When an unhappy employee took American Airlines to court alleging the company retaliated against him for engaging in whistleblower activity, American’s lawyers probably thought victory was a sure thing. The company temporarily had placed the employee on a layoff list, but removed him from it before firing him. Such a minor change in status hardly seemed to be an “adverse employment action” that would give rise to a claim under Section 806 of the Sarbanes-Oxley Act.
American also had precedents on its side–several courts and Department of Labor administrative law judges (ALJs) had ruled in the past that such an action wasn’t retaliation. But unfortunately for American, the ALJ that heard its case disagreed and ruled Dec. 9, 2004, in the employee’s favor.
The surprising result in Hendrix v. American Airlines Inc. highlights the uncertainty companies face when confronted with allegations of retaliation against SOX whistleblowers. More than four years after the controversial Act’s passage, courts and ALJs are still sorting out how to enforce and interpret some of its provisions. The whistleblower protection outlined in Section 806 is proving to be one of the most unpredictable provisions.
When Carrie Wofford and Tom White of Wilmer Cutler Pickering Hale and Dorr recently reviewed all of the decisions interpreting this provision so far, they found confounding discrepancies in five key areas: parent company liability for the acts of a privately held subsidiary; the law’s application to foreign employees; what constitutes fraud against shareholders; what constitutes retaliation; and the burden of proof.
“This area is still nascent and these issues will continue to be litigated until they’re resolved by higher authorities,” Wofford says. “The ALJs’ decisions are not binding on other ALJs, so the interpretations are not yet settled.”
Unfortunately for companies facing SOX whistleblower claims, these discrepancies are unlikely to be resolved any time soon.
“We don’t have a great deal of development in the law,” says Larry DiNardo, a partner at Jones Day. “It will take a while for things to work out, and there’s nothing employers can do right now other than be extremely careful.”
To fall under the protection of SOX, whistleblowers must show they reported a violation to an authority with the power to act on the information or assisted in an investigation; held a reasonable belief that the employer violated an SEC rule, engaged in fraud against shareholders or violated federal securities laws; and was subsequently subject to adverse employment actions, motivated at least in part by their protected activities.
Whether certain actions constitute “fraud against shareholders” is a matter of considerable controversy. Some ALJs have interpreted this broadly, granting protection to employees that raise concerns about internal accounting practices and internal reports that aren’t shared with any shareholders or third parties. Other ALJs, however, have taken a narrow view by denying protection if the wrongdoing was not “intentionally deceitful,” or rejecting cases involving violations that do not have a material impact on shareholders.
“The ALJs are all over the map,” Wofford says. “If an ALJ hasn’t considered the issue yet, it could take either track.”
Further, the questions of whether private subsidiaries of public companies fall under the Act remains uncertain. Most ALJs have reasoned that the Act doesn’t apply to a private subsidiary unless complainants name the publicly traded parents in their complaints, according to White and Wofford’s research. However, some ALJs hold that private subsidiaries are always covered, while others require the employee to show that the parent company played a significant enough role in the subsidiary’s employment decisions so as to “pierce the corporate veil.”
“Cases will likely conclude that the act intended to reach employees of private subsidiaries,” DiNardo says. “But that’s still in the mix.”
Closing The Gates
Despite these areas of confusion, the good news is that the statute is fairly narrowly drawn, and ALJs are, by and large, taking care to ensure that only those cases in which all the elements of a violation are met go forward. This is evidenced by the fact that although there’s been a steady increase in filings of whistleblower claims, there has not been a large number of employee victories.
“There’s all kinds of unhappiness that can arise between employers and employees that doesn’t involve fraud against shareholders,” says Michael Tankersley, a partner at Bracewell & Giuliani in Dallas. “There have been a number of ALJ decisions that correctly draw the boundaries–even if an employee found erroneous accounting or fraudulent reporting activity, if it doesn’t involve a material disclosure of fraud that would impact shareholders in a way that violates securities laws, it does not come under the statute.”
But even if it’s becoming somewhat easier for companies to defend whistleblower cases, the larger problem with these claims is the astronomical expense of investigating them and defending them in court, regardless of their actual merit.
“The real tension is the threats of filings and the demand letters from alleged whistleblowers,” says Brad Newman, a partner at Paul Hastings in Palo Alto, Calif. “That activity is exploding, and so is activity under state laws that mirror Section 806. The mere allegations can have very damaging effects if made public, and conducting diligent investigations of specious claims is adding to the costs companies have to bear.”
As long as SOX remains on the books, companies will have to deal with whistleblower allegations. The key to minimizing liability in this area is developing gold-plated preemptive defenses.
As in every labor law scenario, a company’s first line of defense is careful documentation of the reasons for any adverse employment action. If a company can show performance or misconduct related reasons for the action unrelated to the alleged whistleblowing, that will go a long way toward proving retaliation didn’t take place.
Further, companies should develop an efficient method of disseminating information about any potential whistleblower activity.
“As soon as a report comes in, the employee should develop a little bit of a halo,” Tankersley says. “HR professionals and the employee’s supervisors should be informed right away so they know to treat that person with extra care.”
As another line of defense against whistleblower actions, some employers are considering requiring employees to agree–as a condition of employment–to take 806 claims to binding arbitration. Arbitration may be advantageous to companies in this context because it’s less expensive and more quickly resolved than taking the case before an ALJ or a federal court.
“Section 806 cases are at the very best going to take six months, and three or four years down the road you still may not know the status,” DiNardo says. “Courts will generally uphold arbitration clauses, as long as you provide the same remedies required under the law.” ?