Sarbanes-Oxley Whistleblower Protection - Two Years Later - What Hath Enron Wrought?

Tuesday, February 1, 2005 - 01:00
Stanley L. Goodman

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), enacted in response to Enron-type corporate abuses, protects "whistleblowers" against retaliation because they openly oppose certain violations of law by their employers. Now, two years after its enactment, it is time to take "stock" of these whistleblower provisions.

Sarbanes-Oxley generally covers publicly traded companies, but its whistleblower protection applies to "any officer, employee, contractor, subcontractor, or agent" of these companies. Protected are those employees who have provided information to: (1) law enforcement agencies/regulators; (2) government bodies conducting inquiries; or (3) supervisors or persons authorized by the employer to look into the alleged misconduct. 18 U.S.C. §1514A(a)(1)(A)-(C). Also protected are employees who file, cause to be filed, testify, participate, or otherwise assist in a proceeding regarding violations of the applicable laws. 18 U.S.C. §1514A(a)(2). Sarbanes-Oxley extends protection to whistleblowers who report violations of: (1) 18 U.S.C. §§1341, 1343, 1344, or 1348 (which prohibit mail fraud, wire fraud, and bank fraud); (2) any SEC rule or regulation; and (3) any provision of Federal law relating to fraud against shareholders. 18 U.S.C. §1514A(a)(1) and (2).

Unlike some state laws, such as the New Jersey Conscientious Employee Protection Act ("CEPA"), which expressly protects employees who object to or refuse to participate in unlawful activity, Sarbanes-Oxley is silent on whether this rises to the level of protected activity. N.J.S.A. 34:19-3(c)(1)-(3); 18 U.S.C. §1514A(a)(1)-(2). Thus, it remains unclear if Sarbanes-Oxley protects employees who refuse to "go along" with an employer's unlawful practices, as opposed to actually reporting them.

To assert a claim under Sarbanes-Oxley, an employee must file a complaint with the U.S. Department of Labor ("DOL") within 90 days after the retaliatory action. 18 U.S.C. §1514A(b)(2); 49 U.S.C. §42121(b)(1). After providing the employer with an opportunity to respond to the complaint (but no later than 60 days after the complaint is filed), the DOL may conduct an investigation, determine whether there is reasonable cause to believe that a violation has occurred, and issue a preliminary order. 49 U.S.C. §42121(b)(2)(A).

In order to establish a prima facie case under Sarbanes-Oxley, an employee must prove that she (1) reasonably believed that her employer was breaking the law; (2) engaged in whistleblowing activity as defined by the statute; (3) suffered an adverse employment action; and (4) that there was a causal connection between the whistleblowing activity and the adverse employment action. Welch v. Cardinal Bankshares Corp., 2003-SOX- 15 at 35 (ALJ 2004).

As the statutory language makes clear, the first element does not require the employee to prove that the employer actually violated the law. Welch , supra, at 36. Rather the employee need only show that she reasonably believed this to be the case and that there is a "substantial nexus" between the perceived violation and the employer's conduct. Id. Further, the requirement that protected activity must have contributed to the decision to take unfavorable action assumes that the employer knew about the employee's protected activity. William Peck v. Safe Air International, Inc., 2004 WL 230770, *5 (DOL Adm. Rev. Bd.). Temporal proximity between protected activity and adverse personnel action normally will satisfy the burden of making a prima facie showing of knowledge and causation. Id., citing 29 C.F.R. §1979.104(b)(2).

Unless the complainant establishes a prima facie case, the DOL will dismiss the complaint without further investigation. If the DOL proceeds, the burden shifts to the respondent to demonstrate by clear and convincing evidence that it would have taken the same action in the absence of the employee's protected activity. William Peck, 2004 WL 230770, *5-6; 18 U.S.C. §1514A(b)(2); 49 U.S.C. §42121(b)(2) (B)(ii). Thus, the employer has a high burden to meet in a Sarbanes-Oxley whistleblower case, since the familiar burden shifting analysis of a Title VII claim, whereby the employer simply has a burden of articulating , not proving, a lawful reason for the challenged employment decision, is not followed.

No later than 30 days after the DOL makes its determination and issues a preliminary order, either party may object to the determination and request a hearing before an administrative law judge ("ALJ"). 49 U.S.C. §42121(b)(2)(A); 29 C.F.R. §1979.106. If neither party requests a hearing, the preliminary order becomes final and is not subject to judicial review. Id. In the event that the DOL fails to issue a final decision within 180 days of the filing of the complaint (which, given the experience with similar statutes, will likely be the case), the employee may bring an action in court. 18 U.S.C. §1514A(b) (1)(B).

A prevailing Sarbanes-Oxley whistleblower is entitled to "all relief necessary to make the employee whole," including reinstatement, back pay with interest, expert witness and attorneys' fees and costs. 18 U.S.C. §1514A(c). The statute does not provide for punitive damages. It does, however, impose fines and/or imprisonment of up to 10 years for any person who "knowingly, with the intent to retaliate" takes any action harmful to a whistleblower. 18 U.S.C. §1513(e). Moreover, Sarbanes-Oxley does not diminish other claims that employees may have against under other federal and state laws. 18 U.S.C. §1514A(d).

The DOL reports that as of August 2004, 307 Sarbanes-Oxley whistleblower complaints had been filed. 121 cases have been referred to hearing before an ALJ, 37 were settled and 19 were transferred to judicial forums.

The few reported judicial decisions that have issued to this point mostly address procedural matters, and indicate that the courts will strictly apply statutory requirements of timeliness and exhaustion of administrative remedies. See, e.g., Willis v. VIE Financial Group, Inc., 21 IER Cases (BNA) 1111 (E.D.Pa 2004) (holding plaintiff may not pursue later-arising retaliation claim which occurred during pendancy of initial complaint, but was never the subject of an administrative complaint). Compare McAdams v. Thermal Industries, Inc., 428 F. Supp. 156 (W.D.Pa. 1977) in which the opposite result was reached in applying the exhaustion of administrative remedies rule under Title VII. It has also been held that a Sarbanes-Oxley plaintiff may be required to arbitrate this claim if an agreement to arbitrate exists. Boss v. Solomon Smith Barney, Inc., 263 F. Supp. 2d 684 (S.D.N.Y. 2003).

Clearly, Sarbanes-Oxley has not resulted in the avalanche of whistleblower claims predicted by some commentators. While (at least among my clients) this is likely the result of a new era of corporate responsibility, it may also be attributable to more effective (from the plaintiff's viewpoint) state whistleblower statutes, such as New Jersey's CEPA.

CEPA applies to all New Jersey employers and has no exhaustion of remedies requirement. Claims may be filed directly in court, where a jury trial awaits. Moreover, there is a one-year statute of limitations which runs from the final act of alleged retaliation. N.J.S.A. 34:19-5. Green v. Jersey City Bd. of Educ., 177 N.J. 434, 437-438 (2003).

Prevailing CEPA plaintiffs may recover injunctive relief, including reinstatement, compensatory damages, reasonable attorneys' fees, and punitive damages. N.J.S.A. 34:19-5. The employer also faces a fine of up to a $1,000 for the first violation and a maximum of $5,000 for each subsequent violation. Id. Unlike Sarbanes-Oxley, CEPA's exclusivity clause waives all claims that are based on the same set of facts as the CEPA claim. N.J.S.A. 34:19-8.

While the discerning plaintiff in New Jersey will likely forgo Sarbanes-Oxley in favor of the state statute, that option is not as attractive for the New York plaintiff. New York's whistleblower statute, Labor Law §740, is much more narrow. Unlike both Sarbanes-Oxley and CEPA, the New York Court of Appeals has held that an employee claiming a violation of §740 must establish an actual violation of a statute or regulation creating a substantial risk to public safety, not just a reasonable suspicion. Bordell v. General Elec. Co., 88 N.Y.2d 869, 644 N.Y.S.2d 912, 667 N.E.2d 923 (1996); see also Connolly v. Harry Macklowe Real Estate Co., 161 A.D.2d 520, 555 N.Y.S.2d 790 (1st Dep't 1990) (holding that whistleblower plaintiff must specify which statute, rule or regulation has been violated). The harm complained of must be to the public, not the plaintiff or a limited group. Green v. Saratoga A.R.C., 233 A.D. 2d 821, 650 N.Y.S.2d (3d Dept. 1996). Without documentation of such a complaint, there is no §740 claim. Lambert v. General Electric, 244 A.D.2d 841, 666 N.Y.S.2d 289 (3d Dept. 1997). Like CEPA, there are no administrative prerequisites to filing suit, and the claim may be brought up to one year after the alleged retaliatory action has taken place. N.Y. Lab. Law §740(4)(a).

Specific remedies that a court may order in New York include injunctive relief to prevent further violation of the statute, reinstatement of the employee with full seniority rights and benefits, monetary award for lost wages and other benefits, and attorney's fees and costs. N.Y. Lab. Law §740(5)(a)-(e). An aggrieved party is not entitled to a jury trial or punitive damages. Scaduto v. Restaurant Assocs. Indust., Inc., 180 A.D.2d 458, 579 NY.S. 2d 381 (1st Dept. 1992). Section 740(5) has also been interpreted as only permitting the enumerated equitable relief and not general monetary damages. Id. at 460; McGrane v. Reader's Digest Ass'n, 822 F.Supp. 1044, 1045 (S.D.N.Y. 1993). Also, bringing a cause of action under this statute is deemed "a waiver of the rights and remedies available under any contract, collective bargaining agreement, law, rule or regulation or under common law." N.Y. Lab. Law §740(7).

Labor Law §741, which covers only health care employees, provides for a two-year statute of limitations and the employee need only reasonably believe there is a violation.

So where does this leave us? Whether under state or federal law, whistleblower litigation is trending up. As a result, the policy objective underlying such legislation cannot be ignored. Employers must foster a working environment where employees believe they can report unlawful practices without fear of retaliation. Indeed, Sarbanes-Oxley and CEPA both require employers to establish internal complaint procedures.

Aside from establishing and adhering to such policies, employers should regularly provide their employees with anti-retaliation training. By doing so, employers may not only bolster their potential defenses in the event of litigation, but they also send a clear message to their employees and managers that conduct that may be perceived as retaliatory will not be tolerated.

Lastly, insofar as an employer is compelled to take an adverse employment action against an employee who has arguably engaged in any protected whistleblowing activities, the employer must be able to establish that the decision had an independent, lawful basis. The prudent employer should assume that it will be proving this in court.

Stanley L. Goodman is a Principal in the law firm of Grotta, Glassman & Hoffman, P.C. He represents management clients on issues of labor relations, employment discrimination and wrongful termination. He may be reached at (973) 992-4800.

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