Whistleblowing Under Sarbanes-Oxley: The Mist Begins To Clear

Thursday, June 1, 2006 - 01:00

Editor: Ms. Bertram, would you tell our readers something about your professional experience?

Bertram: I have been practicing in Washington, DC for 16 years and, for the past 11 years, have focused on employment and fair housing litigation and counseling. At the moment I am focused on three main areas: employment litigation and counseling, including federal compliance, discrimination, retaliation, and whistleblower claims; handicapped accessibility issues, including Fair Housing Act and Americans With Disabilities Act compliance and litigation; and, finally, discrimination and harassment outside of the employment context, such as complaints by customers and tenants. My practice involves counseling, litigation and regulatory compliance in all of these areas.

Editor: How did you come to Winston & Strawn? What were the things that attracted you to the firm?

Bertram: After having been with a regional firm for 10 years, I was drawn to Winston because it has a true national employment practice. Its leadership is very strong, and its commitment to labor and employment law is evidenced by the fact that it has 80 lawyers in seven different offices dedicated to this practice. The cooperation and interaction among the various offices is also a very attractive feature of the firm.

Editor: Please tell us about your practice. How has it evolved over the course of your career?

Bertram: Employment lawyers tend to focus on either the labor area, including union issues; the employment area, which is what I do; or the benefits area, which includes ERISA and ESOP issues. Within these three areas practitioners have become highly specialized, and, in fact, there are people focused solely on counseling or solely on litigation. I do not necessarily agree with this approach. I believe that my litigation background and experience makes me, as clients have explained, "bring more to the table" and be a better counselor, and vice versa.

My general litigation background results in my being drawn into some very interesting situations. For example, I was lead counsel for the defense in the first federal mold exposure decision in the country, Roche v. Lincoln Property Company. The case began as an employment law case and morphed into something quite different. It was litigated before the Fourth Circuit and the Supreme Court.

Editor: And Sarbanes-Oxley? How has that impacted your practice?

Bertram: Whistleblower and retaliation litigation have been part of my practice for a long time, even before Sarbanes-Oxley. Nevertheless, Sarbanes has received a great deal of attention in recent years. Section 806 of the statute involves establishing a new set of mechanisms, policies and procedures, including 'call in' lines and, potentially, investigative units, to comply. Employers have been apprehensive about the statute because a number of decisions early on imposed liability on employers for alleged retaliation. In addition, as litigation has developed, it is apparent that there are a number of unsettled standards. For example, does Sarbanes extend to the employees of subsidiaries of public companies? At least one ALJ decision suggests that such employees are covered, irrespective of the parent-subsidiary relationship. Most ALJs have adopted a derivative liability or joint employment standard that looks to the parent company's involvement in the employment decisions of the subsidiary. Needless to say, there are a great many employers who are anxious to know the answer to the question. A resolution is anticipated within the next year.

Editor: Speaking of 806, can you give us an overview?

Bertram: Section 806 prohibits publicly traded companies and their agents and contractors from retaliating against employees for complaining about or participating in investigations of securities violations or fraud. It protects any employee of a publicly traded company who provides information concerning alleged violations of federal fraud and securities laws. The employee must initially show that he or she engaged in protected activity, the employer was aware of that activity, and he or she suffered an adverse employment action. The employee must prove that his or her protected activity was a contributing factor in such action. If the employee makes this showing, the employer bears the burden of establishing a legitimate non-retaliatory reason for the action. That might include showing that the employee would have been terminated for poor performance or for violating a company policy. The employee must then show that the employer's justification was pretextual or false and that the true motivation was retaliation. Even if the employee makes such a showing, the employer may avoid liability by showing that it would have made the same decision regardless of whether the employee engaged in protected activity.

Editor: What is meant by "protected activity" under 806?

Bertram: "Protected activity" is a defined term, but it can be difficult to apply. Many times the complaint is couched in very vague terms, and it is difficult to identify whether the employee is complaining about fraud or simply doing his or her job. In litigation, the ALJs have adopted a two-pronged standard: the employee must reasonably believe that fraudulent or illegal activity is taking place; and he or she must show that a reasonable person with the same information would come to the same conclusion. The ALJs have been willing recently to address this issue on motion and conclude that the complainant did not make a legitimate complaint.

Editor: You indicate that the employer must be aware of the protected activity. Can such awareness be constructive knowledge?

Bertram: Yes. Many commentators have suggested that the knowledge of one supervisor is imputed to everyone in the company. The ALJ decisions have not been that far-reaching. They have said that the knowledge of a particular supervisor should not be imputed to the rest of the company unless that supervisor participated in or had influence over the termination decision. At least one decision has recognized that if the decision-maker has been intentionally isolated from knowledge of the protected activity, imputed knowledge may lie in that situation as well.

Editor: What is meant by "adverse employment action" under the statute?

Bertram: The phrase is not specifically defined in the statute. The ALJ decisions reflect the split in the federal circuit courts on the meaning of this phrase. A majority utilize a "tangible employment action" standard that includes a termination, suspension or other action that results in monetary loss. The other standard is more flexible and considers an adverse employment action to be any action that would deter an employee from complaining.

Under the tangible standard, a bad performance evaluation would not be an adverse employment action, but under the deterrent standard it might be. That issue is now before the United States Supreme Court in Burlington Northern v. White.

Editor: And the protected activity must be a contributing factor in the adverse employment action? Can you give us an example?

Bertram: An important factor considered by the ALJs is the temporal proximity between the protected activity and the termination. Where an employee is terminated within two or three days of making a complaint, for instance, absent clear evidence that the termination decision was made prior to or for reasons independent of the protected activity, the ALJ is likely to find that the complaint was a contributing factor.

The ALJs will also look at direct evidence, such as statements indicating retaliatory intent. They will also consider the company's reaction and response to the whistleblower's complaint. For instance, in a number of cases the ALJ has found that the company was not liable because it was supportive of and responded effectively to the complaint. The ALJs consider many factors to try to get to the bottom of the employer's motivation for termination.

In Platone v. Atlantic Coast Airlines, for instance, the employee made a complaint about a claimed financial impropriety and was thereafter terminated on the grounds that she had engaged in inappropriate relations with another employee. The ALJ weighed the evidence and determined that the whistleblowing activity was a contributing factor in light of a paucity of evidence supporting the termination.

Editor: Suppose the employer can show that it would have taken the same adverse employment action absent any protected activity?

Bertram: Even if the employee can show that the whistleblowing activity was a contributing factor, the employer can still avoid liability if it can show that the employee would have been terminated anyway, irrespective of the activity. This defense was created to avoid the situation where the complainant uses the complaint to insulate himself from liability for misconduct or policy violations that would otherwise result in termination.

Editor: Is there a potential criminal liability here?

Bertram: There is a statute, adopted at the same time as Sarbanes-Oxley, that recognizes that individuals can be held liable for retaliating against anyone (regardless of whether they are employed by the public company) who complains of violations of any federal law. I am not aware of any prosecutions under this new provision. In addition, whenever any whistleblower complaint is filed with the Department of Labor, it is passed on to the SEC. That, of course, can result in an SEC investigation of alleged securities fraud.

Editor: Our publication is directed to corporate counsel and the members of corporate legal departments. What should we be calling to the attention of our corporate counsel readership?

Bertram: All good employers embrace the idea that employees should be encouraged to come forward and report illegal conduct. In fact, many employers had corporate conflict of interest, anti-fraud and whistleblower protection policies in place well before Sarbanes-Oxley was enacted. Now, these policies need to be refined to identify prohibited conduct, establish mechanisms for reporting and investigating complaints that are consistent with Sarbanes-Oxley, and identify a person or department responsible for compliance. Once these pieces are in place, it is crucial to train the employees concerning these policies and to monitor their effectiveness. Also, when complaints are made, companies need to respond swiftly and effectively and ensure that the complainant is not subjected to retaliation (or, even the appearance of it).

Editor: Do you advise clients which are not required to comply with Sarbanes-Oxley to implement these types of policies?

Bertram: I represent many different types of organizations, including those subject to Sarbanes-Oxley and those to whom the statute is not applicable. Almost all of them had effective policies in place long before Sarbanes-Oxley. Regardless of whether Sarbanes-Oxley applies to you, it is important to have some mechanism in place to permit employees to come forward and report fraud and misconduct. Otherwise, a problem with a single supervisor or department can fester and turn into a corporate calamity. So, yes, these policies are important for everyone.

Please email the interviewee at cbertram@winston.com with questions about this interview.