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Sarbanes Oxley : Whistleblower : Policy Management

More Protection for Whistleblowers

By R. Scott Oswald
R. Scott Oswald
Managing Principal
The Employment Law Group, P.C.

2011 marked a sea change for whistleblowers at the Department of Labor’s Administrative Review Board (ARB).  The ARB changed the standard of proving protected activity, embraced the concept of corporate knowledge, established the most generous standard for an adverse action in employment law, and established the fact that most Sarbanes-Oxley cases should proceed to an evidentiary hearing. 

In Sylvester, the ARB loosened the test for analyzing protected activity, specifically rejecting the test set forth in Platone v. FLYi, Inc.  In Platone, the Board held that in order to constitute protected conduct, a complainant's protected communications “must relate ‘definitively and specifically’ to the subject matter of the particular statute under which protection is afforded.” The Board noted that the use of the words “definitively and specifically” in whistleblower cases came from cases discussing the Energy Reorganization Act.

However, because SOX contains no similar language, importing this standard from the ERA, as the Board did in Platone, was inappropriate and overly strict.  Instead, a complainant must only show that he had a reasonable belief that he was disclosing a violation of relevant law.  To demonstrate reasonable belief, the complainant must show that he had a “subjective belief that the complained-of conduct constitutes a violation of relevant law, and also that the belief is objectively reasonable.” 

To satisfy the subjective component of the “reasonable belief” test, the employee must actually have believed that the conduct he complained of constituted a violation of relevant law.  The second element of the “reasonable belief” standard, the objective component, depends on the education and experience of the whistleblower; it “is evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee.” As a consequence, a complainant is not required to prove that their disclosure implicated an actual violation of law – only that the whistleblower reasonably believed that a violation of law occurred or was about to occur.

The reasonable belief standard requires an examination of the reasonableness of a complainant’s beliefs, but not whether the complainant actually communicated the reasonableness of those beliefs to management or the authorities.  In the wake of Sylvester, the ARB instructs adjudicators to examine the whistleblower’s belief, not whether the whistleblower actually articulated her beliefs when analyzing whether a whistleblower held a reasonable belief that her disclosure violated a relevant law. 

The ARB also emphasized that whether a complainant’s belief is objectively reasonable often “involves factual issues and cannot be decided in the absence of an adjudicatory hearing.”  Accordingly, after Sylvester would be improper for an ALJ to dismiss almost any SOX retaliation case prior to trial.    The ARB also dispensed with the requirement that whistleblowers’ disclosures implicate material facts, plainly stating “a complainant can engage in protected activity under Section 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation.” 

In Funke v. Federal Express Corporation, ARB No. 09-004, ALJ No. 2007-SOX 043, the ARB expanded SOX’s whistleblower protections in two important ways.  Funke reported that a FedEx customer was using FedEx’s services to engage in mail fraud.  The ARB confirmed that Funke’s disclosures of the customer’s activity constituted protected activity, even though FedEx was not directly involved in the fraud itself.  Accordingly, the ARB noted that “the plain language of the statute contains no express requirement that the reported misconduct be committed by a complainant’s employer.  Section 1514A protects an employee who provides information ‘regarding any conduct which the employee reasonably believes constitutes a violation’ of one of six enumerated laws or regulations contained therein.”  (Emphasis added). 

In addition to reporting the customer’s conduct to FedEx, Funke also reported the customer’s conduct to the local Sheriff.  The ARB reiterated that SOX protects whistleblowers who report covered fraud to “a Federal regulatory or law enforcement agency.”  Although Congress did not specify whether “Federal” applied to both “regulatory” and “law enforcement” agencies, the ARB found that it was a “hypertechnical distinction that is inconsistent with the common sense view that Congress intended to protect disclosures to ‘law enforcement.’”  (15)(citing references omitted).  Accordingly, whistleblowers’ disclosures made to local law enforcement agencies also constitute protected activity. 

Even more importantly, as the ARB set forth in Vannoy v. Celanese, ARB No. 09-118, ALJ No. 2008-SOX-064 (ARB September 28, 2011), the ARB relieved whistleblowers from the heavy burden of proving their claims without using any of the employer’s confidential information.  Previously, whistleblowers could be subject to serious penalties for doing so. 

Vannoy alleged that Celanese violated SOX by placing him on leave and terminating his employment after he disclosed potential weaknesses in the company’s credit card reimbursement program internally and to the IRS.  Some of the documents Vannoy sent to the IRS included confidential employer information such as employee home addresses and social security numbers.  Vannoy obtained the documents by transferring “personal credit information” to his home computer in furtherance of his complaint and related to improper business deductions.  Vannoy also intended to use it to further his IRS Whistleblower program complaint.

The ARB noted that Vannoy shared information with the IRS that he believed demonstrated SOX and tax law violations.  In finding that Vannoy’s taking of the documents was protected, the ARB noted that there “is nothing in the statutory language that limits the agencies to which a complainant may report information in furtherance of enforcement of laws that fall within the SOX’s coverage.” 

Because Vannoy reported the alleged misconduct to individuals with authority to investigate the misconduct, the ARB found that it “would be incompatible with the congressional intent to promote disclosures of corporate misconduct to narrowly construe the statute in such a way that only reports to the SEC warrant its protection.”  The ARB concluded by noting “[t]here is a clear tension between a company’s legitimate business policies protecting confidential information and the whistleblower bounty programs created by Congress…Passage of these bounty provisions demonstrate that Congress intended to encourage federal agencies to seek out and investigate independently procured, non-public information from whistleblowers such as Vannoy…”

In Menendez v. Halliburton, ARB Nos. 09-002, 09-003, ALJ No. 2007-SOX-005 (ARB Sep. 13, 2011), the ARB affirmed that whistleblowers are protected under SOX even when they are mistaken about the nature of their complaints.  The ARB explained that an employee’s non-frivolous complaint does not have to withstand internal or external review to merit Section 806 protection because that standard would fail to protect employees who bring to light perceived misconduct

Further, in Menendez, the complainant argued that he had been subject to five personnel actions: breach of confidentiality, isolation, removal of duties, demotion, and constructive discharge.  The ARB held that the complainant had been subject to an adverse action, because the SOX prohibits “non-tangible activity” demonstrating “a clear congressional intent to prohibit a very broad spectrum of adverse action against SOX whistleblowers.”  The ARB further noted that Section 806’s intended protections also included non-economic and non-employment related actions. 

In Johnson v. Siemens Building Technologies, Inc., ARB No. 08-032, ALJ No. 2005-SOX-015 (ARB Mar. 31, 2011), the Board applied Section 929A of the Dodd-Frank Act to cases brought before the Act’s effective date and declared that whistleblowers may seek SOX’s protections from non-publicly traded subsidiaries of publicly traded companies.

Johnson sought a determination that SOX coverage extended to Siemens Building Technologies, Inc., a non-publicly traded subsidiary of Siemens AG, a publicly traded company.  Section 806 of SOX, before being amended by Section 929A of the Dodd-Frank Act, applied to companies “with a class of securities registered under section 12 of the Securities Exchange Act of 1934, or that is required to file reports under Section 15(d) of the Securities Exchange Act of 1934, or any officer, employee, contractor, subcontractor, or agent of such company.” 15 U.S.C. § 1514(A)(a) (2002) (amended 2010). 

Johnson’s appeal was pending when Congress enacted Dodd-Frank.  Section 929A of the Dodd-Frank Act amended Section 806 of SOX to extend coverage to, in relevant part, “any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company…”  15 U.S.C. §1514(A)(a) (2010).  Section 929A of the Dodd-Frank Act squarely addressed the issue before the Board. 

The ARB noted that Congress enacted Section 929A to clarify Section 806.  The ARB further noted that whether Section 806 covered subsidiaries was an unsettled point of law prior to the Dodd-Frank Act and that Section 929A is a reasonable interpretation of Section 806.  Accordingly, the ARB found that Section 929A, although not retroactive, made “what was intended all along ever more unmistakably clear” i.e., SOX covers non-publicly traded subsidiaries of publicly traded companies.

Finally, in Villanueva v. Core Laboratories, ARB No. 09-108, ALJ No. 2009-SOX-006 (ARB December 22, 2011), the ARB found that SOX can protect disclosures of violations of United States law by foreign whistleblowers who work for foreign branches or subsidiaries of United States companies.  As a result, compliance professionals should not ignore the disclosures of foreign employees of foreign entities related to United States companies because foreign offices or subsidiaries can still violate U.S. securities laws and regulations.  Even complaints to foreign compliance offices should be taken seriously and investigated when the violation claimed refers to U.S. law. 

2011 was an important year for whistleblowers at the ARB.  As the Consumer Financial Protection Bureau extends whistleblower protections to new industries pursuant to the Dodd Frank Act of 2010 – most recently payday lenders, student loan companies and mortgage finance companies – the ARB’s influence over the scope and contours of whistleblower protection, articulated in its precedents in 2011, will be felt for years to come by employers in areas of the US economy that may have had few, if any, whistleblower protections before.




R. Scott Oswald
Managing Principal
The Employment Law Group, P.C.

R. Scott Oswald is the managing principal of The Employment Law Group, a leading employment law firm. With more than three dozen trials to verdict and more than $85 million recovered in judgments and settlements in employment and whistleblower claims, Mr. Oswald has proven experience in litigating and trying whistleblower retaliation, qui tam, wrongful discharge, discrimination, FMLA, USERRA, non-compete, and wage and overtime actions in federal and state courts, including a $57 million False Claims Act settlement.

His successes have been featured in numerous publications including The National Law JournalBNA’s Daily Labor Report, LawyersUSAEmployment Law360, Virginia Lawyers Weekly, Human Resource Executive and LegalBis Now. Mr. Oswald is recognized as one of the “Top Ten Employment Lawyers” in the Washington, D.C. Metropolitan Area by Top Ten Leaders. 

Mr. Oswald has been awarded a Martindale Hubbell AV Preeminent Peer Review rating and is rated 10 out of 10 by Avvo a legal and medical professionals rating forum. Mr. Oswald, who holds a Top Secret security clearance, lectures extensively on employment and whistleblower law. For more information, visit: www.employmentlawgroup.net.

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