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Unlocking

the Mysteries of

SOX Whistleblower

Claims

By EdEn P. SholEEn

and REBEcca l. BakER

By EdEn P. SholEEn

and REBEcca l. BakER

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Unlocking

the Mysteries of

SOX Whistleblower

Claims

I. Introduction to the act a. overview

T

he Sarbanes-Oxley Act

(“the Act” or “SOX”),1

effective July 30, 2002, seeks to protect investors and to improve corpo-rate responsibility in the wake of recent major corporate account-ing scandals. The Act also seeks to pro-tect employees who “blow the whistle” on their corporate employers.

The “whistleblower” protection provi-sion applies to companies with securi-ties registered under section 12 of the Securities Exchange Act of 1934 (“’34 Act”), or that are required to file reports under section 15(d) of the ‘34 Act.2 The

Act forbids companies from discrimi-nating against employees who engage in protected whistleblowing activity.3

Prohibited retaliatory acts include dis-charge, demotion, suspension, threats, and harassment.4 To be protected, an

employee must: 1) provide information to a federal regulatory or law enforce-ment agency, Congress, or a supervi-sor; or, 2) file, testify, participate in, or assist in proceedings regarding conduct he reasonably believes is or is related to shareholder fraud.5

The criminal prohibition against em-ployee retaliation provides:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or liveli-hood of any person, for providing to a law enforcement officer any truth-ful information relating to the com-mission or possible comcom-mission of any Federal offense, shall be fined . . . or imprisoned not more than 10 years, or both.6

This section of the Act does not distin-guish between public and private entities, but rather applies to all employers.

B. covered Employers

SOX applies to all public companies that

maintain a listing in the United States or have registered securities with the Securi-ties and Exchange Commission (“SEC”).7

The Act does not cover a company that has filed a SEC registration statement that has not yet become effective.8 Less clear is

the Act’s applicability to United States resi-dents working abroad or foreign resiresi-dents working abroad for a covered employer. Most courts and administrative law judges (“ALJs”) have held that SOX whistleblow-er protections do not extend to employees working outside of the United States. In a recent case, Carnero v. Boston Scientific

Corp., the U.S. Court of Appeals for the

First Circuit held that the anti-retaliation provisions do not protect foreign citizens working abroad for foreign subsidiaries of companies covered by SOX.9 The Carnero

court reiterated the well-established pre-sumption against extraterritorial applica-tion of congressional legislaapplica-tion absent clear indication from Congress.

However, at least one ALJ has applied SOX protections to an American citizen working abroad.10 The ALJ held that the

employer engaged in much of the pro-tected activity in the United States (while in the United States informing corporate officers of the fraud alleged to have oc-curred in Italy), and one allegedly retal-iatory decision was made in the United States, thus finding a substantial nexus to the United States.

Another thorn in employer’s side has been whether SOX applies to employees of non-public subsidiaries or companies related to public companies. Generally, ALJs have held that an employee of a non-public subsidiary is protected by the Act, but whether the employer is covered by the Act is a separate question.11 Many of

the cases read the Act narrowly and limit coverage to public companies and their immediate employees.12 Others,

how-ever, apply the Act more broadly, holding parent companies responsible for their subsidiaries’ acts under certain circum-stances.13 Often in these cases, the

subsid-iary and the parent company maintained shared management and control, unity of operations, and a high degree of

intercon-nectivity.14 Other cases impose SOX

li-ability if a subsidiary acted as a company representative or an agent acting on be-half of the publicly-traded company.15 No

United States District Court has addressed the issue directly nor has the Department of Labor’s Administrative Review Board (“ARB”), the final administrative stop for a SOX retaliation claim.16 Because the

law in this area is developing and rapidly evolving, private subsidiaries of public companies cannot be certain how a judge may construe this issue.

In a recent decision, the ARB held that non-public subsidiaries of a public com-pany can be subjected to SOX, even if the parent is not a named respondent, as long as an employee names at least one respondent who is an “officer, employee, contractor, subcontractor, or agent” of a public company.17 Notably, the ARB did

not hold that non-public subsidiaries of public companies always can be liable under SOX, but looked for an agency re-lationship between the employer and the publicly-traded parent, even if neither the employer nor its direct parent was public-ly traded.18 In so holding, the ARB found

that typical agency principles are proper in determining whether a non-public sub-sidiary of a publicly traded company can be liable.19

Another issue awaiting clarification is the exposure of privately owned con-tractors of publicly traded companies. While the Act lists contractors and sub-contractors among those who cannot dis-criminate, it does not specifically address whether the contractor itself must be publicly traded to incur liability. The ALJ in Goodman v. Decisive Analytics Corp., concluded that the contractor itself must be public, noting that “the terms ‘con-tractor’ and ‘subcon‘con-tractor’ in the provi-sion reference two of various entities of a publicly traded company that may not ad-versely affect the terms and conditions of an employee of a publicly traded compa-ny.”20 The Act did not protect employees

of private contractors and subcontractors because any private company engaged in a contractual relationship with a public

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of allegedly fraudulent conduct and the timing of the complaint was suspicious.37

Moreover, a subsequent company inves-tigation revealed no fraudulent conduct had occurred.38 The ALJ thus held that the

complainant’s belief was not reasonable.39 c. Traits of Protected activity

To assert a successful SOX retaliation claim, a whistleblower must demonstrate he reported his complaint with some degree of specificity, and must state par-ticular concerns that reasonably identify the employer’s conduct that he believes is shareholder fraud.40 General questions

about the propriety of a transaction are not protected activity because such ac-tion, without more, would not put the employer on notice that the employee be-lieved it had violated any particular law.41

Similarly, merely reporting violations of internal policy is not enough to trigger SOX. In Reddy v. Medquest, the employ-ee complained to management regard-ing manipulation of the line count in its documents, which resulted in a loss of income for transcriptionists.42 The ALJ

ruled that this action was not protected activity under SOX because it challenged an internal company policy instead of al-leging a violation of federal law.43

Similar-ly, in Marshall v. Northrup Grumman

Syn-optics,44 the ALJ, emphasizing the lack of

evidence implicating shareholder fraud, ruled that the complainant did not have a viable SOX claim because his reporting of internal accounting irregularities and ethical breaches did not relate to federal securities law.45

Another example of unprotected activ-ity is disclosing violations of a law that might result in the revocation of a state license. The complainant in Allen v.

Stew-art Enter. Inc., raised concerns over the

company’s delays in issuing refunds to customers, explaining that such delays might violate Texas and Missouri statutes and cause the loss of licensing.46 The ALJ

determined this was not protected activity because it did not allege fraud defined in the Act.47

Along those same lines, internal re-entity would suddenly be subsumed

un-der the Act. “At present, the caption and language of the SOX employee protection provision does not extend its jurisdiction-al reach that far.”21

c. Individual liability

SOX covers the actions of “officers, em-ployees, contractors, subcontractors or agents” of public companies,22 thus

indi-cating that liability extends to individuals as well as employers. One ALJ held that ex-ecutives who terminated the complainant’s employment may be properly named as parties. In Gallagher v. Granada

Entertain-ment USA, the ALJ noted, “The

Sarbanes-Oxley statute and regulations are broader than previous whistleblower protections,” and do not limit the parties to a complain-ant and his employer.23 Because SOX

de-fines “named person” to include individu-als as well as employers,24 a decision-maker

may be held individually liable.25 II. The Scope of the Protected activity

a. coverage

The Act’s civil protection extends to two types of employee activity: internal or external “whistleblowing,” and participa-tion in investigaparticipa-tions regarding the com-pany. First, SOX protects an employee who provides information, or otherwise helps with an investigation regarding any conduct that an employee reasonably constitutes mail fraud, wire fraud, bank fraud, or securities fraud; any SEC rule or regulation; or any federal law relat-ing to shareholder fraud.26 The employee

must provide this information to a federal law enforcement or regulatory agency, a committee or member of Congress, or a person with supervisory authority over the employee.27 Supervisory authority

in-cludes employees who have the authority to investigate, discover, or terminate the misconduct.28 Second, SOX covers acts

done by an employee “to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employ-er)” relating to alleged mail, bank, wire or securities fraud, any SEC rule or

regula-tion, or Federal law relating to sharehold-er fraud.29

B. Reasonable Belief

Claims involving protected “whistle-blower” activity often turn on the issue of whether the complainant has a “reason-able belief” that the company violated one of the laws and regulations in the Act.30

While the Act does not define “reason-able belief,” ALJs and courts examine the reasonableness of the belief based on the knowledge available to a reasonable person in the circumstances, given the employee’s training and experience.31 The

accuracy or the falsity of a complainant’s allegations is irrelevant. Courts analyze reasonable belief under both subjective and objective rubrics: the employee actu-ally must have believed that the employer violated the law or regulation, and that belief must be reasonable.32 The lack of

actual fraud, subsequent investigations, and the employee’s job duties and/or training or education may lead an ALJ or court to conclude the employee lacks rea-sonable belief.

In Allen v. Stewart Enter. Inc., the ALJ ruled that the employee lacked an actual belief of illegal conduct. In that case, the complainant based her SOX claim on her reporting to her supervisor of uninten-tional mistakes in an internal account-ing system that resulted in faulty interest calculations for clients.33 The ALJ found

that the employee did not have an actual belief of illegal conduct because: (1) she was aware that the problems resulted from computer programming errors, and (2) she did not believe any documents containing the calculations were to be submitted to the SEC.34 Furthermore, the

employee knew that the company was aware of the problem and was taking cor-rective measures.35 An employee cannot

have a reasonable belief that her employer is violating the law if she knows that the company is working to address the poten-tially “illegal conduct.”36

In Barnes v. Raymond James & Assoc., the ALJ found no reasonable belief because the employee could provide no evidence

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conduct she complained of did not vio-late the referenced fraud statutes.56 In Minkina v. Affiliated Physician’s Group,

the complainant alleged retaliation be-cause she told the company and OSHA about a workplace ventilation prob-lem.57 The ALJ denied her claim because

her reports concerned air quality and had nothing to do with fraud or investor protection.58 Similarly, in Hopkins v. ATK Tactical Sys., the complainant told her

employer and OSHA about the illegal release of sludge water, which was not SOX protected activity.59

An employee’s refusal to perform an act is not protected conduct.60 In Getman v. Southwest Securities, Inc., the employee

alleged retaliation because she would not change her recommended rating of a stock report.61 The ALJ disagreed,

explain-ing that Congress distexplain-inguished between notifying the employer of a violation and refusing to commit a violation, thus rul-ing that her inaction was not protected activity under SOX.62 The ALJ, however,

clarified that there may be times where only a refusal to act is sufficient.63

For example, in Bechtel v. Competitive

Technologies Inc., a refusal to sign

disclo-sure forms constituted protected activ-ity.64 In that case, the employee told the

company’s disclosure committee that he could not certify a disclosure form be-cause he could not certify that he was not aware of any other company con-tracts.65 While the disclosure committee

had determined that these issues did not require disclosure, he did not believe that his issues had been addressed and thus refused to sign the forms.66 Likewise, in Jayaraj v. Pro-Pharmaceuticals, Inc., the

complainant’s refusal to attend a meeting was protected activity because prior to the meeting, she had expressed concern that dealing with individuals scheduled to attend the meeting would violate se-curities law. 67

Finally, “an employee’s disclosure must be related to illegal activity that, at its core, involved shareholder fraud.” 68 In

addition to requiring evidence of share-holder fraud, courts also look for an el-porting of systemic discrimination is not

SOX protected activity. In Smith v. Hewlett

Packard, the complainant raised concerns

with management about an internal per-formance system that disproportionately affected minorities.48 Smith claimed that

minority employees were dissatisfied with the process, but acknowledged that there was no current litigation regarding the matter. Without pending litigation, there was nothing for HP to disclose to its shareholders.49 The ALJ noted that not

disclosing a class action lawsuit based on systemic racial discrimination has the potential to affect a company’s financial condition, but “mere knowledge that an employee-evaluation process adversely affected minorities … coupled with an insider’s access to disgruntled conversa-tions about ‘external’ resoluconversa-tions” was not protected activity.50

Likewise, in Harvey v. Home Depot

U.S.A., Inc., the complainant wrote to the

Secretary of Labor alleging that the re-spondent had engaged in race discrimina-tion.51 The ALJ dismissed his SOX claim

based on this conduct, explaining: Providing information to manage-ment about questionable person-nel actions, racially discriminatory practices, executive decisions, or corporate expenditures with which the employee disagrees, or even pos-sible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, stand-ing alone, is not protected conduct under SOX.52

Instead, an employee’s complaint must relate directly to the listed categories of fraud or securities violations.53 While the

ALJ noted that engaging in discriminato-ry conduct may not be in the sharehold-ers’ best interests, such activity does not equate to fraud.54

Other types of concerns do not trig-ger SOX. In Rogus v. Bayer Corp., an employee raised concerns regarding the over-reporting of production yields that resulted in employee’s productivity-plus bonuses.55 The District Court noted this

was not “protected activity” because the

ement of intentional deceit that would impact shareholders or investors.69

Inten-tional deceit is implicit in the definition of fraud,70 but the Act’s protections apply

not only to SEC rules relating to share-holder fraud but also to the “violation of . . . any [SEC] rule or regulation.”71

A recent case before the United States Supreme Court may cast a shadow on the future application of section 806 of the Act. In Garcetti v. Ceballos, the Su-preme Court ruled that because the em-ployee complainant did not speak as a citizen, but rather spoke pursuant to his official duties as a deputy district attor-ney, his speech was not protected by the First Amendment.72 The court held that

when public employees make statements pursuant to their official duties, they are not speaking as citizens for First Amend-ment purposes, and the Constitution does not insulate their communications from employer discipline.73 In striking a

balance between the compelling interests surrounding free speech and the impor-tance of employer oversight in official speech, the court noted that a control-ling factor in the case was that the com-plainant’s expressions were made pursu-ant to his duties as a calendar deputy.74

While this holding directly affects only public employers, it may allow ALJs and federal courts to hold that an employee’s identification of concerns and/or issues falls within his or her job duties and is not protected activity.

d. Establishing a Prima Facie case

An employee who seeks to pursue a SOX claim must establish the four ele-ments of a prima facie case, or OSHA will dismiss his complaint prior to conduct-ing an investigation.75 The complainant

must demonstrate that he engaged in a “protected activity”; that the employer was aware (or should have been aware) of the protected activity; that he suffered an unfavorable personnel action; and, that the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.76

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The prima facie complaint must es-tablish that a nexus existed between the protected activity and the adverse action, or sufficient circumstances to raise an inference that the protected activity was likely a contributing factor in the adverse action.77 Causation requires an employee

to prove his activity was a “contributing factor” in an unfavorable employment action.78 Proximity in time between the

alleged protected activity and adverse employment action can raise an infer-ence of causation.79 A contributing

fac-tor is any facfac-tor, alone or in connection with other factors, that tends to affect in any way the outcome of the decision.80

A whistleblower is not required to prove that his protected conduct was a signifi-cant, motivating, substantial, or predom-inant factor in a personnel action.81 III. Raising a SoX Retaliation claim: The Process

a. General Standards

An employee making a SOX claim must file a complaint with the OSHA Area Di-rector responsible for enforcement activi-ties in the geographical area where he re-sides or was employed (or with any OSHA officer or employee).82 No particular

complaint form is required, except that it must be written and should include a full statement of the acts or omissions, with pertinent dates, that allegedly constitute the violations.83 The employee must file

a claim within 90 days after he is aware, or reasonably should be aware, of the em-ployer’s action against him.84

SOX cases allow for equitable tolling in limited circumstances.85 The

restric-tions on equitable tolling “must be scru-pulously observed. Equitable tolling is not an open-ended invitation to disre-gard limitations periods merely because they bar what may otherwise be a meri-torious cause.”86 Moreover, the burden

is on the complainant to justify the ap-plication of equitable tolling principles in his or her case.87

Generally, under three scenarios, tolling may be proper: (1) if the defendant affir-matively misleads the plaintiff regarding

the cause of action; (2) if the plaintiff has “in some extraordinary way” been pre-vented from asserting his or her rights; (3) if the plaintiff “has raised the pre-cise statutory claim in issue but has mis-takenly done so in the wrong forum.”88

The OSHA Whistleblower Investigations Manual (2003) lists examples of cir-cumstances that justify equitable tolling, including the employer’s concealment of the existence of the adverse action or the discriminatory grounds therefore; the employee’s inability to file within 90 days due to debilitating illness or injury; inability to timely file due to natural di-saster; or the employee mistakenly filed a timely discrimination complaint with another agency.89 Circumstances that do

not justify tolling include ignorance of the filing period; filing an unemployment or worker’s compensation claim; filing a private negligence or damage suit; filing a grievance or arbitration action; or filing a discrimination complaint with a state or other agency that has authority to grant the requested relief.90

B. In the hands of oSha

OSHA will initiate an investigation only if the complaint meets “appropriate jurisdictional requirements, timeliness of filing, and the presence of a prima facie al-legation…”91 OSHA then will notify the

employer of the complaint, the allega-tions, and the substance of the supporting evidence.92 Upon receiving this notice, the

company has 20 days to submit a written statement and any affidavits or support-ing documents to OSHA.93

The employer bears the burden of demonstrating, by clear and convincing evidence, that it would have taken the same adverse employment action in the absence of the protected activity.94 If the

employer cannot produce a legitimate, non-discriminatory reason for the deci-sion, OSHA will investigate and issue a notice of its preliminary conclusion.95 If

OSHA has reasonable cause to believe the company has violated the Act and that preliminary reinstatement is warranted, it will notify the respondent in advance,

which has ten days to respond.96 OSHA’s

investigation must be completed within 60 days of the filing of the complaint, and it must issue written findings as to wheth-er thwheth-ere is reasonable cause to believe the company violated SOX.97

1. Preliminary Orders

If OSHA finds retaliation by the em-ployer, it will issue a preliminary order providing relief, which serves to make the complainant whole and may include: reinstatement of the complainant (unless the company can demonstrate the em-ployee is a security risk); back pay with interest; or compensation for any special damages, including attorneys fees.98 The

findings and preliminary order are effec-tive 30 days after the company’s receipt, unless it files an objection and a request for a hearing.99 Regardless, any

prelimi-nary order requiring reinstatement takes effect immediately upon receipt.100 An

employer may petition the chief ALJ to stay the preliminary reinstatement if it can demonstrate irreparable injury, a like-lihood of success on the merits, and the proper balancing of harms to the public and the parties involved.101

The current state of preliminary rein-statement orders is in flux. In a recent development, the Second Circuit ruled that United States district courts lack ju-risdiction to issue an injunction enforcing OSHA’s preliminary order of reinstate-ment.102 In the Bechtel case, OSHA had

ordered reinstatement based on its opin-ion that the company fired two vice presi-dents in retaliation for raising concerns with the CEO regarding disclosures to the SEC and shareholders.103 The employer,

however, refused to rehire the vice presi-dents, who then obtained a district court’s preliminary injunction ordering reinstate-ment.104 On appeal, the Second Circuit

reversed, holding no SOX provision au-thorized the enforcement of preliminary orders, explaining:

It seems improbable that Congress would have chosen to confer federal judicial enforcement power over

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pre-liminary orders by indirection and opacity when it easily could have modified the jurisdictional provisions … I therefore conclude that the plain text of the provisions granting en-forcement power cannot support a reading that confers on federal courts the power to enforce orders that are preliminary.105

The court’s opinion also rested on the failure of due process for the employer be-fore imposing the reinstatement order.106

Yet, in Welch v. Cardinal Bankshares

Corp., decided just a month after Bechtel,

OSHA denied an employer’s request to stay a preliminary reinstatement order for the former CFO, stating that the em-ployer had offered no evidence establish-ing it would succeed on appeal.107 OSHA

distinguished Welch from Bechtel, noting that the Welch ALJ had conducted a full evidentiary hearing and issued an order on the merits, which was not the case in

Bechtel.108

Alternatives to reinstatement may be available to companies required to make an employee whole while maintaining fa-vorable working conditions.109 Such

alter-natives, noted in Welch, include placing the employee in a different position, al-lowing him to use his skills in other ways, or simply paying the employee as if he had returned to work without actually rehir-ing the employee.110 While Welch does not

offer employers as much hope as Bechtel, it does allow alternative ways to comply with orders without the disruption to the workplace potentially caused by reinstate-ment of a disgruntled employee.

2. Requests for Review

Any party who seeks review of the findings and preliminary order must file any objections and/or a request for a hearing on the record within 30 days of receipt of the findings and preliminary order.111 A timely objection stays the

preliminary order, except a preliminary reinstatement order.112 Without timely

objections, the findings and preliminary order become the final decision, immune

from judicial review.113

Following a request for review, an ALJ will conduct a hearing de novo, on the record,114 and will issue a final decision

containing findings, conclusions, and an order stipulating the employee’s rem-edies, if any.115 This evidentiary burden

framework is somewhat different from the burden-shifting frameworks in other bodies of employment law. The court in

Collins v. Beazer noted, “while reference

to the general body of employment dis-crimination law may provide guidance in some areas, where the statute provides a specific framework the Court follows the statute.”116

A number of ALJs have adopted a “mixed-motive” framework for analyz-ing SOX cases. The regulations state that an ALJ may determine that a violation has occurred only upon demonstration that protected activity was a contribut-ing factor in the unfavorable personnel action alleged in the complaint.117 If the

employer can demonstrate by clear and convincing evidence that it would have taken the same adverse action in the ab-sence of any protected activity, then no relief is warranted.118

Remedies available to the employee in-clude reinstatement to the employee’s for-mer position with equal seniority status; back pay with interest; and compensation for any special damages, including litiga-tion costs, expert witness fees, reasonable attorney’s fees, and emotional distress.119

An ALJ may reconsider its decision within ten days following the issuance of the ini-tial decision and order.120

3. Appeal to the Administrative Review Board (“ARB”)

Any party that seeks review, including judicial review, of the ALJ’s decision must file a written petition for review with the ARB within ten business days of the date of the decision.121 Without a timely

peti-tion, the ALJ’s decision becomes the final order of the Secretary of Labor.122 It is not

mandatory that the ARB grant review.123 If,

after 30 days of the filing of the petition, the ARB has not issued an order notifying

the parties that the case has been accepted for review, the ALJ’s decision will become final.124 Should the ARB accept the case

for review, it will issue its final decision within 120 days after its hearing.125 The

remedies available to a successful com-plainant are the same as are available in the ALJ stage of the proceeding.126

c. Judicial Review

Judicial review is available to any per-son adversely affected or aggrieved by a final order of the ARB.127 That person may,

within 60 days after the final order, file a petition for review in the United States Court of Appeals for the circuit where the violation allegedly occurred or in the cir-cuit in which the complainant resided on the date of the alleged violation.128

d. Removal to district court

If the Department of Labor (“DOL”) has not issued a final decision within 180 days of the filing of the original OSHA complaint, and the delay is not the result of complainant’s bad faith, he may re-move his claim to the appropriate district court.129 The district court’s review is de novo. 130 An employer that challenges the

removal must prove that the claimant’s bad faith led to the DOL’s failure to issue a timely decision.131

The complainant is required to provide fifteen days notice of his intent to remove to federal district court.132 During this

time, the DOL retains jurisdiction over the matter.133 Moreover, the mere filing of

a notice of intent to file a lawsuit in federal district court does not terminate the DOL’s jurisdiction.134 Nor does the expiration of

the 180-day period described above ter-minate the Secretary’s jurisdiction over the matter, which is extinguished only when the complainant files in federal dis-trict court. 135

Removal after the ALJ issues a substan-tive decision that is appealed creates nov-el legal issues. As the comments to the regulations state, the DOL encourages the federal district courts to use collateral es-toppel and res judicata to ensure judicial

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efficiencies and economies.136 Moreover,

the review by the federal district court is

de novo.137 Accordingly, the court’s initial

inquiry should be limited to the review of the administrative record created and review of the ALJ’s decision. Because the standard is not trial de novo, no ad-ditional evidence or discovery should be needed. While the employee will remove to federal district court by filing a com-plaint, employers should seek judicial notice of the administrative record and a ruling on the ALJ’s decision.138

Addi-tionally, if the ALJ’s decision is on appeal and/or the ALJ has had a bench trial but not issued an opinion, the regulations encourage the court to treat the removal as a petition for mandamus and order the DOL to issue a decision.139

IV. Practical Issues and concerns a. State Whistleblower claim

An employer may simultaneously face a SOX whistleblower claim and a claim for wrongful discharge under Sabine Pilot.140

While an employer may argue that SOX preempts any state law claims, the Act provides that it does not diminish an em-ployee’s rights under any federal or state law, or under any collective bargaining agreement.141 Because a Sabine Pilot claim

provides for punitive damages, not avail-able under a SOX whistleblower claim, there may be strategic reasons for a plain-tiff to pursue both.142

B. alternative dispute Resolution Programs

In the event an employee is under an arbitration obligation, current case law provides for staying any administra-tive proceeding and compelling an em-ployee to submit his SOX whistleblower complaint to arbitration. For instance, in Boss v. Salomon Smith Barney, Inc., the court compelled an ex-employee to sub-mit his SOX claim to arbitration, noting that nothing in the text or legislative history evinces an intent to preempt arbitration claims under the Act.143 The Boss decision recently was reaffirmed in Ulibarri v. Affiliated Computer Services,

where the ALJ stayed the whistleblower proceedings pending arbitration.144

The Solicitor of Labor also issued an advice memorandum that enforcement agencies like OSHA can stay enforce-ment of whistleblower claims in defer-ence to private arbitration agreements, expressing a general approval for SOX claims to be addressed through alterna-tive dispute resolution as opposed to administrative proceedings.145 However,

the Solicitor General noted that where the DOL is able to seek immediate pro-visional relief (such as temporary rein-statement), that relief should be sought even if the decision is made to defer to arbitration on the ultimate merits of the complaint.146 This statement is

con-sistent with the theory that deferral to the company’s arbitration program may not be appropriate in cases where im-mediate reinstatement, a SOX remedy, may be unavailable in arbitration.147

The memorandum identifies a series of factors to be reviewed by lawyers with the Solicitor General’s office when de-termining whether to stay a SOX com-plaint and defer to the company arbitra-tion program.

c. Managing the Response to a SoX complaint

While corporations have complied with the numerous reporting requirements of SOX, in many instances managers and/ or human resource (“HR”) personnel have not received additional training to recognize an employee’s SOX whistle-blower complaint. An effective response from a manager and/or HR department will assist a corporation in defending against an employee retaliation claim. Additionally, before responding to a SOX whistleblower complaint, legal and ex-ecutive management should take time to discuss all the issues that may be raised by the allegations and how the company may respond. For example, are all SOX whistleblower complaints brought to the attention of one department? How will the company determine if the audit committee will be informed about the

alleged fraud? If the audit committee will be informed - when and by whom? What is the current relationship with the audit committee, and does it need to be strengthened before any allegations of fraud are brought by an employee in a SOX whistleblower complaint?

In many instances, the audit committee will seek to conduct its own investigation into the alleged fraud, creating further questions: Who will conduct the investi-gation for the audit committee? Does the audit committee have confidence in the company’s internal audit group? Should an external audit group be engaged? The audit committee may retain its own coun-sel as well. What is the role of the audit committee counsel vis a vis company counsel defending against the SOX whis-tleblower complaint?

Additional questions are raised regard-ing the company’s independent auditors: What if the SOX whistleblower complaint is raised before significant SEC filings? Counsel and executive management must be prepared to weigh requests for docu-ments and/or information from the in-dependent auditors and to consider the impact of the disclosure of information and/or documents on the attorney-client privilege related to the ongoing defense of the SOX whistleblower claim.

It also is prudent to prepare for media coverage of the employee’s complaint. Given the heightened scrutiny in the wake of recent corporate scandals, cor-porations should have a media response plan and should instruct employees about where to direct such inquiries. Moreover, a company should be prepared to respond to the SEC. The Act provides for the DOL to notify the SEC of any SOX whistle-blower complaints.148 Depending upon

the allegation(s), the SEC may conduct its own investigation.

d. Settlement of a SoX Whistleblower complaint

Settlement of a SOX whistleblower com-plaint requires government approval.149

The current DOL practice is for a settle-ment to cover only the SOX whistleblower

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claim – no global settlements. Additionally, confidentiality is not possible, as disclosure of the consideration paid and the terms of the settlement agreement are required.

V. conclusion

Defending a SOX whistleblower claim is consuming. The deadlines are compressed, and there are many moving parts – from the audit committee to the independent auditors to the financial condition and/or health of a company. However, the case law is developing rapidly, and it is an exciting time to be practicing in this area.

Eden P. Sholeen is a partner at Bracewell

& Giuliani LLP where she practices in the labor and employment section. She is board certified in labor and employment law.

Rebecca L. Baker is an associate in the

firm’s labor and employment section.

Endnotes

1. Pub. L. No. 107-204, 116 Stat. 745. 2. 18 U.S.C. § 1514A(a). 3. Id. 4. Id. 5. 18 U.S.C. §1514A(a)(1)-(2). 6. 18 U.S.C. §

1513(e). 7. 18 U.S.C. § 1514A(a). 8. Stalcup v. Sonoma

College, 2006 DOLSOX LEXIS 6, *16, 2005-SOX-00114 (ALJ

Feb. 7, 2006). 9. Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006). 10. Penesso v. LCC Int’l, Inc., 2005 DOLSOX LEXIS 95, 2005-SOX-00016 (ALJ March 4, 2005). 11.

Gonzales v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 20, 2004); Platone v. Atlantic Coast Airlines Holdings, Inc., 2003-SOX-27

(ALJ Apr. 30, 2004). 12. Johnson v. Mechanics & Farmers Bank, 2006 DOLSOX LEXIS 69, *6-7, 2006-SOX-0019 (ALJ June 9, 2006) (citing Bothwell v. American Income Life, 2005-SOX-00057 (ALJ Sept. 19, 2005); Powers v. Pinnacle Airlines, Inc., 2003-AIR-12 (ALJ Mar. 5, 2003)); Ambrose v. U.S. Foodservice,

Inc. & Royal Ahold, 2006 DOLSOX LEXIS 37, *26,

2005-SOX-105 (ALJ Apr. 17, 2006). 13. Johnson, 2006 DOLSOX LEXIS at *8 (citing O.Keefe v. TIAA-CREF, 2005-SOX-0086 (ALJ Oct. 19, 2005) slip op.; Mann v. United States Alliance, LLC et al., 2004-SOX-15 (ALJ Feb. 18, 2005); Morefield v. Exelon Services,

Inc., 2004-SOX-2 (ALJ Jan. 28, 2004)). 14. Gale v. World Financial Group, 2006 DOLSOX LEXIS 68, *17, 2006-SOX-43

(ALJ June 9, 2006). 15. Id. at *18. 16. Johnson, 2006 DOLSOX LEXIS 69, *6-7, 2006-SOX-0019 (ALJ June 9, 2006).

17. Klopfenstein v. PCC Flow Technologies Holdings, 2006

DOLSOX LEXIS 59, *30, ARB No. 04-419 (ARB May 31, 2006). 18. Id. at *31. 19. Id. 20. 2006 DOLSOX LEXIS 3, *24, 2006-SOX-11 (ALJ Jan. 10, 2006). 21. Id. 22. 18 U.S.C. § 1514A(a). 23. 2004 DOLSOX LEXIS 95, *4, 2004-SOX-00074 (Oct. 19, 2004) (citing 18 U.S.C. § 1514A(b)(2)(B)).

24. Id. (citing 69 Fed. Reg. 52104, 52105 (Aug. 24, 2004)). 25. Id. at *8. 26. 18 U.S.C. § 1514A(a)(1). 27. 18 U.S.C. §

1514A(a)(1)(A)-(C). 28. Accordingly, an employee’s complaint to a supervisor who does not have direct supervisory authority over the individual is probably sufficient to trigger the Act’s protections. Id. 29. 18 U.S.C. § 1514A(a)(2). 30.

Lerbs v. Buca Di Beppo Inc., 2004 DOLSOX LEXIS 65, *31,

2004-SOX-8 (ALJ June 15, 2004) (citing Melendez v. Exxon

Chemicals Americas, ARB No. 96-051, ALJ No. 193-ERA-6

(ARB July 14, 2000)). 31. Id. (quoting Minard v. Nerco

Delamar Co., 92-SWD-1 (Sec’y Jan. 25, 1995), slip op. at 7,

n.5). 32. Id. at 7, 20. 33. 2006 DOLSOX LEXIS 87, 2004-SOX-60, 61, & 62 (ALJ July 27, 2006). 34. Id. at *25. 35. Id.

36. Id. at *27. 37. 2005 DOLSOX LEXIS 2, 2004-SOX-58 (ALJ

Jan. 10, 2005). 38. Id. at *17. 39. Id. 40. Lerbs, 2004 DOLSOX LEXIS at *33-34 (citing Bechtel Constr. Co. v. Sec’y of

Labor, 50 F.3d 926, 931 (11th Cir. 1995)). 41. See Allen, 2006

DOLSOX LEXIS at *31-33. 42. 2004 DOLSOX LEXIS 48, 2004-SOX-00035 (ALJ June 10, 2004). 43. Id. at 7. 44. 2005

DOLSOX LEXIS 63, 2005-SOX-0008 (ALJ June 22, 2005).

45. Id. 46. Allen, 2006 DOLSOX LEXIS at *27. 47. Id. at

*27-28. 48. No. 2005-SOX-00088, 89, 90, 91, & 92 (ALJ Jan. 19, 2006). 49. Id. 50. Id. 51. 2006-DOLSOX LEXIS 65, *30, ARB Nos. 04-114 & 115 (ARB June 2, 2006). 52. Id. at *32.

53. Id. 54. Id. 55. No. 3:02cv1778 (MRK), 2004 U.S. Dist.

LEXIS 17026 (D. Conn. 2004). 56. Id. at *18 n.6. 57. 2005 DOLSOX LEXIS 41, 2005-SOX-00019 (ALJ Feb. 22, 2005).

58. Id. at *17. 59. No. 2004-SOX-00019, at *5 (ALJ Wood,

May 27, 2004). 60. 2005 DOLSOX LEXIS 18, ARB No. 04-059 (ALJ July 29, 2005). 61. Id. 62. Id. 63. Id. 64. 2005 DOLSOX LEXIS 44, 2005-SOX-00033 (ALJ Oct. 5, 2005) 65.

Id. 66. Id. 67. 2005 DOLSOX LEXIS 5, *72,

2003-SOX-00032 (ALJ Feb. 11, 2005). 68. Livingston v. Wyeth, 2006 U.S. Dist. LEXIS 52978, *30 (M.D.NC July 28, 2006). 69. Tuttle v.

Johnson Controls, 2004-SOX-76 (ALJ Jan. 3, 2005). 70. Id. at

3. 71. Klopfenstein, 2006 DOLSOX LEXIS at *39 (citing 18 U.S.C. § 1514A(a)(1)). 72. 126 S. Ct. 1951 (2006). 73. Id. at 1960. 74. Id. 75. 29 C.F.R. § 1980.104(b). 76. Id. 77. See

Taylor v. Express One Int’l, Inc., 2001-AIR-2 (ALJ Feb. 15, 2002).

78. Id. 79. Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d

1365, 1376 (N.D. Tex. 2004). 80. Davis v. United Airlines, Inc., 2001-AIR-5 (ARB Apr. 25, 2002). 81. Id. 82. 29 C.F.R. § 1980.103(c). 83. 29 C.F.R. § 1980.103(b). 84. 29 C.F.R. § 1980.103(d); Murray v. TXU Corp., 279 F. Supp. 2d 799. 802 (N.D. Tex. 2003) (interpreting “filed” to mean the date the Department of Labor receives the complaint). For complaints sent by mail, the date of filing is the date of the postmark. 29 C.F.R. § 1980.103(d). See also, Halpern v. XL Capital, Ltd., 2005 DOLSOX LEXIS 24, No. 04-120 (ARB Aug. 31, 2005) (90-day limitations period runs from the date an employee is told of the adverse employment action). 85. Lotspeich v. Starke Memorial

Hosp., 2005 DOLSOX LEXIS 51, *9-10, 2005-SOX-14 (ALJ

March 3, 2005) (citing Doyle v. Alabama Power Co., 1987-ERA-43 (Sec’y Sept. 29, 1989)). 86. Id. 87. See Harvey v. Home

Depot, 2006 DOLSOX LEXIS 65, *37-38, ARB Nos. 04-114 &

115 (ARB June 2, 2006). 88. Lotspeich, 2005 DOLSOX LEXIS at *8-*9. 89. OSHA Manual at 2-4 (2003). 90. OSHA Manual at 2-4 – 2-5 (2003). 91. 29 C.F.R. § 1980.104(b); OSHA Manual at 2-2 (2003). 92. 49 U.S.C. § 42121(b)(2).

93. 29 C.F.R. § 1980.104(c). 94. 29 C.F.R. § 1980.104(c). 95.

49 U.S.C. § 42121(b)(2)(B)(ii); 29 C.F.R. § 1980.104(c); OSHA Manual at 14-2. 96. 29 C.F.R. 1980.104(e). 97. 29 C.F.R. 1980.105(a). 98. 29 C.F.R. § 1980.105(a)(1). 99. 29 C.F.R. § 1980.105(c). 100. Id. 101. 69 Fed. Reg. at 52109 (2004).

102. Bechtel, 448 F.3d 469 (2nd Cir. 2006). 103. Id. at 471. 104. Id. 105. Id. at 473. 106. Id. at 474. 107. 2006 DOLSOX

LEXIS 66, ARB No. 06-062 (June 9, 2006). 108. Id. at *5.

109. Id. at *10. 110. Id. 111. 29 C.F.R. § 1980.106(a). 112.

29 C.F.R. § 1980.106(b)(1). 113. 29 C.F.R. § 1980.106(b)(2).

114. 29 C.F.R. § 1980.107(b). 115. 29 C.F.R. § 1980.109(a). 116. Collins, 334 F. Supp. at 1375, n.11. 117. 29 C.F.R. §

1980.109(a); Collins, 334 F. Supp. at 1375. 118. 29 C.F.R. § 1980.109(a). 119. 29 C.F.R. § 1980.109(b). 120. 29 C.F.R. § 1980.110(c). 121. 29 C.F.R. § 1980.110(a). 122. Id. 123. 29 C.F.R. § 1980.110(b). 124. Id. 125. 29 C.F.R. § 1980.110(c). 126. 29 C.F.R. § 1980.110(d). 127. 29 C.F.R. § 1980.112(a). 128. Id. 129. 18 U.S.C. § 1514A(b)(1)(B).

130. Id. 131. Murray v. TXU Corp., 279 F. Supp. 2d at __. 132. 29 C.F.R. § 1980.114(b). 133. Powers v. Pinnacle, ARB

No.05-138, ALJ No. 2005-SOX-65 (ARB Oct. 13, 2005) (holding the ALJ retained jurisdiction until the complainant filed in federal district court); McIntyre v. Merrill Lynch & Co., ARB No. 04-055, ALJ No. 2003-SOX-23 (ARB July 27, 2005) (only dismissing complainant’s petition for review after complainant filed in federal district court). 134. Rusick v.

Merrill Lynch & Co., 2006 DOLSOX LEXIS 25 *4-5, 8 No.

2006-SOX-00045 (ALJ March 22, 2006) (holding that the filing of a notice of intent to file in federal court did not remove the matter from the Secretary’s jurisdiction). 135. Id.; Powers

v. Pinnacle, ARB No.05-138, ALJ No. 2005-SOX-65 (ARB Oct.

13, 2005) (holding the ALJ retained jurisdiction until the complainant filed in federal district court); McIntyre v. Merrill

Lynch & Co., ARB No. 04-055, ALJ No. 2003-SOX-23 (ARB

July 27, 2005) (only dismissing complainant’s petition for review after complainant filed in federal district court). 136. 69 Fed. Reg. 52111 (2004). 137. 18 U.S.C. 1514A(b)(1)(B).

138. See McClendon v. Hewlett-Packard Co., 2005 U.S. Dist.

LEXIS 43579, *6 ( D. ID June 9, 2005). 139. 69 Fed. Reg. 52111 (2004). 140. Sabine Pilot v. Hauck, 687 S.W.2d 733 (Tex. 1985). 141. 18 U.S.C. § 1514A(d). 142. Sabine Pilot, 687 S.W.2d at 736. 143. 263 F. Supp. 2d 684 (S.D. N.Y. 2003).

144. No. 2005-SOX-46 and 47 (ALJ Jan. 13, 2006). 145.

eugene scalia, consideraTion of employmenT arbiTraTion agreemenTs (Aug. 9, 2002). 146. Id. 147. michaeldelikaT, corporaTewhisTleblowinginThesarbanes-oxleyera 4:4 (2006).

148. 29 C.F.R. § 1980.108(b); OSHA Manual at 14-5 (2003). 149. 29 C.F.R. § 1980.111.

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