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Two-and-a-half years after the passage of the Sarbanes-Oxley Act, a little noticed provision on whistleblowing is gaining traction. Within the sweeping corporate governance measures introduced by Sarbanes-Oxley in 2002, Congress also enacted a provision designed to protect employees who face retaliation after reporting instances of a company’s financial fraud by allowing them to sue their employer. The law is intended to shield employees from potential retaliation by punishing employers through compensatory damages. Hundreds of whistleblower cases have been filed to date. While the results have been largely favorable to employers, employment law experts said the scales could be tipped if several administrative law rulings stand, and as attorneys gain experience suing under the law. The provision received far less attention than other areas of the act but “[i]t was a significant change in employment law,” said Michael Delikat of Orrick, Herrington & Sutcliffe, because it was the first federal whistleblower law governing financial fraud. Other whistleblower laws, he said, covered specific industries like nuclear power or mining and focused on safety concerns rather than financial wrongdoing. Under Sarbanes-Oxley, companies are required to create mechanisms to manage the reporting of financial fraud on top of ethical guidelines already in place, said Delikat. The law also shields employees from retaliation should they report financial wrongdoing. Under Sarbanes-Oxley, an employee can start an action by filing a complaint with Occupational Safety and Health Administration, a division of the Department of Labor. The department has 180 days to issue a final decision. If a report is not issued within the time period, an employee can file a suit in federal court. Observers said that to date, OSHA has administered most of the claims. So far though, employers have lost few of the more than 300 cases filed since the act’s inception. A vast majority of those cases ended in dismissal, said Philip Berkowitz, head of Nixon Peabody’s international labor and employment group. Of the cases decided on the merits, employers have won six while employees have won three, according to a study conducted by Nixon Peabody. “The law is still very much in the formative stage,” said Berkowitz, similar to anti-discrimination laws soon after their enactment. “It’s too early to see a significant trend,” explained Delikat. Other employment law experts agreed and pointed to factors that could change the landscape over time. For example, plaintiffs’ lawyers need more experience with the law to bring successful actions, said Pearl Zuchlewski, a plaintiffs’ lawyer at Kraus & Zuchlewski. OSHA had handled most of the suits to date, and Zuchlewski said the agency’s handling of the suits also will improve over time. “The OSHA investigators are … uneven,” she said, with some lacking the comfort level to effectively manage the new provisions. Neither the defense nor the plaintiffs bar is confident that OSHA will handle these cases consistently in the near future, said Gary Friedman, an employment partner at Mayer, Brown, Rowe & Maw. EARLY RULINGS Despite a streak of victories, the coast is not clear for employers. For one thing, administrative judges have applied the whistleblower provisions broadly. In one area, several opinions have placed non-public subsidiaries of publicly-traded companies under Sarbanes-Oxley’s reach, said Friedman. “That multiplies 10, 15, 30 fold the number of companies that are potentially covered … [more] than probably one would have expected,” he said. The result, he said, is that many more employees now enjoy the protections offered by the whistleblower shield because of the rulings. In another development, one administrative judge set a favorable standard for employees in Halloum v. Intel Corp. Under Halloum, an employee needs to show only that he or she had a “reasonable belief” that a company violated the law when making a Sarbanes whistleblower claim, said Friedman. Even if the company later proves no such breaches occurred, it could still be found guilty of violating the whistleblower provisions. Halloum contrasts drastically with the standards in state whistleblower laws like New York’s. “There’s a view that the New York whistleblower statute has no teeth,” said Friedman, because an employee must show that a company violated the law among other things. Legislation sponsored by Attorney General Eliot Spitzer conforming New York to more employee-friendly federal standards is pending. One other decision from last year, Richards v. Lexmark, decided by an administrative law judge, involved an employee whom the company for weeks had planned on firing. The employee was finally let go, a day after he issued a report questioning the company’s accounting methods. The timing of the discharge, the judge said, created an inference of causation between the discharge and the employee’s report. The ruling requires companies to better document their decision to fire an employee, said Berkowitz, especially employees who may work in areas involving the company’s finances or accounting practices. Another concern for employers arises from the potential negative impact of a whistleblower case should it reach the public. “There’s a real premium in the SOX area as opposed to garden variety employment cases,” said Delikat. If accusations of financial wrongdoing reach the public, he said, the news may have a profound negative impact on a company’s stock price even if later proved wrong. A discrimination suit, unless it transforms into a class action or is especially egregious, will have little negative impact outside of the potential liability arising from the case. But a whistleblower action, said Delikat, could send a company’s stock stumbling, providing employees claiming retaliation with hefty bargaining power when bringing a case.

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