Standard for SOX Whistleblower Retaliation Claims Clarified

Mark Hamblett

New York Law Journal

2013-03-07 00:00:00.0

The standard for analyzing whistleblower retaliation claims under the Sarbanes-Oxley Act has been clarified by the U.S. Court of Appeals for the Second Circuit.

Deciding the appeal of a whistleblower who claimed he was fired for arguing that a company should make certain disclosures under Sarbanes-Oxley, the court clarified the burden-shifting framework for retaliation claims under the act, 18 U.S.C. §1514A.

In 2001, J. Scott Bechtel was hired as vice president of technology commercialization by Competitive Technologies Inc. (CTI), a company that acts as an agent for patent holders who want to license or sell technologies to companies that will bring them to market.

In 2002, after CTI hired John Nano as president and CEO, Nano and Bechtel began to clash. In October 2002, Bechtel reported to the company's general counsel that Nano, in an effort to quickly generate revenue and keep the company out of bankruptcy, might be violating certain legal requirements.

In December 2002 and March 2003, Bechtel was asked, and agreed, to join a committee to review the company's financial transactions and make recommendations on its disclosure obligations under Sarbanes-Oxley.

At both meetings, Bechtel and other committee members disagreed over what disclosures were required. Fearing personal liability under the act, Bechtel refused to sign the relevant disclosure forms.

In May 2003, the CTI board approved a cost-cutting proposal by Nano that included terminating Bechtel. Nano fired him the next month.

Three months later, Bechtel filed a whistleblower complaint under the act with the Department of Labor's Occupational Safety and Health Administration (OSHA).

In 2005, OSHA found there was reasonable cause to believe CTI violated the act, and it ordered Bechtel be reinstated, given back wages and awarded compensatory damages.

CTI filed objections to the findings and sought a formal hearing before an administrative law judge (ALJ).

Almost six years of wrangling ensued, including two remands to the ALJ from the Administrative Law Board. Ultimately, the board in 2011 upheld a decision by the ALJ dismissing Bechtel's complaint.

Bechtel appealed to the Second Circuit, where Judges Jose Cabranes (See Profile), Reena Raggi (See Profile) and Peter Hall (See Profile) heard oral arguments on Dec. 7, 2012, in Bechtel v. Administrative Review Board, 11-4918-ag.

Writing for the panel, Cabranes said Bechtel had to prove by a preponderance of the evidence that he was engaged in protected activity; that CTI knew he was engaged in protected activity; that he suffered an unfavorable action: and that the "protected activity was a contributing factor in the unfavorable action."

"Even if the employee proves these elements by a preponderance of the evidence, the employer may rebut this prima facie case with clear and convincing evidence that it would have taken the same adverse action in the absence of any protected activity," he said.

On the second remand, he said, the ALJ initially applied the correct standard, but made the mistake of elaborating and stating that until an employee meets his burden of proof, the employer "need only articulate a legitimate business reason for its action."

The ALJ, Cabranes said, "seems to have thought that, in addition to the framework specified by the statute and regulations, there existed a second burden-shifting system that applied when the complainant failed to prove a prima facie case by a preponderance of the evidence."

Cabranes said the ALJ's "alternative burden-shifting scheme has no basis in any relevant law or regulation and is simply incorrect."

The board, however, did not make the same mistake, Cabranes said, as it found that "Bechtel had failed to prove by a preponderance of the evidence that his protected activity was a contributing factor in the adverse employment action."

Kirstin Marie Jahn of Jahn & Associates in Boulder, Colo., represented Bechtel.

Trial Attorney Dean Romhilt of the U.S. Department of Labor argued for the Administrative Review Board.

Garrick Sevilla of Williams Mullen in Raleigh, N.C., argued for CTI.

This article originally appeared in the New York Law Journal.