Philip Berkowitz ()
Sarbanes Oxley’s creation of a new category of federal whistleblowers is now more than 10 years old, and Dodd-Frank’s expansion of those rights is going on four years, but the rights of individuals to bring whistleblower claims, the appropriate standards of proof, and how employers may defend these claims, continue to bedevil litigants and the courts.
The year 2014 is likely to be a watershed one for resolving a number of these key issues. In its first SOX whistleblower case, the U.S. Supreme Court will clarify whether all contractors and subcontractors of publicly traded companies are covered by SOX—rendering the employees of all these entities potential whistleblowers.
Another controversial issue in 2014, reflecting a circuit split, is whether a whistleblower, to be protected by SOX, must first file a claim with the Securities and Exchange Commission.
Other simmering issues, which I will call the Platone/Paraxel Paradox (for reasons to become evident): To state a claim, must a whistleblower specifically identify a violation of one of the six criminal statutes enumerated in SOX? Must a SOX whistleblower allege fraud against shareholders?
The reader, we presume, is aware that SOX prohibits publicly traded employers (and their privately held subsidiaries) from retaliating against employees who provide information and/or assist in an investigation of an employer’s violation of SOX, SEC regulations or securities fraud. Dodd-Frank, similarly, prohibits retaliation against whistleblowers who possess a “reasonable belief” that he or she provided information that “relates to a possible securities law violation.”
We also assume knowledge of Dodd-Frank’s “bounty” remedy for whistleblowers who voluntarily provide original information to the SEC. If the information leads to an SEC enforcement action and recovery of more than $1 million, the informer may collect a monetary award ranging between 10 percent and 30 percent of the monetary sanctions collected.
The Supreme Court has before it, in Lawson v. FMR,1 the issue of whether Congress, by including the words “contractor” and “subcontractor” in the list of entities that may not retaliate against whistleblowers, meant to extend SOX whistleblower protection to every business entity that has a contractual relationship with a publicly traded company.
In Lawson, the plaintiffs worked for privately held investment advisors to publicly owned Fidelity mutual funds. They claimed they were retaliated against, in violation of SOX, for complaining internally about alleged financial improprieties. The federal district court in Boston denied the defendants’ motion to dismiss on the basis that SOX only reaches employees of public companies, holding that the employing entities were contractors to a public company, and that employees were protected. But the court certified the question for interlocutory appeal. The U.S. Court of Appeals for the First Circuit reversed, holding that SOX applies only to employees of public companies.
The U.S. Department of Labor’s Administrative Review Board (ARB) subsequently rejected the First Circuit’s interpretation in Spinner v. David Landau & Associates, holding that an auditor who was fired by a privately held firm could bring a SOX claim because the firm provided compliance services to a public company.2 The Lawson plaintiffs petitioned the Supreme Court for further review, and on Nov. 12, 2013, the justices heard oral argument. At argument, the justices seemed to recognize that Congress could not have intended SOX to cover all employees of every “officer, employee, contractor, subcontractor, or agent” of a public company, and that some “limitation” was necessary.
Justice Stephen Breyer asked early in the argument whether SOX would apply to a gardener with three employees that spends one day a week cutting a public company’s lawn, if one employee complained about alleged fraud completely unrelated to the public company. Resolution of this question may play a key part in the final decision. The plaintiffs argued that SOX would apply, because, they said, Congress intended, in the wake of the Enron scandal, to protect every employee of a contractor or subcontractor and every report of fraud.
The employers argued that only employees of public companies are protected. This position, though, would deprive contractors’ employees of any protection, and arguably makes the “contractors” and “subcontractors” language in Section 806 superfluous. The government as amicus asserted that while Congress intended to cover employees of contractors, this was only in the capacity of fulfilling the contract with the public company. Under this theory, Breyer’s gardening employees would be covered if they were reporting fraud in connection with the contractor’s work for the publicly traded company, but not if they were reporting fraud unrelated to the publicly traded company.3
There is an ever-widening split, though, between the SEC and several federal courts as to whether, in order to qualify for whistleblower protection, an individual must first file a complaint with the SEC. Dodd-Frank defines a “whistleblower” as one who provides information to the SEC.4 However, SOX also prohibits retaliation against an individual who complains internally about alleged violations of SOX, Dodd-Frank or securities laws.5 Thus, the question is whether a person needs to disclose information to the SEC to be protected.6
SEC regulations state that individuals do not need to submit information to the agency; rather, any employee who makes internal complaints can bring a claim under Dodd-Frank.7 In 2013, this interpretation was adopted by New York and Massachusetts federal courts.8 However, in July 2013, in Asadi v. G.E. Energy United States, the U.S. Court of Appeals for the Fifth Circuit held that, to be a protected whistleblower under Dodd-Frank and hence collect a bounty or be protected from retaliation under that statute, the employee must first provide information to the SEC. Even though the employee, who internally reported alleged violations of the Foreign Corrupt Practices Act (FCPA) might have been protected by that statute, he was outside the purview of Dodd Frank.9
While employers have argued that the statute only protects those who initially file with the SEC, a victory on this ground may be pyrrhic. Requiring that employees, to be protected as whistleblowers, must first file with the SEC, will result in employees turning to the SEC at their earliest opportunity, with complaints of wrongdoing against their employers, and at the first whiff of potentially retaliatory conduct.
Employers normally encourage their disgruntled employees to bring their complaints, first and foremost, to their attention, so that the employer may address their issues. A victory for employers in this case may convince employees, and their lawyers, that there is little to be gained by complaining internally. Encouraging the SEC to put its nose under the employer’s tent in these cases may not be quite what employers bargained for.
In the days of yore (i.e., during the George W. Bush administration), the Department of Labor’s Administrative Review Board (which issues final Labor Department decisions of SOX whistleblower claims) held, in the seminal case Platone v. FLYI,10 that a communication must “definitively and specifically” relate to a violation or rule listed in Section 806 of SOX in order to be a protected communication. Those enumerated provisions are mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders.11
There followed a long series of circuit court decisions holding SOX whistleblowers to this fairly stringent standard. Thus, for example, in Day v. Staples, the U.S. Court of Appeals for the First Circuit denied whistleblower protection to employees whose good faith allegations of improper conduct failed to allege violations of the “basic elements” of one of these laws. Similar decisions issued from the Ninth, Fourth, and Fifth circuits.12
Ah, but that was then. In 2011, the ARB reversed Platone, overruling that case’s “definitive and specific” standard in favor of a “reasonable belief” standard, in Sylvester v. Parexel Int’l.13
In 2013, the Third and Tenth circuits granted “Chevron deference” to the ARB’s new view of the matter, thus making it far easier for plaintiff whistleblowers to bring SOX retaliation claims.14 Moreover, in Lockheed v. Administrative Review Board, the U.S. Court of Appeals for the Tenth Circuit held that a plaintiff need not specifically allege that the defendant’s conduct constitutes fraud against shareholders—instead, a showing that she “reasonably believed” the defendant’s conduct violated any other of the enumerated statutes was more than enough to permit her claims to survive.
As for New York, in Sharkey v. JPMorgan Chase & Co.,15 issued shortly after Sylvester v. Paraxel, U.S. District Judge Robert Sweet seemed to endorse the ARB’s new, more lenient standard in denying the defendants’ motion to dismiss.
But lo: in December 2013, with nary a cite to Sylvester v. Paraxel, Sweet granted the JPMorgan defendants’ motion for summary judgment, instead citing pre-Paraxel case law, and held the plaintiff failed to “definitively and specifically” relate her allegations to one of the six enumerated categories of misconduct under SOX.16
Sweet’s decision, on the eve of the New Year, suggests that courts will not necessarily roll over and accept the ARB’s revised view of a SOX plaintiff’s burden, and is a harbinger of an interesting year ahead in this rapidly developing area.
Philip M. Berkowitz is a partner and U.S. cochair of Littler Mendelson’s international law practice.
1. Docket No. 12-3, cert. granted, May 20, 2013.
2. Spinner v. David Landau & Associates, ARB Case Nos. 10-111, 10-115, ALJ Case No. 2010-SOX-029 (May 31, 2012).
3. For a detailed discussion of this issue, see E. Ellis and S. Melnick, “High Court Thinking on 1st SOX Whistleblower Case,” Law360 (Nov. 17, 2013).
4. 15 U.S.C. §78u-6(a)(6).
5. 15 U.S.C. §78-u6(h)(1)(A)(iii).
6. There is no controversy, though, that to receive a bounty reward under Dodd-Frank, one must have provided original information, to the SEC, that leads to the recovery of monetary sanctions of $1 million or more. 15 U.S.C. §78u-6(b); 17 C.F.R. §240.21F-3.
7. 17 C.F.R. §240.21F-2.
8. See Ellington v. Giacoumakis, 2013 U.S. Dist. LEXIS 148939 (D. Mass. Oct. 16, 2013 and Murray v. UBS Securities, 2013 U.S. Dist. LEXIS 71945 (S.D.N.Y. May 21, 2013). Accord Egan v. TradingScreen, 2011 U.S. Dist. LEXIS 47713 (S.D.N.Y. May 4, 2011).
9. 720 F.3d 620 (5th Cir. 2013).
10. ARB 04-154, 2006 DOLSOX LEXIS 105 (Dept. of Labor Sept. 29, 2006), aff’d, 548 F.3d 322 (4th Cir. 2008).
11. 18 U.S.C. 1514A.
12. See Van Asdale v. Int’l Game Tech., 577 F. 3d 989 (9th Cir. 2009); Welch v. Chao, 536 F. 3d 269 (4th Cir. 2008); Allen v. Admin. Review Board, 514 F.3d 468 (5th Cir. 2008).
13. 2011, DOLSOX LEXIS 39 (Dept. of Labor May 25, 2011).
14. See Lockheed Martin v. Administrative Review Board, 717 F.3d 1121 (10th Cir. 2013); Wiest v. Lynch, 710 F.3d 121 (3d Cir. 2013).
15. 805 F.Supp.2d 45, 56-57 (S.D.N.Y. Aug. 19, 2011).
16. 10 Civ. 3824 (S.D.N.Y. Dec. 12, 2013).