Recent US Whistleblower Developments

Posted by Shannon Walker

on October 11, 2013

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The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act both extend whistleblower protection to certain individuals who report conduct they believe constitutes a violation of federal law relating to financial, securities, or shareholder fraud. The United States Supreme Court is expected to soon issue a decision on the important question of whether SOX protects whistleblowing activity by employees of private entities who are contractors to public companies.

Supreme Court to Decide SOX’s Application to Contractors of Publicly Held Companies 

The United States Supreme Court recently issued a writ to decide whether SOX whistleblower protections extend to employees of privately held contractors of public companies, such as accounting firms, mutual fund investment advisors and other private companies that provide services to public companies. Currently, a section of SOX prohibits a publicly traded company or “any officer, employee, contractor, subcontractor, or agent of such company” from discriminating against its employees for reporting potential securities violations.

Last year, the First Circuit Court decided in Lawson v. FMR, LLC, that the complainants did not have claims under the above mentioned section of SOX because of their status as employees of private companies. The Lawson decision conflicts with decisions of the Department of Labor’s Administrative Review Board, which hold that SOX’s whistleblower protections do extend to employees of private contractors. The Supreme Court is expected to resolve this split of authority in ruling on the Lawson appeal.

 Second Circuit Clarifies Burden of Proof for SOX Whistleblower Claims

The Second Circuit Court of Appeals recently took the opportunity to “clarify the burden-shifting framework applicable to whistleblower retaliation claims under SOX” in connection with its review and affirmance of a decision by the Administrative Review Board dismissing an executive’s SOX claim based on his allegation that he was terminated three months after he questioned the company’s failure to disclose certain aspects of the company’s finances. Joining other federal circuits, the Second Circuit confirmed that, to prove a SOX claim, a whistleblower must show by a preponderance of the evidence that he or she engaged in statutorily protected activity, the employer knew he or she engaged in the protected activity, the employee experienced an adverse employment action, and the protected activity was a contributing factor in the adverse action. If a complainant can prove these four elements, then an employer may avoid liability by proving by “clear and convincing evidence” it would have taken the same adverse action absent the protected activity.

Employers should note that the burden on SOX defendants — to rebut the employee’s case with “clear and convincing evidence” — is a substantially higher standard than that applied under Title VII, which only requires an employer to articulate a legitimate, nondiscriminatory reason for the adverse action.

Recent decisions, as well as the Supreme Court’s decision to consider the breadth of SOX’s whistleblower provision, serve as a reminder that courts generally take a broad view of what constitutes protected activity under SOX and Dodd-Frank. Employers should ensure that training of management and human resources professionals involved in the investigation and assessment of potential whistleblower complaints underscores the scope of activities that may constitute protected activity.