Sarbanes-Oxley Act (SOX)
Whistleblower Digest
STATUTE AND REGULATIONS
[Last Updated June 3, 2014]
Table of Contents
Statutory and Regulatory History

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FRAUD AGAINST SHAREHOLDERS WHISTLEBLOWER PROTECTION

On July 30, 2002, the Sarbanes-Oxley Act of 2002 , P.L. 107-204 was signed into law by President Bush. Section 806 of the Act, to be codified at 18 U.S.C. § 1514A, is a whistleblower provision that provides protection for employees of publicly traded companies who provide "information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders...." Complaints under this provision are filed with the Secretary of Labor, who is to investigate and adjudicate the matter under the rules and procedures found in the statutory AIR21 whistleblower provision. The Sarbanes-Oxley whistleblower procedure is somewhat different than AIR21 and all other whistleblower cases administered by the DOL in that if the Secretary has not issued a final decision within 180 days of the filing of the complaint, and there is no showing that such delay is due to the bad faith of the claimant, the claimant may bring an action at law or equity for de novo review in the appropriate district court of the United States.

In addition to the civil whistleblower provision at section 1107 (to be codified at 18 U.S.C. § 1513), the Act also includes a criminal penalty for retaliation against informants.

See also Legislative History | Conference Report (Senate) | Conference Report (House)

 

FINAL SARBANES-OXLEY WHISTLEBLOWER REGULATIONS PUBLISHED BY OSHA

On August 24, 2004, OSHA published final regulations setting out the procedures and time frames for handling SOX whistleblower complaints. 69 Fed. Reg. 52104 (Aug. 24, 2004). Some highlights of the preamble to the final rule include:

 

  • Regulations are only procedural and not interpretative . Several commentators made suggestions of regulatory provisions to assist in the defining the parameters of SOX whistleblower coverage on matters such as whether coverage extends to employees employed outside the U.S. or to foreign corporations that have U.S. employees, and on the scope of protected activity. OSHA declined to set such parameters on the ground that "the purpose of these regulations is to provide procedural rules for the handling of whistleblower complaints and not to interpret the statute." 69 Fed. Reg. at 52107.

     

  • Liability for adverse actions of a contractor or subcontractor . In response to one commentor's suggestion that OSHA clarify the scope of a respondent's liability for the actions of contractors or subcontractors, OSHA cited the ARB decision in Stephenson v. NASA , ARB No. 96-080, ALJ No. 1994-TSC-5 (ARB Apr. 7, 1997) for the proposition that "a respondent may be liable for its contractor's or subcontractor's adverse action against an employee in situations where the respondent acted as an employer with regard to the employee of the contractor or subcontractor by exercising control of the work product or by establishing, modifying, or interfering with the terms, conditions, or privileges of employment." OSHA added: "Conversely, a respondent will not be liable for the adverse action taken against an employee of its contractor or subcontractor where the respondent did not act as an employer with regard to the employee." 69 Fed. Reg. at 52107.

     

  • Reinstatement: security risk: petition to OALJ for stay . Several commentors addressed the "security risk" exception to preliminary reinstatement. OSHA clarified that this provision was added to the AIR21 regulations [which are the procedural model for SOX process] in response to the events of September 11, 2001, and "was designed to address situations where after-acquired evidence establishes that an employee's reinstatement might pose a significant safety risk to the public, notwithstanding the fact that the employee's discharge was retaliatory in violation of the Act." OSHA stated that the exception is not to be broadly construed and that it would only apply where reinstatement might result in "physical violence" against persons or property. Thus, OSHA perhaps implicitly rejected one commentor's observation that "security risk" could include risk to trade secrets. OSHA, however, amended section 1980.106(b)(1) to provide that a named person could file a motion with OALJ for a stay of the Assistant Secretary's preliminary reinstatement order. In OSHA's view, however, such a stay would only be granted in exceptional circumstances akin to the criteria for equitable injunctive relief. Section 1980.110(b) was similarly changed to permit the filing of a motion with the ARB to stay an ALJ's reinstatement order.

     

  • Economic reinstatement . OSHA also explained its reasoning for including "economic reinstatement" as an option in lieu of actual reinstatement:

    When a violation is found, the norm is for OSHA to order immediate reinstatement. An employer does not have a statutory right to choose economic reinstatement. Rather, economic reinstatement is designed to accommodate an employer that establishes to OSHA's satisfaction that reinstatement is inadvisable for some reason, notwithstanding the employer's retaliatory discharge of the employee. If the employer can make such a showing, actual reinstatement might be delayed until after the administrative adjudication is completed as long as the employee continues to receive his or her pay and benefits and is not otherwise disadvantaged by a delay in reinstatement. The employer, of course, need not request the option of economic reinstatement in lieu of actual reinstatement, but if it does, there is no statutory basis for allowing the employer to recover the costs of economically reinstating an employee should the employer ultimately prevail in the whistleblower adjudication.

    69 Fed. Reg. at 52109.

     

  • Definition of conclusion of the hearing . Where the ARB grants a petition for review, it must issue a decision no later than 120 days after the date of the conclusion of the hearing before the ALJ. In the preamble to the final rule, OSHA defines the conclusion of the hearing to be "10 days after the date of the decision of the administrative law judge unless a motion for reconsideration has been filed in the interim." 69 Fed. Reg. at 52111.

     

  • Concluding the administrative proceeding after the complainant elects to proceed in federal district court . In response to commentors who suggested specific incorporation of preclusion principles into the regulations to protect employers from having to defend both a DOL and a federal court action -- including a provision that once a complainant elects to go to district court DOL's administrative adjudication should cease and desist -- OSHA stated that there was no statutory basis for doing so, that it did not have the authority to regulate litigation in federal district courts, and that there was no legislative history suggesting that the complainants had to end their administrative proceedings prior to seeking relief in the federal courts. OSHA, however, observed that to date, complainants who choose to go to federal court generally do so before the ALJ conducts the hearing, and that after the complainant files in district court, ALJs dismiss the hearing requests, often in response to a motion filed by the complainant.

INTERIM SOX REGULATIONS

On May 28, 2003, the Occupational Safety and Health Administration published an Interim Rule implementing the whistleblower provision of the Sarbanes-Oxley Act (SOX). Procedures for the Handling of Discrimination Complaints Under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002 , Title VIII of the Sarbanes-Oxley Act of 2002; Interim Rule, 29 CFR Part 1980, 68 Fed. Reg. 31859 (May 28, 2003) . These regulations mirror, in most respects, the AIR21 regulations, but also take into consideration the ERA and STAA regulations.

Highlights include: (1) a regulatory definition that takes into account SOX's unique statutory provisions that identify individuals as well as the employer as potentially liable for discriminatory action; (2) a provision that reinstatement may be ordered "where appropriate" [the preamble explains that it may not be appropriate to reinstate an employee, for example, who is a security risk; it also takes the position that in some cases "economic reinstatement" as is frequently used in Federal Mine Safety and Health Act cases may be used]; (3) a provision that an ALJ has broad authority to limit discovery in view of the time limit on DOL proceedings before a complainant may seek a de novo hearing in federal court [the preamble noting that a complainant who seeks excessive or burdensome discovery or who fails to adhere to an agreement to delay filing in federal court in order to conduct discovery, might face a finding of bad faith by the federal court; (4) a decision to follow the ERA model in regard to OSHA participation in an ALJ/ARB proceeding ( i.e ., not prosecuting the case, but reserving the discretion to participate as a party or amicus at any stage in the proceeding) [the preamble, however, invites comments on this "preliminary decision" that OSHA would not ordinarily participate as a prosecuting party]; (4) a provision that ARB review is not a matter of right, but is accepted at the discretion of the Board; (5) a provision to apply the "substantial evidence" standard of review by the ARB of the ALJ's findings of fact [the preamble states that this feature is borrowed from the STAA regulations]; (6) a provision that a complainant must provide 15 days advance notice of an intent to file a Federal court complaint. The preamble suggests that principles of issue or claim preclusion may apply if a complainant seeks Federal court de novo review if the ARB issues a decision more than 180 after the filing of the complaint. The preamble also suggests that where an administrative hearing has been completed and is awaiting a decision from the ALJ or the ARB, a Federal court might treat a complaint as a petition for mandamus to order the issuance of a decision under appropriate time frames.

 

Constitutionality

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FEDERAL COURT DECISIONS

CONSTITUTIONALITY OF ADJUDICATION OF SOX WHISTLEBLOWER COMPLAINTS IN NON-ARTICLE III AGENCY

In Schmidt v. Levi Strauss & Co. , No. 5:05-cv-01026 (N.D.Cal. Mar. 28, 2008), the court in considering whether the whistleblower provision of SOX includes a right to a jury trial, stated that it "presumptively considers Congress's assignment of adjudicative rights to a non-Article III agency constitutional." Slip op. at 14.

 

 

Department of Labor Jurisdiction

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ADMINISTRATIVE REVIEW BOARD DECISIONS

DOL LACKS AUTHORITY TO ADJUDICATE CLAIMS UNDER 18 U.S.C. § 1513(e)

In Kukucka v. Belfort Instrument Co. , ARB Nos. 06-104 and 120, ALJ Nos. 2006-SOX-57 and 81 (ARB Apr. 30, 2008), the Complainant argued that because the Respondent sued him in civil court, it is covered under section 1107 of the SOX, which provides a criminal penalty for anyone who "with the intent to retaliate, takes any action harmful to any person" providing to a law enforcement officer information relating to the commission of a federal offense. 18 U.S.C.A. § 1513(e). The ARB, however, held that the Department of Labor does not have the authority to administer this SOX provision, citing Henrich v. Ecolab, Inc. , ARB No. 05-030, ALJ No. 2004-SOX-51, slip op. at 3 (ARB May 30, 2007).

 

 

Preemption

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FEDERAL COURT DECISIONS

SOX SECTION 1514A CLAIM FOUND TO PREEMPT COMMON LAW CLAIM FOR WRONGFUL TERMINATION UNDER FACTS OF THE CASE

In Rock v. Lifeline Systems Co. , No. 13-11833 (D. Mass. Apr. 22, 2014)(2014 WL 1652613), the Plaintiff was a sales person who charged that she was illegally terminated from employment under several laws for reporting a fire hazard with the Defendant's medical alert devices. The Defendant argued that the Plaintiff's common law wrongful termination claim was preempted by the Plaintiff's SOX Section 1514A complaint. The court found that the allegations that gave rise to the common law claim arose from the same set of facts that gave rise to the SOX claim. The court found that the SOX was "designed to protect employees from the very same set of actions that [the Plaintiff] presently invokes in the wrongful termination claim" and that "[h]er reporting of the 'suspected violations of safety standards' that she believed 'present a threat to the safety of the population at large,' ' arises from the same conduct that prompted her to report the alleged mail, wire and securities fraud'." Slip op. at 25 (citation omitted).

A FEDERAL SOX WHISTLEBLOWER CLAIM DOES NOT PREEMPT THE STATE LAW CAUSE OF ACTION FOR WRONGFUL DISCHARGE IN VIOLATION OF PUBLIC POLICY

In Jones v. Home Federal Bank , No. 1:09-cv-00336-CWD (D. Idaho Mar. 17, 2010) (case below 2009-SOX-32), the plaintiff alleged that she was terminated after working for Home Federal Bank for 10 weeks because she had objected to, opposed and provided information to executive officers of Home Federal Bank about conduct she reasonable believed constituted a violation of the rules and regulations of the SEC and other provisions of federal and state law relating to fraud against shareholders. The defendant's filed a motion to strike contending that the plaintiff's state law claim, wrongful termination in violation of public policy, must be stricken because the relevant public policy that the plaintiff claims was violated by her discharge is contained in SOX, which provides a federal remedy. The District Court denied the defendant's motion on the basis that granting the motion would contradict the clear intent of SOX not to preempt or diminish the rights, privileged or remedies under state law.

 

 

Retroactive Application

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ADMINISTRATIVE REVIEW BOARD DECISIONS

EFFECTIVE DATE OF SOX; COVERAGE MAY BE ESTABLISHED EVEN THOUGH PROTECTED ACTIVITY OCCURRED BEFORE SOX WAS EFFECTIVE IF ADVERSE ACTION OCCURRED AFTER EFFECTIVE DATE

In Harvey v. Home Depot U.S.A., Inc. , ARB Nos. 04-114 and 115, ALJ Nos. 2004-SOX-20 and 36 (ARB June 2, 2006), the Complainant's protected activity occurred prior to the effective date of the SOX whistleblower provision. The ARB noted, however, that it had implicitly recognized in prior cases that SOX whistleblower protection may apply so long as the complainant proves that the protected activity was a contributing factor and the adverse action occurred after the effective date of the SOX.

JURISDICTION; AUTHORITY TO HEAR FALSE CLAIMS ACT ASPECT OF RETALIATION CLAIM

In Paz v. Mary's Center for Maternal & Child Care , ARB No. 06-031, ALJ No. 2006-SOX-7 (ARB Nov. 30, 2007), the Complainant filed a complaint with DOL alleging retaliation under SOX and the False Claims Act, 31 U.S.C.A. § 3730(h). The ARB affirmed the ALJ's finding that DOL does not have jurisdiction to hear the False Claims Act aspect of the retaliation claim.

 

ADMINISTRATIVE LAW JUDGE DECISIONS

RETROACTIVE APPLICATION OF SOX WHISTLEBLOWER PROVISION NOT PERMITTED

In McIntyre v. Merrill, Lynch, Pierce, Fenner & Smith, Inc. , 2003-SOX-23 (ALJ Jan. 16, 2004), the ALJ agreed with the ALJ decisions in Gilmore v. Parametric Technology, 2003-SOX-1 (ALJ Feb.6, 2003) and Kunkler v. Global Futures & Forex, Ltd, 2003-SOX-6 (ALJ Apr.24, 2003) in which it was determined that the whistleblower provision of the Sarbanes-Oxley Act could not be afforded retroactive application. See Landgraf v. USI Film Products, 511 U.S. 244 (1994) (strong presumption against retroactive application unless Congress manifested a clear intent to have the statute in question apply retroactively).

 

RETROACTIVE APPLICATION; DATE OF ALLEGED RETALIATION RATHER THAN DATE OF PROTECTED ACTIVITY DETERMINES WHETHER THE ACT APPLIES

In Lerbs v. Buca Di Beppo, Inc. , 2004-SOX-8 (ALJ June 15, 2004), the Respondent moved for summary decision on the ground that the Sarbanes-Oxley Act was not in effect when the Complainant engaged in the activity that he contends was protected. The ALJ, however, held that it is the date of the alleged retaliatory action rather than the date of the protected activity that determines whether the Act applies. Thus, retroactive application of the SOX whistleblower provision was not implicated.

 

Statutory and Regulatory Interpretation

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FEDERAL COURT DECISIONS

STANDARD OF REVIEW; FOURTH CIRCUIT FINDS THAT THE ARB'S INTERPRETATION OF § 1514A IS ENTITLED TO CHEVRON DEFERENCE

In Welch v. Chao , No. 07-1684 (4th Cir. Aug. 5, 2008), the Fourth Circuit stated that it would review the appeal of SOX decision by the ARB based on de novo review for questions law, but give deference to the ARB's interpretation of § 1514A under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc. , 476 U.S. 837, 843-44 (1984). The court based Chevron deference on the fact that Congress explicitly delegated to the Secretary of Labor authority to enforce § 1514A by formal adjudication, see 18 U.S.C. § 1514A(b), and that the Secretary has delegated her enforcement authority to the ARB, see 67 Fed. Reg. 64,272, 64,273 (Oct. 17, 2002). The court stated that on questions of fact, it would uphold the ARB's findings if supported by substantial evidence.

LEGISLATIVE HISTORY; COMMENTS OF ONE SENATOR IN CONGRESSIONAL RECORD ACCORDED LITTLE WEIGHT

In Schmidt v. Levi Strauss & Co. , No. 5:05-cv-01026 (N.D.Cal. Mar. 28, 2008), the court found that the comments of Senator Leahy in the Congressional Record should be accorded little weight as legislative history, even though he was the principal author of the whistleblower provision that became section 1515A of the SOX, citing authority to the effect that committee reports are the authoritative source.

RELEVANCE OF OTHER FEDERAL CASELAW TO CONSIDERATION OF SOX WHISTLEBLOWER COMPLAINT

In Collins v. Beazer Homes USA, Inc. , __ F.Supp.2d __, 2004 WL 2023716 (N.D.Ga. Sept. 2, 2004), the court was considering the Respondent's motion for summary judgment. The court noted that, given the scarcity of caselaw on the SOX, it was required to look to other federal whistleblower statutes for guidance. The court specifically observed that the SOX regulations were grounded in AIR21, STAA and ERA whistleblower laws, and that the SOX burdens of proof are derived from AIR21. The court acknowledged that USDOL/OALJ decisions may provide guidance, but noted that the ALJ decisions cited by the parties were not in the context of a motion for summary judgment, and that the court was bound to follow the decisions of the 11th Circuit Court of Appeals. Collins , 2004 WL 2023716 * 6 and n.10.

The court also observed that the evidentiary framework for a SOX whistleblower case "is an analysis different from the general body of employment discrimination law." Collins , 2004 WL 2023716 at n.11. The court cited the analysis in Stone & Webster Eng'g Corp. v. Herman , 115 F.3d 1568, 1572 (11th Cir. 1997), in which the Court of Appeals had discussed how the ERA analysis was its own "free-standing" framework distinct from the body of general employment discrimination law. Id . The district court stated that "while reference to the general body of employment discrimination law may provide guidance in some areas, where the statute provides a specific framework the Court follows the statute." Id .

STATUTORY INTERPRETATION; REFERENCE TO SIMILAR WHISTLEBLOWER STATUTES FOR GUIDANCE

In the absence of case law interpreting the whistleblower provision of SOX, 18 U.S.C. § 1514A, courts will look for guidance to case law regarding similar federal whistleblower statutes (such as the ERA, 42 U.S.C. § 5851) in ascertaining Congressional intent. Bozeman v. Per-Se Technologies, Inc. , 1:03-CV-3970 (N.D.Ga. Sept. 12, 2006) (citing Collins v. Beazer Homes USA, Inc. , 334 F.Supp.3d 1365, 1374 (N.D.Ga. 2004)).

ALJ DECISIONS; ALTHOUGH NOT BINDING PRECEDENT, USEFUL AS GUIDANCE IN THE ABSENCE OF RELEVANT JUDICIAL AUTHORITY

Because of the absence of judicial authority on the subject, the court in Livingston v. Wyeth , No. 1:03-CV-00919 (M.D.N.C. July 28, 2006), reviewed ALJ decisions on whether the SOX whistleblower provision applies retroactively. The court found such decisions to be useful for guidance, albeit not binding.

SOX SECTION 1513(e) DOES NOT CREATE A PRIVATE CAUSE OF ACTION

In In Re Compact Disc Minimum Advertised Antitrust Litigation , MDL No. 1361 (D.Me. Oct. 2, 2006), the Plaintiff filed suit against a lawyer, several law firms, an entertainment company, and numerous other entertainment entities, alleging essentially that they conspired to steal a valuable invention he had developed for targeted marketing of online consumer goods. One count of the Plaintiff's suit was grounded in the Sarbanes-Oxley Act, 18 U.S.C. § 1513(e), on the theory that the Defendants took harmful action against him because he conveyed information to the Department of Justice relating to possible commission by record companies of antitrust violations and securities fraud. The court held that section 1513(e) does not create a private right of action (the Complainant admitted that he was not an employee, and therefore was not covered by the SOX whistleblower provision at section 1514A). The court found that section 1513(e) is criminal rather than civil in nature, and that private citizens lack a judicially cognizable interest in prosecution or nonprosecution of another.

SOX REGULATIONS ARE ENTITLED TO CHEVRON DEFERENCE

Noting that Congress had explicitly delegated to the Secretary of Labor authority to enforce § 1514A by formal adjudication, the First Circuit held that the DOL regulations implementing the SOX whistleblower provision are entitled to Chevron deference. Day v. Staples, Inc. , No. 08-1689, slip op. at 23 and n.7 (1st Cir. Feb. 9, 2009) (case below 2006-SOX-34).

 

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