Why it matters: In a victory for employers, the Fifth U.S. Circuit Court of Appeals limited the scope of Sarbanes–Oxley’s whistleblower protections by holding that plaintiffs must report conduct in violation of U.S. law—not illegal activity under the law of a foreign country. A Colombia-based whistleblower filed suit under SOX but an administrative law judge, the Department of Labor’s Administrative Review Board, and the Fifth Circuit all agreed that the case should be tossed because the allegedly illegal conduct the whistleblower reported violated Colombian law, not U.S. law. Importantly, the Fifth Circuit based its decision on this narrower ground and avoided the broader question of whether Section 806 of Sarbanes-Oxley applies extraterritorially—a question that remains unsettled.
Detailed Discussion
A 24-year employee with Saybolt Colombia, William Villanueva lived in Bogota and served as the company’s general manager. Although Saybolt Colombia is a Colombian limited liability company headquartered in Bogota, it is also an indirect affiliate of Core Labs, a Netherlands limited liability company with headquarters in Amsterdam and an office in Houston, Texas. Core Labs’ securities are registered pursuant to the Securities Exchange Act and publicly traded on the New York Stock Exchange.
Beginning in January 2008, Villanueva began reporting concerns about what he believed to be fraudulent underreporting of taxable revenue to the Colombian government by Saybolt Colombia. He raised his concerns with both Saybolt Colombia and Core Labs employees, including an executive in the Houston office. Core Labs requested that two different law firms provide opinion letters addressing Villanueva’s issues and both concluded that no impropriety had occurred.
Villanueva disagreed with the opinion letters and refused to certify and sign Saybolt Colombia’s tax returns. He was then terminated. Villanueva filed a complaint with the Occupational Safety and Health Administration alleging that Core Labs and Saybolt Colombia retaliated against him for blowing the whistle on the scheme to violate Colombian tax law in violation of Section 806 of the Sarbanes–Oxley Act.
OSHA dismissed the complaint and an administrative law judge affirmed, ruling that he lacked jurisdiction to weigh in on the dispute. The Administrative Review Board determined that it had jurisdiction but affirmed dismissal on the extraterritorial nature of Villanueva’s disclosures about alleged violations of foreign law.
The Fifth Circuit agreed.
“Section 806 prohibits retaliation only if the employee provides information regarding conduct that he or she reasonably believes violates one of six enumerated categories of U.S. law,” the federal appellate panel wrote: federal mail-, wire-, bank-, or securities-fraud statutes; any rule or regulation of the SEC; or any other federal law related to fraud against shareholders. “[I]n neither his complaint to OSHA nor in his communications to Core Labs and Saybolt Colombia employees did Villanueva indicate that he was providing information that he reasonably believed violated any of these six categories.”
The court avoided the issue of whether Section 806 can have extraterritorial application, relying upon the narrower grounds that Villanueva failed to engage in any protected whistleblowing activity.
Villanueva attempted to save his suit by pointing out language in his OSHA complaint that he believed income tax was being perpetrated in Colombia “at the express direction of Core Labs’ executive in Houston using mail, e-mail and telephones to accomplish the fraud.”
But the court said a single reference in a nine-page OSHA complaint was “insufficient to demonstrate that he had a reasonable belief that there was a violation of U.S. mail- and wire-fraud statutes.” Rather, the panel wrote, “the focus of Villanueva’s complaint to OSHA was that Core Labs retaliated against him because he complained of Saybolt Colombia’s violation of Colombian tax laws.”
The critical focus of Section 806 is on whether the employee reported conduct that he or she reasonably believed constituted a violation of federal law, the court explained, and “Villanueva’s underlying evidence of record does not evince that he complained to Core Labs or Saybolt Colombia executives that they were violating U.S. law by using domestic mail or wires to orchestrate Colombian tax-law violations.”
Consequently, Villanueva failed to demonstrate that he engaged in any protected activity and was not entitled to the protections of Section 806, the panel concluded, affirming dismissal of the complaint.
To read the opinion in Villanueva v. U.S. Department of Labor, click here.
