Allen B. Roberts and Stuart Gerson are co-authors of the recent Law360 article Examining The Purpose Of Sarbanes-Oxley. This summary of recent Administrative Review Board actions explains the shift in the standards whistleblowers must meet, and how employers should prepare for this new era of litigation.
By: Allen B. Roberts, Stuart M. Gerson and Daniel J. Schuch
In a case packed with allegations of the kind rarely found beyond the script of a soap opera, the U.S. Department of Labor ("DOL") Administrative Review Board ("ARB") determined that protected activity under the Sarbanes-Oxley Act of 2002 ("SOX") does not require a showing of fraud against shareholders. Rather, per the ARB, it is sufficient that an employee reasonably believes conventional mail or wire fraud has occurred. The holding in Brown v. Lockheed Martin Corp. (pdf) evidences the ARB's adherence to a literal, and clinical, construction of SOX – and serves as a clear indication of the ARB's willingness to reach beyond the underlying objectives envisioned by Congress in the wake of the infamous collapse of Enron and WorldCom. If upheld and followed, Brown effectively expands SOX whistleblower protections well beyond the intended beneficiary of the law – the "innocent investor."
Background – SOX
Legislative history shows that SOX was enacted in response to "a culture, supported by law, that discourage[s] employees from reporting fraudulent behavior not only to the proper authorities ... but even internally. [Congress noted that such a] corporate code of silence not only hampers investigations, but also creates a climate where ongoing wrongdoing can occur with virtual impunity." As a result, SOX was enacted to "encourage and protect employees who report fraudulent activity that can damage innocent investors in publicly traded companies."
As such, Section 806 of SOX was crafted to protect employee-whistleblowers who:
… provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of [18 U.S.C. §] 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the [Securities and Exchange Commission], or any provision of Federal law relating to fraud against shareholders. [Emphasis added].
The ARB and U.S. District Courts, determining what constitutes "protected activity" under SOX, have issued conflicting opinions with respect to the import of the phrase "relating to fraud against shareholders." Some decisions have interpreted this phrase narrowly, so as to explicitly include only allegations of fraud against shareholders, while others have read the term more broadly, so as to include activities involving mail or wire fraud, regardless of whether such fraud actually involves a shareholder.
In the Brown decision, the ARB came down firmly favoring the broad approach, holding that shareholder fraud is not required to establish the existence of protected activity under theories of mail or wire fraud.
Facts of the Brown Case
Andrea L. Brown ("Brown") was employed as Director of Communications at the Lockheed Martin ("Lockheed") facility in Colorado Springs, Colorado. In May 2006, she learned that Lockheed's Vice President of Communications (the "VP") "developed sexual relationships with ten … soldiers, purchased a laptop computer for one soldier, had sent inappropriate emails and a box of sex toys to soldiers in Iraq, and had traveled to welcome home ceremonies on the pretext of business while [the VP] actually took soldiers away in limousines to expensive hotels for intimate relations." (See the ALJ's Jan. 15, 2010 Recommended Decision and Order (pdf)). Brown believed the VP developed such "paramours" through Lockheed's Pen Pal Program, which was created to facilitate communications between Lockheed employees and U.S. soldiers serving overseas. Brown also believed the costs associated with the VP's conduct, including the laptop, hotel rooms, limousines, travel expenses, and sex toys – not quantified in the decision – were charged to the federal government under an existing contract for the Pen Pal Program. Brown reported her concerns to Lockheed's Vice President of Human Resources, and the Pen Pal Program was discontinued within days.
After the Pen Pal Program was discontinued, the VP asked Brown if she knew who filed the complaint. Brown confirmed that she told the Vice President of Human Resources "a few things," but she did not know who reported her. Thereafter, Brown's working conditions at Lockheed reportedly deteriorated dramatically: her position was eliminated and her job duties were assigned to someone apparently favored by the VP; she lost her office, and was instructed to work from home or use a visitor's office; and, she was told not to attend Lockheed's annual communications conference, despite being named as a recipient of the Lockheed's Comet Award. Finally, on a day she was instructed by her replacement to report to Lockheed's facility, the visitor's office was occupied, and she was instructed to work from a cubicle, despite being in a leadership position. Ultimately, Brown gave notice of her constructive discharge by way of "forced termination" in February 2008.
Brown's SOX Complaint
Following her separation from Lockheed, Brown filed a SOX complaint with OSHA. After administrative investigation and dismissal of her complaint, Brown filed objections and obtained a hearing before an Administrative Law Judge ("ALJ"), who determined that Brown had engaged in protected activity under the mail and wire fraud theories of SOX:
Complainant testified that she grew concerned that [the VP] made purchases with company funds that would ultimately be billed to the government. … Complainant had reason to believe that such actions were taken in furtherance of a ‘scheme or artifice to defraud' because … she had been aware of [the VP's] alleged and undisputed systemic use of the Pen Pal Program to recruit new paramours.
The ALJ also found Brown to have been constructively discharged because of her protected activity, and ordered reinstatement and backpay and awarded medical expenses, $75,000 in compensatory damages, attorneys' fees, and costs.
Lockheed filed a timely appeal of the decision to the ARB. Addressing whether Brown engaged in protected activity, the ARB determined that SOX "does not require that mail fraud or wire fraud pertain to fraud against the shareholders," and affirmed the ALJ's decision.
The Consequence of Brown
The ARB's holding in Brown is likely to serve as a bellwether for the administrative interpretation of SOX, with employee-whistleblowers reaping the benefits of the expanded definition of "protected activity." In a typical case, a SOX complainant has the right to remove his or her case from administrative proceedings before the DOL and file an original action in federal court if the DOL has not issued a final decision within 180 days after filing the complaint. However, Brown may eliminate any perceived incentive for SOX complainants to remove cases rooted in mail, wire, or bank fraud, and that lack the elements of shareholder fraud, for fear that a court might construe SOX-protected activity more narrowly than the ARB – and within the congressional intent of shareholder protection.
Because respondent companies must accept the forum selected by the complainant, the only avenue for judicial consideration of an ARB decision applying Brown will be review by a U.S. Court of Appeals. However, in reviewing the ARB's application of Brown, a Court of Appeals might constrain its review under principles of judicial deference. The Supreme Court of the United States has clearly articulated the level of deference that must be given to decisions issued by administrative agencies, such as the ARB:
If … the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute. … Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. … If this choice represents a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, [courts] should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.
Chevron USA v. Natural Resources Defense Council, 467 U.S. 837, 842-44 (1984). The Supreme Court further instructed that "[i]t is fair to assume generally that Congress contemplates administrative action with the effect of law when it provides for a relatively formal administrative procedure." See U.S. v. Mead Corp., 533 U.S. 218, 230 (2001). Such procedure has been established by Congress under SOX.
As the text of Section 806 and the cases interpreting it illustrate, ambiguity appears to exist with respect to the phrase "relating to fraud against shareholders" and its application to the statutory protections that precede it. As such, it is not unreasonable to believe that a Court of Appeals, if posed with the issue, would defer to the ARB's application of Brown, unless it can be established that such interpretation is against the manifest intent of Congress in enacting SOX. This issue is likely to become the subject of recurrent litigation as the various Courts of Appeal, and ultimately the Supreme Court of the United States, ascertain the intent of Congress. And, finally, we note that the Supreme Court has tended to be very hospitable to plaintiffs claiming retaliation.
What Should Employers Do in Light of Brown?
Publicly traded companies subject to SOX jurisdiction are encouraged to:
Now, more than ever, employers need to become intimately familiar with the employee protection provisions contained in Section 806 of SOX. The DOL has requested a $6 million increase in its budget, as well as an increase of 45 dedicated investigators, for the Office of the Whistleblower Protection Program ("OWPP"), which enforces Section 806.
The proposed increase in the OWPP's budget and staffing, in spite of the current economic conditions facing the federal government, serves as a clear indication of the DOL's commitment to the OWPP and laws such as SOX. As a result, a significant increase in enforcement activity under SOX and other laws establishing whistleblower protections is likely to occur going forward.
It is important that employers subject to SOX jurisdiction implement an internal whistleblowing policy that provides a clear procedure for employees to report alleged corporate misconduct. Such a policy must clearly state that employees who file a complaint under the policy are protected from retaliation.
It is vital that managers and supervisors are trained regarding the broad reach of anti-retaliation laws, including SOX. Managers and supervisors should be made aware of their responsibilities when an internal complaint of corporate misconduct is raised, including how to identify such a complaint.
Employers confronted with internal complaints asserting allegations of mail, wire, or bank fraud should initiate measures consistent with their distinct corporate compliance and human resources policies to minimize potential exposure to whistleblower claims under SOX. Of course, the interplay of individual employment issues with larger compliance issues needs to be coordinated, with appropriate delegation and management of information throughout the multiple stages of investigation and decision-making.
Further, and notwithstanding the holding in Brown, in connection with any investigation based on an employee's complaint about corporate malfeasance, both the complaint and the details of the investigation should be carefully documented so that if a SOX whistleblower complaint ensues, the company has a better chance of being able to demonstrate that the complaining employee raised allegations of certain frauds but never sounded a concern about shareholder fraud.
* * *
Undoubtedly, Brown draws some baselines and opens the debate on how broadly "protected activity" will be construed under SOX relative to the interests of the presumed "innocent investor." However, the ARB's holding in Brown should not necessarily be read by whistleblowers or their employers as the final word. Employers need not forsake the congressional purpose underlying SOX whistleblower protections. Whistleblower allegations that are rooted in mail, wire, and bank fraud – but are lacking in a reasonable belief of shareholder fraud – may yet be held deficient. Ultimately, the merit of a complaint that the employee-whistleblower suffered a reprisal for engaging in protected activity may turn on the validity of the complaining employee's reasonable belief that such allegations implicate shareholder fraud.
On the heels of its 2-1 decision in Hyman v. KD Resources, allowing equitable estoppel to extend the Sarbanes-Oxley (SOX) statute of limitations (noted in our blog posting of April 20, 2010), the Department of Labor Administrative Review Board (ARB) has issued a unanimous decision clarifying the burden for whistleblowers to survive dismissal of complaints that are not filed within the explicit 90-day statute of limitations. Daryanani v. Royal & Sun Alliance, ARB No. 08-106, ALJ No. 2007-SOX-79 (ARB May 27, 2010).
Adhering to the principle that equitable estoppel may apply when certain employer conduct interferes with a whistleblower-employee’s exercise of rights, the ARB nevertheless refused to extend the SOX statute of limitations on the basis of alleged inaction by an employer. Holding equitable estoppel would not be available in the circumstances, the ARB observed that the employer had no affirmative obligation to:
The ARB also clarified that:
Administrative Appeals Judge Wayne C. Beyer, who dissented in Hyman v. KD Resources, wrote a concurring opinion to emphasize two supplemental points. First, he would find a pre-complaint settlement agreement and release of “all claims” binding, even though the release did not expressly refer to SOX claims. Second, consistent with his Hyman v. KD Resources dissent, he would not allow settlement discussions to toll the limitations period.
While Hyman v. KD Resources may have created a broader opening of the equitable estoppel door, Daryanani v. Royal & Sun Alliance helps to define the space within by placing the burden squarely on the complainant – even while ARB members continue to show different tolerances for applying principles of equitable modification.
By Allen B. Roberts, Douglas Weiner
The U.S. District Court for the District of Massachusetts held in Lawson v. FMR LLC (pdf) that SOX coverage can apply not only to employees of publicly traded companies, but to employees of private management services firms as well.
The typical business model in the financial services industry is that public mutual fund companies generally have no employees of their own, but are managed by private investment advisors. The public company’s investment assets are thus managed by employees of a private employer.
Plaintiffs, employees of a private investment advisor to a public mutual fund, alleged they had engaged in activity protected by SOX, for which they suffered retaliation. The employer moved to dismiss the lawsuit, arguing plaintiffs were not covered by the Section 806 whistleblower protections because they were not employees of a publicly traded company. The defendants noted the very title of the whistleblower section of SOX is “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.” The plaintiffs countered that Congress intended to extend coverage to private employees in cases such as the plaintiffs.
The Lawson court, the first federal court to decide the issue, agreed with the putative whistleblowers and held that SOX covers employees of private firms providing contract services to the public company.
The court found that the private employers in question made fundamental decisions as to how the publicly held mutual funds are invested. The court held that, “For the goals of SOX to be met, contractors and subcontractors, when performing tasks essential to insuring that no fraud is committed against shareholders, must not be permitted to retaliate against whistleblowers.”
The court looked to the legislative history of SOX, citing Congress’s attempt to address “failures to report instances of fraud against shareholders, failures not only on the part of public company employees, but also ‘employees’ of those institutions working with the public company.” Finding broad coverage was consistent with Congressional intent, the Court stated that, “[i]f Section 806 only protected employees of public companies, then any reporting of fraud involving a mutual fund’s shareholders would go unprotected, for the very simple reason that no ‘employee’ exists for this particular type of public company.”
What may employers expect next? There are indications that Secretary of Labor Hilda Solis and other newly appointed officials and members of the DOL’s Administrative Review Board will be examining positions and precedents in prior interpretations of SOX protections that had been criticized by advocates as not sufficiently inclusive of intended whistleblower rights. The Lawson decision, coming from outside the DOL, suggests more aggressive litigation by whistleblowers urging an expansive reading of SOX protections – and some measure of receptivity to theories that previously had not won mainstream acceptance.
By: Allen B. Roberts, Victoria M. Sloan
Employers who thought they were free of exposure if no complaint was filed within the statute of limitations applicable in Sarbanes-Oxley ("SOX") and other whistleblower claims administered by the Secretary of Labor need to recalibrate their risk based on a recent decision allowing equitable estoppel.
In Hyman v. KD Resources, an employee missed the 90-day SOX statute of limitations by filing his complaint 160 days after he was discharged. Two newly appointed members of the Administrative Review Board (“ARB”) allowed the complaint to survive and remanded it to the Administrative Law Judge who had dismissed it as untimely.
Equitable Estoppel Principles
According to the ARB, equitable estoppel becomes available to extend a statutory time limitation when a whistleblower can show that the failure of a timely filing is attributable to reasonable reliance on an employer’s misleading or confusing representations or conduct.
Among the bases for equitable estoppel in whistleblower cases are:
The principles to extract from KD Resources:
The Significance of the Decision
The KD Resources decision comes within months of the January 11, 2010 announcement by Secretary of Labor Hilda Solis of new appointments to the Administrative Review Board. The 2-member majority opinion emphasized the “fact intensive” nature of the considerations applicable when a whistleblower seeks to revive a dismissed complaint on grounds of equitable estoppel or equitable tolling (where ignorance excuses timely filing because essential information bearing on a claim could not be discovered by the whistleblower’s exercise of reasonable diligence). For its part, the dissent emphasized that settlement discussions may have offered “hope” to the complainant but fell well short of the “promise” necessary to support an equitable estoppel argument. The dissent also noted the whistleblower’s improper appellate reliance on documents that were not disclosed in the record before the Administrative Law Judge and the unavailability of equitable estoppel to complainants who are represented by counsel.
Apart from its immediate impact – possibly opening the door to more litigation of claims that do not satisfy a rigid application of the statute of limitations – the ARB’s KD Resources decision may signal ARB reluctance to dispose of cases by summary processes and a trend to more evidentiary hearings. Looking forward, there may be a message, also, that the newly constituted ARB will be hospitable to other bases for remanding summary dispositions. If this happens, employers and complainants alike will increasingly encounter the rigors and expense of developing a full evidentiary record in whistleblower proceedings.
Written by
Jill Barbarino
David W. Garland
Stuart M. Gerson
Kenneth J. Kelly
Allen B. Roberts
Amy J. Traub
Victoria M. Sloan
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