases have happened yet “and one can only speculate now about the circumstances under which they might do so.” What’s more, the SEC would likely consider retaliation against whistleblowers very unfavorably if it were investigating some fraud allegation the whistleblower exposed.
Wofford says she expects to see “more difficult cases—particularly involving U.S. nationals working overseas and U.S.-based employees on temporary assignment overseas. And these more difficult cases may make it harder for courts to draw clear lines. So we expect to see continued developments as the courts grapple with issues relating to extraterritorial application of SOX whistleblower protections.”
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