Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) and Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”) both extend whistleblower protection to certain individuals who report conduct they reasonably believe constitutes a violation of federal law relating to financial, securities, or shareholder fraud. As described in more detail below, the United States Supreme Court is expected to issue a decision on the important question of whether SOX protects whistleblowing activity by employees of private entities who are contractors to public companies. Moreover, a number of federal circuit courts have issued rulings recently on issues concerning key provisions of SOX and the Dodd-Frank Act.
Supreme Court to Decide SOX’s Application to Contractors of Publicly Held Companies
The United States Supreme Court recently granted certiorari to decide whether SOX whistleblower protections extend to employees of privately held contractors of public companies, such as accounting firms, mutual fund investment advisors and other private companies that provide services to public companies. Section 1514A of SOX prohibits a publicly traded company or “any officer, employee, contractor, subcontractor, or agent of such company” from discriminating against its employees for reporting potential securities violations.
Last year, the First Circuit decided in Lawson v. FMR, LLC, 670 F.3d 61, 62-63 (1st Cir. 2012) that the complainants did not have claims under Section 1514A because of their status as employees of private companies. The Lawson decision conflicts with decisions of the Department of Labor’s (“DOL”) Administrative Review Board (“ARB”), which hold that SOX’s whistleblower protections do extend to employees of private contractors. See, e.g., Spinner v. David Landau & Assocs. LLC, No. 10-111 (ARB May 31, 2012). The Supreme Court is expected to resolve this split of authority in ruling on the Lawson appeal.
Conflicting Decisions Regarding Whether the Dodd-Frank Act Protects Individuals Who Do Not Disclose Alleged Fraud to the SEC
In Murray v. UBS Securities LLC, et al., No. 2-cv-05914 (JMF), 2013 WL 2190084 (S.D.N.Y. May 21, 2013), United States District Judge Jesse M. Furman of the Southern District of New York interpreted the anti‑retaliation provisions of the Dodd-Frank Act broadly to extend whistleblower protection to individuals who report alleged wrongdoing only internally within their employer and not to the Securities and Exchange Commission (the “SEC”). The Dodd-Frank Act defines a “whistleblower” as “any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission.” 15 U.S.C. § 78u-6(a)(6) (emphasis added). However, the Dodd-Frank Act’s provision regarding “[p]rotection of whistleblowers” prohibits discrimination against a “whistleblower” who makes disclosures that are “required or protected” under SOX or any other law, rule, or regulation within the jurisdiction of the SEC. 15 U.S.C. § 78u-6(h)(1)(A)(iii). The defendant in Murray argued that because the plaintiff made his reports of alleged wrongdoing to his superiors at UBS — and not to the SEC — he was not afforded protection under the Dodd-Frank Act. The court found the statute “ambiguous” and thus relied on the language of a rule promulgated by the SEC under the Act (17 C.F.R. § 240.21F-2(b)(1)), which sets out a more expansive definition of “whistleblower” and provides that an individual qualifies as a whistleblower even though he never reports information to the SEC. Accordingly, the court ruled that the plaintiff was a whistleblower for purposes of Dodd-Frank and denied the defendant’s motion to dismiss the complaint.
Just two months after issuance of the Murray decision, the Fifth Circuit ruled in Asadi v. G.E. Energy (USA), L.L.C., 702 F.3d 620 (5th Cir. 2013), that the anti-retaliation provisions in the Dodd-Frank Act protect only whistleblowers who disclose alleged fraud to the SEC. The Fifth Circuit determined that the text of Dodd-Frank “clearly and unambiguously” provides a single definition of “whistleblower;” consequently, it declined to consider the SEC’s rule purporting to define the term “whistleblower” more broadly. The court further discussed a practical reason for its interpretation: broadly construing “whistleblower” to provide a right of action under Dodd-Frank to individuals who make disclosures protected under SOX would render moot SOX’s own anti-retaliation provision and its administrative scheme (which, among other things, requires that claims be filed with the DOL within 180 days after the employee becomes aware of the violation).
While the Fifth Circuit’s decision in Asadi conflicts directly with Murray and other district court decisions, the Supreme Court may await further Circuit Court decisions before taking up the question as to whether individuals who report internally (without going to the SEC) can be protected under Dodd-Frank.
Second Circuit Clarifies Burden of Proof for SOX Whistleblower Claims
The Second Circuit Court of Appeals recently took the opportunity to “clarify the burden-shifting framework applicable to whistleblower retaliation claims under SOX” in connection with its review and affirmance of a decision by the ARB dismissing an executive’s SOX claim based on his allegation that he was terminated three months after he questioned the company’s failure to disclose certain aspects of the company’s finances. Bechtel v. U.S. Dep’t of Labor, 710 F.3d 443 (2d Cir. 2013). Joining other federal circuits, the Second Circuit confirmed that, to prove a SOX claim, a whistleblower must show by a preponderance of the evidence that he or she engaged in statutorily protected activity, the employer knew he or she engaged in the protected activity, the employee experienced an adverse employment action, and the protected activity was a “contributing factor” in the adverse action. If a complainant can prove these four elements, then an employer may avoid liability by proving by “clear and convincing evidence” it would have taken the same adverse action absent the protected activity.
Employers should note that the burden on SOX defendants — to rebut the employee’s prima facie case with “clear and convincing evidence” — is a substantially higher standard than that applied under Title VII, which only requires an employer to articulate a legitimate, nondiscriminatory reason for the adverse action.
Third Circuit Adopts Employee-Friendly Test on “Protected Activity” Standard
Section 806 of SOX prohibits retaliation against an employee who reports any conduct the employee “reasonably believes constitutes a violation” of (a) federal criminal law provisions prohibiting mail, wire or bank fraud; (b) any rule or regulation of the Securities and Exchange Commission; or (c) any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). In Wiest v. Lynch, 719 F.3d 121 (3d Cir. 2013), the trial court had dismissed the SOX claim, finding that the complainant failed to allege that his internal communications to management “definitively and specifically related” to a statute or rule listed in SOX. The Third Circuit reversed, ruling that, rather than enumerating each element of one of the laws set forth in Section 1514A(a)(1), whistleblowers need only have had a subjectively and objectively reasonable belief that their employer has violated or will violate a law or regulation enumerated in Section 1514A(a)(1).
Tenth Circuit Issues Decision Broadly Interpreting the Range of Statutory Violations Encompassed By the Whistleblower Provision of SOX
In Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121 (10th Cir. 2013), complainant Andrea Brown made an ethics complaint about a senior executive at Lockheed Martin. Specifically, Brown claimed that the executive, who ran a pen pal program between Lockheed employees and U.S. soldiers in Iraq, had sexual relationships with soldiers, sent troops sexually explicit materials, and used company funds to buy a soldier a laptop. She brought a SOX claim alleging she had been constructively terminated because she had engaged in this alleged protected activity.
On appeal, the employer challenged whether Brown had engaged in protected activity under SOX, arguing that SOX only protects employees who complain about mail or wire fraud if the mail or wire fraud ultimately “relat[es] to fraud against shareholders.” The Tenth Circuit disagreed and explained: “The plain, unambiguous text of § 1514A(a)(1) establishes six categories of employer conduct against which an employee is protected from retaliation for 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.” Thus, according to the Tenth Circuit’s reading of SOX, the law protects whistleblowers who report conduct that could violate the statutory provisions listed in § 1541A(a)(1), even if such violations are unrelated to fraud against shareholders.
Recent decisions, as well as the Supreme Court’s decision to consider the breadth of SOX’s whistleblower provision, serve as a reminder that courts generally take a broad view of what constitutes protected activity under SOX and Dodd-Frank. Employers should ensure that training of management and human resources professionals involved in the investigation and assessment of potential whistleblower complaints underscores the scope of activities that may constitute protected activity.