Article - Sarbanes-Oxley Whistleblower Claims: Fast Start or Fizzle?

Most public companies now face another substantial challenge in workforce management and exposure to litigation. The whistleblower protection provisions of the Sarbanes-Oxley Act[1] prohibit employers with publicly traded stock or debt from retaliating against employees who engage in certain protected activities, such as providing information in relation to alleged accounting improprieties, or participating in a proceeding related to alleged securities law violations. The scope of prohibited acts is broad, including not only discharge, demotion and suspension, but also “harassment” and “threat[s].”[2] An aggrieved employee can file an administrative complaint with the Occupational Safety and Health Administration (“OSHA”), and can proceed to federal court after a waiting period, regardless of OSHA’s determination.

The fact that Time magazine featured three prominent corporate whistleblowers as the collective “person of the year” shortly after Sarbanes-Oxley became effective symbolizes the visibility that whistleblower claims can have, and underscores the need for prudent human resources and risk management. Indeed, although Sarbanes-Oxley requires that an aggrieved employee first file his complaint with OSHA and permit OSHA at least 180 days to investigate before he may file a civil lawsuit, our experience has shown that an employee who believes he has been mistreated may not sit quietly and wait after visiting OSHA. Instead, he may file a complaint at the Securities and Exchange Commission and attempt to get the United States Attorney's office involved to investigate the alleged wrongdoing with an eye toward criminal liability. Furthermore, whistleblower complaints may have significant implications for the audit process, leading independent auditors to define new audit criteria and require substantial additional audit work before issuing an opinion. These implications and others have led at least one commentator to suggest that smaller public companies may consider going private simply to avoid the additional burdens.[3]

The outlook is not altogether bleak for public companies. Recent statistics show that employers prevail most of the time in these whistleblower cases at the administrative level.[4] Between July 2002, when the Act passed, and December 2003, OSHA recorded 169 charges alleging Sarbanes-Oxley whistleblower retaliation. OSHA found for the employer in an overwhelming 77 of the 79 cases in which it completed an investigation. Of those, 45 were appealed to an Administrative Law Judge (the next stop in the procedures defined by OSHA’s regulations[5]), and OSHA’s determinations have been reversed by an ALJ only three times. Only four ALJ determinations have gone to the next step, an appeal to the Administrative Review Board. In each case, the Board affirmed the ALJ. No Sarbanes-Oxley whistleblower complaint has yet reached the final stage of appeal provided by the OSHA regulations, a federal circuit court of appeals review.

Although an aggrieved employee must first bring his complaint to OSHA, the employee may file a civil lawsuit in federal district court if OSHA does not complete its investigation within 180 days. So far, seven of the first 169 cases have reached federal court. Once in court, there is a significant risk that the plaintiff will try to burden the company with high-cost discovery aimed at putting the company’s accounting practices on trial. The employee will argue that he needs to discover such information in order to satisfy his obligation to show a good-faith basis for his belief that wrongdoing occurred. The true issue, however, remains whether the employee spoke out and was retaliated against as a result, not whether accounting improprieties occurred. Thus, companies may make a strategic decision not to contest the good-faith element, and thereby try to limit discovery to avoid expense and keep the dispute focused on alleged retaliation.

An aggrieved or disgruntled employee may also attempt to gain leverage by naming individuals in his OSHA and federal court complaint. While Sarbanes-Oxley is explicit in its provision of criminal penalties for individual officers and agents who retaliate against whistleblowers[6], whether the Act permits individual civil liability remains an open question. The statute provides that “[n]o company . . . or any officer, employee, contractor, subcontractor, or agent of such company,” may retaliate against a whistleblower.[7] Courts have interpreted similar language in Title VII to mean that only companies may be liable for the acts of their agents and employees, not individuals. Because the remedies available under Sarbanes-Oxley closely parallel the remedies available under Title VII, courts may interpret the Sarbanes-Oxley language the same way and reject individual liability. The question remains open, though, and it is likely that individuals will continue to be sued.

The remedies available to prevailing employees are limited (relief “necessary to make the employee whole”), and are similar to those available under other federal anti-discrimination statutes – reinstatement, back pay with interest, and attorney’s fees,[8] but not punitive damages. While damages awards can still easily reach seven figures, the compounding effects of public relations issues, parallel government investigations, additional audit procedures, and heavy professional fees[9] render these types of claims a very significant concern. Indeed, the fact that the Act’s mechanisms are readily available to any unhappy employee, coupled with current public skepticism about public company conduct, ensures that public companies will be confronted with an increasing number of whistleblower claims for quite some time to come.

[1] Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A.

[2] An Administrative Law Judge recently narrowed the scope of actionable adverse action, finding that a poor job performance was not enough. Rather, an employee needs to show “some tangible job consequences” in order to establish adverse action, like “lower salary, . . . jeopardized . . . job security, or . . . [other] tangible job detriment.” Dolan v. EMC Corp., DOL ALJ, No. 2004-SOX-1, 3/24/04.

[3] Tom Barry, Sarbanes-Oxley Leads Firms to Mull Privatization, Atlanta Bus. Chron., Jan. 16, 2004.

[4] Sarbanes-Oxley Claims Represent Largest Category of Non-Health, Safety Cases for DOL, Daily Lab. Rep. (BNA) (Dec. 10, 2003).

[5] 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, 68 Fed. Reg. 31,860 (2003) (to be codified at 29 C.F.R. pt. 1980) (proposed May 28, 2003).

[6] 18 U.S.C. § 1513(e).

[7] 18 U.S.C. § 1514A(a).

[8] 18 U.S.C. § 1514A(c).

[9] Fees often include those directly related to litigation as well as the broad internal investigations that often accompany whistleblower complaints.