Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The corporate scandals of 2002 have brought greater attention to the role of the U.S. Department of Labor in regulating corporate financial activity. As the Securities and Exchange Commission investigated potential securities violations at Enron and WorldCom, the Labor Department disclosed its own investigations at those companies. Last August, under my direction as the solicitor of labor, the department filed an amicus brief in the Enron ERISA litigation highlighting how corporate misconduct that violates securities laws may also breach ERISA fiduciary duties. The Sarbanes-Oxley Act of 2002 has now lodged important new responsibilities not only at the SEC but also at the Labor Department, which will investigate and adjudicate complaints by whistleblowers who alleged workplace retaliation for bringing corporate misconduct to light. These Sarbanes-Oxley cases will bear important similarities to whistleblower cases already handled by the department, while also presenting new issues that require particular care and sophistication. Sarbanes-Oxley makes it illegal to fire or otherwise discriminate against an employee for providing information or assisting an investigation regarding what the employee “reasonably believes” is a federal securities violation. This protection attaches when information or assistance is provided to a federal regulatory or law enforcement agency, to Congress, or to someone in the company with “supervisory authority over the employee” or the authority to “investigate, discover, or terminate misconduct.” The act also makes it illegal to retaliate against an employee for commencing or participating in a proceeding related to alleged federal securities violations — testifying in a securities case, for example. A broadly worded provision enforced by the Justice Department makes it a crime to retaliate against an employee for providing information to a law enforcement officer about the “commission or possible commission of any Federal offense.” Remedies under the act include reinstatement, back pay, and compensation for any “special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.” Notably, the act has been interpreted to empower the Labor Department to “preliminarily reinstate” an employee — prior to any court hearing — when it finds “reasonable cause” that a violation occurred. The Labor Department has given investigative responsibility under Sarbanes-Oxley to the Occupational Safety and Heath Administration. Cases will be heard by the department’s administrative law judges, with appeal to the secretary’s “Administrative Review Board.” (Additionally, the act enables complainants to commence proceedings anew in federal court if they have not received a final decision from the department within 180 days of filing the complaint.) There is much to the new whistleblower provision that is familiar to employment lawyers and the Labor Department. OSHA already has personnel assigned exclusively to investigating cases under 13 different whistleblower statutes that address not only occupational safety and health but also environmental protection and airline safety, for instance. These cases, in turn, account for a significant portion of the docket of the department’s administrative law judges. The substantive requirements of Sarbanes-Oxley are also to a large degree familiar to the Labor Department and employment lawyers. A complainant makes a “prima facie” case by showing that “protected activity” was a “contributing factor” to adverse job action by the company — all terms of art in discrimination law. The employer can prevail with “clear and convincing” evidence that it would have taken the same action in the absence of protected activity — also a familiar burden-shifting in employment cases. Other aspects of Sarbanes-Oxley whistleblower cases, however, are new or require greater familiarity with Labor Department procedures than initially is evident. THE SECURITIES CASE WITHIN THE CASE The greatest challenge Sarbanes-Oxley presents for the department is getting to the bottom of disputes that often will involve subtle questions of accounting and corporate finance. Sarbanes-Oxley cases can involve sophisticated personnel at relatively high levels of a company who allege, for instance, practices inconsistent with generally accepted accounting practices. The complainant in such a case will be well-versed in corporate finance and accounting requirements, and the company will have reservoirs of expertise on which to draw. OSHA will not. In these circumstances, OSHA investigators will be tempted to resolve cases without satisfying themselves whether there was, in fact, a securities violation. That is possible under Sarbanes-Oxley because the act does not require an actual securities violation for whistleblower liability; protection attaches when an employee “reasonably believes” he is reporting a securities violation. So, in more challenging Sarbanes-Oxley cases, investigators may skirt the question whether there was a securities violation in fact, and decide that the complainant at least reasonably believed the securities laws were flouted. For corporations under investigation, this will elevate the importance of other elements of the whistleblower case. The securities “case within the case” should not be ignored. Corporations must take great care when presenting their compliance with the securities laws to the Labor Department, since a Sarbanes-Oxley whistleblower complaint may often be followed by an SEC investigation or class action in which the explanation given the Labor Department could be key evidence. But corporations under investigation for Sarbanes-Oxley whistleblower violations should recognize that their best defense at the Labor Department often will rest on principles of employment law — in proving that the complainant does not have a prima facie case, for instance, or that protected activity was not a “contributing factor” — rather than in vindicating their accounting practices and SEC compliance. WHAT’S PROTECTED Employees in today’s sophisticated corporations routinely forward data and express opinions that reflect on the company’s financial condition and that, accordingly, touch on the company’s disclosures to the SEC and shareholders. Accountants are paid to identify, assess, and resolve issues that ultimately are reflected in corporate financial statements, for instance. When an employee expresses a “reasonable belief” that the company should expense an item one way, but the company reasonably chooses a different approach, has the employee engaged in protected activity that later could support a Sarbanes-Oxley complaint? A case that may prove important on this point and others is Huffman v. Office of Personnel Management (Fed. Cir. 2001). Huffman was an assistant inspector general at the Office of Personnel Management who reported misconduct that amounted to a “gross mismanagement and abuse of authority.” When he subsequently was removed from his position he filed a complaint under the Whistleblower Protection Act, but the U.S. Court of Appeals for the Federal Circuit rejected his claim. Reiterating a rule it applied in other cases, the court stated that “an employee who makes disclosures as part of his normal duties cannot claim the protection of the WPA.” The federal whistleblower law was intended to protect employees who “go above and beyond the call of duty and report infractions of law that are hidden,” the court explained. The court also based its decision on the ground that extending protection to “assigned normal duties” “would be inconsistent with the WPA’s recognition of the importance of fostering the performance of normal work obligations and subjecting employees to normal, non-retaliatory discipline.” If one’s normal duties were protected activity under the act, the court explained, “any discipline” for work performance “would be presumptively illegal. . . . We find it highly unlikely that Congress intended this result.” It remains to be seen whether the Labor Department and the courts will regard Huffman as persuasive precedent under Sarbanes-Oxley. At minimum, though, the considerations identified in Huffman may warrant requiring that when an employee’s “normal duties” involve commenting on corporate financial data, some added showing is needed before statements by the employee constitute “blowing the whistle” under Sarbanes-Oxley. SOME DEFERENCE TO ARBITRATION Companies facing Sarbanes-Oxley whistleblower investigations will want to consider whether they have an agreement with the complainant — or his union — to arbitrate employment disputes. If so, then under a policy adopted by the Labor Department last year, department investigators and prosecutors may agree to defer to the arbitration process. As the solicitor of labor, I issued a memorandum to the lawyers in the Labor Department noting the general federal policy favoring arbitration, and identifying circumstances where it was appropriate for the department to stay investigation and enforcement in deference to the arbitral process. The memorandum, which is posted on the Web site of the solicitor’s office, provides for deferral to disputes that already have been arbitrated, and to those that have not yet been arbitrated but that are subject to an arbitration process that one or both of the parties is prepared to initiate. The memorandum specifically identifies whistleblower cases as candidates for deferral: “Deferral will be most appropriate in matters involving individual claims for relief in the form of back pay and reinstatement: matters under section 11(c) of the OSH Act, for example, STAA, [and] other whistleblower statutes . . .” (emphasis added). Deferral may be warranted even when the arbitration award did not expressly address Sarbanes-Oxley. “[I]f an arbitrator determines that a complainant was terminated for legitimate performance reasons and not because of national origin,” the memorandum explains, “that award may also resolve the complainant’s whistleblower claim.” Whether the department defers to arbitration in a particular case will depend on a number of factors, many of them drawn from a “due process protocol” for arbitration developed by the American Bar Association and the American Arbitration Association to assure the integrity and fairness of arbitration. The memorandum is not binding on administrative law judges within the department. In short, the Sarbanes-Oxley whistleblower provision is an unusual fusion of employment law and securities regulation that carries important responsibilities — and challenges — for the Labor Department, corporations, and lawyers who represent them. Eugene Scalia is a partner in the D.C. office of Gibson, Dunn & Crutcher and serves as co-chair of the firm’s labor and employment practice group. He recently served as the solicitor of labor for the U.S. Department of Labor, where his responsibilities included implementing the whistleblower provision of the Sarbanes-Oxley Act.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.