BUSINESS AND COMMERCIAL LAW
Retaliation Against Whistle-Blowing under the Sarbanes-Oxley Act

By Susan L. Maupin

The Sarbanes-Oxley Act (Sarbanes-Oxley) provides important protections for employees of “publicly traded companies” who “blow the whistle” on conduct that they “reasonably believe” involves a violation of federal securities laws, the rules or regulations of the Securities and Exchange Commission, or “any provision of federal law relating to fraud against shareholders.”

Pursuant to Sarbanes-Oxley, whistle-blowing employees may not be “discharge[d], demote[d], suspend[ed], threaten[ed], harass[ed], or in any other manner discriminate[d] against . . . with respect to . . . compensation, terms, conditions, or privileges of employment” because the employee engaged in protected activity. Sarbanes-Oxley protects two types of activities. First, employees are protected if they provide information, or assist in an investigation, regarding any alleged fraud. Second, an employee will be protected if he or she files, testifies in, participates in, or otherwise assists in a proceeding relating to securities fraud. Employees are protected even if the allegations of fraud are mistaken or unsubstantiated, as long as the employees “reasonably believe” that the reported conduct constitutes a violation of the statute.

A complainant must demonstrate that the whistle-blowing contributed to the unfavorable personnel action.

OSHA proceedings. Before bringing a claim of discrimination under Sarbanes-Oxley, an employee initially must file a complaint with the Occupational Safety and Health Administration (OSHA) within 90 days after the date that the alleged discriminatory conduct occurred. The complaint must include “a full statement of the acts and omissions, with pertinent dates, which are believed to constitute the violations.”

The complainant must make a prima facie showing that his or her whistle-blowing was a “contributing factor” in the personnel action alleged or the complaint will be dismissed. The regulations explain that a complainant typically meets the prima facie burden “if the complaint shows that the adverse personnel action took place shortly after the protected activity.” If this prima facie showing is made, OSHA will begin an investigation of the allegations.

Administrative law court proceedings. Hearings before an administrative law judge (ALJ) begin as quickly as possible, and they are conducted under a de novo standard of review. OSHA’s decision to dismiss a complaint without investigation or to proceed with an investigation is not subject to review by the ALJ. To establish a violation of the statute, the complainant must demonstrate that the whistle-blowing was a contributing factor in the unfavorable action alleged in the complaint. If, however, the named party demonstrates by clear and convincing evidence that it would have taken the same action regardless of the protected activity, it will avoid liability.

If the ALJ finds that a violation has occurred, it issues an order providing all relief necessary to make the employee whole. If the ALJ determines that the complaint was frivolous or brought in bad faith, it may award the named party reasonable attorney fees not exceeding $1,000. Decisions of the ALJ become effective ten business days after the date of the decision unless a timely petition for review has been filed with the Administrative Review Board (ARB).

ARB proceedings. Within those ten days, a party may file a written petition to the ARB for a review of the decision. Any exceptions that are not included in the petition are deemed waived. The ARB’s decision concludes all of the proceedings before the ALJ. If the ARB finds that the named party violated the law, the final order provides all necessary relief to the employee. If the ARB finds that the named party did not violate the law, it issues an order denying the complaint.

Judicial review. Within 60 days after the ARB issues a final order, a party may file a petition for review in the U.S. Court of Appeals. If the ARB has not issued a final decision within 180 days of the filing of the complaint, and there is no showing of bad faith on the part of the complainant, the complainant may bring an action at law or equity for de novo review in the U.S. district court that has jurisdiction over that matter, regardless of the amount in controversy.

Settlement agreements. The regulations provide for two types of Sarbanes-Oxley settlement proceedings: investigative or adjudicatory. The parties may choose an investigative settlement at any time after the complaint is filed and before the findings and order are objected to or become final if the assistant secretary of labor for OSHA and all parties agree. The parties may enter an adjudicatory settlement at any time after the filing of objections to the order if the parties agree and the settlement is approved by the ALJ or by the ARB, depending on where the case is pending.

Preventing claims. Employers can take several common-sense precautions to help prevent whistle-blower claims or at least provide a strong defense should one arise. First, employers should adequately document all personnel actions and retain the supporting documentation for any adverse employment actions. Should an employee allege that he or she was retaliated against in violation of Sarbanes-Oxley, the employer will have documented evidence demonstrating its legitimate, nonretaliatory reasons for taking the adverse employment action. Employers should also enforce all company policies in a uniform manner. This will help employers rebut any argument that a whistle-blowing employee was treated differently than other employees.

It is also helpful for employers to draft a code of corporate conduct that encourages employees to report misconduct that may potentially violate Sarbanes-Oxley. If the employer has an employee manual, it should include this as a policy. As with a harassment policy, employers should give examples of what conduct might constitute whistle-blowing activity and identify one or more persons to whom reports can be made.

Sarbanes-Oxley whistle-blower complaints should be addressed and investigated promptly and thoroughly. Employers should document all of the steps taken in the investigative process, including keeping a record of all complaints, interviews, and conclusions. If it is determined that an employee engaged in discrimination or retaliation, employers should take timely and effective remedial action. Keeping the employee informed during this process and advising him or her of the outcome often will show an employee that a complaint is being taken seriously, and this may well prevent the filing of a formal complaint.

Employers should also take great care to revise their current retaliation policy to include a “no retaliation” provision protecting Sarbanes-Oxley whistle-blowers. It is also imperative for employers to provide training to all levels of employees regarding their rights and obligations under the act. Because individuals can be held liable for discrimination and retaliation under Sarbanes-Oxley, employees need to understand what is expected of them. In addition to being advised not to discriminate or retaliate against employees who engage in protected activity under Sarbanes-Oxley, supervisors should be trained to immediately forward whistle-blower complaints to the appropriate “point person.” Employers may want to consider retaining outside special counsel to handle Sarbanes-Oxley complaint investigations. Given the likelihood that a complaint will involve corporate and/or securities issues, it would be wise to have a specialist in those areas handle the investigation rather than a corporate human resources manager who may not have the requisite background and experience.

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This article is an abridged and edited version of one that originally appeared on page 12 of The Brief, Spring 2006 (35:3). For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

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Susan L. Maupin is a shareholder in the Columbia, South Carolina, office of the McNair Law Firm. She can be reached at .

Copyright 2007

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