Two recent decisions have clarified the heightened burden facing employers addressing whistleblower retaliation claims under Section 806 of the Sarbanes-Oxley Act (SOX).  

On October 9, 2014, in Fordham v. Fannie Mae, ARB Case No.12-061, the Department of Labor Administrative Review Board made clear that SOX employers face a higher burden of proof and a different order of evidentiary consideration than whistleblowers when litigating SOX retaliation claims. 

The following month, on November 12, 2014, the Fifth Circuit struck an additional blow to employers in Halliburton, Inc. v. ARB, Case No. 13-60323 (5th Cir. Nov. 12, 2014), when it ruled that a company’s disclosure of a SOX whistleblower’s identity, which resulted in his workplace ostracism, constitutes illegal retaliation.  

Although these decisions undoubtedly make it easier for SOX whistleblowers to bring retaliation claims, they also provide valuable insight on steps employers can take to ensure that they are properly handling retaliation claims before, as well as during, litigation.

Fordham v. Fannie Mae: clarifying the steps and standards

In order to prevail on a SOX whistleblower retaliation claim, employees must show that they:

  1. engaged in protected activity
  2. that the employer knew about the activity
  3. that the employee suffered an adverse employment action and
  4. that the protected activity was a “contributing factor” in that adverse action. 

Prior to Fordham, some DOL Administrative Law Judges simultaneously considered evidence from the whistleblower, as well as the employer, to determine whether the “contributing factor” prong was met under a “preponderance of the evidence” standard.

Yet, in Fordham, which reversed and remanded in part a DOL ALJ decision and order dismissing a former IT technical risk employee’s Section 806 claim, the ARB issued a 2-1 panel decision clarifying the order in which evidence of a “contributing factor” is to be considered and burdens of proof for whistleblower and employer litigants.  The majority in Fordham held that Section 806 claims must be decided using a two-step process, each with a different burden of proof.  First, the whistleblower must establish a prima facie claim, by a preponderance of the evidence.  As part of this initial step, only evidence submitted by the whistleblower can be considered when determining whether the protected activity was a “contributing factor” to the adverse employment action.  Then, after the whistleblower’sprima facie claim has been established, the employer’s evidence in support of any affirmative defenses (i.e. a non-retaliatory reason for the employment action) may be considered under the higher “clear and convincing” standard.

Halliburton, Inc. v. ARB: identifying the whistleblower

Following the Fordham ruling, in Halliburton, the Fifth Circuit denied Halliburton’s appeal of an ARB ruling that it retaliated against a whistleblower in violation of SOX Section 806.  In this case, the whistleblower, the Director of Technical Accounting Research and Training, used Halliburton’s internal procedures to raise a complaint about the company’s allegedly questionable accounting practices. 

In response to the complaint, the whistleblower’s direct supervisor informed him that he “was not a ‘team player’ and needed to work more closely with colleagues to resolve any concerns over accounting practices.”  Halliburton subsequently ordered a new study on the accounting practices and concluded that the practices were in fact proper.  When the whistleblower sought to speak with his supervisor regarding the accounting practices again, his supervisor refused to meet with him.  The whistleblower subsequently filed a confidential complaint with the Securities and Exchange Commission, but continued to engage Halliburton regarding his concerns.  His internal complaint, which showed his identity, eventually went to the board and Halliburton’s General Counsel.   

The SEC contacted Halliburton’s General Counsel to inform Halliburton that it was investigating its allegedly improper accounting practices.  In response to the SEC’s statement, Halliburton’s General Counsel sent an email to the whistleblower’s boss and others asking them to preserve relevant documents because “the SEC has opened an inquiry into the allegations of” the whistleblower. After the email was subsequently forwarded to members of  the whistleblower’s work group , his colleagues began treating him differently and refused to associate with him. 

Although the SEC decided that no enforcement action would be taken against Halliburton, the ARB determined that the disclosure of the whistleblower’s identity and the resulting hostile work environment amounted to retaliation in violation of Section 806.  The Fifth Circuit affirmed the ARB’s decision and held that the plain language of  SOX permits noneconomic damages, including emotional distress and reputational harm.

5 tips for employers handling retaliation claims

  • Establish policies and procedures.  The best defense to handling whistleblower claims of improper retaliation is to have policies and procedures relating to internal whistleblowing.  Procedures should establish timelines for handling internal complaints and set forth clear guidelines prohibiting all forms of retaliation.
  • Conduct separate investigations.  In order to rebut a claim of whistleblower retaliation, employers must show that there was a valid reason for any adverse employment action.   Accordingly, companies should separate their investigation into whistleblowers claims (handled by legal or other appropriate department) from their employee performance evaluation (handled by HR).
  • Watch your tone. The manner in which companies respond to whistleblower complaints is vital.  Using the appropriate tone and sending a proper response can be the difference between an internal complaint becoming an external whistleblower report.
  • Document, document, document.  Employers must establish their defense to whistleblower retaliation by clear and convincing evidence.  Properly documenting the response to the whistleblower’s complaint and the employment evaluation process is essential to the company’s defense.
  • Respect whistleblower secrecy.  Companies should resist the impulse to identify an anonymous whistleblower.   Attempts to ferret out the whistleblower’s identity only support claims of retaliation and could lead to the creation of a hostile work environment or a violation of the company’s internal policies on whistleblower anonymity.  In some cases, like Halliburton, it may be obvious who the whistleblower is based on the facts of the case or the size of the company.  In these instances, companies should take steps to prevent further dissemination of the whistleblower’s identity and ensure that a hostile work environment does not develop.