Since the Sarbanes-Oxley Act (SOX) was passed in 2002, employees attempting to bring whistleblower claims alleging retaliation under the Act have largely been unsuccessful.The recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act (Act) includes sweeping reforms to SOX Section 806 whistleblower claims, creates a new private right of action for retaliation and establishes a new "bounty" system to encourage reports that lead to a successful judicial or administrative action brought by the Securities and Exchange Commission. An increase in whistleblowing claims may be expected because of these new employee friendly amendments.
SOX Reforms: Making It Easier for Employees
In the eight years since its passage, courts have construed SOX's statutory protection narrowly, and even with employers' more onerous burden of proof, employees have often failed to succeed in proving their claims. The Act provides individuals asserting SOX whistleblower claims greater protections and enhanced rights.
For instance, in some cases, courts have held that, under SOX, publicly traded companies are not liable for the actions of their non-publicly traded subsidiaries if the subsidiary is a distinct entity. Under the Act, Congress explicitly eliminates this defense and amends SOX Section 806 to cover "any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such (publicly-traded) company." The Act also expands coverage to include "nationally recognized statistical rating organizations."
Section 806 of SOX is also amended to increase the time in which an employee may file a complaint with the Secretary of Labor: the time limit has increased from 90 days to 180 days, and the statute of limitations runs either after 180 days from the date of the alleged violation or 180 days after the date on which the employee became aware of the alleged violation.
Lastly, under existing SOX language, if an individual brings a retaliation action under SOX and the Secretary of Labor has not issued a final decision within 180 days of the filing of the complaint, the individual may bring an action in the appropriate U.S. District Court. The Act makes clear that in these situations, an individual is entitled to a trial by jury.
New Private Right of Action for Retaliation Claims
Section 922 of the Act creates a cause of action for an employee who believes he or she has been retaliated against for providing information to the SEC, participating in a investigation or action brought by the SEC based on such information, or making disclosures required under SOX, The Securities Exchange Act of 1934, or any other law or rule subject to the SEC's jurisdiction. This new cause of action is part of a new section of the Securities Exchange Act of 1934.
Under these changes, an employee may bypass the administrative review process and bring a retaliation claim directly to the appropriate U.S. District Court, and the statute of limitations is generous. Any employee may bring a retaliation action within six years after the date on which the violation occurred or not more than three years after the date on which the employee should have known the material facts related to retaliation. All claims under the Act must be brought within 10 years of the date on which the violation occurred.
The potential relief for this cause of action is substantial and can include:
- reinstatement with the same seniority status the employee would have had but for the retaliation;
- two times the amount of back pay owed to the individual, with interest; and
- compensation for litigation costs, expert witness fees and reasonable attorneys' fees.
Notably absent from this new cause of action is a "reasonable belief" requirement. Section 806 of SOX explicitly requires an employee to have a reasonable belief that reported conduct constitutes a violation of one of the enumerated laws. This SOX requirement has led to many claims failing at the administrative and judicial level, and the failure to require individuals to reasonably believe reported conduct violates an applicable law in this new cause of action will likely allow many claims to progress further in litigation.
If an employee and his/her attorney have the choice between this private right of action and a retaliation action brought under SOX, they have every reason to choose this new alternative under the Act. The statute of limitations is long, potential relief is more attractive and exhausting administrative remedies does not appear to be a requirement.
Predispute Arbitration Agreements
Section 922 of the Act also prohibits the use of any predispute arbitration agreement purporting to cover SOX claims/matters. Indeed, the language of the Act provides that SOX rights cannot "be waived by any agreement, policy, form or condition of employment, including by a predispute arbitration agreement." (Emphasis added). Further, the Act makes clear that a predispute arbitration agreement is not valid or enforceable if the agreement mandates arbitration of a dispute arising under SOX's whistleblower provisions.
Whistleblowing Bounty Hunters
In a further attempt to entice potential whistleblowers to disclose information to the SEC, the Act establishes a new "bounty" or award available to individuals who disclose information and meet certain criteria. To qualify for the award, an individual must provide "original information" to the SEC, which is defined as information that is: (A) derived from the independent knowledge or analysis of a whistleblower; (B) not known to the SEC from any other source, unless the individual is the original source of the information; and (C) not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit or investigation, or from the news media, unless the whistleblower is a source of the information. If the "original information" an individual provides to the SEC leads to a successful judicial or administrative action brought by the SEC under the securities laws that results in monetary sanctions exceeding $1 million, the individual is entitled to an award of between 10 percent and 30 percent of the monetary sanctions imposed. The possibility of a large award will likely lead to certain employees of regulated companies keeping their eyes open for an opportunity to receive such an award.
The Act's amendments to SOX and the Securities Exchange Act make it easier and more profitable for individuals to accuse their employers of violating the law. Companies should review these amendments and adjust their internal compliance and reporting procedures accordingly. Although these changes, especially the bounty provisions, may encourage individuals to report any violations immediately to the SEC rather than begin with an internal report, a vigilant company with a strong culture of compliance should strive to have appropriate mechanisms/procedures in place to prevent and correct any questionable conduct before it becomes the latest song of the whistleblower.