The Sarbanes-Oxley Act protects whistleblowers who report company misconduct other than just fraud against shareholders, the 10th U.S. Circuit Court of Appeals recently held.
Andrea Brown sued Lockheed Martin alleging she was constructively discharged for making an ethics complaint about the company’s vice president of communications. According to Brown, the VP used a company-sponsored pen pal program to have sexual relationships with soldiers and send sex toys to soldiers stationed in Iraq. In addition, the VP purchased a laptop for one soldier and traveled to welcome-home ceremonies for soldiers on the pretext of business, while actually taking them to expensive hotels to have sex. Concerned that such expenses were being passed on to Lockheed’s customers – including the government – Brown reported her concerns.
But after she reported the misconduct, Brown was demoted, received poor performance reviews, and was instructed to use an office that doubled as a storage room. After taking a medical leave, she provided Lockheed with a notice of forced termination and filed a complaint with the Occupational Safety and Health Administration alleging violations of Sarbanes-Oxley.
OSHA denied her complaint, but an administrative law judge found for Brown after a two-day trial, awarding reinstatement, back pay, medical expenses, and non-economic compensatory damages in the amount of $75,000. The Department of Labor Administrative Review Board affirmed the findings.
On Lockheed’s appeal, the 10th Circuit also affirmed, finding that an allegation of shareholder fraud is not the only category of employer conduct covered by Sarbanes-Oxley.
Lockheed argued that Brown’s complaint failed to trigger the protections of the Act because it sounded in mail or wire fraud and not fraud against shareholders. But “[t]his interpretation of the statute is incorrect,” the panel said.
“The plain, unambiguous text of §1514A(a)(1) establishes six categories of employer conduct against which an employee is protected from retaliation of reporting: violations of 18 U.S.C. §1341 (mail fraud), §1343 (wire fraud), §1344 (bank fraud), §1348 (securities fraud), any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders,” the court explained.
Because the statute lists various federal laws, “Lockheed’s reading of the statute would render their enumeration. . . wholly superfluous,” the court said. “Congress could have accomplished the more limited purpose attributed to it by Lockheed by limiting whistleblower protection under Sarbanes-Oxley only to an employee who reports conduct ‘the employee reasonably believes constitutes a violation of any provision of federal law relating to fraud against shareholders.’ Because Congress did not so phrase the statute, the proper interpretation of §1514A(a) gives each phrase distinct meaning and holds a claimant who reports violations of 18 U.S.C. §§1341, 1343, 1344, or 1348 need not also establish such violations relate to fraud against shareholders to be protected from retaliation under the Act.”
Further, the court deferred to the Board’s interpretation of the Act, which recognized Brown’s claims. The three-judge panel dismissed Lockheed’s contention that deference was not required because the Board’s stance changed from a previously expressed position. “Because the Board’s interpretation of Section 806 is based on a permissible construction of the statute, we hold an employee complaint need not specifically relate to shareholder fraud to be actionable under the Act,” the court concluded.
Rounding out its analysis, the panel said Brown met all of the other elements required to establish a prima facie claim under Sarbanes-Oxley’s whistleblower protection provisions.
Brown subjectively believed the VP committed fraud – even if she didn’t use that word in her complaint to HR – and her belief was objectively reasonable, the court said.
Noting “the litany of adverse circumstances Brown faced following her ethics complaint,” a reasonable person would see resignation as her only option under these circumstances. “Prior to making an ethics complaint, Brown held a leadership position, had her own office, and received consistently high performance ratings,” the court said. After her complaint, Brown received lower performance ratings, lost her title, office, and supervisory responsibilities, and was told she was one of two employees considered for a layoff, “kept in a constant state of uncertainty as to whether she would continue to have a job and, if so, what her job would be.”
Finally, the court said Brown’s protected activity was a contributing factor in the unfavorable personnel action. Shortly after the conclusion of the investigation against the VP, “the cascade of difficulties which culminated in Brown’s constructive termination” began, the court said. In addition to temporal proximity, the court applied the cat’s paw theory of liability to a new supervisor who relied upon the VP for input in personnel matters.
Upholding the ruling for Brown, the 10th Circuit remanded for a quantification of damages, particularly in light of the fact that an appropriate position at Lockheed no longer exists.
To read the decision in Lockheed Martin Corp. v. Administrative Review Board, click here.
Why it matters: The 10th Circuit’s broad interpretation of Sarbanes-Oxley’s whistleblower protections is bad news for employers hoping for a narrower reading of the Act. Lockheed sought to contain whistleblowers’ claims to shareholder fraud, not more generalized fraud, but an administrative law judge, the Administrative Review Board of the Department of Labor, and the 10th Circuit have now all taken a contrary position. The decision serves as a warning to employers about the potential breadth in how courts will interpret the law.