What SOX 806 Whistleblowers Need to Prove
Floyd R. Hartley, Jr.
This article is reprinted with permission from Executive Counsel. Congress passed the Sarbanes-Oxley Act (SOX)—hastily—on July 30, 2002, in the wake of
a series of well-publicized corporate scandals and the resulting public outcry. Five years
later there is still debate about its efficacy, vitality and cost. Though commentators have leveled much disdainful criticism at SOX, at least one
group of celebrants remains: corporate fraud whistleblowers, along with their lawyers.
Indeed, SOX created a new class of whistleblowers and a new cause of action against
which companies must protect themselves, in Section 806 This section protects whistle-
blowers from retaliatory or discriminatory actions by their employers for reporting violations, primarily of certain laws relating to fraud against shareholders.
What kinds of risks does this create for public companies? Five years of litigation has
clarified those risks, at the same time it has clarified the whistleblower protection afforded
by the law.
FILING DEADLINE STRICTLY ENFORCED
To complain about retaliation under Section 806, a whistleblower must file a com
plaint, either with the Secretary of Labor or OSHA, within 90 days of the alleged retaliation.
Importantly, failure to do so precludes the Department of Labor from awarding any
relief and deprives federal district courts of jurisdiction. Employers facing the prospect
of defending Section 806 complaints may take some comfort from the fact that the 90
day deadline is strictly enforced. In Flood v. Cedant Corporation, for example, OSHA
dismissed a complaint that was filed five days late. Failing to file within 90 days of the
retaliation is fatal to the whistleblower’s claim and may afford the employer an absolute
defense to liability. THE TRIGGER Because the filing deadline is strictly enforced, it becomes critical to determine when
the 90-day clock starts ticking. Both the statute and implementing regulations require
that a Section 806 complaint be filed within 90 days of the alleged violation.
The key, then, is when the alleged violation occurs. The regulation (29 C.ER. § 1980.103) answers that question precisely,
noting that an alleged violation occurs
“when the discriminatory decision has
been both made and communicated to the
complainant.” That means the clock may start ticking
before the employee actually suffers the
alleged retaliation. Indeed, that happened
in Flood v. Cedant, where Flood’s Section
806 complaint was dismissed because,
while it was filed 84 days after his actual
termination, that was at least 95 days after
Cedant told him he would be fired on a
date certain. Thus, telling an employer that
he will be terminated at the end of the
month may immediately trigger the 90day
dock even though the employee
remains employed another three weeks or
more. EQUITABLE TOLLING RARE Facing the prospect of dismissal for
falling to timely file a complaint, a number of employees have argued that the
deadline should be equitably tolled. That
is, they have asserted that as a matter of
equity or fairness certain circumstances
justify stopping the clock so it does not
continue running against them. SOX 806 obviously applies to publicly-traded companies, but it also encompasses
individual officers, employees, and agents
of the publicly-traded company, as well as
its contractors and subcontractors. Although the Department of Labor’s
Administrative Review Board (ARB) has
recognized the possibility of equitably
tolling the deadline, stopping the clock
is—by far—the exception rather than the
rule. The clock will not stop, for example,
merely because the public company
allegedly will not be harmed or prejudiced.
Nor is the employee’s or his attorney’s lack
of familiarity with SOX sufficient. Ignorance
is no excuse. However, the ARB has identified three
circumstances in which equitable tolling may be appropriate:
- When the employer has actively misled
the employee with respect to the cause
of action.
- When the employee has in some
extraordinary way been prevented from
asserting his or her rights.
- When the employee has raised the precise
statutory claim in issue, but has
mistakenly done so in the wrong
forum.
The employee, therefore, bears the burden
of proving he or she is entitled to
equitable tolling—that is, that something
significant about the circumstances, as a
matter of fairness, mandates stopping the
90-day clock. Based on the decisions to date, which
emphasize the limited availability of equitable
tolling, the employee’s burden in that
regard is substantial. PRIVATE COMPANIES MAY BE LIABLE Since SOX focuses on risks to shareholders
and Section 806 covers employees
who report violations of law relating to
fraud against shareholders, one would
think that Section 806 applies only to publicly-traded companies. Ultimately that
may prove true. However, while Section
806 obviously applies to publicly-traded
companies, it also encompasses individual
officers, employees, and agents of the publicly-
traded company, as well as its contractors
and subcontractors. The ARB’s decision last year in
Klopfenstein v. PCC Flow Technologies
Holdings, Inc. notes two ways in which
private companies may be liable under
Section 806. First, on its own, a private subsidiary of
a public company may be subject to Section
806. In Klopfenstein, the ARB held
that its prior cases “did not have occasion
to discuss whether a non-public subsidiary
of a public parent could be covered under
the Act.” Instead of definitively resolving
the issue of whether it did not, the ARB
simply recognized that the question was
not yet answered and left it open for
another day. Private subsidiaries of public
companies, therefore, should remain cognizant
of that uncertainty and act accordingly.
Second, independent of the open question
as to private subsidiaries, all private
companies—and their officers—may subject
themselves to Section 806 by, for
example, acting as the agent, contractor
or subcontractor of a publicly-traded
company. This may not require much. Whether a
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,” the ARB
said. Agency, it explained, depends on “the
existence of required factual elements: the
manifestation by the principal that the agent shall act for him, the agent’s acceptance
of the undertaking and the understanding
of the parties that the principal is
to be in control.” The ARB also noted that a company’s
officers are typically considered general
agents of the company. Klopfenstein,
therefore, provides a profound warning
that private companies (and their officers)
should not ignore. THE EMPLOYEE’S PRIMA FACIE CASE Once an employee timely files a Section
806 corporate fraud whistleblower complaint,
he must still prove his case. On this
point, the Section 806 litigation to-date
provides relatively straightforward guidance
on the four basic elements of the
employee’s case:
(1) that the employee engaged in protected
activity;
(2) that the employer knew about the protected
activity;
(3) that the employee suffered an unfavorable
personnel action; and
(4)that the protected activity was a contributing
factor in the unfavorable personnel
action.
Importantly, even if an employee
proves each of these elements, the employer
may still avoid liability by demonstrating
by clear and convincing evidence that
it would have taken the same action in
the absence of the employee’s protected
activity. PROTECTED ACTIVITY To engage in protected activity under
Section 806, generally the employee must
blow the whistle on corporate fraud (or, in
very limited instances, refuse to engage in
it). Usually, it’s enough for the employee
to provide information about possible
fraudulent conduct to a person with
supervisory authority over the employee. The employee must, however, blow the
whistle about matters covered by SOX. It
is not enough to complain about poor business decisions, or even violations of
other federal laws. Instead, the complaint
must concern certain categories of fraud
or securities violations—basically, fraud
against shareholders. A key measure is
whether the report relates to alleged
misrepresentation of the company’s financial
condition. “UNFAVORABLE PERSONNEL
ACTION” After blowing the whistle, the employee
must show he suffered “unfavorable personnel
action.” This does not mean that he
must be fired or demoted. Nor does it
mean, though, that he can invoke Section
806 to complain about “ordinary tribulations
of the workplace.” Instead, the
employee must have been subjected to
something that either tangibly impacts his
job or would, objectively, dissuade
employees from complaining. The adopted
standard is fairly flexible and may provide
a continuing source of future litigation.
“CONTRIBUTING FACTOR” Finally, the employee must prove that
his employer knew about the protected
activity—the whistleblowing—and that it
was “a contributing factor” in the unfavorable
personnel action he suffered. Based on existing Section 806 litigation,
that is not as high a hurdle as it might at
first appear. The ARB has explained that
“(a] contributing factor is any factor
which, alone or in combination with other
factors, tends to affect in any way the outcome
of the decision.” Therefore, a complainant need not
show that protected activity was the only
or most significant reason for the unfavorable
personnel action, or that a respondent’s
reason was pretext, but rather may
prevail by showing that the respondent’s
“reason, while true, is only one of the reasons
for its conduct, and another (contributing]
factor is the complainant’s protected
activity.” Thus, the employee need only show
that the whistleblowing was one of any
number of factors contributing to the
employment decision. With that, the
employee may state a prima fade case
under Section 806. In response, though, the employer may
still avoid liability by showing it would
have taken the same action even if the
employee never engaged in protected
activity. For almost five years now the Sarbanes-Oxley Act has provided fertile ground for
public commentary, dispute, and litigation.
In recent months, talk of modifying
the statute and curtailing some of its more
costly requirements has escalated. Those
discussed modifications, though, do not
target the whistle-blower protection provisions
of Section 806. Thus, public and private companies
alike would do well to familiarize themselves
with the provision, its incumbent
risks, and the lessons to be learned from the first four-plus years of Section 806 litigation.
Floyd R. Hartley, Jr. is a partner in the
Dallas office of Hughes & Luce LLP. He concentrates
his practice on civil litigation
defense in federal and state courts in Texas,
in areas including commercial disputes, discrimination,
harassment, retaliation, whistle-
blower claims, “Sabine Pilot claims,”
and civil rights matters. He also represents
clients in administrative proceedings.
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