Sounding Out The Bounds Of Whistleblowing

Maybe whistleblowing isn’t that painful on corporate ears after all. Four years after Congress enacted Sarbanes-Oxley and established Section 806—which protects employees from retaliation if they raise complaints about a company’s compliance with securities law—legal experts say the whistleblower provision can be a nuisance, especially when workers abuse its protections.

Overall, however, as court cases move forward and decisions on the scope of whistleblower protections emerge, Section 806 isn’t evolving into the compliance nightmare that other portions of SOX have become.

Bertram

“Sure it’s frustrating that some complaints are simply not legitimate and are raised as a protective measure. But employers don’t seem to view the law negatively,” says Connie Bertram, a partner with Winston & Strawn. “[Whistleblower] liability is secondary concern to making sure your company is compliant and that you don’t have an employee who is acting outside the law.”

Garry Mathiason, a partner with Little Mendelson, agrees that the SOX whistleblower provision has not riled companies the way other parts of the law (such as Section 404’s auditing provisions) have. While widespread irritation exists over the growing number of retaliation lawsuits filed by workers, Mathiason says that goes beyond SOX to a wide range of employment matters. Retaliation complaints have increased “because plaintiffs’ counsel have become much more sophisticated about how to prove retaliation cases,” he says.

Pate

Lesley Pate, an attorney with the law firm Venable, Baetjer, Howard & Civiletti, notes that the vast majority of SOX whistleblower complaints filed to date have been resolved in the company’s favor. Part of the reason for the high number of claims found meritless, she says, is that while Section 806 encompasses more than just accounting fraud, it doesn’t cover everything—a fact employees often miss when they make a complaint.

“There’s a perception out there among employees that if I’m a whistleblower, Sarbanes-Oxley applies to me,” Pate says. “People in the legal community and business people who deal with these things day-in and day-out understand that’s not the case.”

‘Middle Of Road’ Approach

Under Section 806, public companies cannot fire, discipline or otherwise harass any employee because he has spoken up about what he believes to be a violation of federal law or Securities and Exchange Commission rules—when the supposed violation relates to fraud against shareholders. So far, Pate says, much of the litigation surrounding SOX whistleblower actions has centered on exactly what “fraud against shareholders” is.

“The conduct that an employee is complaining about doesn’t have to be a violation of the securities laws or anti-fraud against shareholder laws—just that the employee reasonably believed that the conduct they’re complaining about constituted a violation of securities laws or antifraud laws,” Pate says.

SOX 806

Excerpt below is 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.

Partial excerpt from Section 806 of The Sarbanes-Oxley Act of 2002.

The U.S. Department of Labor is the agency charged with jurisdiction over SOX whistleblower claims. So far, says Bertram at Winston & Strawn, administrative law judges in at the Labor Department have “taken kind of a middle of the road approach” to many of the issues that have been raised.

Mathiason

When SOX was first enacted, some questioned whether the Labor Department was the appropriate agency to handle whistleblower complaints. But Mathiason at Little Mendelson says the Labor Department deserves praise for the efficient way it has ferreted out bogus claims.

“The system is very good. The administrative law judges are so good that [even the lower standard of proof under SOX] hasn’t made the kind of dent you might expect,” he says. “The whistleblower system in Sarbanes-Oxley is probably the best there is for differentiating valid cases and [meritless] ones.”

Writing On The Wall

Although many SOX whistleblower complaints are undeniably legitimate, the perception exists that workers sometimes misuse the process while trying to save their jobs, such as an employee making a SOX-related complaint just before he is about to be fired or receive a poor performance review.

“People are trying to wrap cases into Sarbanes-Oxley because it’s very powerful,” says Michael Ference, a partner with Sichenzia Ross Friedman Ference. “It’s one thing to say you’ve been wrongfully terminated; it’s quite another thing to say you’ve retaliated against in violation of Sarbanes-Oxley.”

Bevilacqua

Louis Bevilacqua, a lawyer at Cadwalader, Wickersham & Taft who helps his clients respond to whistleblower complaints, says the governance device devolved into another channel for employee complaints of all kinds. “You end up getting calls about ‘My boss said this,’ and ‘Is that a problem?’ ” he says. “There’s everything from harassment to bad work conditions.”

But while Bevilacqua criticizes SOX as a whole, he considers whistleblowing issues only a small part of the law’s burden. Most well-governed companies already had some sort of whistleblowing system in place anyway, he says.

William Donovan, a former general counsel at a Fortune 100 company and now partner at DLA Piper Rudnick Gray Cary, agrees. The SOX whistleblowing provision does sometimes create conflict between protecting employees trying to avoid getting fired and offering a legitimate channel for fearful employees to speak up, he says, but overall “people see the whistleblower protections as having a legitimate purpose.”

Two Cases With Impact?

Two recent Supreme Court decisions could affect SOX whistleblower claims, although neither case involved Sarbanes-Oxley. In the first case, Garcetti v. Ceballos, the court ruled 5-4 that public employees who make statements pursuant to their official duties are not speaking as citizens for First Amendment purposes, and that they can be disciplined even if they are blowing the whistle about allegedly improper practices.

The second case, Burlington Northern & Santa Fe Railway v. White, clarified what standard must be met to prove retaliation against an employer under Title VII of the Civil Rights Act. The justices ruled 9-0 that an employee can sue for retaliation when he or she is subject to actions that would have been materially adverse to a reasonable employee.

Pate says she believes employers will try to drive SOX whistleblowing cases through the Garcetti door, arguing that employees who are required as part of their job to report misconduct do not get the same protection as other workers. “We’re going to have to wait and see if there’s a case or some further guidance from the administrative process,” she says.

Donovan

Donovan agrees that Garcetti could weigh on SOX whistleblowers. “The court was very divided as to rights of employers versus the rights of whistleblowers, and they went the way of the employer,” he says. “It’s an indication—though not necessary a conclusive indication—that the Supreme Court might be more hesitant to protect whistleblower rights under Sarbanes-Oxley than some might have thought.”

The Burlington Northern ruling is more directly applicable to SOX whistleblower cases, Pate says, because administrative law judges at the Labor Department look to Title VII to determine how to enforce the SOX whistleblower law.

Administrative law judges have been split over what constitutes an adverse action under SOX, she says. “That same split had come up under Title VII. I think we’re going to see [the Burlington Northern decision] becoming the standard that ALJs and courts are going to start applying” to SOX whistleblower cases as well.

The decisions in the cases above, as well as related coverage of whistleblower issues, can be found in the box above, right.