A recent decision by the U.S. Department of Labor’s Administrative Review Board (the “ARB”) continues the trend of broadening whistleblower protections under the Sarbanes-Oxley Act (“SOX” or the “Act) for employees making reports of certain illegal activities. In Funke v. Federal Express Corporation, the ARB ruled that an employee engaged in protected activity under SOX when she reported suspicions that a third-party customer of her employer was engaging in mail fraud. The ARB also determined that the employee was protected by SOX when she made her report to local law enforcement. Prior to this ruling, SOX’s whistleblower protections were generally viewed as extending only to reports of employer misconduct made either to a federal authority or the employer itself. Earlier this year, the ARB relaxed the pleading standards for whistleblower complaints in Sylvester v. Parexel International LLC. Together, these decisions make it easier for employees to bring SOX claims and more difficult for employers to defend them.
The Sarbanes-Oxley Act
Congress enacted SOX in 2002 in the wake of a number of high-profile corporate and accounting scandals. SOX’s whistleblower protections prohibit retaliation against employees who provide information or assist in investigations related to certain fraudulent acts. Section 1514A of the Act provides that covered employers and individuals may not “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” because the employee has reported what he or she reasonably believes is a violation of laws prohibiting mail, wire, radio, TV, bank, or securities fraud; SEC rules; or federal laws relating to fraud against shareholders. Sox provides protection when such a report is made to a federal regulatory or law enforcement agency, Congress, or a person with supervisory authority over the employee. The Act vests enforcement and investigation authority with the Occupational Safety and Health Administration (“OSHA”). To prevail on a whistleblower claim, an employee must show that he or she engaged in activity protected under SOX, that the employer took an adverse action against the employee, and that there was a causal connection between the protected activity and the adverse action.
The ARB Relaxes Pleading Standards in Sylvester v. Parexel International LLC
In Sylvester v. Parexel International LLC, decided in May 2011, two former employees filed a SOX complaint with OSHA alleging that they had been terminated because they had reported falsified data during clinical drug trials. The Administrative Law Judge (“ALJ”) dismissed the employees’ complaint on the grounds that it did not “definitively and specifically” show a violation of SOX. The ARB reversed the ALJ, ruling that the heightened pleading standards required by federal courts did not apply to complaints filed with OSHA. To avoid dismissal in federal court, a complaint must generally state sufficient facts to show not just a possible violation of the law, but one that is “plausible.” In contrast, the Sylvester decision stated that a whistleblower complaint filed with OSHA need include only “a full statement of the acts and omission, with pertinent dates, which are believed to constitute [SOX violations].” 29 C.F.R. § 1980.103(b). Furthermore, the Sylvester decision departed from prior federal court opinions that had consistently required the illegal activity reported to be “at its core, related to shareholder fraud.” See, e.g., Livingston v. Wyeth, Inc., 2006 WL 2129794, *10 (M.D.N.C. 2006). The ARB noted that the statute was clear that protection extended to disclosures regarding any of the six areas of illegality identified in Section 1514A.
The ARB Broadens Protections to Cover Reports of Third-Party Misconduct in Funke v. Federal Express Corporation
In Funke v. Federal Express Corporation, a FedEx courier filed a SOX complaint with the Occupational Safety and Health Administration (OSHA) alleging that she had been suspended without pay for three days in retaliation for reporting concerns to her dispatchers and the local Sheriff’s department regarding suspected mail fraud by an individual to whom she was delivering packages. The ALJ dismissed the employee’s complaint on the grounds that her report did not constitute protected activity under SOX because it was not a report of misconduct “by the employer” and it was not “related to fraud against shareholders.” Upon review, the ARB reversed the ALJ’s decision, stating that “[t]he statute on its face does not limit its application to reported misconduct of the employer.” The ARB noted that SOX protects an employee who provides information “regarding any conduct” that the employee reasonably believes constitutes a violation of the laws or regulations identified in Section 1514A. As such, whistleblower protections extended to reports of misconduct by third parties, such as in this case, one of the employer's customers.
The ARB also reiterated its prior ruling in Sylvester that protected activity was not limited to providing information regarding possible fraud against shareholders. Finally, the ARB rejected FedEx’s contention that the courier’s reports to the Sheriff’s department were not protected under SOX. The ARB acknowledged that the phrase “Federal regulatory or law enforcement agency” was somewhat ambiguous in that “[i]t is unclear whether Congress intended for the adjective ‘Federal’ to apply only to ‘regulatory agency’ and not ‘law enforcement agency.’" Regardless, the ARB adopted what it termed the “common sense view that Congress intended to protect disclosures to ‘law enforcement.’”
Together, the ARB’s decisions in Sylvester and Funke will make it easier for employees to bring whistleblower claims. A relaxed pleading standard will mean that fewer complaints will be dismissed early in the process. The ARB’s expansion of protected activity to include third-party misconduct and illegality not directly related to shareholder fraud will bring more employee reports under umbrella of SOX’s protection. As such, employers can expect that more whistleblower complaints may be filed with OSHA and that more of these complaints will result in full OSHA investigations of a complaint’s factual claims. Employers should understand that complaints regarding customers, contractors, vendors, or business partners may be viewed as reports triggering SOX protection. Employers defending whistleblower claims will also likely be required to shift their focus from arguing that the employee’s activity was not protected under Sox to establishing that an action take against any employee was actually unrelated to the employee’s report.