‘Protected Activity’ Continues to Broaden Under SOX
Although many attorneys representing plaintiffs with retaliation claims are still not familiar with the whistleblower protections afforded by the Sarbanes-Oxley Act of 2002 (SOX), whistleblower claims under it continue to be on the rise. Plaintiffs attorneys are catching on quickly, especially given the trend toward broadening the scope of whistleblower protections under SOX in favor of employees. In light of recent case law, which highlights the loose definition of what constitutes “protected activity” under SOX, corporate employers and defense attorneys should be on guard and tread carefully when it comes to employee complaints about corporate fraud and wrongdoing.
SOX was enacted in response to corporate scandals like Enron that undermined investor confidence and exposed a need for more comprehensive corporate regulations. Notably, SOX contains protections for employees who “blow the whistle,” i.e., report suspected violations of corporate fraud and wrongdoing.
Section 806 of SOX prohibits publicly traded companies from retaliating against employees for “any lawful act done by the employee … to 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. Section 1341 (mail fraud), 18 U.S.C. Section 1343 (mail, radio or television fraud), 18 U.S.C. Section 1344 (bank fraud), 18 U.S.C. Section 1348 (securities fraud), “or any rule of regulation of the Securities and Exchange Commission [SEC] or any provision of federal law relating to fraud against shareholders.” Section 806 protects employees who blow the whistle to persons with investigative authority, including a supervisor.
Whistleblower claims under Section 806 are subject to a burden-shifting framework. In order to establish a claim of retaliation under Section 806, an employee must establish by a preponderance of the evidence that:
- The employee engaged in protected activity (i.e., blew the whistle);
- The employer was aware of the employee’s protected activity;
- The employee suffered an adverse employment action; and
- The employee’s protected activity was a contributing factor in the unfavorable action.
Section 806 also requires that the employee show that he “reasonably believed” his employer’s conduct constituted a violation of one of the six enumerated categories in the statute, and that belief must be “objectively reasonable. Objective reasonableness 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.” A “reasonable but mistaken belief” that an employer violated a relevant law is protected.
If the employee meets his burden, the employer faces the uphill battle of establishing, “by clear and convincing evidence,” that it would have taken the same unfavorable action absent the protected activity.
Whether an employee engaged in “protected activity” is often a hotly contested issue in SOX whistleblower litigations. Recent cases have continued to broaden the scope of “protected activity,” while also confirming that not every “run of the mill” corporate complaint constitutes blowing the whistle.
Courts and the Department of Labor consider an employee’s knowledge and expertise when determining whether an employee’s belief that his employer was violating SOX was reasonable. For example, in Becker v. Community Health Systems, the complainant was the chief financial officer, who alleged that he was constructively discharged after he declined to adjust the corporation’s earnings figure from negative $12.8 million to negative $4 million without any explanation. The ARB held in the complainant’s favor, finding that his extensive experience supported the reasonableness of his skepticism regarding the reduction.
However, an employee’s knowledge level can also be held against him or her. In Beacom v. Oracle America, the vice president of one of Oracle’s sales divisions alleged that the company falsely projected inflated sales revenue numbers. The U.S. Court of Appeals for the Eighth Circuit agreed with the district court that even under the less stringent standard, the plaintiff’s alleged belief that the company was defrauding its investors was objectively unreasonable. This was because an individual in the plaintiff’s position would have understood the “predictive nature” of sales projections and that the alleged discrepancy in the figures (although $10 million dollars) was only “minor” given that Oracle annually generated billions of dollars.
Moreover, a recent U.S. Court of Appeals for the Fourth Circuit case demonstrates that an employee can rely on a co-worker’s training and experience to form the basis of her “reasonable belief” that her employer is engaged in fraud. In Deltek v. Department of Labor, Administrative Review Board, the Fourth Circuit affirmed the ARB’s finding of liability in favor of an employee who was terminated while on a leave of absence shortly after sending a letter complaining about fraudulent invoicing practices to company management and the SEC. The employer claimed it terminated the employee because of her behavior while at work. Notably, the employer attempted to dispute that the employee had engaged in “protected activity” by arguing that the employee’s belief could not have been objectively reasonable because she lacked “a college degree or relevant work experience” to assess if the invoicing practices were fraudulent, but the ARB rejected this argument. Instead, the ARB found that in forming her reasonable belief, the plaintiff relied on her discussions with another employee who had extensive experience with invoicing. Further, the court found that substantial evidence supported the ARB’s finding that the employee’s complaints “contributed” to her termination.
Another recent ARB decision, Dietz v. Cypress Semiconductor, has broadened the scope of “protected activity” under SOX even further. In Dietz, the complainant worked as a program manager and sent an email to his supervisor complaining that a bonus plan that his direct reports were subject to violated state wage law. In his email, the complainant specifically invoked the corporation’s whistleblower policy and cited to the specific state wage laws that he believed were violated. However, the complainant made no mention of fraud or of any of the SOX provisions being violated. In a follow up teleconference, during which the corporation’s counsel assured the complainant that the bonus plan was legal, the plaintiff also complained that the corporation purposefully did not inform employees that the bonus plan provided for compulsory deductions from their base salary when it gave these prospective employees their offer letters. Shortly thereafter, the complainant alleged a series of retaliatory reprimands and ultimately resigned.
The ARB held that the complainant’s email was not “protected activity” because he only reported that he thought the bonus plan violated state wage laws, and this allegation is not enough “without some allegation of a knowing misrepresentation or concealment of a material facts.” However, the ARB held that the complainant blew the whistle on the teleconference when he complained that he believed the corporation had acted “knowingly.” The ARB further held that the complainant had a reasonable belief that the bonus plan constituted mail or wire fraud because the corporation used mails or wires in the course of executing and administrating the bonus plan. In so holding, the ARB noted that “mail and wire fraud statutes can be triggered even when the connection between the alleged fraud and the use of mails or wires might seem tenuous.” While Dietz has been viewed as a victory for whistleblowing employees, the decision also reinforces the requirement that whistleblower complaints must relate to fraud as set forth in one of the six enumerated categories in SOX.
Verfuerth v. Orion Energy Systems, is also a unique case demonstrating where the line between protected and unprotected activity is drawn. In Verfuerth, the plaintiff was the CEO of a publicly traded company that he founded. The CEO alleged that he became concerned about a number of corporate issues, including his belief that the company’s law firm might have a conflict of interest. The CEO also expressed other concerns to the company’s board of directors and sought the removal of several individuals from the board, including one board member who he alleged that the company’s public disclosures had identified as a CPA, although his CPA license had lapsed. On the morning the board scheduled a meeting to terminate his employment, the CEO sent what he described as a “whistleblower email” to several board members detailing his concerns, the majority of which he had previously “brought to the attention” of the board.
The district court granted summary judgment for the company. First, the district court noted that with one exception, the CEO’s concerns did not relate to fraud, but rather were “run of the mill” corporate problems that were required to be disclosed to shareholders. However, the district court rejected the CEO’s attempt to elevate complaints about “waste,” violations of codes of conduct and breaches of fiduciary duty to illegal fraud pursuant to SOX. The court noted that the CEO’s concerns about alleged stock manipulation by a board member could have amounted to protected activity under SOX, however, the board was aware of the allegations at least four years before the CEO supposedly “blew the whistle.” The court further held that the CEO’s own certification (as accurate) of the company’s quarterly and annual reports during the same time period he alleged the company failed to make “required disclosures” rendered it impossible for him to establish that he “subjectively believed” fraud was occurring during the same time frame.
In conclusion, the recent case law offers some important lessons for employers and their counsel.
• Given the broad scope of “protected activity,” it is critical that employers obtain all of the details about a complaint when it is made. “Run of the mill” corporate complaints are not protected activity under SOX, but any fraud-related complaints may likely fall within the broad scope of SOX.
• Employers should create detailed documentation of the employee’s complaint, which will help guard against an employee attempting later to expand the scope of the complaint to argue he or she had a subjective and objective belief of a SOX violation.
• Employers should tread carefully when they suspect that employees have engaged in “protected activity” under SOX, as whistleblower claims can be costly. For example, recently in Becker, the ARB awarded the employee $1.9 million in back pay, front pay and compensatory damages.
While plaintiffs counsel may be slow to understanding SOX and the benefits of its causes of action and available remedies, employers and their counsel should be taking steps to head them off and reduce the risk of litigation.