On May 25, 2011, the federal Department of Labor’s Administrative Review Board (ARB) issued a decision greatly increasing the scope of what constitutes protected activity under the whistleblower protection provisions in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX). Sylvester v. Parexel International LLC (ARB No. 07-123).
The ARB’s ruling in Sylvester upset well-accepted standards established in earlier arbitration and court cases interpreting SOX regarding the requirement that a complaining party must:
- Have a reasonable belief in an actual violation.
- Complain of conduct that “definitively and specifically” relates to one of the violations listed in SOX 806.
Federal courts and Administrative Law Judges (ALJs) have regularly held that a SOX whistleblower does not need to show that an actual SOX violation occurred, only that he had a subjective and objective “reasonable belief” that the conduct complained of amounted to a SOX violation. The objective component of the test required that courts or ALJs look to “the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee.” Further, both the ARB and federal courts have held that the whistleblower must provide information about an actual violation, not a potential or hypothetical one. The requirement that an employee must complain of conduct that “definitively and specifically relates” to a violation of any of the categories of fraud or securities violations named in SOX 806 has been well established and broadly adopted by courts and administrative tribunals and has proven to be one of the strongest defenses used by defendants to obtain summary dismissal of SOX whistleblower complaints.
The ARB in Sylvester also decided, at least for administrative hearings, the unresolved issues of:
- Whether complaints of fraud must pertain to actions that affect shareholders.
- Whether all of the elements of fraud must be pled and proved.
A majority of courts have held that SOX whistleblowers must show that they provided information regarding fraud, or violations of SEC rules or regulations that relate to shareholder fraud. Some courts have gone further to hold that any complaint of fraud must also relate to shareholders, while other courts have gone the other direction to hold that a complaint can relate to any SEC rule or regulation, regardless of whether the rule implicates shareholder fraud. Increasingly, courts require SOX whistleblower complainants to allege all of the elements of a claim of securities fraud: materiality, scienter [knowledge], reliance, economic loss, and loss causation. However, many courts have refused to adopt this requirement.
In Sylvester, the complainants filed a complaint with the Occupational Safety and Health Administration (OSHA), alleging that their employer (Parexel International LLC) violated SOX Section 806 by discharging them in retaliation for engaging in protected activity.
On August 31, 2007, an ALJ dismissed the claims on the grounds that they failed to establish subject matter jurisdiction. Specifically, the ALJ held that the claimants failed to allege that they had engaged in protected activity within the meaning of SOX because their complaints to management: (1) did not “definitively and specifically” relate to a violation of any laws covered by the whistleblower provisions of SOX 806; (2) did not involve an actual violation by their employer of any of the laws enumerated in SOX 806; (3) did not involve shareholder fraud or conduct otherwise adverse to shareholders; and (4) did not constitute reasonable concerns about SOX violations.
The full ARB reversed the ALJ, setting new standards for what constitutes prima facie evidence of protected activity.
The ARB Ruling
The ARB in Sylvester redefined SOX’s “reasonable belief” standard, holding that it requires an examination of the reasonableness of a complainant’s beliefs, but not whether the complainant communicated the reasonableness of those beliefs to management or other authorities. Future complainants will likely rely on this holding to argue that they do not need to explain the basis for their complaints at the time they are made, so long as they (or their lawyers) can justify it later.
The ARB next held that a complainant need not describe an actual present or past violation of one of the categories of law in Section 806 of SOX to be protected. Rather, a complaint concerning a violation of law that is about to be committed is protected, so long as the employee reasonably believes that it is likely to occur. This belief must be grounded in facts known to the employee, but the employee need not wait until the law has actually been violated to have engaged in protected activity.
Most significantly, the ARB held that its prior holding that an employee’s complaint must “definitively and specifically” relate to the categories of fraud or securities violations listed in Section 806 “has evolved into an inappropriate test and is often applied too strictly.” The ARB instead held that the proper test was whether the employee reported conduct that he or she reasonably believes constituted a violation of one of the categories of law enumerated in Section 806.
The ARB further held that protected conduct under SOX is not limited to disclosures about shareholder fraud, but also includes any disclosures about mail fraud, wire fraud, radio fraud, television fraud or bank fraud.
Finally, the ARB held that a SOX whistleblower complainant need not establish the elements of fraud to prevail on a Section 806 claim. The ARB specifically refused to impose “a materiality requirement on the communication that the complainants contend is protected activity.” The ARB pointed to the “reasonable belief” standard, noting that a complainant can have an objectively reasonable belief of a violation of one of the laws listed in SOX 806 without alleging, proving or approximating the elements of fraud. The distinction is that a SOX whistleblower claim is not a direct fraud claim, but rather a retaliation claim against an employer who took an adverse action against an employee.
In sum, the ARB’s decision in Sylvester is consistent with the more recent pro-employee approach it has taken to interpreting the whistleblower provisions in SOX. Nonetheless, federal courts may continue to take a more conservative approach to the issues with which the ARB was confronted.
Regardless, as a result of Sylvester, employers hit with SOX whistleblower claims will face a harder time when seeking dismissals through dispositive motions focused on the protected activity element. Already both the ARB and ALJs are implementing these new standards to revive cases that previously appeared dead. Taken together with the new rules implementing the whistleblower provisions of the Dodd-Frank Act, it is increasingly important for employers to implement effective compliance and investigation programs.