Sarbanes-Oxley Act (SOX)
Whistleblower Digest
COVERED RESPONDENT
[Last updated Dec. 16, 2014]

Table of Contents

[ See Covered Employee for additional relevant caselaw. ]

Non-Publicly Traded Company

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FEDERAL COURT DECISIONS

SUIT DISMISSED WHERE PLAINTIFF COULD NOT REBUT THAT NEITHER OF NAMED DEFENDANT WAS A PUBLICLY TRADED COMPANY

In Savage v. Finney , No. 12 CV 2398, 2012 WL 2374687 (N.D.Ill. June 20, 2012), the plaintiff was fired from his position as Chief Financial Officer of the Woodlawn Community Development Corporation ("WCDC") and the Woodlawn Organization ("TWO"), and he alleged his firing was retaliation for reporting that his employers were, with assistance from the other defendants, engaging in questionable financial practices, to the United States Department of Housing and Urban Development ("HUD"). However, the court granted the defendants' motion to dismiss his SOX retaliation complaint because the plaintiff could not rebut that neither of the defendant-companies are publicly traded companies.

COVERED EMPLOYEE; EMPLOYEES OF PRIVATELY HELD CONTRACTOR TO PUBLICLY TRADED COMPANY NOT RETAINED TO PROVIDE EMPLOYMENT SERVICES

In Lawson v. FMR, LLC , 670 F.3d 61, 68 (1st Cir. 2012), cert. granted , No. 12-3 (U.S. May 20, 2013), the plaintiffs were employees of private companies that provide advising or management services by contract to the Fidelity family of mutual funds. The First Circuit accepted for interlocutory review the following question certified by the district court:

Does the whistleblower protection afforded by Section 806(a) of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, apply to an employee of a contractor or subcontractor of a public company, when that employee reports activity which he or she reasonably believes may constitute a violation of 18 U.S.C. §§ 1341, 1343, 1344, or 1348; any rule or regulation of the Securities and Exchange Commission; or any provision of Federal law and such a violation would relate to fraud against shareholders of the public company?

Slip op. at 9. The court characterized the question as "whether Congress intended the whistleblower provisions of § 1514A also to apply to those who are employees of a contractor or subcontractor to a public company and who engage in protected activity." Slip op. at 12-13 (footnote omitted). The court concluded that

only the employees of the defined public companies are covered by these whistleblower provisions; the clause "officer, employee, contractor, subcontractor, or agent of such company" goes to who is prohibited from retaliating or discriminating, not to who is a covered employee and so does not violate the rule against rendering superfluous any statutory language. The text of § 1514A(a) first identifies covered employers: those with a class of securities registered under section 12 of the 1934 Act or those that file reports with the SEC pursuant to section 15(d) of the 1934 Act. Such public companies may not retaliate against their own employees who engage in protected activity. Section 1514A(a) then enumerates a list of representatives of such employers, including those who are contractors or subcontractors, and they are also barred from retaliating against employees of the covered public-company employer who engage in protected activity.

***

   Section 1514A(a)'s list of company representatives serves . . . to ensure an employee of a public company is covered under the provision if he or she were harassed by officers, other employees, or contractors or subcontractors to the public company for reporting fraud in that public company.

Slip op. at 16-17 (footnotes omitted). The court found supportive of its interpretation the title of Section 806 and the caption of section 1514A(a), which both refer to protection for employees of publicly traded companies; Congress' use of explicit language in other provisions of SOX when it wished enact broader whistleblower protection elsewhere; SOX's reference to AIR21 as a model, where the law limited coverage of certain contractor was explicit; the contrast between the language in SOX and ERA and PSIA whistleblower laws which explicitly extend coverage to employees of contractors of the regulated entities; canons of constructions relevant to securities laws and their relationship between investment companies and their advisors; and contemporaneous legislative history; post-enactment legislative activity. Moreover, the court found that no deference was owed to SEC or DOL in regard to the interpretation of the term "employee" in section 1514A. Those agencies had filed amicus briefs supporting the broad interpretation urged by the Plaintiffs. The court noted that certain DOL regulations concerning what constituted "reasonable belief" under SOX had been given deference in the decision in Day v. Staples , 555 F.3d 42, 54 and n.7 (1st Cir. 2009), but found that this was dicta, and was distinguishable because it involved different regulations.

One member of the three judge panel dissented, explaining that the majority's statutory interpretation analysis was faulty, and that the majority had failed to explain adequately why the broad deference given to DOL regulations and case law in Day v. Staples was dicta or was distinguishable.

[NB: Agency/contractor for employment purposes and "integrated enterprises" theories of contractor /subcontractor liability were not before the Court of Appeals in Lawson . See slip op. at nn.1 and 7. Moreover, the Court of Appeals did not reach the question of whether coverage was limited to complaints relating to fraud against shareholders of the public company. Slip op. at 15.]

COVERED ENTITY UNDER SOX; A LOCAL GOVERNMENTAL ENTITY IS NOT A PUBLICLY TRADED COMPANY AND IS NOT A COVERED ENTITY UNDER SOX

In addition to claims under Title VII of the Civil Rights Act of 1964 and the Family Medical Leave Act, the plaintiff alleged that the Dallas Independent School District ("DISD") retaliated against him in violation of SOX when it terminated his employment. The district court granted the defendant's motion to dismiss his SOX claim because DISD is not a publicly traded company, and as a local governmental entity, it is not a covered employer under SOX. Sherman v. Dallas ISD , No. 3:10-CV-1146-B-BH, 2011 WL 477500 (N.D.Tex. Jan. 24, 2011), adopted Sherman v. Dallas ISD , No. 10-cv-1146 (N.D.Tx. Feb. 8, 2011).

FRANCHISEE NOT AN COVERED EMPLOYER WHERE A PUBLICLY TRADED COMPANY WAS NOT NAMED AS A DEFENDANT, AND THERE WAS NO ALLEGATION THE DEFENDANT WAS AN AGENT OF A PUBLICLY TRADED COMPANY

In Heaney v. Prudential Real Estate Affiliates, Inc. , No. 05-820 (E.D.La. July 3, 2008) (case below ARB No. 05-039, ALJ No. 2004-SOX-72), the court granted summary summary against the Plaintiff on his SOX whisteblower claim where the Defendant presented affidavits to show that the Employer/Defendant was a state limited liability corporation and a franchise of Prudential Real Estate Affiliates, Inc., and the Plaintiff's only response was to submit the SEC Form 10-K for Prudential Financial, Inc., which was not a named defendant, and where the Plaintiff had not alleged that the Employer/Defendant was an agent of any company required to file under either of the applicable SEC laws.

THE SARBANES-OXLEY ACT WHISTLEBLOWER PROVISION ONLY APPLIES TO PUBLICLY TRADED COMPANIES

In Tumban v. Biomerieux, Inc. , No. 1:06CV00442 (M.D.N.C. Mar. 13, 2007), the Plaintiff brought a complaint in federal district court for wrongful discharge under state law based on the ground that she was engaged in the protected activity of being a "whistleblower" when she pointed out to her supervisors failures in compliance with regulatory guidelines and standards that govern the manufacture and testing of medical devices. The Plaintiff sought to show that she fit the "public policy" exception for an at will employee under the state law by showing that she had engaged in whistleblowing activity, citing by analogy the Sarbanes-Oxley Act. The court, however, observed that the Sarbanes-Oxley Act only applies to publicly traded companies, and therefore found that it did not apply to the Plaintiff's case.

ADMINISTRATIVE REVIEW BOARD DECISIONS

MOHEGAN TRIBE FOUND NOT TO BE A COVERED ENTITY SUBJECT TO SUIT UNDER SOX SECTION 806

In Stroud v. Mohegan Tribal Gaming Authority , ARB Nos. 13-079, 14-013, ALJ Nos. 2013-ACA-3, 2013-CFP-3 (ARB Nov. 26, 2014), the Complainant filed a Sarbanes-Oxley Act and a Consumer Financial Protection Act claim against the Mohegan Tribal Gaming Authority, which was owed by the Mohegan Tribe, a tribal sovereign nation. The ARB affirmed the ALJ's summary decision dismissing the SOX and CFPA claims. In regard to the SOX complaint, the ARB found that the Mohegan Tribe was not a publicly traded company as defined in 18 U.S.C.A. 1514A(a), nor a contractor, subcontractor or agent of such a company. In regard to the CFPA claim, the ARB found that the Complainant had presented no evidence that Congress had abrogated tribunal sovereign immunity or that the Mohegan Tribe had waived immunity from suit.

COVERED EMPLOYER; INDIAN TRIBE

A sovereign Indian tribe is not an entity covered under SOX, 18 U.S.C.A. § 1514A, and moreover is immune from suit under that provision pursuant to sovereign immunity. Hylton v. The Seminole Tribe of Florida , ARB No. 10-078, ALJ No. 2010-SOX-14 (ARB Oct. 31, 2011)

COVERED EMPLOYER; NON-PUBLICLY TRADED OUTSIDE ACCOUNTING FIRM

In Field v. BKD, LLP , ARB No. 09-136, ALJ No. 2009-SOX-46 (ARB May 27, 2011), the ARB summarily affirmed the ALJ's dismissal of the Complainant's SOX complaint against an outside accounting firm, and one of its subsidaries. According to the complaint, the outside accounting firm had ignored the waste and fraud reported of the Complainant's employer (a public water agency) and had worked with corrupt agency water managers to suppress the misconduct. The ALJ dismissed because he found that the Respondents were not publicly traded companies covered by the SOX whistleblower provision. The ARB described a complainant's burden to establish that named respondents are covered companies under the SOX whisleblower provision:

   To prevail on the merits of a Section 806 case, a covered employee must prove by a preponderance of the evidence that he or she, inter alia , suffered an unfavorable personnel action by a covered company. 49 U.S.C.A. § 42121; 18 U.S.C.A. § 1514A(b)(2)(C). Therefore, as a threshold matter, to avail himself of the SOX whistleblower protections, Field must demonstrate that the Respondents are covered companies under Section 806, i.e., a company "with a class of securities registered" under the Securities Exchange Act, or that is "required to file reports" under the Act. 18 U.S.C.A. § 1514A(a).

   Before the ALJ, the Respondents submitted documentary evidence demonstrating that BKD, LLP, and BKD Corporate Finance, LLC have no class of securities registered under section 12 and are not required to file reports under section 15(d) of the Securities Exchange Act of 1934. Field offered no evidence to the contrary. Instead, Field argued that Section 806 should apply because: (1) BKD, LLP is a certified public accounting firm registered with the Public Company Accounting Oversight Board, which must follow accepted accounting procedures; (2) BKD, LLP has a contract with Denver Water and must work in the best interest of Denver residents; (3) BKD, LLP provides services to publicly-owned companies, and (4) BKD, LLP's failure to address the waste and fraud affected Field's employment at Denver Water. Based upon the Respondents' uncontroverted evidence, the ALJ found that the Respondents are not publicly-traded companies within the meaning of 18 U.S.C.A. § 1514A(a). Therefore, the ALJ concluded that the Respondents are not subject to Section 806. Accordingly, the ALJ dismissed Field's complaint.

USDOL/OALJ Reporter at 3-4. The ARB found the ALJ's finding that the Respondent accounting firm and its subsidiary were not covered employers under section 1514A was correct as a matter of law.

COVERED EMPLOYER; GOVERNMENT WATER AGENCY

In Field v. Denver Water , ARB Nos. 09-099, 09-100, ALJ Nos. 2009-SOX-22 and 24 (ARB May 26, 2011), the ALJ properly granted summary decision because Denver Water was not demonstrated by the Complainant to be a covered company under Section 806, i.e., a company "with a class of securities registered" under the Securties Exchange Act, or that is "required to file reports" under the Act. 18 U.S.C.A. § 1514A(a).

COVERED EMPLOYER; AMERICAN MEDICAL ASSOCIATION

In Fleszar v. American Medical Association , ARB Nos. 07-091, 08-061, ALJ Nos., 2007-SOX-30, 2008-SOX-16 (ARB Mar. 31, 2009), the Complainant had brought two complaints against the American Medical Association (AMA) pursuant to the whistleblower provision of the SOX. In separate decisions, different ALJs dismissed the complaints on the ground that the AMA is not a publicly traded company. The ARB agreed, finding it "uncontroverted that the AMA is a not-for-profit company that does not issue securities that are registered under Section 12 or file reports under Section 15(d) [and therefore] it is not subject to the whistleblower protection provision of the SOX." The ARB addressed, and rejected, the Complainant's arguments that the AMA was covered because (1) it had filed documents with the SEC, (2) it engaged in commercial transactions, and (3) it had owned an investment company. The ARB found that the AMA's filings with the SEC relating to its retirement plan did not create coverage; that a non-profit's contractual relationships with publicly traded companies and government entities did not create coverage; that the AMA had divested itself of the investment company prior to the enactment of the SOX; and that the investment company was never the Complainant's employer.

COVERED EMPLOYER; PUBLICLY TRADED PARENT COMPANY NEED NOT BE NAMED AS A RESPONDENT AS LONG AS AT LEAST ONE NAMED RESPONDENT IS AN OFFICER, EMPLOYEE, CONTRACTOR, SUBCONTRACTOR, OR AGENT OF SUCH A COMPANY

In Andrews v. ING North America Insurance Corp. , ARB No. 06-071, ALJ Nos. 2005-SOX-50 and 51 (ARB Aug. 29, 2008), the Complainants alleged that the company that employed them and from which they had been terminated, along with several individuals, retaliated against them in violation of the SOX. That company was a subsidiary four levels remote from the publicly traded parent company. OSHA treated the company as the sole Respondent, and dismissed on the ground that the Respondent was not a covered employer under SOX. Before the ALJ, the Complainants moved to add the parent company as a Respondent only the day before the hearing. The ALJ ruled that the Complainants had "abandoned that motion." Following a full hearing and briefing on the coverage issue, the ALJ found that the Complainants had failed to establish that the Respondent was a covered employer or that it had acted as an agent of the parent.

The ARB stated that the ALJ had relied upon its decision in Flake v. New World Pasta Co. , ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), in concluding that the SOX does not provide a cause of action against a non-public subsidiary. The ARB stated that it had rejected such a reading of Flake and also the proposition that a subsidiary cannot by definition be an agent, in Klopfenstein v. PCC Flow Techs. Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-011 (ARB May 31, 2006). The ARB noted that its decision in Klopfenstein , had been issued after the ALJ ruled in this case. The ARB remanded, stating that "on remand the Complainants must be given an opportunity to prove by a preponderance of evidence that [the parent company] is a covered company and that [the named Respondent] acted as its agent." The ARB also wrote:

   Furthermore, SOX does not require a complainant to name a corporate respondent that is itself "'registered under section 12, or that is required to file reports under section 15(d)' so long as the complainant names at least one respondent who is covered under the Act as an "officer, employee, contractor, subcontractor, or agent' of such a company." Thus, since they do not have to name ING Groep, N.V. as a respondent, the issue whether or not the Complainants abandoned their motion to amend the complaint to name ING Groep, N.V. is moot.

USDOL/OALJ Reporter at 5 (footnote omitted).

NON-PROFIT, NON-PUBLICLY TRADED COMPANY IS NOT COVERED BY THE SOX WHISTLEBLOWER PROVISION

In Paz v. Mary's Center for Maternal & Child Care , ARB No. 06-031, ALJ No. 2006-SOX-7 (ARB Nov. 30, 2007), the ARB affirmed the ALJ's finding that the SOX whistleblower provision did not cover the Respondent because it was a non-profit, non-publicly traded company.

ADMINSTRATIVE LAW JUDGE DECISIONS

COVERED EMPLOYER; THE AMERICAN MEDICAL ASSOCIATION

In Fleszar v. American Medical Association , 2007-SOX-30 (ALJ June 13, 2007), the ALJ dismissed the Complainant's SOX complaint because the Respondent was not subject to the provisions of § 806 of the SOX, and thus not a properly named Respondent. Specifically, the ALJ found that the "AMA is a private organization that has not registered securities under § 12 of the SEA. Similarly, § 15(d) relates solely to reports of registered issuers of securities, and the AMA is not such an issuer. Consequently, I find the AMA does not fall under either specific category of publicly traded company subject to the § 806 whistleblower provisions." Slip op. at 3 (footnotes omitted). The Complainant alleged that the Respondent had filed reports to the SEC under § 15(d). The ALJ, however, found that the pleadings showed that those reports related to defined benefits plans that did not involve the issuance of securities, and would not have been filed under § 15(d). The ALJ also rejected the Complainant's contention that the Respondent was covered under § 806 because it had contractual relationships with publicly traded companies and governmental entities, or due to real estate transactions or mutual fund activities.

COVERED EMPLOYER; MERE FACT THAT RESPONDENT SUBJECT TO REPORTING REQUIREMENTS OF OTHER FEDERAL LAWS DOES NOT ESTABLISH SOX COVERAGE; MERE FACT THAT RESPONDENT'S DONORS ARE SIMILAR TO SHAREHOLDERS DOES NOT ESTABLISH COVERAGE

In Stevenson v. Neighborhood House Charter School , 2005-SOX-87 (ALJ Sept. 7, 2005), the Respondent was not shown to be a company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 nor to be a company that is required to file reports under Section 15(d) of that Act. The Complainant asserted that coverage should be found under the whistleblower provision of SOX because the Respondent had a retirement plan with benefits subject to reporting and disclosure requirements under ERISA. The ALJ found this fact to be irrelevant, writing that nothing in the SOX or its legislative history "suggests that being subject to reporting requirements under one federal law, such as ERISA, automatically extends coverage of any other federal legislation, such as Sarbanes-Oxley, to a company."

The Complainant also argued SOX whistleblower coverage based on allegations that the Respondent had violated other parts of SOX, and that the Respondent was subject to reporting under SEC Rules 10b5 and 15c2-12. The ALJ again found these allegations to be irrelevant.

Finally, the Complainant argued coverage based on the fact that the Respondent receives funds from both private donors and public corporations. The Complainant argued that such donors are much like the shareholders of a publicly traded corporation. The ALJ found that there was "no indication that Congress intended for a private company to fall within the purview of Sarbanes-Oxley simply because it receives funds from private donors or public companies."

RESPONDENT; NO LIABILITY IF NOT A COMPANY WITH A CLASS OF SECURITIES REGISTERED UNDER SECTION 12 OR IF NOT REQUIRED TO FILE REPORTS UNDER SECTION 15(d)

In Flake v. New World Pasta Co. , 2003-SOX-18 (ALJ July 7, 2003), the ALJ granted summary judgment to Respondent where it established that it was not a company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. section 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. section 78o(d), thereby subjecting it to jurisdiction under Section 806 of the Sarbanes Oxley Act, 18 U.S.C. section 1514A(a).

In 1999, Respondent had filed a registration statement with the SEC as a result of a public offering of indentures; however, the ALJ found that thereafter Respondent's registration obligation was automatically suspended by virtue of the plain language of 15 U.S.C. section 15(d). In making this determination, the ALJ found that the absence of a regulation on this point was not of relevance in view of the plain language of the statute itself. Moreover, automatic suspension was supported by both a publication issued by the Chief Counsel for the SEC Division of Corporate Finance "Manual of Publicly Available Telephone Interpretations" and that Division's "Frequently Asked Questions" publication.

Subsequently, respondent had filed some of the reports required by section 15(d) pursuant to its indenture agreement with its lenders; however, the ALJ found that such a contractual arrangement did not make Respondent an issuer required to file reports under section 15(d) - rather in order for SOX whistleblower liability to attach the company must be required by the SEA to make such filings.

COVERED EMPLOYER; "COMPANY REPRESENTATIVE" STATUS IS NOT CONFERRED MERELY BECAUSE FINANCIAL SERVICES ARE PROVIDED TO A PUBLICLY TRADED COMPANY

In Roulett v. American Capital Access , 2004-SOX-78 (ALJ Dec. 22, 2004), the Respondent provided insurance for registered companies in connection with debt securities of publicly traded companies, and associated services. The Complainant argued that the SOX whistleblower provision extended to the Respondent because it is a "company representative" for publicly traded companies. The ALJ found that the only merit to this argument was its creativity. The ALJ declined "to expand [coverage under the whistleblower provision of the SOX] to a non-publicly traded company solely because it engages in financial business with publicly traded companies."

COVERED EMPLOYER; NON-PROFIT

In Paz v. Mary's Center for Maternal & Child Care , 2006-SOX-7 (ALJ Dec. 12, 2005), the Complainant's response to the ALJ's order to show cause why the complaint should not be dismissed on the ground that the Respondent, a non-profit, was not covered under the SOX was that he had filed his complaint under both a SOX and False Claims Act, and that OSHA mishandled his complaint by processing it only under the SOX. The ALJ found that the Respondent was not a publicly traded company and dismissed the complaint. She noted that she did not have jurisdiction over False Claims Act claims.

COVERED EMPLOYER; CONTRACTOR OF PUBLICLY TRADED COMPANY; MERELY ENTERING INTO A SETTLEMENT AGREEMENT IS NOT THE TYPE OF CONTRACTUAL RELATIONSHIP CONTEMPLATED UNDER SECTION 1514A; CONTRACTOR MUST HAVE BEEN ACTING ON BEHALF OF PUBLICLY TRADED IN DISCRIMINATING AGAINST THE COMPLAINANT FOR LIABILITY TO ATTACH

In Reno v. Westfield Corp., Inc. , 2006-SOX-30 (ALJ Feb. 23, 2006), the named Respondent was not a publicly traded company, and it moved for summary decision based on lack of coverage under SOX. The Complainant contended that it was a contractor of a publicly traded company, and therefore was covered under SOX. The ALJ granted summary decision because the Complainant failed to present any evidence to show that the Respondent actually was a contractor of the publicly traded company. Although the Complainant showed that the two companies had entered into a settlement agreement, the ALJ found such evidence failed to show a contractual relationship. Moreover, even if there existed a material fact as to whether the Respondent was a contractor within the meaning of Section 1514A, the claim would still fail because merely being a contractor does not impose liability under the SOX; rather than the contractor or agent must have been acting on behalf of the publicly traded company when discriminating against the employee for liability to be imposed. Since the Complainant presented no such evidence, the claim was denied.

COVERED EMPLOYER; NON-PUBLICLY TRADED CONTRACTOR THAT PROVIDES SERVICES TO PUBLICLY TRADED COMPANIES

In Goodman v. Decisive Analytics Corp. , 2006-SOX-11 (ALJ Jan. 10, 2006), the Complainant was an employee of a company that provided engineering consulting services under contract with publicly traded companies. There was no allegation that the company employing the Complainant was publicly traded. The ALJ observed that different ALJs have reached different conclusions as to the jurisdictional breath of SOX, but that no definitive appellate interpretation had yet been established. The ALJ concluded that "employees of private contractors and subcontractors of publicly traded companies are not afforded SOX whistleblower protection. Any broader interpretation means every non-publicly traded company becomes subject to SOX if it engages in any contractual relationship with a publicly traded company." Slip op. at 9-10. The ALJ found that the caption and language of the SOX employee protection provision does not extend jurisdiction that far. The ALJ concluded that the Complainant was not an employee of a publicly traded company or a company required to file with the SEC, and therefore was not an employee entitled to SOX whistleblower protection under 18 U.S.C. § 1514A(a). The ALJ, therefore, granted summary decision in favor of the Respondent.

COVERED EMPLOYER; COMPANY THAT PROVIDES SERVICES TO PUBLICLY TRADED COMPANIES

In Smith v. Hewlett Packard , 2005-SOX-88 to 92 (ALJ Jan. 19, 2006), the Complainant asserted that the Respondent was covered under the whistleblower provision of the SOX because it performed direct mail services as a first tier contractor to publicly traded companies. Because there was no allegation that any of the companies with which the Respondent did business directed or controlled its employment decisions, including the decision to terminate the Complainant's employment, nor that the Respondent acted on behalf of a publicly traded company when it elected to terminate the Complainant's employment, the ALJ found that the Respondent was not a covered employer under the SOX.

COVERED EMPLOYER; FACT THAT RESPONDENT HAD GOVERNMENT CONTRACTS AND ARGUMENT THAT PUBLIC POLICY FAVORS PROTECTING WHISTLELBLOWERS ARE INSUFFICIENT TO PERMIT A SOX CASE TO PROCEED WHERE THE RESPONDENT IS NOT A PUBLICLY TRADED COMPANY

In Judith v. Magnolia Plumbing Co., Inc. , 2005-SOX-99 and 100 (ALJ Sept. 20, 2005), the Complainants did not contest that the Respondent was neither a publicly traded company or that it did not have a class of securities registered under section 12 of the Securities Exchange Act of 1934. Rather, the Complainants argued that the SOX should apply because the Respondent had numerous contracts with municipal and federal governments. The Complainant also argued that public policy to protect whistleblowers who seek to bring acts of malfeasance before the public should permit their SOX case to proceed. The ALJ rejected both arguments: "[i]f a company is not publicly traded, the Act simply does not apply."

COVERED EMPLOYER; FDIC

The Federal Deposit Insurance Corporation is not a covered employer under the SOX whistleblower provision. Gibson-Michaels v. Federal Deposit Insurance Corp. , 2005-SOX-53 (ALJ May 26, 2005).

EMPLOYER; CONTRACTOR OR SUBCONTRACTOR CANNOT DISCRIMINATE ON BEHALF OF COVERED EMPLOYER, BUT COMPLAINANT MUST NEVERTHELESS BE AN EMPLOYEE OF THE COVERED EMPLOYER TO HAVE SOX COVERAGE

The named Employer was neither a publicly traded company nor a subsidiary of a publicly traded company. The Complainant argued it was a contractor or subcontractor of various publicly traded companies, and therefore she should be considered a covered employee based upon the inclusion in Section 806 of the language referring to "any officer, employee, contractor, subcontractor, or agent of such company." 18 U.S.C. 1514A(a). The ALJ held, however, that "this language simply lists the various potential actors who are prohibited from engaging in discrimination on behalf of a covered employer. It does not bridge the gap in this case which is created by the fact that the Complainant is not an employee of a publicly traded company. That is, while it is at least theoretically possible that a privately held entity such as APG could engage in discrimination prohibited by Section 806 when acting in the capacity as an agent of a publicly traded company in regard to an employee of that company, there is nothing in the language of Sarbanes-Oxley or its legislative history that suggests that Congress intended to bring the employees of non-public contractors, subcontractors and agents under the protective aegis of Section 806." Minkina v. Affiliated Physician's Group , 2005-SOX-19 (ALJ Feb. 22, 2005).

[Editor's note: Compare Kalkunte v. DVI Financial Services, Inc. , 2004-SOX-56 (ALJ July 18, 2005), casenoted infra , in which the ALJ found that a "turnaround specialist" firm could be held liable under SOX where that company's president had been installed as the CEO and president of the company it was helping through bankruptcy and which actually employed the Complainant.]

NON-PUBLICLY TRADED FIRM SPECIALIZING IN RESTRUCTURING SERVICES FOR COMPANIES IN DISTRESS FOUND TO BE A LIABLE CONTRACTOR OR AGENT

AMENDMENT OF COMPLAINT TO ADD RESPONDENT; TOO LATE AFTER EVIDENTIARY HEARING COMPLETED

In Kalkunte v. DVI Financial Services, Inc. , 2004-SOX-56 (ALJ July 18, 2005), one Respondent was a firm that provides crisis management and restructuring services to companies in financial distress ("AP Services"). The other Respondent ("DVI Financial" or "DVI") was a financial services company that had contracted with AP Services to provide leased employees to manage DVI through bankruptcy and dissolution. DVI was a publicly traded company, but AP Services was not. The Complainant was a DVI employee. The President of AP Services, Mr. Toney, was appointed by the DVI Board of Directors as temporary President and CEO of DVI upon filing for Chapter 11 protection. The chief protagonist as described in the complaint was Mr. Toney. There was no dispute that DVI was a covered employer, but the question was presented whether AP Services could be held liable

The ALJ reviewed the facts and relevant law, and concluded that AP Services was a properly named Respondent because (1) it was a subcontractor or contractor, (2) it had assumed respondeat superior liability to the Complainant, (3) it was an agent under the statute, and (4) the Complainant could also be viewed as a third party beneficiary to the agreement between the Respondents. The ALJ rejected AP Services argument that it had to actually employ the Complainant to be covered under the SOX, writing:

   DVI contracted to AP the power to determine how best to manage the corporation and its assets in light of the pending bankruptcy. ... Included in those powers was the power to evaluate DVI's employees' value to the company and to terminate those who were no longer needed. ... Mr. Toney, as CEO, had the authority to terminate anyone at DVI, and Ms. Clay [an AP Services employee brought to DVI to work on Human Resources issues] testified that she performed the duties of Chief Administrative Officer as part of her duties at DVI. Thus AP, through Mr. Toney and Ms. Clay, had the power to affect Ms. Kalkunte's employment.

Slip op. at 9 (citations to the record omitted). Following the evidentiary hearing before the ALJ, the Complainant moved to amend the complaint to name Mr. Toney as a Respondent. The ALJ recounted the procedural history of the case, and -- finding that although he had left the record open following the hearing the scope of that ruling did not include naming an additional party -- denied the motion.

[Editor's note: Compare Minkina v. Affiliated Physician's Group , 2005-SOX-19 (ALJ Feb. 22, 2005), supra , in which the ALJ held that employees of non-publicly traded contractors, subcontractors and agents are not under the protective aegis of Section 806]

Non-Publicly Traded Subsidiary of Publicly Traded Parent

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FEDERAL COURT DECISIONS

SUBSIDIARIES OF PUBLICLY TRADED COMPANIES; DODD-FRANK ACT AMENDMENT TO SOX FOUND TO APPLY RETROACTIVELY

In Ashmore v. CGI Group Inc. , No. 11 Civ. 8611, 2012 WL 2148899 (S.D.N.Y. June 12, 2012), the defendant was a subcontractor of a public housing authority that provided services related to the administration of HUD's Section 8 project-based rental subsidy program. The court held that the Dodd-Frank Act amendment to SOX - which clarified that subsidiaries of publicly traded companies are covered under SOX - applies retroactively, and thus the defendant is a covered company.

DODD-FRANK AMENDMENT TO SOX CLARIFYING THAT SUBSIDIARIES OF PUBLICLY-TRADED COMPANIES ARE COVERED EMPLOYERS UNDER SOX

In Leshinsky v. Telvent GIT, S.A. , No. 10 Civ. 4511, 2012 WL 2686111 (S.D.N.Y. July 9, 2012) , the plaintiff was an employee of a subsidiary of a publicly traded company who alleged that he was terminated for complaining about a proposal to use fraudulent information in a bid to gain a contract with the New York Metropolitan Transit Authority ("MTA"). Because he was employed by a subsidiary of a publicly traded company, the court therefore set out to determine whether the 2010 Dodd-Frank amendment - which clarified that it protects employees of subsidiaries of publicly traded companies - applies retroactively.

In finding that the amendment did apply retroactively to pending claims, the court cited the ARB's decision in Johnson v. Siemens Bldg. Tech., Inc. , ARB No. 08-032, 2011 WL 1247202, at *11 (DOL ARB Mar. 31, 2011) (citation omitted), which held that Dodd-Frank's amendment for subsidiary coverage simplify clarified "what was intended all along." The court also engaged in its own analysis to verify that the amendment was in fact just a clarification, finding that "the statute was ambiguous as to its application to employees of non-public subsidiaries, and this ambiguity is confirmed by the extensive conflict among the different judicial and administrative decisions applying the statute." Leshinsky at *14. The court also found that SOX's legislative history and the policy positions underlying the statute affirmed the ARB's conclusion that the amendment provides a reasonable interpretation of the statute. Finally, court found that other recent decisions did not preclude applying the amendment retroactively, and after its application of "earlier labor law-derived tests" further confirmed that "the amended language is more consistent with the statute's purpose than the contrary reading." Id. at *19.

COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY FOUND NOT COVERED UNDER PRE-DODD-FRANK AMENDMENTS TO SECTION 806 OF THE SOX WHISTLEBLOWER PROVISION; DISTRICT COURT REJECTS ARB ANALYSIS IN JOHNSON v. SIEMENS BUILDING TECHNOLOGIES, INC .

In Mart v. Gozdecki, Del Giudice, Americus & Farkas LLP , No. 12 C 2496, 2012 WL 5830627 (N.D.Ill. Nov. 16, 2012), the Plaintiff sued his former law firm for malpractice for failure to file the Plaintiff's SOX claim in a timely fashion. The Defendant sought dismissal of the malpractice suit on the ground that the Plaintiff's SOX claim lacked merit because the Respondent was a non-publicly traded subsidiary of a publicly traded company, and non-publicly traded subsidiaries were not covered by the SOX whistleblower provision prior to the Dodd-Frank amendments to SOX. The validity of this defense depended on whether the pre-amendment version of the SOX whistleblower provision covered non-publicly traded subsidiaries. The court first looked to the plain language of the statute and found that its coverage was unambiguously limited to publicly traded companies. The court further held that even if the statutory text was ambiguous, other tools of statutory construction suggested that pre-amendment section 806 did not protect employees of privately held subsidiaries. The court was not persuaded by other federal court and an ALJ decision that held otherwise. The court also was not persuaded by the ARB's decision in Johnson v. Siemens Building Technologies, Inc. , ARB No. 08-032, ALJ No. 2005-SOX-15 (ARB Mar. 31, 2011) (2011 WL 1431986) and the district court's decision in Leshinsky v. Telvent GIT, S.A. , --- F. Supp. 2d ---, 2012 WL 2686111, at **8-17 (S.D.N.Y. July 9, 2012), that the Dodd-Frank amendment was meant only to clarify existing law. The court found that those decisions skipped the fundamental step of analyzing whether the statute was ambiguous, and that the vast majority of ALJs and federal courts that have reached the issue have concluded that section 806 did not extend protection to employees of privately held subsidiaries, absent circumstances not present in the instant case. The court concluded that Dodd-Frank alters, rather than clarifies, section 806 of SOX. The court applied the principle of anti-retroactivity set forth in Landgraf , and found that the Dodd-Frank amendment did not have retroactive effect. Thus, the Plaintiff was not a covered employee under section 806 of SOX, and he could not therefore demonstrate that he was damaged by his former attorneys' failure to timely file the SOX claim. Thus, the legal malpractice claim failed as a matter of law.

DISTRICT COURT CONCLUDED THAT PLAINTIFF WAS NOT A COVERED EMPLOYEE UNDER SOX BECAUSE THE NAMED EMPLOYER WAS A NON-PUBLIC SUBSIDIARY OF A PUBLIC PARENT COMPANY AND NOT ITSELF A PUBLICLY TRADED COMPANY

In Hein v. AT&T Operations, Inc . , No. 09-CV-291 (D.Colo. Dec. 17, 2010)(case below 2008-SOX-32), a former employee sued her former employer for retaliation in violation of the Sarbanes-Oxley Act, alleging that she was retaliated against for reporting to executives that a directive to re-code contracts within a recording system violated SOX. The plaintiff alleged that she was reprimanded, given work assignments, sent to a fitness for duty examination and eventually terminated in retaliation for her alleged protected activity. The defendant moved for summary judgment claiming that the plaintiff could not prove that she was a covered employee under SOX since the defendant, AT&T Operations, Inc., is a corporate subsidiary of AT&T and not itself a publicly traded company. The defendant further alleged that the plaintiff did not engage in protected activity under SOX because the alleged violations did not pertain to matters that would be material to stockholders. Additionally, the defendant asserted that the plaintiff could not show that she experienced any pre-termination adverse employment action or that her complaints were a contributing factor in her employment termination.

The District Court found that in light of the "corporate law principle" that parent companies are not liable for their subsidiaries' actions and the fact that Congress supported this rationale by mentioning subsidiaries of public companies in SOX provisions other than § 1514A, the plaintiff was not a covered employee under §1514A. Accordingly, the Court granted the defendant's motion for summary judgment concluding that the defendant was not itself a publicly traded company subject to § 1514A and that the plaintiff failed to also name the parent company as a defendant.

CERTIFICATION OF INTERLOCUTORY APPEAL REGARDING THE APPLICABILITY OF SOX TO NON-PUBLIC AFFILIATES

In Lawson v. FMR, LLC , Nos. 08-10466, 08-10758 (D.Mass. July 28, 2010)(case below 2007-SOX-27), in two separate cases, employees of nonpublic companies in the mutual fund industry sought the protection of the SOX whistleblower provision, alleging their employers unlawfully retaliated against them after they complained of employers' improper business activities. The District Court dismissed the action in part; however, the Court found that the employees did state a claim under SOX. The Court granted the employer's motion that the dispositive issue of SOX's applicability be certified under 28 U.S.C. § 1292(b) for interlocutory appeal to the Federal Court of Appeals. Section 1292(b) permits certification of controlling questions of law, as to which there is substantial ground for difference of opinion, the immediate appeal of which may materially advance the ultimate termination of the litigation. First, the Court reasoned that the question of applicability of the statute to non-public affiliates in the mutual fund industry plainly controls this litigation. Second, the Court found that different views about the applicability question have been stated in a number of judicial and administrative cases. Third, the effect of a First Circuit opinion on the question earlier rather than later - whether an affirmation or reversal - would materially advance termination of these cases in inferior federal courts.

COVERED EMPLOYEE; EMPLOYEE OF NON-PUBLICLY TRADED SUBSIDIARY

In Rao v. Daimler Chrysler Corp. , No. 2:06-CV-13723 (E.D.Mich. May 14, 2007) (case below 2006-SOX-78), the district court granted summary judgment against the Plaintiff in a SOX whistleblower suit where the Defendant was not itself a public company, but only the subsidiary of its publicly traded parent, and the publicly traded parent had not been named in the complaint. The court reviewed ALJ decisions on this issue, and while recognizing some merit to the position that the background to enactment of SOX might support the view that subsidiaries should be covered, observed that the clear statutory text of section 1514A only lists employees of public companies as protected individuals. The court stated it was not its job to rewrite the statute, especially in light of the corporate law principle that parent companies are not ipso facto liable for the actions of their subsidiaries, and that Congress had specifically overrode this principle in other portions of SOX.

The court then looked to common law agency principles to determine whether the Defendant was acting as an agent for its parent company in its actions towards the Plaintiff. The court granted summary judgment in favor of the Defendant on this issue because the Plaintiff's amended complaint only mentioned employees of the Defendant as those who were aware of the situation and his complaints, and did not assert that anyone at the parent company had such knowledge.

ADMINISTRATIVE REVIEW BOARD DECISIONS

COVERED EMPLOYER/EMPLOYEE; SUMMARY DECISION IMPROPER WHERE DISPUTED FACTS EXISTED AS TO COVERAGE OF EMPLOYEE OF NON-PUBLICLY TRADED COMPANY UNDER BASES SUCH AS CONTRACTOR RELATIONSHIP, AGENCY, AND COMPANY REPRESENTATIVE STATUS

In Charles v. Profit Investment Management , ARB No. 10-071, ALJ No. 2009-SOX-40 (ARB Dec. 16, 2011), the Complainant named several business entities and two individuals as Respondents to her SOX Section 806 whistleblower complaint. The ALJ granted summary decision on behalf of the Respondents on the ground that the Complainant was not a covered employee under the SOX because her employer was a privately held company. The ARB held that the ALJ's conclusion was incorrect.

The ARB stated that "[t]he plain language of Section 806(a) identifies several categories of potentially covered entities beyond the registration and reporting requirements of SOX (i.e., "any officer, employee, contractor, subcontractor, or agent of such company")" and observed that the Second and Sixth Circuits had concluded that "the use of the term "any" preceding the listing of the several entities identified in Section 806(a) is an indication that Congress intended the clause "officer, employee, contractor, subcontractor, or agent" to be interpreted in an all-encompassing manner." USDOL/OALJ Reporter at 6 (citing in a footnote Johnson v. Siemens Bldg Techs., Inc ., ARB No. 08-032, ALJ No. 2005-SOX-015, slip op. at 22 (ARB Mar. 31, 2011)). The ALJ had concluded that only one of the Respondents was a covered entity, as it was the only entity required to file reports under the Securities Exchange Act of 1934, and that it would be an exceptionally broad interpretation of the SOX to sweep in any privately held company under contract with a publicly traded company. The ARB found it incorrect to conclude that "no contractor" is ever covered, and that summary decision was improper in the instant case given disputed facts and relevant pending discovery disputes.

The ARB also disagreed with the ALJ's conclusion that there were no genuine issues of material fact with regard to whether one of the individuals and one of the business entities named as Respondents were agents of the publicly traded company or any other covered employer. The ARB found evidence in the record suggesting possible coverage.

The ARB rejected the Respondents' assertion that the Complainant was not covered by the SOX because she was employed by a private company that had sole control over the terms and conditions of employment. The ARB observed that under the regulations an employee is defined as "an individual presently or formerly working for a company or company representative . . . or an individual whose employment could be affected by a company or company representative." The ARB further observed that a "company representative" is "any officer, employee, contractor, subcontractor, or agent of a company" and that the Complainant had alleged in her complaint that she was a Vice President and the office administrator for each of the named business entities and well as others. The ARB found that the employment and agency relationships were disputed in the record, that if the Complainant had an employment relationship with the publicly traded company, de facto or otherwise, she may be a covered employee. The ARB found that factual issues remained about the contractual and agency relationships involved. Moreover, the ARB found that it was possible that one or more of the Respondents may have acted as a representative of the publicly traded company, and that if the Complainant's employment "could be affected by" any such company representative, she may be considered a covered employee under Section 806.

COVERED EMPLOYERS; CONSOLIDATED SUBSIDIARIES OF PUBLICLY TRADED PARENT COMPANY

In Merten v. Berkshire Hathaway, Inc. , ARB No. 09-025, ALJ No. 2008-SOX-40 (ARB June 16, 2011), the ALJ granted the Respondents' motion to dismiss finding that the Complainant did not set forth facts in his complaint that supported a finding that a non-publicly traded subsidiary was an agent of the publicly traded parent company for purposes of employee protection under Section 806 or, therefore, that the Respondents were employers subject to the SOX. The ALJ relied on the ARB's analysis in Klopfenstein v. PCC Flow Tech. Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006) , holding that a subsidiary acting as the agent of a publicly traded company with respect to the challenged employment decision can be held liable under Section 806, and the the "integrated enterprise test" for determining whether a parent company is responsible for the activity of its subsidiary as set forth in Pearson v. Component Tech. Corp. , 247 F.3d 471, 485 (3d Cir. 2001). The ARB vacated the ALJ's decision, and remanded for the ALJ to address the subsidiary's status as a consolidated entity of the parent company consistent with the Board's more recent holding in Johnson v. Siemens Bldg. Tech., Inc. , ARB No. 08-032, ALJ No. 2005-SOX-15 (ARB Mar. 31, 2011), and if so, to determine the issue of liability under the facts presented at hearing. In Johnson , the ARB held that Section 806 of the SOX applied to consolidated subsidiaries, even before enactment of Section 929A of the Dodd-Frank Act.

COVERED EMPLOYER; UNDER JOHNSON , ALJ MUST DETERMINE WHETHER NON-PUBLICLY TRADED RESPONDENT IS INCLUDED ON THE CONSOLIDATED FINANCIAL STATEMENTS OF A PUBLICLY TRADED PARENT COMPANY

In Mara v. Sempra Energy Trading, LLC , ARB No. 10-051, ALJ No. 2009-SOX-18 (ARB June 28, 2011), the ALJ granted summary decision dismissing the complaint based on the finding that the Respondent was not a covered employer under SOX because it was not a publicly-traded company and did not act as an agent on employment matters for either of its parent companies. The ARB reversed the grant of summary decision based on its recent decision in Johnson v. Siemens Bldg Techs., Inc. , ARB No. 08-032, ALJ No. 2005-SOX-015 (Mar. 31, 2011), in which it determined that Section 929A of the 2010 Dodd-Frank Act, which extended SOX coverage to "subsidiary or affiliate [companies] whose financial information is included in the consolidated financial statements of such company," was a "clarification" of the original Section 806's term "company." Because the ALJ did not make findings on whether the Respondent appears on the consolidated financial statements of its publicly traded parent companies, the ARB remanded for the ALJ to make findings on whether the Respondent is a "subsidiary or affiliate" company within the meaning of SOX.

CONSOLIDATED SUBSIDIARIES OF PUBLICLY TRADED COMPANY WERE COVERED UNDER THE SOX WHISTLEBLOWER PROVISION, EVEN PRIOR TO DODD-FRANK ACT AMENDMENT OF SECTION 806

Coverage of consolidated subsidiaries

In Johnson v. Siemens Building Technologies, Inc. , ARB No. 08-032, ALJ No. 2005-SOX-15 (ARB Mar. 31, 2011) (en banc), the ARB held in an en banc decision that Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 18 U.S.C.A. § 1514A (West Supp. 2010) "covers a subsidiary whose financial information is included in the consolidated financial statements of a parent company subject to the registration and reporting requirements of Sections 12 and 15(d), respectively, of the Securities Exchange Act of 1934." The ARB remanded the case to the presiding ALJ for a determination of whether the Respondent was a consolidated subsidiary of the parent company at the time of the adverse employment action.

No retroactive effect to Dodd-Frank amendment because Dodd-Frank was merely a clarification of what was intended

The ARB found that the amendment to Section 806 of SOX by Section 929A of the Dodd-Frank Act to include coverage of "any subsidiary or affiliate whose financial information is included in the consolidated financial statements" of "a company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d))" is merely a clarification of Section 806, and what was intended all along. Thus, the Dodd-Frank Act amendment does not need to be afforded retroactive effect as to "consolidated subsidiaries" because they were covered under the pre-amendment law.

Agency analysis; Klopfenstein should not be interpreted narrowly

In Johnson , the ALJ had originally analyzed the complaint under Klopfenstein v. PCC Flow Tech. Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), and found that the Respondent subsidiary was not a covered "agent" under SOX because there was no evidence that the parent controlled employment decisions at the subsidiary, knew of the Complainant's concerns about accounting irregularities, or played any role in the termination of the Complainant's employment. The ARB indicated that the ALJ had applied Klopfenstein too narrowly "by exclusively focusing on the agency factors upon which the Board's ruling in Klopfenstein turned, [and] fail[ing] to consider alternative bases and factors upon which common law agency might be established." The ARB stated, however, that given its finding that a consolidated subsidiary is covered, it would not discuss the issue further.

The ARB left open for the ALJ to address on remand the question of whether its ruling affected the liability of the parent company.

The concurring opinion

Agency coverage: focus should be on Section 806's purpose as a securities law

One member of the Board noted in a concurring opinion that the Board had not explained how the ALJ erred by failing to consider alternative grounds for agency coverage, and stated that an explanation was warranted. Specifically, the ALJ only looked at "actual authority," and not two other bases for attributing legal consequences of one party's actions to another party - "apparent authority" and "respondeat superior." The concurring member also stated that the ALJ had failed to take into consideration that Section 806 is primarily a securities law when construing the common law agency principles. The concurring member wrote: "Construed as an antifraud provision, rather than an employment or labor law, it is sufficient, as an example, to establish that the retaliating entity exists as an agent of the publicly traded parent company 'for purposes of producing accounting or financial information which is consolidated into the parent's financial reports, or that an agent or contractor facilitated fraud like the subsidiaries, off-the-books special purpose entities (SPEs), and the accounting firms that helped precipitate the financial collapse of Enron, the key corporate figure in the legislative history of Sarbanes-Oxley.'" USDOL/OALJ Reporter at 24, quoting Walters v. Deutsche Bank AG , ALJ No. 2008-SOX-70 (ALJ Mar. 23, 2009), slip op. at. 7-8. In such instances, the focus for coverage purposes is "on the agent's role in preparing financial data or its participation in fraud or deception." Id. , quoting Walters :, supra .

Parents and consolidated subsidiaries are a single, unitary company under SEC registration and filing rules, and so too under Section 806 of the SOX

The concurring member also wrote separately to emphasize what he considered to be the key factor in determining that the Dodd-Frank amendment was merely a clarification of SOX Section 806: the statutory and regulatory backdrop, by which the publicly traded parent company and its consolidated subsidiaries are considered a single, unitary company. The member stated that "the absence of an explicit reference to subsidiaries in Section 806 does not, as ALJs and several district courts have held, exclude subsidiaries from coverage. ... Rather than exclude subsidiaries from coverage, Section 806's statutory and regulatory backdrop evidence a congressional presumption that consolidated subsidiaries of publicly traded companies are subject to Section 806's prohibitions against retaliation, and that employees of such subsidiaries who engage in whistleblower protected activities are thereby protected." USDOL/OALJ Reporter at 27.

COVERAGE OF EMPLOYEE OF NON-PUBLICLY TRADED SUBSIDARY OF PUBLICLY TRADED PARENT; ARB REQUEST FOR BRIEFS

In Johnson v. Siemens Building Technologies , ARB No. 08-032, ALJ No. 2005-SOX-15 (ARB Apr. 15, 2010), the ARB announced that it would be reviewing the question of whether an employee of a subsidiary of a publicly held company may bring an action against a non-public subsidiary under section 806. The ARB noted that ALJs and the courts had struggled with the question, resulting in a variety of diverging and conflicting opinions. The Board noted that many ALJs have employed common law agency theory, or an integrated enterprise or single employer test, in analyzing the issue, whereas the ALJ in Morefield v. Exelon Servs., Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004), had held that subsidiaries are covered within the purpose of the SOX without resort to either the integrated enterprise test or agency theory. The ARB quoted the ALJ's decision in Morefield :

A publicly traded corporation is, for Sarbanes-Oxley purposes, the sum of its constituent units; and Congress insisted upon accuracy and integrity in financial reporting at all levels of the corporate structure, including the non-publicly traded subsidiaries. In this context, the law recognizes as an obstacle no internal corporate barriers to the remedies Congress deemed necessary. It imposed reforms upon the publicly traded company, and through it, to its entire corporate organization.

Under these circumstances, the scope of Sarbanes-Oxley whistleblower protection tracks the flow of financial and accounting information throughout the corporate structure and remains as permeable to the internal "corporate veils" as the financial information itself. I conclude that employees of non-public subsidiaries of publicly traded companies are covered by the whistleblower protection provisions of Sarbanes-Oxley.

Johnson , USDOL/OALJ Reporter at 3-4 (quoting Morefield , slip op. at 4-6). The ARB noted that the Morefield approach had been reconsidered, and adopted, in Walters v. Deutsche Bank AG , 2008-SOX-70 (ALJ Mar. 23, 2009). The ARB also noted variations in the courts' approaches to the issue.

Accordingly, the ARB requested additional briefing by the Complainant, Respondent, OSHA, the SEC, and amici curiae on the issue. Briefs are due on or before July 15, 2010, with reply briefs due on or before August 4, 2010.

ADMINISTRATIVE LAW JUDGE DECISIONS

LIABILITY OF PUBLICLY TRADED PARENT FOR ACTIONS OF NON-PUBLICLY TRADED SUBSIDIARY IN REGARD TO EMPLOYEE OF THE SUBSIDIARY

In Walters v. Deutsche Bank AG , 2008-SOX-70 (ALJ Mar. 23, 2009), the Complainant worked for a non-publicly traded Swiss subsidiary of a German corporation that was listed on the New York Stock Exchange. The Complainant was European head of insurance asset management relationships for a division of the Swiss subsidiary. OSHA dismissed the complaint on the ground that adverse actions occurring out the United States are not covered by the whistleblower provision of SOX. Before the ALJ, the Respondents moved for summary decision on the ground that the Complainant was not an employee of a publicly traded company.

Before turning to the extraterritorial question, the ALJ first considered whether Section 806 covers an employee of a non-publicly traded subsidiary of a company publicly traded in the United States. The ALJ noted that in the first seven years of SOX, a number of administrative decisions had denied coverage for such employees unless the subsidiaries were "agents" of the parent company for employment matters. The ALJ, however, indicated that the issue warranted closer review considering the remedial purposes of SOX.

First, the ALJ rejected the notion that the whistleblower provision of SOX was primarily a labor law, with its focus on an "'integrated enterprise test' used as a 'sort of labor-specific veil-piercing test' when parent/subsidiary relationships are involved." Slip op. at 6 (citations omitted). Rather, the ALJ noted that under SOX a publicly traded company's compliance responsibility is direct, and not derivative. As the ALJ stated later in the decision, "Section 806 is fundamentally an antifraud law, not a labor law." Slip op. at 9.

Next, the ALJ analyzed the ARB decision in Klopenstein v. Flow Technologies , ARB No. 04-149, ALJ No. 2004- SOX- 11 (ARB, May 31, 2006), and found that it had been misapplied in subsequent decisions because that decision "dealt exclusively with direct liability of the subsidiary, not direct or derivative liability of a parent company." Slip op. at 7. The ALJ noted that the ARB had endeavored to make it clear in its decision that, since the parent company in that case was not a party to the complaint, the decision "was limited to circumstances in which the non-publicly traded subsidiary, acting as an agent, could itself be directly liable as a covered employer under the Act." Id. (footnote omitted).

The ALJ noted that employing a labor law test to Section 806 would seem to run counter to the examples of activities that Congress wanted to address in enacting SOX. For example, a labor law test would seem to exclude employees of Arthur Andersen who helped Enron shred documents. Yet the legislative history indicated that these were the types of whistleblowers Congress passionately meant to protect.

The ALJ carefully reviewed the legislative history and concluded that, unlike the worker protection emphasis of the ERA whistleblower provision found in English v. General Elec. Co. , 496 U.S. 72 (1990), "the worker protection aspect of the whistleblower protection afforded by Section 806 is secondary to one of Sarbanes-Oxley's most important antifraud components: the whistleblower's disclosures." Slip op. at 11-12 (footnote omitted). The ALJ explained:

While the Court in English , supra, was inclined to view employee protection as the paramount purpose of Section 210 of the ERA, the legislative history of Sarbanes-Oxley demonstrates that the paramount purpose of Section 806 is to encourage corporate insiders to report fraud and financial misrepresentation in the interest of protecting shareholders and investors. The job protection Section 806 provides the whistleblower is simply one method, among others, Congress crafted to accomplish that paramount purpose. Moreover, in providing Section 806 whistleblower protection, Congress expressly obviated the issue raised in English . Thus, Section 806 (a)(d) specifically declines to preempt other laws.

Id. at 12, n.12. Thus, the ALJ concluded that:

Under these circumstances, it seems wholly incongruous to revitalize the theories of derivative liability applicable to labor law situations to shield the parent company from the consequences when wholly owned subsidiaries fire whistleblowers. To do so directly compromises the purposes of the Act at a very fundamental level.

Id. at 13. The ALJ's decision goes on to examine in detail the statute, the statutory history, caselaw, and context and policy considerations, whether Section 806 imposes direct liability on a parent for the actions of a subsidiary under Section 806, and especially the ALJ's earlier decision denying a motion to dismiss in Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004). In sum, the ALJ concluded that:

the term "employee of a publicly traded company" in Section 806 is, for parent/wholly owned subsidiary relationships, co-extensive with the employee coverage in Section 301 and includes, within its meaning, all employees of every constituent part of the publicly traded company, including subsidiaries and subsidiaries of subsidiaries which are consolidated on its balance sheets, contribute information to its financial reports, are covered by its internal controls and the oversight of its audit committee, and subject to other Sarbanes-Oxley reforms imposed upon the publicly traded company.

Id. at 23.

Returning to the issue of extraterritorial application of Section 806, the ALJ again noted that the analysis of the issue largely depended on whether the SOX whistleblower provision was viewed as a labor law or as an antifraud securities law, comparing in this respect the approach of the courts in Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006) (labor law analysis) and O'Mahony v. Accenture Ltd. , 537 F. Supp. 2d 506 (S.D.N.Y. 2008) (antifraud analysis). Again reviewing in detail the statute, the statutory history, caselaw, and context and policy considerations, the ALJ concluded that "It seems fairly clear that Sarbanes-Oxley's financial, accounting, and corporate governance reforms are bounded not by borders, but by the scope of operations contributing to the publicly traded multinational company's consolidated financial reports." USDOL/OALJ Reporter at 33. Based on this review, the ALJ denied the motion to dismiss, stating:

Here, as in O'Mahony , the Complainant does not ask for the intervention of American law in a dispute between foreigners that occurred abroad. His employer is publicly traded in the U.S., and all elements essential to establishing a prima facie violation of Section 806 allegedly occurred in the United States. Walters, moreover, does not seek enforcement of American law in Germany or Switzerland; he seeks application of American law for the damages he suffered as a consequence of the violation of Section 806 that occurred in the United States. For all of the foregoing reasons, I conclude that adjudication of the charges in the Complaint does not require extraterritorial application of American law. Accordingly, Complainant is entitled to have his case heard on the merits.

Id. at 41-42.

COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY WHICH WAS NOT THE PUBLICY TRADED PARENT COMPANY'S AGENT IN REGARD TO THE COMPLAINANT'S EMPLOYMENT

In Savastano v. WPP Group, PLC , 2007-SOX-34 (ALJ July 18, 2007), the Complainant relied on the ALJ decision in Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004), to argue that she qualified for coverage under the whistleblower provision of SOX as a covered employee of a subsidiary of publicly traded parent company. The ALJ, however, found that Morefield 's approach to non-public subsidiaries was inconsistent with the ARB's holding in Klopfenstein v. PCC Flow Technologies Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), and had not been followed in later federal district court and ALJ decisions. In Klopfenstein , the ARB held that a non-public subsidiary of a publicly held parent company could be subject to the Act's whistleblower provisions if the evidence establishes that it acted as an "agent" of its publicly held parent as determined under principles of general common law agency. The ALJ wrote that "for an employee of a nonpublic subsidiary to be covered under Section 806, the non-public subsidiary must act as an agent of its publicly held parent, and the agency must relate to employment matters. Rao , 2007 U.S. Dist. LEXIS 34922, at *15; Brady v. Calyon Secs. (USA) , 406 F. Supp. 2d 307, 318 n.6 (S.D.N.Y. 2005)." Slip op. at 7.

In the instant case, the ALJ found that the Complainant had alleged no facts that would tend to support a finding that either her non-publicly traded employer or its non-publicly traded holding company were acting as agents of the publicly traded parent in connection with the termination of her employment with her employer. The Complainant had not contradicted the Respondents' claims that: (1) the subsidiary acted and was run independently from the parent; (2) there was no overlap in the officers; (3) the companies had separate offices, operations and officers and were rarely, if ever, involved in one another's daily activities; (4) no officer or employee of the parent exerted any control over the terms and conditions of the Complainant's employment; and (5) no officer or employee of the parent had anything to do with the decision to hire or terminate the Complainant. The ALJ found that, while the Complainant had identified statements from the parent's annual report indicating that its non-public subsidiaries may act as its agents for purposes of collecting and reporting financial data, there was no factual predicate for finding an agency relationship pertaining to employment matters. Accordingly, the ALJ granted summary decision in favor of the Respondents.

COVERED EMPLOYER; NON-PUBLICLY TRADED SUSIDIARY OF PUBLICLY TRADED PARENT

In Bothwell v. American Income Life , 2005-SOX-57 (ALJ Sept. 19, 2005), the Complainant alleged that the company that employed him was a covered employer under SOX, even though it was not a publicly traded company, because it is a subsidiary of a publicly traded company. The ALJ reviewed the statutory language and legislative history of SOX and concluded that the Complainant's argument was not meritorious: "If Congress had wanted to include non-publicly traded subsidiaries of publicly-traded parent companies as covered employers, it could have done so in drafting the statute."

Pleading; Amendment of Complaint

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FEDERAL COURT DECISIONS

COVERED EMPLOYER; LEAVE TO AMEND COMPLAINT TO ALLEGE THAT EMPLOYERS WERE PUBLICLY TRADED COMPANIES NOT AVAILABLE WHERE COMPLAINT EXPRESSLY ALLEGED THAT THEY WERE A PUBLIC AGENCY AND AN ASSOCIATED NON-PROFIT ENTITY

In Sears v. County of Monterey, No. , C 11-01876 (N.D. Cal. Feb. 3, 2012) (2012 WL 368688), an engineer and his wife challenged the engineer's termination from employment by the Housing Authority of the County of Monterey (HACM) and the Monterey County Housing Authority Development Corporation (HDC). The complaint named 25 defendants. In the complaint, it was alleged that HACM is a public agency which provides affordable housing and associated services in Monterey County, and that HDC is a subdivision of HACM and is organized as a non-profit entity under the Internal Revenue Code. One of the several grounds upon which the complaint was based was SOX's whistleblower provision, 18 U.S.C. 1514A. Some of the defendants (not including HACM or HDC) filed motions to dismiss. The court dismissed the SOX complaint as to the moving defendants on the ground that neither plaintiff was an employee of the moving defendants. The court also observed that the complaint expressly alleged that the engineer was employed by HACM and HDC, neither of which was alleged to be a publicly traded entity. The court held that the plaintiffs would not be granted leave to amend the complaint in a contradictory manner to allege that HACM or HDC are publicly-traded entities. Thus, the court dismissed the SOX complaint as to all of the defendants without leave to amend.

EXHAUSTION OF ADMINISTRATIVE REMEDIES; FAILURE TO NAME EMPLOYER AS DEFENDANT

In Smith v. Psychiatric Solutions, Inc. , No. 3:08-cv-00003 (N.D.Fla.. Mar. 31, 2009), the court held that the Plaintiff could only pursue her SOX whistleblower complaint in federal court against defendants named in her administrative complaint because the federal court's jurisdiction depended on the claim having been administratively exhausted. 18 U.S.C. § 1514(b)(1)(A). The Plaintiff had only named the publicly traded parent corporation in her OSHA complaint, and had not named the subsidiary for which she worked. Since the Plaintiff did not allege in her complaint or amended complaint that the parent company was her employer, a necessary element of a SOX whistleblower claim, the parent company was entitled to summary judgment. Even if the parent had been alleged to be the Plaintiff's employer, there was no evidence to support an employment relationship. The fact that an insurance document had the parent's name on it and that the parent had sent an official to investigate the Plaintiff's post-termination grievances were legally insufficient to establish such an employment relationship, while voluminous other documentary evidence suggested that the subsidiary was the Plaintiff's employer.

ADMINISTRATIVE REVIEW BOARD DECISIONS

COVERED EMPLOYER; PUBLICLY TRADED PARENT COMPANY NEED NOT BE NAMED AS A RESPONDENT AS LONG AS AT LEAST ONE NAMED RESPONDENT IS AN OFFICER, EMPLOYEE, CONTRACTOR, SUBCONTRACTOR, OR AGENT OF SUCH A COMPANY

In Andrews v. ING North America Insurance Corp. , ARB No. 06-071, ALJ Nos. 2005-SOX-50 and 51 (ARB Aug. 29, 2008), the Complainants alleged that the company that employed them and from which they had been terminated, along with several individuals, retaliated against them in violation of the SOX. That company was a subsidiary four levels remote from the publicly traded parent company. OSHA treated the company as the sole Respondent, and dismissed on the ground that the Respondent was not a covered employer under SOX. Before the ALJ, the Complainants moved to add the parent company as a Respondent only the day before the hearing. The ALJ ruled that the Complainants had "abandoned that motion." Following a full hearing and briefing on the coverage issue, the ALJ found that the Complainants had failed to establish that the Respondent was a covered employer or that it had acted as an agent of the parent.

The ARB stated that the ALJ had relied upon its decision in Flake v. New World Pasta Co. , ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), in concluding that the SOX does not provide a cause of action against a non-public subsidiary. The ARB stated that it had rejected such a reading of Flake and also the proposition that a subsidiary cannot by definition be an agent, in Klopfenstein v. PCC Flow Techs. Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-011 (ARB May 31, 2006). The ARB noted that its decision in Klopfenstein , had been issued after the ALJ ruled in this case. The ARB remanded, stating that "on remand the Complainants must be given an opportunity to prove by a preponderance of evidence that [the parent company] is a covered company and that [the named Respondent] acted as its agent." The ARB also wrote:

   Furthermore, SOX does not require a complainant to name a corporate respondent that is itself "'registered under section 12, or that is required to file reports under section 15(d)' so long as the complainant names at least one respondent who is covered under the Act as an "officer, employee, contractor, subcontractor, or agent' of such a company." Thus, since they do not have to name ING Groep, N.V. as a respondent, the issue whether or not the Complainants abandoned their motion to amend the complaint to name ING Groep, N.V. is moot.

USDOL/OALJ Reporter at 5 (footnote omitted).

INTERLOCUTORY APPEAL OF AMENDMENT OF COMPLAINT TO NAME PUBLICLY-HELD PARENT COMPANY AS A RESPONDENT

In Gonzalez v. Colonial Bank , ARB No. 05-060, ALJ No. 2004-SOX-39 (ARB May 31, 2005), the ALJ had granted the Complainant's motion to amend his complaint to add the publicly-held parent company as a Respondent. The ALJ denied the Respondent's motion for reconsideration and for certification of an interlocutory appeal. The Board found that the ALJ did not abuse his discretion in denying certification of the interlocutory appeal because the issue of whether the complaint could be amended to relate back is not a purely legal question, but a mixed question of law and fact. The ALJ was required to determine whether the party to be added received notice of the filing of the action such that it would not be prejudiced in maintaining a defense, and whether the party knew, or should have known that, but for a mistake concerning the identity of the proper party, the complainant would have brought an action against the proper party. The Board also found that the ALJ correctly determined that even if the amendment did not relate back, the issue of first impression of whether a subsidiary of a publicly-held company falls within SOX's coverage, would remain. The Board also rejected the argument that the relation-back issue is a threshold jurisdictional issue -- timeliness is not a jurisdictional bar because SOX's limitations period for filing a complaint is subject to equitable tolling. Finally, the Board held that even if the ALJ had certified the question it would have not exercised its discretion to hear the appeal because of the Board's strong policy against piecemeal appeals.

AMENDMENT TO COMPLAINT; WHEN PERMITTED

In Gonzalez v. Colonial Bank , ARB No. 05-060, ALJ No. 2004-SOX-39 (ARB May 31, 2005), the Respondent had filed an interlocutory appeal of the ALJ's order granting the Complainant's motion to amend his complaint to add the publicly-held parent company as a Respondent. Although the Board denied interlocutory review, and therefore did not rule on whether the ALJ properly granted the motion, the Board stated the following about an ALJ's authority to permit an amendment of the complaint:

    An administrative law judge may permit a complainant to amend a complaint when the amendment is reasonably within the scope of the original complaint, the amendment will facilitate a determination of a controversy on the merits of the complaint and there is no prejudice to the public interest and the rights of the parties. An amended complaint will relate back to the original complaint for purposes of determining the timeliness of the complaint when the amendment adds a party against whom a claim is asserted if the claim in the amended pleading arose out of the conduct, transaction, or occurrence described in the original pleading. Furthermore, an amended complaint relates back if, within the limitations period, the party to be added received notice of the filing of the action such that the party will not be prejudiced in maintaining a defense on the merits, and the party knew or should have known that, but for a mistake concerning the identity of the proper party, the complainant would have brought an action against the proper party.

Id. , slip op. at 3 (footnotes omitted).

Related orders: Gonzalez v. Colonial Bank , 2004-SOX-39 (ALJ Aug. 17, 2004) (Order Granting Motion to Amend Complaint); Gonzalez v. Colonial Bank , 2004-SOX-39 (ALJ Dec. 20, 2004) (Order Denying Motion to Reconsider Order on Motion for Leave to Amend Complaint); Gonzalez v. Colonial Bank , 2004-SOX-39 (ALJ Feb. 7, 2005) (Order Denying Request for Certification of Interlocutory Appeal).

ADMINISTRATIVE LAW JUDGE DECISIONS

COVERED EMPLOYER; MOTION TO ADD PUBLICLY TRADED PARENT COMPANY BEFORE THE ALJ; LIMITED REFERENCES TO PARENT IN PLEADINGS INADEQUATE TO ESTABLISH EARLIER NAMING AS RESPONDENT; TIMELINESS OF ATTEMPT TO AMEND COMPANY; RELATION BACK

In Bothwell v. American Income Life , 2005-SOX-57 (ALJ Sept. 19, 2005), the Complainant sought to add as a Respondent the publicly traded parent company of the company that had employed him - and which had been named as the Respondent - after the Respondent subsidiary had filed a motion to dismiss based on it not being a publicly traded company subject to SOX.

The Complainant argued that he had requested inclusion of the publicly traded parent company consistently throughout the case. The ALJ, however, found the pleadings' limited references to the parent company did not exhibit any allegation of "facts that could conceivably make [the parent company] liable under the Act." In addition, the ALJ found that the Complainant's attempt to add the parent company was untimely, as it occurred more than 90 days after the date of his termination. See 29 C.F.R. § 1980.103. The ALJ found that the "relation back" standard of FRCP 15(c) was not met because it was undisputed that the parent company did not have notice of the action prior to the expiration of the statute of limitations.

AMENDMENT OF COMPLAINT TO ADD PUBLICLY TRADED PARENT COMPANY

In McIntyre v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 2003-SOX-23 (ALJ Sept. 4, 2003), the ALJ permitted the Complainant to amend the complaint to add the publicly traded parent company as a named Respondent, finding that there was "a genuine issue of material fact concerning the subsidiary's actions as an agent with arguable express, implied and apparent authority to act on behalf of its parent...." The ALJ distinguished the ALJ's decision Powers v. Pinnacle Airlines, Inc. , 2003-AIR-12 (ALJ Mar. 5, 2003) ( Powers involved an indirect subsidiary, whereas the instant case involved a direct subsidiary).

COVERED EMPLOYER; NAMED RESPONDENT NOT A PUBLICLY TRADED COMPANY; FAILURE TO NAME PUBLICLY TRADED PARENT CORPORATION; FAILURE TO AMEND COMPLAINT TO ADD A COVERED EMPLOYER

Where the Complainant brought his complaint against his employer alone, that employer was not a publicly traded company, and the Complaint did not name any parent company that may be publicly traded, and did not move to amend his complaint, the ALJ granted summary decision to the Respondent employer on the ground that it was not a covered employer. The ALJ also noted that no parent companies had participated before OSHA and that there was no indication that the parent companies were sufficiently involved in the management and employment relations of the Respondent to justify a piercing of the corporate veil. Dawkins v. Shell Chemical, LP , 2005-SOX-41 (ALJ May 16, 2005).

COVERED EMPLOYER; FAILURE TO NAME PUBLICLY TRADED COMPANY AND TO PROVE THAT THE COMPANY FITS WITHIN THE SOX DEFINITION OF A COVERED EMPLOYER

In Grant v. Dominion East Ohio Gas , 2004-SOX-63 (ALJ Mar. 10, 2005), the ALJ sua sponte raised the issue of whether the Complainant had established whether the named Respondent was a publicly traded company subject to the whistleblower provision of SOX. The ALJ stated that a complainant cannot maintain a SOX whistleblower action "unless he names a publicly traded company as Respondent, and establishes that the named Respondent is actually covered by the Act." Slip op. at 33 (citation omitted; emphasis as in original). The ALJ found that the Complainant had failed to name a publicly traded company as Respondent and made no attempt to prove that Respondent or its parent company were in fact publicly traded or otherwise covered by the Act, despite sufficient opportunity to do so. The ALJ also observed that even if the Complainant had named the parent company as a Respondent, and that parent company was shown to be a publicly traded company, the mere fact of a parent-subsidiary relationship would not establish liability; rather evidence must be presented to justify piercing the corporate veil. Finally, the ALJ indicated that the mere fact that there exists a doctrine of piercing the corporate veil does not "operate to pull a parent company into litigation if the parent company is not named in the first place." The ALJ noted that the Complainant had been represented by counsel, but had filed his complaint solely against the subsidiary, that the parent had never been a party to the claim, and that the Complainant had never taken any steps to cure this deficiency. The ALJ, therefore, found that the failure to establish a covered respondent under the Act was grounds for dismissal of the complaint.

COVERED EMPLOYER; NON-PUBLIC SUBSIDIARY OF PUBLICLY TRADED COMPANY; BOTH COMPANIES NAMED AS RESPONDENTS

In Gonzalez v. Colonial Bank , 2004-SOX-39 (ALJ Aug. 20, 2004), the Complainant's employer, a non-publicly traded company, moved for summary decision on the ground that it was not a covered employer under the SOX whistleblower provision. The Complainant, however, had recently amended his complaint to name his employer's parent company as a Respondent, alleging that the parent had shared management and function with the subsidiary and that the parent's actions affected the Complainant's employment. The parent was a publicly traded company. The ALJ found that since the parent company had been named as a respondent, and Congress intended to provide whistleblower protection to employees of subsidiaries of publicly traded companies, the Complainant had set forth a cause of action sufficient to withstand a motion for summary decision.

COVERED EMPLOYER; FAILURE TO NAME PUBLICLY TRADED PARENT COMPANY AS A RESPONDENT

In Klopfenstein v. PPC Flow Technologies Holdings, Inc. , 2004-SOX-11 (ALJ July 6, 2004), the ALJ considered the issue of whether the Complainant's failure to name a publicly traded company in his complaint should result in the dismissal of the complaint.

The Complainant was employed by a limited partnership, which was owned by a holding company. Neither the limited partnership nor the holding company was a publicly traded company. The holding company in turn was owned by a parent company, which was a publicly traded company. The complaint, for unexplained reasons, named only the holding company and the Vice President for Finance for the limited partnership. The Vice President had conducted an investigation of some of the Complainant's business practices at the request of the holding company, but made no recommendations as to what should be done about his findings. The complaint did not name either the limited partnership or the publicly traded parent company.

The Respondent holding company moved to dismiss based on Flake v. New World Pasta Co. , ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), in which the ARB held that SOX only covers companies with securities registered under § 12 or companies required to file reports under § 15(d) of the Exchange Act. The ALJ agreed with the Complainant that employees of non-public subsidiaries of publicly traded companies can be covered by the SOX whistleblower provisions, citing the ALJ's decision in Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004). The ALJ also found that, had the Complainant sued the parent company in this case, the commonality of management and purpose would likely have been sufficient to bestow whistleblower protection. But since the only company sued by the Complainant was a subsidiary of the parent company, which was neither the Complainant's employer nor a publicly traded company, the ALJ found that the complaint could not be maintained. The ALJ wrote: "Despite the apparent legislative intent to attach liability to publicly traded companies who surround themselves by other entities under their control, it does not seem the Act provides a cause of action directly against such subsidiary alone." Klopfenstein, Slip op. at 12. The ALJ also rejected the Complainant's contention that the holding company was an agent of the parent company.

The ALJ also found that the named Vice President of Finance was not a proper party to the action because he was not an officer, employee, contractor, subcontractor, or agent of the publicly traded parent company.

RESPONDENT MUST BE PUBLICLY TRADED COMPANY UNDER SOX WHISTLEBLOWER PROVISION; UNTIMELY ATTEMPT TO ADD PARENT COMPANY REJECTED BY ALJ

In Powers v. Pinnacle Airlines, Inc. , 2003-AIR-12 (ALJ Mar. 5, 2003), Complainant alleged that she was harassed and intimidated by the Respondent in retaliation for voicing concerns about flight and duty time under Federal Aviation Regulations. In addition to an AIR21 whistleblower complaint, Complainant also alleged that the Respondent violated the whistleblower provision of the Sarbanes-Oxley Act because she raised concerns about the accuracy of the Respondent's on-time flight records and the fraudulent impact they had on stockholders. The ALJ granted Respondent motion for dismissal of the SOX complaint on the ground that Respondent is not a publicly traded company. See 18 U.S.C. § 1514A(a)(1).

Complainant attempted to cure this deficiency by adding Northwest Airlines, Inc. to the caption of the case. The ALJ, however, held that Complainant could not "get around the fact that her Employer, Pinnacle, is not a publicly traded company by unilaterally adding another corporate entity that is publicly traded, i.e. , Northwest Airlines, Inc. as a respondent, after the investigation and determination by OSHA." The ALJ also found that Northwest had been attempted to be added as a respondent in the hope that it could be found liable for the actions of its indirect subsidiary, Pinnacle. The ALJ wrote that: "However, this ignores the general principle of corporate law that a parent corporation is not liable for the acts of its subsidiaries. In other words, the mere fact of a parent-subsidiary relationship between two corporations does not make one company liable for the torts of its affiliate. United States v. Bestfoods, et al. , 524 U.S. 51, 61 (1998). Nor has the Complainant even alleged any facts that would justify piercing the corporate veil and ignoring the separate corporate entities." The ALJ also found that any complaint against Northwest Airlines, Inc. would be untimely, as it was made more than ninety days after the date of the alleged violation.

NON-PUBLICLY TRADED FIRM SPECIALIZING IN RESTRUCTURING SERVICES FOR COMPANIES IN DISTRESS FOUND TO BE A LIABLE CONTRACTOR OR AGENT

AMENDMENT OF COMPLAINT TO ADD RESPONDENT; TOO LATE AFTER EVIDENTIARY HEARING COMPLETED

In Kalkunte v. DVI Financial Services, Inc. , 2004-SOX-56 (ALJ July 18, 2005), one Respondent was a firm that provides crisis management and restructuring services to companies in financial distress ("AP Services"). The other Respondent ("DVI Financial" or "DVI") was a financial services company that had contracted with AP Services to provide leased employees to manage DVI through bankruptcy and dissolution. DVI was a publicly traded company, but AP Services was not. The Complainant was a DVI employee. The President of AP Services, Mr. Toney, was appointed by the DVI Board of Directors as temporary President and CEO of DVI upon filing for Chapter 11 protection. The chief protagonist as described in the complaint was Mr. Toney. There was no dispute that DVI was a covered employer, but the question was presented whether AP Services could be held liable

The ALJ reviewed the facts and relevant law, and concluded that AP Services was a properly named Respondent because (1) it was a subcontractor or contractor, (2) it had assumed respondeat superior liability to the Complainant, (3) it was an agent under the statute, and (4) the Complainant could also be viewed as a third party beneficiary to the agreement between the Respondents. The ALJ rejected AP Services argument that it had to actually employ the Complainant to be covered under the SOX, writing:

   DVI contracted to AP the power to determine how best to manage the corporation and its assets in light of the pending bankruptcy. ... Included in those powers was the power to evaluate DVI's employees' value to the company and to terminate those who were no longer needed. ... Mr. Toney, as CEO, had the authority to terminate anyone at DVI, and Ms. Clay [an AP Services employee brought to DVI to work on Human Resources issues] testified that she performed the duties of Chief Administrative Officer as part of her duties at DVI. Thus AP, through Mr. Toney and Ms. Clay, had the power to affect Ms. Kalkunte's employment.

Slip op. at 9 (citations to the record omitted). Following the evidentiary hearing before the ALJ, the Complainant moved to amend the complaint to name Mr. Toney as a Respondent. The ALJ recounted the procedural history of the case, and -- finding that although he had left the record open following the hearing the scope of that ruling did not include naming an additional party -- denied the motion.

[Editor's note: Compare Minkina v. Affiliated Physician's Group , 2005-SOX-19 (ALJ Feb. 22, 2005), supra , in which the ALJ held that employees of non-publicly traded contractors, subcontractors and agents are not under the protective aegis of Section 806]

Agency; Piercing the Corporate Veil; Intertwined Operations

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FEDERAL COURT DECISIONS

COVERED EMPLOYER; WHERE COMPLAINANT WAS EMPLOYEE OF NON-PUBLIC SUBSIDIARY, HE MUST ESTABLISH THAT THE SUBSIDIARY WAS AN AGENT OF THE PUBLICLY TRADED PARENT TO BE ABLE TO MAINTAIN A SOX WHISTLEBLOWER ACTION AGAINST THE SUBSIDIARY

In Malin v. Siemens Medical Solutions Health Services , No. 8:07-cv-01896 (D.Md. Aug. 13, 2009), the district court earlier had held that the Defendants could only be liable under the SOX whistleblower provision only if they were shown to be agents of their publicly traded parent company with respect to the Plaintiff's hiring, supervision and termination. The court permitted the Plaintiff 90 days to take further discovery to establish such a relationship. Following that discovery, the court granted the Defendants' motion for summary judgment. The Plaintiff had focused on the parent's code of ethics, human resources policies, and history of assuming liability in a prior case. The court found that this focus was misguided, and that the relevant consideration was whether the parent was involved in the Plaintiff's hiring, supervision or termination. The court stated that non-public subsidiaries are not subject to the whistleblower provisions simply because their parent is required by other SOX provisions to report the subsidiary's financial condition or to adopt an umbrella compliance policy. The court found that the parent's assumption of legal and financial liability for other offenses dealing with different facts was irrelevant. The court found that the fact that the Plaintiff applied for his job through the parent company's website failed, because as the Defendants' showed, the job posted actually clarified that the Defendants, and not the parent company, were the employing entities.

ADMINISTRATIVE REVIEW BOARD DECISIONS

COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY, LIABILITY BASED ON AGENCY RELATIONSHIP IN REGARD TO FIRING OF COMPLAINANT

In Klopfenstein v. PPC Flow Technologies Holdings, Inc. , ARB Nos. 07-021, 07-022, ALJ No. 2004-SOX-11 (ARB Aug. 31, 2009), the ARB affirmed the ALJ's holding that the non-publicly traded subsidiary of a publicly traded parent company had acted as the parent's agent for the purpose of discharging the Complainant, and therefore was properly named as a Respondent in the Complainant's SOX complaint. The Complainant was vice president of a division of a subsidiary of the aforementioned subsidiary. A revenue recognition policy, on which basis the Complainant was discharged, was a policy of the parent company; an employee in the parent's finance department had learned of the violation; the official who fired the Complainant was both president of the subsidiary and executive vice president of the parent; that official conferred with other senior managers from both the subsidiary and the parent following an investigation of and report on the violation of the policy. However, the vice president of finance for the subsidiary at which the Complainant was employed was not an agent and was not proper Respondent under SOX. He had investigated the issue and prepared a report, but was not a decision maker in the termination of the Complainant's employment.

COVERED EMPLOYER; FINANCIAL ACTIVITIES WITH PUBLICLY TRADED BANK

The ARB in Kukucka v. Belfort Instrument Co. , ARB Nos. 06-104 and 120, ALJ Nos. 2006-SOX-57 and 81 (ARB Apr. 30, 2008), stated that the Complainant's initial burden under section 1514A(a) was to establish that the Respondent had either registered its securities under section 12 or had to file reports under section 15(d). Because he had not alleged such in response to the ALJ's show cause orders, the ARB found that the ALJ had properly dismissed the Complainant's SOX complaints. On appeal the Complainant argued that the Respondent's financial activities made the company directly reliant on a publicly-traded bank, SunTrust, and that the Respondent had "public debt" because it accepted public money to develop products. The ARB recognized that contractors, subcontractors, and agents of companies that are subject to the SOX registration and filing requirements are covered by the SOX whistleblower provision, but found that the Complainant had offered no evidence that the Respondent's "public debt" or its "reliance" on SunTrust was equivalent to being a contractor, subcontractor or agent of Sun Trust. Moreover, the ARB found that the Complainant had failed to offer evidence to demonstrate that SunTrust was subject to section 1514A's registration and filing requirements.

The Complainant also argued that the Respondent should be considered a subsidiary of SunTrust because its favorable extension of credit and debt burden kept the Respondent in business and thus SunTrust, a publicly traded company, controlled the Respondent. The ARB, however, found that the Complainant had offered no evidence to support his allegation that SunTrust's extension of credit amounted to control of the Respondent or that such control, if it existed, made the Respondent the bank's contractor, subcontractor, or agent.

COVERED RESPONDENT; SUBSIDIARY AND CORPORATE OFFICER'S STATUS AS COVERED RESPONDENTS IS DETERMINED BASED ON COMMON LAW AGENCY PRINCIPLES; SOX WHISTLEBLOWER COMPLAINT DOES NOT REQUIRE NAMING OF PUBLICLY TRADED COMPANY SO LONG AS ONE RESPONDENT IS AN OFFICER, EMPLOYEE, CONTRACTOR, SUBCONTRACTOR, OR AGENT OF SUCH A COMPANY

In Klopfenstein v. PCC Flow Technologies Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), the Complainant was the Vice President of Operations for a subsidiary (the "Employer") of two limited liability corporations, which in turn were subsidiaries of a holding company ("Holding"), which in turn was the subsidiary of a publicly traded parent company. At issue was the ALJ's finding that the holding company and a Vice President of Finance for the Complainant's Employer were not covered entities under the SOX. The ARB held that the ALJ misapplied the ARB's decision in Flake v. New World Pasta Co. , ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), and misapplied the law of agency. The ALJ had concluded that under Flake , the SOX does not provide a cause of action against a non-public subsidiary; the ARB noted that in Flake , the named Respondent did not have a publicly traded parent, so the ARB did not have the occasion in that case to decide whether a non-public subsidiary of a public parent could be covered under the Act.

And the ARB did not specifically reach that issue in the present case either. Rather, the ARB wrote: "[w]e do not interpret the Act to require a complainant to name a corporate respondent that is itself 'registered under § 12 or required to file reports under § 15(d),' so long as the complainant names at least one respondent who is covered under the Act as an 'officer, employee, contractor, subcontractor, or agent' of such a company." USDOL/OALJ Reporter at 13. In addition, the ARB held that Flake did not stand for the proposition that a subsidiary cannot by definition be an agent. Rather, "[w]hether a particular subsidiary or its employee is an agent of a public parent for purposes of the SOX employee protection provision should be determined according to principles of the general common law of agency." USDOL/OALJ Reporter at 14 (footnote omitted). The ARB stated that the function of the ALJ is to ascertain whether the factual elements set forth in the Restatement of Agency are present. The ARB remanded to the ALJ to make findings of fact necessary to apply agency principles in determining whether the holding company and the Employer's VP for Finance were the publicly traded parent company's agents with regard to the termination of the Complainant's employment.

ADMINISTRATIVE LAW JUDGE DECISIONS

COVERED EMPLOYER; WHOLLY OWNED SUBSIDIARY; FAILURE TO ESTABLISH GENUINE ISSUE OF MATERIAL FACT THAT SUBSIDIARY WAS AN AGENT

In Lowe v. Terminex International Co., LP , 2006-SOX-89 (ALJ Sept. 15, 2006), the Respondent offered a number of documents in support of its motion for summary decision to show that it was not a publicly traded company. In his answer, the Complainant argued that the Respondent's written submissions were misleading and that he was unable to respond fully because of the accelerated pace and limited scope of discovery. The ALJ, however, found that there was nothing in the record to create a genuine issue of material fact on whether an agency relationship existed between the named Respondent and its publicly traded parent company. Thus, the remaining issue was the purely legal issue of whether a privately held subsidiary of a publicly held company is subject to SOX. Noting that the applicable section title of the SOX refers to employees of publicly traded companies, and that a general principle of corporate law is that a parent corporation is not liable for the acts of its subsidiary in the absence of specific congressional intent to depart from that principle, and that subsidiaries are referenced in another part of the SOX but not the whistleblower provision, the ALJ found that subsidiaries were not included within the operative terms of the SOX whistleblower provision. The ALJ also found that the ARB decision in Klopfenstein v. PCC Flow Technologies Holdings, Inc. , ARB No., ALJ No. 2004-SOX-11 (ARB May 31, 2006), appeared to have implicitly addressed the issue. Although in that case the ARB remanded to evaluate whether the private subsidiary acted as the parent's agent, because the law did not permit a finding that a subsidiary is never a parent's agent, and expressly did not reach the converse issue of whether a subsidiary could always be considered an agent or one with its parent for purposes of the SOX whistleblower provision, the ALJ pointed out that the ARB could have resolved the case by finding that a subsidiary is a covered employer under the SOX. "That it did not so is consistent with the clear language of the Act." Slip op. at 8.

COVERED EMPLOYER; PARENT COMPANY; MERE NAMING OF PARENT NOT SUFFICIENT TO ESTABLISH LIABILITY; RATHER, GROUNDS MUST EXIST FOR PIERCING OF CORPORATE VEIL

In Bothwell v. American Income Life , 2005-SOX-57 (ALJ Sept. 19, 2005), the ALJ found that the Complainant had untimely attempted to add a publicly traded parent company as a named Respondent after the non-publicly traded subsidiary had moved for dismissal on the ground that it was not a covered employer under the SOX. The ALJ also ruled that, assuming that the parent had been timely named as a Respondent, it was not automatically to be assumed to fall under the purview of SOX. The ALJ noted that other ALJs had required sufficient commonality of management and purpose to justify piercing the corporate veil and holding the parent liable for its subsidiary's actions. Conceding that courts have found parent companies liable for their subsidiaries' actions when the two corporate identities are used interchangeably, the ALJ found that liability nonetheless extends only to areas where the parent has exerted its influence and control.

In the instant case, the Complainant pointed to certain indicia of interchangeability (e.g., litigation costs combined into single liability; references to subsidiaries as "distribution systems in the parent company"; commonality of directors and officers; etc.), but the ALJ found that such evidence was insufficient to justify piercing the corporate veil. The ALJ pointed out that the was no evidence that the subsidiary was acting as an agent of the parent with respect to employment practices toward the Complainant or any other employee; that the parent took any part in hiring or terminating the Complainant or had any role in the payment of his salary; or that the parent's employees had any interaction with the Complainant.

COVERED EMPLOYER; SUBSIDIARY AND PARENT NOT SO INTERTWINED AS TO BE ONE ENTITY; PARENT NOT NAMED AS A RESPONDENT

In Hughart v. Raymond James & Associates, Inc. , 2004-SOX-9 (ALJ Dec. 17, 2004), the Complainant did not name, and was not seeking relief from, the parent company. The named Respondent was a wholly owned subsidiary, which was neither a publicly traded company with registered securities nor required to file reports under section 15(d) of the Securities Exchange Act. Consequently, the ALJ found that the Respondent was liable under the whistleblower provision of SOX "only if the parent company and its wholly owned subsidiary are so intertwined as to represent one entity." Slip op. at 44. The ALJ concluded that "in an employment discrimination case, the parent company will only be held liable where it controlled or influenced the work environment of, or termination decision about, an employee of its subsidiary company." Id.

In the instant case, there were indicia that the parent controlled some operational aspects of the subsidiary. The Complainant's employee benefits (including pharmacy benefits, health insurance, stock purchase plans and profit sharing plans) were provided by the parent company. He was subject to the parent company's ethics policy. The letterhead used by the subsidiary contained both its own logo and the parent company's logo, with address. Portions of the two companies were housed at the same location.

The ALJ found, however, that other evidence established that the parent and subsidiary were not so inseparable as to be considered one entity subject to the whistleblower provision of SOX. The Complainant's paychecks were issued by the subsidiary, and there was no evidence of the funds of the parent and subsidiary were commingled. Nearly all the workers with whom the Complainant had day-to-day contact were employees of the subsidiary, and he only very occasionally came into contact with employees of the parent. His supervisors were all employees of the subsidiary. There was no indication that the subsidiary was acting as an agent for the parent with respect to employment practices toward the Complainant. The subsidiary had its own human resources department that was solely responsible for interacting with its employees.

The ALJ noted that several ALJs had held that a parent company subject to SOX may be held liable for SOX violations of a wholly owned subsidiary, but that the parent company must be named in the complaint to extend such liability.

Extraterritorial Coverage

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FEDERAL COURT DECISIONS

PROTECTED ACTIVITY UNDER SOX SECTION 806; COMPLAINANT MUST PROVIDE INFORMATION THAT HE OR SHE REASONABLY BELIEVED VIOLATED ONE OF THE SIX PROVISIONS OF U.S. LAW ENUMERATED IN SECTION 806; INFORMATION PROVIDED BASED ON REASONABLE BELIEF OF VIOLATION OF A FOREIGN LAW IS NOT COVERED; COURT DOES NOT REACH QUESTION OF EXTRATERRITORIAL APPLICATION OF SECTION 806

In Villanueva v. U.S. Dep't of Labor , No. 12-60122 (5th Cir. Feb. 12, 2014), the Complainant filed a SOX whistleblower complaint alleging that his employer, a Columbia affiliate of a Netherlands limited liability company whose stock is publicly traded in the U.S., retaliated against him in violation of SOX § 806 for blowing the whistle on an alleged scheme to violate Columbian tax law. OSHA and the ALJ dismissed the complaint on ground that it would require impermissible extraterritorial application of SOX § 806. The ARB dismissed the complaint on the narrow ground that the Complainant's disclosures of alleged violations of foreign law did not have a sufficient connection to a violation of one of the six provisions of U.S. law enumerated in § 806.

On appeal, the Fifth Circuit did not reach the question of whether § 806 applies extraterritorially. Rather, the court found that the Complainant's claim did not fall within the scope of § 806's protection. The court noted that "§ 806 bars companies that are publicly traded in the United States from retaliating against a whistleblowing employee, but only if the employee seeking the statute's protection demonstrates that he provided information regarding conduct that he or she reasonably believed violated one of the six enumerated provisions of U.S. law. See 18 U.S.C. § 1514A(a)(1)(C); Allen , 514 F.3d at 476." Slip op. at 3. The court determined that "On review of the facts of the case . . . we conclude that Villanueva did not provide information regarding conduct that he reasonably believed violated one of the six provisions of U.S. law enumerated in § 806; rather, he provided information regarding conduct that he reasonably believed violated Colombian law. In other words, he failed to show that he engaged in protected activity under § 806." Slip op. at 3 (emphasis as in original).

DISMISSAL OF FOREIGN SUBSIDIARY UNDER FRCP 12(b)(2) WHERE PLAINTIFF FAILED TO ESTABLISH GROUNDS FOR DISTRICT COURT'S PERSONAL JURISDICTION OVER THAT DEFENDENT

In Nielsen v. AECOM Technology Corp. , No. 12 Civ. 5163(KBF), 2012 WL 6200613 (S.D.N.Y. Dec. 11, 2012) (case below ARB No. 12-073, ALJ No. 2012-SOX-13), the Plaintiff commenced a SOX Section 806 whistleblower action against his former employer--defendant AECOM Middle East, Ltd. ("AME")--and its parent--defendant AECOM Technology Corp. ("AECOM"). AECOM was a publicly-traded company located in the United States. AME was not publicly-traded and was incorporated and headquartered outside the U.S. AME did not have operations, offices, or employees in the U.S. AECOM was not involved in AME's daily operations--and the two entities do not share any personnel. While the case was before the U.S. Department of Labor, an ALJ dismissed the claim on the ground that hearing the claim would allow an improper extraterritorial application of SOX. The claim was refilled in U.S. district court, and the Defendants sought dismissal of AME under Rule 12(b)(2) on the basis that the court does not have personal jurisdiction over AME. Applying New York law, the court found that it would obtain personal jurisdiction over a nonresident party if it was "doing business" in the state. The court found that the Plaintiff's conclusory allegation that the defendants engage in business in "this District" was an insufficient showing to withstand the Rule 12(b)(2) motion. Moreover, the Plaintiff's own declaration that the personnel functions of AME and AECOM's central headquarters in New York were intertwined was insufficient, the Plaintiff having not provided anything to support the truth of the statement, and the record being devoid of any basis for Plaintiff's own personal knowledge of the corporate structure for personnel decisions. Thus, the court found that it did not have personal jurisdiction over AME.

EXTRATERRITORIAL APPLICATION OF SOX NOT IMPLICATED WHERE, EVEN THOUGH THE PLAINTIFF WAS STATIONED OVERSEAS, SHE WAS AN EMPLOYEE OF A U.S SUBSIDIARY, THE ALLEGED FRAUD OCCURRED IN THE U.S., AND THE ALLEGED RETALIATORY CONDUCT OCCURRED IN THE U.S.

In O'Mahony v. Accenture Ltd. , No. 1:07-CV-07916 (S.D.N.Y. Feb. 5, 2008), the Plaintiff - who had been assigned to establish and head a new office in France for a French subsidiary - alleged that she had been retaliated against because she had objected to a fraudulent scheme to evade the payment of social security contributions due in France for U.S. employees working in that country. The Defendants, relying primarily on Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006), moved to dismiss on the ground that § 1514A does not apply extraterritorially. The court denied the motion. It distinguished Carnero on several grounds.

First, the plaintiff in Carnero was a foreign employee employed and compensated exclusively by Latin American subsidiaries of a U.S. corporation. In the instant case, the Plaintiff was employed within the U.S. from 1984 through 1992, and was compensated by the U.S. subsidiary of a Bermuda corporation from 1984 through 2004. Thus, the employment relationship through 2004 was between a U.S. employer and its employee.

Second, in Carnero , the alleged wrongful conduct occurred in Latin America. In the instant case the alleged fraud involved employees of the Defendants located in the U.S. and occurred in the U.S. Moreover, the alleged retaliation was undertaken by executives located in the U.S.

Third, in Carnero , the plaintiff brought an action against the U.S. parent for alleged misconduct abroad by its Latin American subsidiary. In the instant case the action was brought against the foreign parent and its U.S. subsidiary for alleged misconduct of the U.S. subsidiary in the U.S.

The court then analyzed whether § 1514A even raised an extraterritorial question in the instant case, applying a two factor test of (1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial adverse effect in the United States or upon United States citizens. In the present case, the Plaintiff's allegations only fit the conduct test. The court found that the test was met because, inter alia, the Plaintiff had alleged sufficient facts that, if proven, would constitute a violation of § 1514A, and because the "center of gravity" of the wrongdoing was in the U.S., even though the employee was located abroad. The court found that extending jurisdiction over the complaint would be reasonable and in accordance with Congressional policy where the Plaintiff was an employee of a U.S. subsidiary during the time that the alleged fraudulent misconduct occurred, and complained about misconduct occurring in the U.S. Thus, the court was not being "being asked to intervene to apply American law in a dispute between foreigners that occurred abroad concerning a foreign transaction." In sum, the court found that it had jurisdiction over the dispute and that exercise of that jurisdiction would not implicate extraterritorial application of the law.

EXTRATERRITORIAL COVERAGE OF SOX WHISTLEBLOWER PROVISION

In Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006) (case below 2004-SOX-18), the Complainant was an Argentinean citizen resident in Brazil working for two Brazilian subsidiaries of a U.S. parent company. The Complainant was employed and paid by the subsidiaries rather than the parent U.S. company. It was undisputed that the alleged fraudulent conduct reported by the Complainant was instituted in Latin America and that his employment duties were mainly performed outside the U.S.

OSHA and an ALJ dismissed the complaint based on the principle that legislation, unless a contrary intent appears, applies only within the territorial jurisdiction of the U.S. The Complainant then filed in federal district court seeking de novo relief. The district court dismissed on the same grounds as OSHA and the ALJ.

On appeal, the First Circuit first noted that the Complainant's claim would fit generally within the whistleblower protection provision of the SOX if not for the extraterritoriality issue. The court detailed case law regarding the "well-established presumption against the extraterritorial application of Congressional statutes," the provisions and structure of the SOX, the legislative history of the SOX whistleblower provision, and other factors, and held that the SOX whistleblower provision "does not reflect the necessary clear expression of congressional intent to extend its reach beyond our nation's borders." The court therefore held that "the district court properly dismissed Carnero's complaint under 18 U.S.C. §1514A."

The court carefully limited its ruling to the facts of the case, noting that many other fact patterns could be imagined that may or may not be covered by the reasoning in the instant decision.

PERSONAL JURISDICTION OVER FOREIGN CORPORATION; ADEQUATE TIME TO CONDUCT DISCOVERY

In Mifsud v. Tyco Valves and Controls, LP , No. C06-585 (W.D.Wash. Dec. 13, 2006), the Plaintiffs amended their complaint to name the Defendants' indirect parent company, Tyco International, a Bermuda corporation, and to include a cause of action under the SOX whistleblower provision. Tyco International moved to dismiss based on lack of subject matter jurisdiction. The court denied the motion, granting the Plaintiffs ninety days to conduct discovery solely on the question of personal jurisdiction over Tyco International.

ADMINISTRATIVE REVIEW BOARD DECISIONS

SECTION 806 DOES NOT HAVE EXTERRITORIAL APPLICATION; WHERE DISCLOSURES BY THE COMPLAINANT DID NOT POINT TO A U.S. LAW OR DOMESTIC FINANCIAL STATEMENT THAT WAS FRAUDULENT, BUT ONLY POTENTIAL FRAUDULENT CONDUCT UNDER FOREIGN LAW, THE COMPLAINT MUST BE DISMISSED

In Villanueva v. Core Laboratories, NV , ARB No. 09-108, ALJ No. 2009-SOX-6 (ARB Dec. 22, 2011) (en banc), the ARB considered en banc the issue of the extraterritorial application of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act (SOX), 18 U.S.C.A. § 1514A (Thomson/West 2011). In Villanueva , the Complainant was a non-U.S. citizen working in Columbia for a Columbian company. The Colombian company did not list securities under Section 12 or file reports under Section 15(d) of the Securities and Exchange Act of 1934. The Columbian company was an indirect subsidiary of a Netherlands limited liability company whose securities are registered under Section 12 of the Securities and Exchange Act of 1934, and are publicly traded on the New York Stock Exchange. The parent company had a U.S. office in Houston, Texas. The Complainant was the Columbian company's CEO. The Complainant alleged that he suffered adverse employment actions, including the termination of his employment, because he reported that a "transfer pricing scheme" and claimed exemptions from a value-added tax constituted fraudulent conduct under Colombian law. Relying on the court of appeals' decision in Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir.), cert. denied , 548 U.S. 906 (2006), the ALJ concluded that SOX Section 806 does not have extraterritorial application, and that whether he could adjudicate the case hinged on whether the adjudication required extraterritorial application. The ALJ found that the facts of Carnero were indistinguishable and dismissed the complaint for lack of jurisdiction. The ARB decided the appeal en banc.

A three-judge majority of the ARB applied the two-step process found in the Supreme Court decision in Morrison v. National Australian Bank, Ltd. , 130 S. Ct. 2869, 2877 (2010), to resolve the question of extraterritorial application of Section 806. In Morrison , which arose under Section 10(b) of the Securities Exchange Act of 1934, the Court first determined whether Section 10(b) had any extraterritorial reach. Second, the Court determined whether the essential part of the transnational transactions occurred domestically or extraterritorially. In analyzing Section 806, the ARB began with the second step of the Morrison analysis. The ARB framed this step as involving "the narrow question [of] whether Section 806(a)(1) includes extraterritorial laws within its definition of protected activity or whether the presumption against extraterritoriality limits the definition to domestic securities and financial disclosure laws...." Looking to the text of Section 806, the ARB found that it refers only to domestic securities laws, criminal laws and financial regulation, and that there was "no clear context or legislative history extending the six protected categories [listed in Section 806] to include extraterritorial laws without demonstrating a connection to a domestic law." USDOL/OALJ Reporter at 11 (footnote omitted). The ARB observed that the Supreme Court had invoked a presumption against extraterritoriality in cases arguably involving stronger language than Section 806(a)(1). The ARB also noted that the Dodd-Frank Act and SOX included explicit language on extraterritorial application in other sections, and therefore applied the rule of statutory construction that "[w]here Congress 'includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion of exclusion.'" Id . at 12, quoting Russello v. United States , 464 U.S. 16, 23 (1983). Thus, the ARB found that Section 806(a)(1) does not allow for its extraterritorial application.

The ARB then turned to the question of whether the fraudulent activity reported in the instant case would trigger extraterritorial application of Section 806. The Complainant asserted that Section 806 need not be applied extraterritorially because the parent company's executives in Houston, Texas directed the fraudulent scheme to evade Columbian taxes, refused him a pay raise, and ordered his discharge. The ARB found that even if it was true that executives in Houston directly controlled all aspects of the Colombia company's business, finances, and operations, it would "not change the fact that the disclosures involved violations of extraterritorial laws and not U.S. laws or financial documents filed with the SEC. [The Complainant] did not point to a U.S. law or domestic financial statement that was fraudulent. Therefore, under the facts presented in this case, [The Complainant's] reporting of foreign tax law is beyond the reach of Section 806." USDOL/OALJ Reporter at 13.

Finally, the ARB noted that the ALJ erred in characterizing his dismissal of the complaint as for lack of subject matter jurisdiction. Rather the dismissal was more properly characterized as a sua sponte order by the ALJ dismissing the case for failure to state a claim upon which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).

One member of the ARB dissented on the ground that Section 806 does, in fact, apply extraterritorially based on an analysis that focuses on the context and legislative history of that law. Another member of the ARB agreed with the other dissenting opinion, but went on to explain his alternative conclusion that even if the majority decision was correct about the non-extraterritorial application of Section 806, the facts viewed in the light most favorable to the Complainant presented a domestic claim "within the focus of congressional concern" contemplated by Section 806. The dissent criticized the majority's focus on the effect of the alleged fraud being of violation of Columbian law. The dissent concluded that the Complainant expressly implicated criminal wire and mail fraud by officials in Houston. But more importantly, the dissent found that the focus of congressional concern underlying Section 806 is prohibition of retaliatory conduct by publicly traded companies and their subsidiaries. Thus, the dissent would have focused on whether the alleged retaliation occurred domestically. Moreover, the dissent noted that the Complainant was the CEO of the Columbian company, that there was no person above him at the Columbian company, and that he reported to and was immediately accountable to the parent's Houston, Texas office.

COVERED EMPLOYER/EMPLOYEE; RESIDENTS OF FOREIGN COUNTRIES EMPLOYED BY FOREIGN COMPANIES OPERATING IN THOSE COUNTRIES

In Ahluwalia v. ABB, Inc. , ARB No. 08-008, ALJ No. 2007-SOX-44 (ARB June 30, 2009), the Complainant was a citizen of the United Kingdom who was employed in Abu Dhabi, United Arab Emirates, by a company formed under the laws of the UAE, and which was a subsidiary of a Swiss holding company whose principal place of business was in Zurich, Switzerland. The Complainant claimed that the employee protection provision of the SOX prohibits retaliation anywhere in the world that affects reports made to the SEC. The ALJ dismissed, inter alia, on the ground that SOX's employee protections did not apply to the Complainant because he was employed in a foreign country by a foreign company.

On appeal the ARB found that the complaint was controlled by its decision in Ede v. The Swatch Group , ARB No. 05-053, ALJ Nos. 2004-SOX-068, -069 (ARB June 27, 2007), in which the ARB held that Section 806 does not protect residents of foreign countries employed by foreign companies operating in those countries. The ARB further held that even if the Complainant had reported fraud committed by the Respondents to the SEC, such reporting does not defeat the jurisdictional restrictions.

COVERED EMPLOYER/EMPLOYEE; RESIDENTS OF FOREIGN COUNTRIES EMPLOYED BY FOREIGN COMPANIES OPERATING IN THOSE COUNTRIES

In Pik v. Goldman Sachs Group, Inc. , ARB No. 08-062, ALJ No. 2007-SOX-92 (ARB June 30, 2009), the Complainant was a citizen of the Czech Republic who was employed in London, England by Goldman Sachs Services Limited (GSSL), a company registered in the British Virgin Islands. GSSL was a subsidiary of the Respondents. The ALJ dismissed the complaint on the ground that the SOX's employee protections did not apply because the Complainant worked in the Respondent's London office, and all of the alleged adverse employment actions took place in London.

On appeal the ARB found that the complaint was controlled by its decision in Ede v. The Swatch Group , ARB No. 05-053, ALJ Nos. 2004-SOX-068, -069 (ARB June 27, 2007), in which the ARB held that Section 806 does not protect residents of foreign countries employed by foreign companies operating in those countries. The Complainant argued that the ALJ had jurisdiction over his claim because he should have been transferred to the Respondents' New York office prior to his discharge. The ARB rejected the argument because the transfer had not happened, and because the Complainant had not explained what effect the transfer would have had on the jurisdictional issue.

EXTRATERRITORIAL APPLICATION OF SOX; COMPLAINANT'S FAILURE TO RAISE A GENUINE ISSUE OF MATERIAL FACT ON WHETHER HE HAD BEEN EMPLOYED BY A U.S. COMPANY

In Salian v. Reedhycalog UK , ARB No. 07-080, ALJ No. 2007-SOX-20 (ARB Dec. 31, 2008), the Complainant failed to met his burden of raising a genuine issue of material fact sufficient to defeat the Respondent's motion for summary decision asserting that the SOX did not cover the complaint because the Complainant was a foreign national employed by a foreign subsidiary of a U.S. company, outside the United States. The Respondent cited Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006), and submitted sworn affidavits from company officials stating that the Complainant was: (1) a resident of India; (2) directly employed by a United Kingdom-based company; (3) operating out of Dubai, U.A.E.; (4) who performed no work in the United States. In response, the Complainant stated that "for all practical purposes" he was an employee of the U.S. parent, and therefore covered by the SOX. In support, he submitted several documents that mentioned both him and the U.S. parent. The ARB found, however, that these documents did not provide factual support for his contention that he was actually employed by the U.S. parent. Other information provided by the Complainant was not material to the issue, and therefore the ARB found that the Complainant failed to raise a genuine issue of material fact.

EXTRATERRITORIAL APPLICATION OF SOX WHISTLEBLOWER PROVISION; ARB FOLLOWS CARNERO RULING

In Ede v. The Swatch Group Ltd. , ARB No. 05-053, ALJ Nos. 2004-SOX-68 and 69 (ARB June 27, 2007), the ARB found that substantial evidence supported the ALJ's findings that the Complainants worked solely for foreign subsidiaries of the Respondent in Switzerland, Hong Kong and Singapore; that they never worked for the Respondent within the United States; and that their SOX complaint was grounded in adverse actions that occurred outside the United States. The ARB also found no reason to depart from the First Circuit decision in Carnero v. Boston Scientific Corp ., 433 F.3d 1, 4, 6-7 (1st Cir. 2006), cert. denied , __ U.S. __, 126 S.Ct. 2973 (June 26, 2006), that SOX section 806 does not protect employees who work exclusively outside the United States. The ARB therefore denied the complaint.

ADMINISTRATIVE LAW JUDGE DECISIONS

EXTRATERRITORIAL COVERAGE OF SECTION 806 WHISTLEBLOWER PROVISION

In Walters v. Deutsche Bank AG , 2008-SOX-70 (ALJ Mar. 23, 2009), the Complainant worked for a non-publicly traded Swiss subsidiary of a German corporation that was listed on the New York Stock Exchange. The Complainant was European head of insurance asset management relationships for a division of the Swiss subsidiary. OSHA dismissed the complaint on the ground that adverse actions occurring out the United States are not covered by the whistleblower provision of SOX. Before the ALJ, the Respondents moved for summary decision on the ground that the Complainant was not an employee of a publicly traded company.

Before turning to the extraterritorial question, the ALJ first considered whether Section 806 covers an employee of a non-publicly traded subsidiary of a company publicly traded in the United States. The ALJ noted that in the first seven years of SOX, a number of administrative decisions had denied coverage for such employees unless the subsidiaries were "agents" of the parent company for employment matters. The ALJ, however, indicated that the issue warranted closer review considering the remedial purposes of SOX.

First, the ALJ rejected the notion that the whistleblower provision of SOX was primarily a labor law, with its focus on an "'integrated enterprise test' used as a 'sort of labor-specific veil-piercing test' when parent/subsidiary relationships are involved." Slip op. at 6 (citations omitted). Rather, the ALJ noted that under SOX a publicly traded company's compliance responsibility is direct, and not derivative. As the ALJ stated later in the decision, "Section 806 is fundamentally an antifraud law, not a labor law." Slip op. at 9.

Next, the ALJ analyzed the ARB decision in Klopenstein v. Flow Technologies , ARB No. 04-149, ALJ No. 2004- SOX- 11 (ARB, May 31, 2006), and found that it had been misapplied in subsequent decisions because that decision "dealt exclusively with direct liability of the subsidiary, not direct or derivative liability of a parent company." Slip op. at 7. The ALJ noted that the ARB had endeavored to make it clear in its decision that, since the parent company in that case was not a party to the complaint, the decision "was limited to circumstances in which the non-publicly traded subsidiary, acting as an agent, could itself be directly liable as a covered employer under the Act." Id. (footnote omitted).

The ALJ noted that employing a labor law test to Section 806 would seem to run counter to the examples of activities that Congress wanted to address in enacting SOX. For example, a labor law test would seem to exclude employees of Arthur Andersen who helped Enron shred documents. Yet the legislative history indicated that these were the types of whistleblowers Congress passionately meant to protect.

The ALJ carefully reviewed the legislative history and concluded that, unlike the worker protection emphasis of the ERA whistleblower provision found in English v. General Elec. Co. , 496 U.S. 72 (1990), "the worker protection aspect of the whistleblower protection afforded by Section 806 is secondary to one of Sarbanes-Oxley's most important antifraud components: the whistleblower's disclosures." Slip op. at 11-12 (footnote omitted). The ALJ explained:

While the Court in English , supra, was inclined to view employee protection as the paramount purpose of Section 210 of the ERA, the legislative history of Sarbanes-Oxley demonstrates that the paramount purpose of Section 806 is to encourage corporate insiders to report fraud and financial misrepresentation in the interest of protecting shareholders and investors. The job protection Section 806 provides the whistleblower is simply one method, among others, Congress crafted to accomplish that paramount purpose. Moreover, in providing Section 806 whistleblower protection, Congress expressly obviated the issue raised in English . Thus, Section 806 (a)(d) specifically declines to preempt other laws.

Id. at 12, n.12. Thus, the ALJ concluded that:

Under these circumstances, it seems wholly incongruous to revitalize the theories of derivative liability applicable to labor law situations to shield the parent company from the consequences when wholly owned subsidiaries fire whistleblowers. To do so directly compromises the purposes of the Act at a very fundamental level.

Id. at 13. The ALJ's decision goes on to examine in detail the statute, the statutory history, caselaw, and context and policy considerations, whether Section 806 imposes direct liability on a parent for the actions of a subsidiary under Section 806, and especially the ALJ's earlier decision denying a motion to dismiss in Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004). In sum, the ALJ concluded that:

the term "employee of a publicly traded company" in Section 806 is, for parent/wholly owned subsidiary relationships, co-extensive with the employee coverage in Section 301 and includes, within its meaning, all employees of every constituent part of the publicly traded company, including subsidiaries and subsidiaries of subsidiaries which are consolidated on its balance sheets, contribute information to its financial reports, are covered by its internal controls and the oversight of its audit committee, and subject to other Sarbanes-Oxley reforms imposed upon the publicly traded company.

Id. at 23.

Returning to the issue of extraterritorial application of Section 806, the ALJ again noted that the analysis of the issue largely depended on whether the SOX whistleblower provision was viewed as a labor law or as an antifraud securities law, comparing in this respect the approach of the courts in Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006) (labor law analysis) and O'Mahony v. Accenture Ltd. , 537 F. Supp. 2d 506 (S.D.N.Y. 2008) (antifraud analysis). Again reviewing in detail the statute, the statutory history, caselaw, and context and policy considerations, the ALJ concluded that "It seems fairly clear that Sarbanes-Oxley's financial, accounting, and corporate governance reforms are bounded not by borders, but by the scope of operations contributing to the publicly traded multinational company's consolidated financial reports." USDOL/OALJ Reporter at 33. Based on this review, the ALJ denied the motion to dismiss, stating:

Here, as in O'Mahony , the Complainant does not ask for the intervention of American law in a dispute between foreigners that occurred abroad. His employer is publicly traded in the U.S., and all elements essential to establishing a prima facie violation of Section 806 allegedly occurred in the United States. Walters, moreover, does not seek enforcement of American law in Germany or Switzerland; he seeks application of American law for the damages he suffered as a consequence of the violation of Section 806 that occurred in the United States. For all of the foregoing reasons, I conclude that adjudication of the charges in the Complaint does not require extraterritorial application of American law. Accordingly, Complainant is entitled to have his case heard on the merits.

Id. at 41-42.

EXTRATERRITORIAL APPLICATION; COMPLAINANT WORKED IN LONDON AND ADVERSE ACTION OCCURRED IN LONDON

Where the Complainant worked in the Respondent's London office and the alleged adverse employment actions occurred in London, the ALJ found that the whistleblower provisions of SOX did not apply, citing Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006). Pik v. Goldman Sachs Group, Inc. , 2007-SOX-92 (ALJ Feb. 21, 2008).

JURISDICTION; EXTRATERRITORIAL APPLICATION OF SOX

In Neuer v. Bessellieu , 2006-SOX-132 (ALJ Dec. 5, 2006), the Respondent argued that the complaint should be dismissed under FRCP 12(b)(1) for lack of jurisdiction because the publicly traded parent was located in Israel, the purported protected activity took place in Israel, and the Complainant was not a U.S. citizen. Acknowledging that one court had ruled that the SOX whistleblower provisions generally do not have extraterritorial reach, the ALJ found distinctions that made granting a 12(b)(1) motion premature. Specifically, the ALJ noted that although the purported protected activity occurred during a company visit to Israel, the Complainant was employed full time in the U.S. by a wholly owned subsidiary, which was conducting business in the U.S; the alleged adverse personnel action occurred in North Carolina; and the record contained a visa application that raised the prospect that there was significant intermingling of the business activities of the parent and the subsidiary.

COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY OF FOREIGN CORPORATION; DIFFICULTY SERVICING FOREIGN COMPANY

In Teutsch v. ING Groep, N.V. , 2005-SOX-101, 102 and 103 (ALJ Sept. 25, 2006), the ALJ issued an order allowing the Complainant to amend her complaint to name and serve additional parties. Thereafter, the parent company of the originally named non-publicly traded subsidiary moved to dismiss on the basis that it had not been properly served. The ALJ directed the Complainant to serve the parent company, which was based in The Netherlands, by a date certain. Shortly after the deadline set by the ALJ, the Complainant stated that she attempted service in good faith. The Respondent, however, refused to concede that service had been made. The Complainant was hampered in effecting timely service because service under the Hague Convention was out of her control. Several months later, the Respondent requested that the ALJ rule on its motion to dismiss. The ALJ, while acknowledging that the Complainant had proceeded in good faith to attempt service, found that it was uncertain whether service would be obtained. Accordingly, he proceeded to decide the motion to dismiss. The ALJ found that the parent company on which service had not been affected was the only publicly traded firm in the matter. The record showed that the parent company and its officers had not controlled the management of its subsidiaries, or the individual managers named in the complaint. The ALJ rejected the Complainant's contention that SOX included non-publicly traded subsidiaries of publicly traded companies merely because of that relationship. Accordingly, the ALJ dismissed the complaint.

COVERED EMPLOYER; PARENT LISTED ON EUROPEAN BUT NOT U.S. EXCHANGES

In Deutschmann v. Fortis Investments , 2006-SOX-80 (ALJ June 14, 2006), the named Respondent was not a publicly traded company, and the Complainant argued that it was subject to SOX because it was the subsidiary of a publicly traded company. The ALJ noted that the parent had not been named as a party, that the complaint had not been amended to name the parent company, and that the Complainant had presented no evidence to show that the two companies were so intertwined that one would consider them to be one entity. Moreover, the Respondent presented evidence that, even assuming that the subsidiary was an agent of the parent, the parent was not covered by the SOX because it was a foreign corporation listed on exchanges in Belgium and the Netherland and not on a U.S. exchange. The Complainant countered that the parent had a class of securities registered in the U.S. called American Depository Receipts; however, the Respondent attested that those securities were exempt from registration under SEC Rule 12g3-2(b), and therefore were not securities registered under section 12 or required to file reports under section 15(d) of the SEA. In light of the foregoing, the ALJ granted summary decision in favor of the Respondent.

COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY OF FOREIGN CORPORATION; DIFFICULTLY SERVING FOREIGN COMPANY

In Andrews v. ING North America Insurance Corp. , 2005-SOX-50 and 51 (ALJ Feb. 17, 2006), although the Complainants had named the parent company, ING Groep, N.V., in their initial complaint, ING Groep was a foreign corporation allegedly incapable of being effectively served, and by the time of the hearing the only named Respondent was the non-publicly traded U.S. subsidiary for which the Complainants worked. The Respondent moved to dismiss on the ground that it was not an employer covered under the whistleblower provision of the SOX. The ALJ found that the Respondent did not fit the statutory definition, that the publicly traded parent was an indispensable party if the Complainants wanted to show a commonality of management in purpose or to attempt to pierce the corporate veil, and that merely being owned at a distance by publicly traded company does not make a subsidiary an agent of the parent company within the meaning of the Act. Accordingly, the ALJ granted the Respondent's motion to dismiss.

[Editor's note: The decision is not entirely clear on the point, but it appears that the Complainants only speculated that they could not sue the foreign parent company, and made no attempt to serve the parent.]

COVERED EMPLOYER; EXTRATERRITORIAL APPLICATION OF SOX

In O'Mahony v. Accenture Ltd. , 2005-SOX-72 (ALJ Jan. 20, 2006), the ALJ found persuasive the holdings of other ALJs and the First Circuit Court of Appeals that the whistleblower provision of the SOX applies only to employees who work within the United States. Thus, the ALJ dismissed the complaint where the Complainant-- an Irish national residing in France -- was an employee and partner of the French operating subsidiary of a Bermuda-based company traded on the New York Stock Exchange.

EXTRATERRITORIAL COVERAGE; EMPLOYMENT OVERSEAS FOR A FOREIGN SUBSIDIARY, BUT SUBSTANTIAL NEXUS TO THE U.S.

In Penesso v. LLC International, Inc. , 2005-SOX-16 (ALJ Mar. 4, 2005), the Complainant was employed in Italy by the Italian subsidiary of a corporation headquartered in McLean, Virginia. The Respondent filed a motion for summary decision based on, inter alia, the proposition that the whistleblower provision of SOX does not have extraterritorial application, citing in support Concone v. Capital One Financial Corp. , 2005-SOX-6 (ALJ Dec. 3, 2005) and Carnero v. Boston Scientific Corp. , 2004 WL 1922132 (D.Mass. Aug. 27, 2004). The ALJ distinguished Concone and Carnero , finding that the facts in the case before him were materially different, the Complainant being a U.S. citizen, much of the protected activity having occurred in the U.S., and at least one of the alleged retaliatory actions (a decision not to issue bonuses) was made in the U.S. The ALJ concluded that "unlike Concone and Carnero , this case has a substantial nexus to the United States, and it is appropriate for the complainant to bring this claim under §1514A of the Sarbanes-Oxley Act." Slip op. at 3 (footnote omitted).

Joint Venture

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ADMINISTRATIVE LAW JUDGE DECISIONS

COVERED EMPLOYER; JOINT VENTURE OF TWO CORPORATIONS

In Mann v. United Space Alliance, LLC , 2004-SOX-15 (ALJ Feb. 18, 2005), the ALJ granted summary judgment to the Respondents on the ground that none the named Respondents were employers for purposes of the employee protection provision of the SOX. The Complainant was employed by United Space Alliance (USA), which was a limited liability company equally owned by Boeing and Lockheed Martin. The ALJ found that there was no evidence that Boeing or Lockheed could have affected, or did affect, the Complainant's employment with USA, or that USA was acting as their agent with respect to the Complainant's employment. See 29 C.F.R. § 1980.101. While those companies participated in the hiring and dismissing of USA's president and CEO, it was the responsibility of USA's president and CEO to hire and dismiss management and other employees of USA, and to establish the terms of their employment.

The ALJ also considered whether the fact that Boeing and Lockheed owned USA brought them under the coverage of SOX. Although USA did not have a class of securities registered under section 12 of the SEA nor was it required to file reports under section 15(d) of the SEA, the Complainant argued that it was the agent of the two ownership companies.

The ALJ found no prior precedent addressing the applicability of SOX to a joint venture, but looked to cases involving subsidiaries, finding that in all those cases "shared management and control and unity of operations have been key factors in holding the parent company and its subsidiary to be covered by the Act." Slip op. at 9 (citations omitted). The ALJ found that such factors were not present in the instant case.

Not a Publicly Traded Company at the Time of the Adverse Action

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ADMINISTRATIVE LAW JUDGE DECISIONS

COVERED EMPLOYER; RESPONDENT WHICH HAD FILED A REGISTRATION WITH THE SEC WHICH HAD NOT YET BECOME EFFECTIVE

In Stalcup v. Sonoma College , 2005-SOX-114 (ALJ Feb. 7, 2006), the Respondent had filed a registration statement with the SEC. The Complainant was subsequently terminated. At the time he was terminated, the registration neither had become effective nor had it been withdrawn. The ALJ found that under the plain language of section 806 of the SOX, the Respondent is not a covered employer. Because the Complainant argued that there was evidence of ambiguity or a drafting error, the ALJ nonetheless examined section 806 in the context of the rest of the Act, the legislative intent and the policy of the Act.

The Complainant argued that the Respondent fit the definition of "issuer" found in the definitions portion of the Act, and that this general definition applied to "all or most other sections of the Act, wherever the term 'issuer' is used." Slip op. at 3, quoting Complainant's brief. The ALJ, however, noted that the term "issuer" is not used in Section 806 and that Congress was quite explicit in Section 806 in referring to and defining publicly traded companies. The ALJ rejected the Complainant's argument that this was a drafting mistake, the ALJ noting that other sections of the Act applied to the categories of companies narrowly defined in Section 806 and that, given that Section 806 "is different in both purpose and effect from most other provisions of the Act, there are logical reasons why Congress may have decided not to apply section 806 to prospective public companies." Finally, the ALJ found that the Complainant's argument that the limited coverage of section 806 was contrary to the policies underlying the Act did not give the ALJ the authority to redraft the law.

COVERED EMPLOYER; EMPLOYER WHICH FILES A REGISTRATION BUT WITHDRAWS IT BEFORE APPROVAL

In Roulett v. American Capital Access , 2004-SOX-78 (ALJ Dec. 22, 2004), the Respondent had filed a registration with the SEC in preparation for an IPO, but subsequently obtained private financing and withdrew the registration before any approval by an exchange or the SEC was effected. The Securities Exchange Act provides that a registration does not become effective until it is approved by the relevant exchange authorities who must then certify to the SEC that the security has been approved. The ALJ held, therefore, that the Respondent never registered a class of securities under section 12 of the Securities Exchange Act of 1934.

COVERED EMPLOYER; EMPLOYER DID NOT SEEK REGISTRATION UNTIL AFTER THE COMPLAINANT HAD BEEN TERMINATED FROM EMPLOYMENT

In Roulett v. American Capital Access , 2004-SOX-78 (ALJ Dec. 22, 2004), the Respondent had filed a registration with the SEC in preparation for an IPO, but subsequently obtained private financing and withdrew the registration before any approval by an exchange or the SEC was effected, and the ALJ consequently found that it was not a covered employer under the whistleblower provision of the SOX. The ALJ also found that, even if the application had been approved by the SEC, the Respondent had not filed until after the Complainant had already been terminated from employment. The ALJ found that SOX may not be applied retroactively to confer coverage before a company meets the jurisdictional requisites.

COVERED EMPLOYER; COVERAGE UNDER SOX AT THE TIME OF THE ADVERSE ACTION

In Gallagher v. Granada Entertainment USA , 2004-SOX-74 (ALJ Apr. 1, 2005), the Respondent was not a publicly traded company subject to SOX at the time that it made the decision not to promote the Complainant following a contemplated merger. After the merger, however, the Respondent became a company subject to the requirements of sections 12 or 15(d) of the Securities and Exchange Act. The decision not to renew the Complainant's employment contract was made after the merger. Thus, the Respondent was not a covered employer at time of the refusal to promote but was a covered employer at the time of the non-renewal of the employment contract.

Section 15(d) Exempt Company

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FEDERAL COURT DECISIONS

SOX; WORLD BANK NOT A COVERED COMPANY

In Hudes v. Aetna Life Ins. Co. , 806 F.Supp.2d 180 (D.D.C. Aug. 30, 2011) (case below ALJ No. 2010-SOX-12), aff'd Hudes v. Aetna Life Ins. Co. , No. 11-7109 (CA DC Nov. 20, 2012), the plaintiff worked as a lawyer at the World Bank, and alleges that the Bank fired her in retaliation for "reporting corruption and securities law violations to [the World Bank's] Audit Committee and U.S. Congressional committees charged with oversight." Hudes at 185. In addition to several other claims, the plaintiff filed a retaliation complaint under Section 806 of SOX. The World Bank argued that it is not a covered company under § 1514A, as its securities are explicitly exempt under both the Securities Act and the Exchange Act. The court agreed, and dismissed the plaintiff's SOX complaint.

ADMINISTRATIVE REVIEW BOARD DECISIONS

COVERED EMPLOYER; AUTOMATIC EXEMPTION FROM REPORTING UNDER SECTION 15(d) WHERE SECURITIES ARE HELD BY FEWER THAN 300 PERSONS

The whistleblower protection provisions of the Sarbanes-Oxley Act cover only companies with securities registered under § 12 or companies required to file reports under § 15(d) of the Exchange Act. In Flake v. New World Pasta Co. , ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), the parties agreed that New World was not subject to § 12 of the Securities Exchange Act, and the dispute was whether it was required to file reports under § 15(d). The parties agreed "that in 1999 New World registered securities pursuant to the Securities Act of 1933 and that at the beginning of each fiscal year thereafter New World's securities were held of record by fewer than 300 persons." Under § 15(d), the applicable reporting requirements are automatically suspended when a company's securities are held at the beginning of the fiscal year by fewer than 300 persons.

The Complainant contended that SEC rule 12h-3 applies, and that because New World had not filed "Form 15" as that rule dictates, the suspension from reporting requirements is invalid. New World countered that the Form 15 filing applies only to a company that becomes illegible for the suspension during a fiscal year, citing several SEC informal, non-binding interpretative statements in support. The ARB observed that the SEC had expressed this view (that the suspension goes into effect by operation of law and the failure to file Form 15 has no effect on the automatic suspension) not only in informal guidance, but also in notice and comment rulemaking. The ARB rejected Complainant's argument that the SOX whistleblower provision should be interpreted to include any publicly traded company, and found that no genuine issue of material fact existed as to whether New World was a covered employer under that law. Thus, it affirmed the ALJ's dismissal.

Liability of Individuals

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FEDERAL COURT DECISIONS

CAUSATION - KNOWLEDGE OF INDIVIDUAL NAMED AS DEFENDANT CANNOT BE INFERRED SOLELY ON CIRCUMSTANTIAL EVIDENCE

In Leshinksy v. Telvent GIT, S.A. , No. 10-cv-4511, 2013 WL 1811877 (S.D.N.Y. May 1, 2013), one of the named Defendants was the General Manager of the Plaintiff's employer. This Defendant moved for summary judgment on the ground that there was no evidence that he had any knowledge of Plaintiff's complaints. The court granted dismissal of this Defendant because the Plaintiff failed to point to any substantive evidence supporting an inference that the General Manager knew of the protected activity. The court explained that causation cannot be inferred in regard to a decisionmaker's knowledge of the plaintiff's protected activity solely based on circumstantial evidence:

   Retaliation cases must often be proven with "the cumulative weight of circumstantial evidence, since an employer who discriminates against its employee is unlikely to leave a well-marked trail, such as making a notation to that effect in the employee's personnel file." Carlton v. Mystic Transp., Inc. , 202 F.3d 129, 135 (2d Cir. 2000); see also Woodman v. WWOR-TV, Inc., 411 F.3d 69, 83 (2d Cir. 2005) (observing in a Title VII case that "'[k]nowledge' is a fact often established - even in criminal cases where the prosecution's burden is beyond a reasonable doubt' simply through circumstantial evidence" (citations omitted)). In retaliation cases, however, "district courts have consistently held that, with regard to the causation prong of the prima facie standard, "[a]bsent any evidence to support an inference that [the decisionmakers] knew of [p]laintiff[']s [protected activity], [p]laintiff cannot rely on circumstantial evidence of knowledge as evidence of causation.'" Murray v. Visiting Nurse Servs. of N.Y. , 528 F. Supp. 2d 257 (S.D.N.Y. 2007) (collecting cases); see also Gordon v. New York City Bd. of Educ. , 232 F.3d 111, 117 (2d Cir. 2000) (explaining that "the lack of knowledge on the part of particular individual agents is admissible as some evidence of a lack of a causal connection").

Leshinksy , supra, slip op. at 28.

SUIT FOR DAMAGES AGAINST FORMER EMPLOYER, UNION, AND GOVERNMENT OFFICIALS BARRED BASED ON JUDICIAL IMMUNITY, RES JUDICATA, TIMELINESS AND OTHER GROUNDS

In Williams v. UAL Inc. , No. 12-CV-3781 (N.D. Cal. Dec. 13, 2012) (related to N.D.Cal. 04-CV-3787, ARB No. 08-063, ALJ No. 2008-AIR-3), the Plaintiff brought suit against his former employer, union officials, federal and state court judges and court personnel, the Secretary of Labor, former and current ARB members, and a DOL ALJ, alleging that they engaged in a conspiracy to terminate him from his employment for improper reasons and to uphold that termination through the various legal challenges he has made over the past several years. The Plaintiff's legal theories primarily relied on RICO and the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, ("SOX") as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The court dismissed all claims without leave to amend. In regard to the judges, the court found that they were protected by judicial immunity. As to the court personnel, the court found that they were protected by absolute quasi-judicial immunity. As to the Department of Labor employees, the court found that the same claims against them had previously been litigated and rejected by a federal district court in a final judgment. Thus, the claims against the Department of Labor employees were barred by the doctrine of res judicata, and the court did not reach the question of whether the Plaintiff's damages claims could only be brought against the United States, and not individual federal defendants acting in their official capacities. The court found that the claim against the Plaintiff's former employer was time barred. The claim against the union was time barred. Finally, the court found that claims against individual union officers for the breach of the duty of fair representation are not permitted.

SOX PROHIBITS RETALIATION AGAINST AN INDIVIDUAL WHO IS AN EMPLOYEE OF A PUBLICLY HELD COMPANY'S CONTRACTOR, SUBCONTRACTOR, OR AGENT

In Lawson v. FMR LLC , Nos 08-10466, 08-10758 (D. Mass. Mar. 31, 2010)(Memorandum and Order)(case below 2007-SOX-27), two former employees of a nonpublic mutual fund company sought the protection of Sarbanes-Oxley Act whistleblower provision, alleging that they were unlawfully retaliated against after complaining about the company's improper business activities. In denying the employers' motion to dismiss the District Court found that the nonpublic mutual fund company served as the investment advisor for the publicly held mutual funds, therefore, the firm's employees were covered by the SOX whistleblower protections. The mutual fund company tried to argue that the former employees were outside the protection of SOX because they were not employed directly by the mutual funds that were owned by public investors, however, the Court found that SOX also prohibits retaliation against an individual who is an employee of a publicly held company's contractor, subcontractor, or agent.

INDIVIDUAL LIABILITY; INDIVIDUAL NOT SPECIFICALLY NAMED IN OSHA COMPLAINT AS A PARTY

In Bridges v. McDonald's Corp. , No. 1:09-cv-01880 (N.D.Ill. Dec. 21, 2009) (case below 2008-SOX-41), the district court granted summary judgment dismissing the count of the Plaintiff's SOX claim against her former supervisor, where that supervisor had not been named as a party when the case was before OSHA and OALJ. The court acknowledged that the SOX regulation may provide for individual liability, but found a complainant is nonetheless obligated to exhaust her administrative remedies for each claim that she seeks to assert against each defendant. The mere fact that an individual is named in the body of the OSHA complaint is insufficient to put OSHA and that individual on notice that the complainant is pursuing a claim against that individual. The court found that the limited exception recognized in Title VII case law permitting a claim against an unnamed party when that party had adequate notice of the proceeding and the opportunity to participate in conciliatory proceedings, is not applicable in SOX proceedings because the Title VII procedures are geared toward fostering settlement, while the SOX administrative scheme is judicial in nature. Accordingly, the court found that the Plaintiff had failed to exhaust her administrative remedies as to her SOX claim asserted against the supervisor as an individual.

ADMINISTRATIVE REVIEW BOARD DECISIONS

COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY, LIABILITY BASED ON AGENCY RELATIONSHIP IN REGARD TO FIRING OF COMPLAINANT

In Klopfenstein v. PPC Flow Technologies Holdings, Inc. , ARB Nos. 07-021, 07-022, ALJ No. 2004-SOX-11 (ARB Aug. 31, 2009), the ARB affirmed the ALJ's holding that the non-publicly traded subsidiary of a publicly traded parent company had acted as the parent's agent for the purpose of discharging the Complainant, and therefore was properly named as a Respondent in the Complainant's SOX complaint. The Complainant was vice president of a division of a subsidiary of the aforementioned subsidiary. A revenue recognition policy, on which basis the Complainant was discharged, was a policy of the parent company; an employee in the parent's finance department had learned of the violation; the official who fired the Complainant was both president of the subsidiary and executive vice president of the parent; that official conferred with other senior managers from both the subsidiary and the parent following an investigation of and report on the violation of the policy. However, the vice president of finance for the subsidiary at which the Complainant was employed was not an agent and was not proper Respondent under SOX. He had investigated the issue and prepared a report, but was not a decision maker in the termination of the Complainant's employment.

LIABILITY OF TURNAROUND AND CORPORATE RESTRUCTURING COMPANY

In Kalkunte v. DVI Financial Services, Inc. , ARB Nos. 05-139, 05-140, ALJ No. 2004-SOX-56 (ARB Feb. 27, 2009), DVI Financial Services, Inc. ("DVI"), hired a law firm to assist it in restructuring or going into bankruptcy, and about the same time hired AP Services, LLC ("APS"), to negotiate for operating funds. The next month, APS sent one of its principals, who was a specialist in turnaround operations and corporate restructuring, to work at DVI. APS also supplied workers for general management services. Later, after DVI filed for bankruptcy, the APS principal became CEO of DVI, and another APS official became DVI's chief administrative officer The Complainant was a contract attorney working for DVI, who later filed a SOX whistleblower complaint against DVI and APS.

On appeal to the ARB it was not disputed that the Complainant was an employee and that DVI was an employer under the provisions of the Act. The ARB, however, reviewed more closely whether APS was liable under the SOX, 18 U.S.C.A. § 1514A(a), and its implementing regulations at 29 C.F.R. § 1801.101 and § 1801.102. The ARB agreed with the ALJ that under the statutory and regulatory definitions, the Complainant was "an employee" whose employment could be (and was) affected by APS, and that APS was a "company representative" of DVI, because it was its "contractor, subcontractor, or agent."

As CEO, the DVI principal had authority to hire and fire DVI employees, and supervised the APS employees who were under contract with DVI. He was the decision maker in eliminating more than ninety DVI employee positions, and it was he who determined that the Complainant's services were no longer needed. It was the APS official working as DVI's chief administrative officer who notified the Complainant of her discharge.

The ARB noted that the DVI principal who was also CEO of DVI and thereby an "officer" under the Act and regulations, could have been held personally liable, but found that the issue of his personal liability was not before it because the ALJ had held that the Complainant waited too long to seek to add that person as a party respondent.

ADMINISTRATIVE LAW JUDGE DECISIONS

COVERED INDIVIDUALS AND ENTITIES; HARMONIZATION AND CLARIFICATION OF REGULATIONS TO LIMIT LITIGATION TO PERSONS OR ENTITIES IN A POSITION TO EFFECT TERMS AND CONDITIONS OF EMPLOYMENT

In Gallagher v. Granada Entertainment USA , 2004-SOX-74 (ALJ Oct. 19, 2004), the Complainant sought to amend his complaint to name additional Respondents, including the executive who terminated his employment, and "any person or business entity ... whose acts in concert with or at the direction of the Employer ... lead to" his discharge. Slip op. at 3, quoting Complainant's motion.

The ALJ noted that the SOX whistleblower statute and regulations are broader in scope that previous types of whistleblower cases under DOL's jurisdiction in that they do not restrict the parties to a complainant and an employer, but require the Secretary to give notice that a complaint has been filed to both "the employer" and "the person named in the complaint." The ALJ reviewed the applicable laws and regulatory history and sought to harmonize the regulations and clarify who could be named as a party. The ALJ concluded that the regulations imply that only someone in a position to take unfavorable personnel actions would be a "named person." The ALJ also found that the regulations imply "that any 'named person' would have had direct authority over a complainant, and are consistent with the assumption [made in the regulatory history] that the employer and the named person(s) ordinarily are the same."

The ALJ thus concluded that the executives named as those who terminated the Complainant's employment could be added as "named parties." The ALJ denied addition of the "acting in concert" group (which the Respondent estimated would add more than 30 individuals or entities to the litigation). The ALJ concluded that the regulations did not contemplate expansion of Respondents to that extent, but limited individuals as parties to superiors who could discriminate against the Complainant in regard to the "'terms or conditions of his employment' as Congress used the phrase in 18 U.S.C. § 1514(A) and the Secretary applied it in 29 C.F.R. § 1980.102(a)."

The ALJ acknowledged that SOX permits compensation for special damages [in other words, SOX is not limited to equitable relief which can only be provided by the corporate Employer], but concluded that "[t]he availability of damages does not convert this statutory proceeding into a common law tort action, permitting joinder of persons or entities who were not the Complainant's superiors as if they were joint tortfeasors."

COVERED RESPONDENTS; INDIVIDUAL OFFICERS NOT NAMED IN OSHA FINDINGS, BUT CLEARLY IDENTIFIED IN THE COMPLAINT

In Jordan v. Sprint Nextel Corp. , 2006-SOX-41 (ALJ Mar. 14, 2006), Sprint filed a motion to dismiss three individually named Respondents (the Complainant's supervisor, Sprint's General Counsel, and Sprint's CEO), arguing that they had not been properly served, that claims against the individuals had not been investigated and considered by OSHA, and that the Complainant would not be prejudiced by their dismissal because complete relief is available against the corporate Respondent. The ALJ denied the motion. The ALJ distinguished the decision of the ALJ in Powers v. Pinnacle Airlines, Inc ., 2003-SOX-12 (ALJ Mar. 5, 2003), in which the ALJ denied the Complainant's attempt to add a publicly traded company as a Respondent in an attempt to cure the deficiency that the originally named Respondent was not a publicly traded entity, and the Complainant had not alleged any facts that would justify piercing the corporate veil and ignoring the separate corporate structure. The ALJ observed that the SOX expressly covers officers of the company named in the complaint, and that the Complainant in the instant case had expressly named the supervisor, general counsel, and CEO in the complaint filed with OSHA. The ALJ found that the fact that OSHA's findings only named Sprint as the Respondent in this mater was not dispositive. OSHA was required under 29 C.F.R. § 1980.104(a) to notify all persons named in the complaint of receipt of the complaint, and any failure by OSHA in this respect could not be attributed to the Complainant or used to justify dismissal of his complaint. Nor was the service requirement jurisdictional, its purpose being merely to give adequate notice of the complaint. The ALJ observed that it was clear from the pleadings that the three individuals were well aware of the pendency of the proceedings. Finally, the ALJ noted that proceedings before him were de novo.

Liability of Company Engaged for Turnaround/Corporate Restructuring

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ADMINISTRATIVE REVIEW BOARD DECISIONS

LIABILITY OF TURNAROUND AND CORPORATE RESTRUCTURING COMPANY

In Kalkunte v. DVI Financial Services, Inc. , ARB Nos. 05-139, 05-140, ALJ No. 2004-SOX-56 (ARB Feb. 27, 2009), DVI Financial Services, Inc. ("DVI"), hired a law firm to assist it in restructuring or going into bankruptcy, and about the same time hired AP Services, LLC ("APS"), to negotiate for operating funds. The next month, APS sent one of its principals, who was a specialist in turnaround operations and corporate restructuring, to work at DVI. APS also supplied workers for general management services. Later, after DVI filed for bankruptcy, the APS principal became CEO of DVI, and another APS official became DVI's chief administrative officer The Complainant was a contract attorney working for DVI, who later filed a SOX whistleblower complaint against DVI and APS.

On appeal to the ARB it was not disputed that the Complainant was an employee and that DVI was an employer under the provisions of the Act. The ARB, however, reviewed more closely whether APS was liable under the SOX, 18 U.S.C.A. § 1514A(a), and its implementing regulations at 29 C.F.R. § 1801.101 and § 1801.102. The ARB agreed with the ALJ that under the statutory and regulatory definitions, the Complainant was "an employee" whose employment could be (and was) affected by APS, and that APS was a "company representative" of DVI, because it was its "contractor, subcontractor, or agent."

As CEO, the DVI principal had authority to hire and fire DVI employees, and supervised the APS employees who were under contract with DVI. He was the decision maker in eliminating more than ninety DVI employee positions, and it was he who determined that the Complainant's services were no longer needed. It was the APS official working as DVI's chief administrative officer who notified the Complainant of her discharge.

The ARB noted that the DVI principal who was also CEO of DVI and thereby an "officer" under the Act and regulations, could have been held personally liable, but found that the issue of his personal liability was not before it because the ALJ had held that the Complainant waited too long to seek to add that person as a party respondent.

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