Sarbanes-Oxley Interpreted by First Circuit for First Time

The First Circuit in Day v. Staples recently had its first opportunity to interpret the requirements under the whistleblower protection (18 U.S.C. §1514A) provision of the Sarbanes-Oxley Act (“SOX”). Kevin M. Day worked for Staples as a Reverse Logistics Analyst. Prior to his termination, Day allegedly voiced concerns about certain business practices that he believed to be unethical and unlawful:

First, he claimed to his employer that Reverse Logistics issued monetary credits to customers without having received proper documentation; this, in his view, raised the risk of Staples overpaying credits to customers who did not return goods. Second, he alleged that Reverse Logistics knowingly withheld money from contract customers by under-issuing credits over $25.00; this, in his view, raised the risk to Staples of inaccurately accounting by overstating Staples revenues and to customers of not getting full refunds. Third, he claimed that Reverse Logistics’s practice of canceling and reissuing pick-up orders could permit couriers to overbill Staples. This, in his view, raised the risk of a reduction in Staples’s profits.

In considering whether Day was protected under SOX’s whistleblower provision, the First Circuit noted that Section 1514A prohibits retaliation against any employee who “provide[s] information…regarding any conduct which the employee reasonably believes constitutes a violation” of the pertinent laws listed in that section.

The precise issue before the First Circuit was whether Day “reasonably believed” that Staples’ conduct violated SOX. The court, thus, addressed what constitutes a “reasonable belief” under Section 1514A. In doing so, the First Circuit first noted that SOX protects employees from retaliation where the employee voices about any one of three specific types of illegal conduct:

a violation of specified federal criminal fraud statutes
a violation of any rule or regulation of the SEC
a violation of any provision of federal law relating to fraud against shareholders

The court noted that a reasonable belief must be both subjective and objective:

The employee must show that his communications to the employer specifically related to one of the laws listed in § 1514A. … [I]n addition to a subjective belief, an objectively reasonable belief that conduct complained of constituted a violation of the relevant law set out in the statute. The employee is not required to provide the employer with the citation to the precise code provision in question. The employee is not required to show that there was an actual violation of the provision involved.

Although the court found that Day possessed subjective good faith, it concluded that his complaints lacked the objective component. Specifically, the First Circuit stated noted that “the complaining employee’s theory of such fraud must at least approximate the basic elements of a claim of securities fraud.” In this case, the court characterized Day’s complaints as more akin to concerns over efficiency, rather than shareholder fraud. The court also found that Day failed to satisfy the materiality requirement:

[C]omplaints about purely internal practices that are not financial in nature and are not reported to shareholders do not meet the materiality requirement for an objectively reasonable belief in shareholder fraud.

The First Circuit’s decision provides much needed guidance regarding the elements employees must satisfy to assert a viable whistleblower claim under the Sarbanes-Oxley Act.

Retaliation Sarbanes-Oxley Whistleblower

Guyden sued the employer, asserting a whistleblower claim under the Sarbanes-Oxley Act (SOX). The trial court dismissed, based on the parties’ arbitration agreement. The 2nd Circuit affirmed.

We need not determine what our decision would be under those circumstances, however, because this Agreement gives the arbitrator the power to order additional discovery upon a showing by Guyden that such discovery is necessary to enable her to present her claim. The
FAA also provides the arbitrator with further authority to compel the production of evidence and
witnesses at a pre-merits hearing. Guyden thus has both a contractual and a statutory basis for further discovery should it prove necessary for her claim. Although Guyden asserts that she will be unable to make the showing of necessity the arbitrator will require, her challenge assumes that, in violation of her contractual and statutory rights, an arbitrator will deny her needed discovery. Guyden has introduced no evidence that her fears are well-founded, however, and we must enforce the Agreement unless and until the record proves otherwise.

The court held that SOX claims are subject to arbitration. The court rejected Guyden’s argument that there exists an “inherent conflict” between SOX’s underlying purpose (the public dissemination of information about a corporate employer’s fraudulent activities) and arbitration. The court observed that “[t]ellingly … both Houses of Congress, acting separately, rejected versions of SOX that would have prohibited mandatory arbitration of whistleblower claims.” Guyden made a similar argument regarding a confidentiality clause in the arbitration agreement, but the court rejected that as well. With respect to that conclusion, the court stated “[w]e agree … with the Fifth Circuit’s observation that confidentiality clauses are so common in the arbitration context that Guyden’s ‘attack on the confidentiality provision is, in part, an attack on the character of arbitration itself.'”

The Second Circuit’s decision in Guyden v. Aetna

Whistleblower Claims under Sarbanes-Oxley Subject to Arbitration

Whistleblowers bringing claims under the Sarbanes-Oxley Act (SOX) must contend with another hurdle in getting such claims before a judge or jury. In Guyden v. Aetna, the Second Circuit affirmed the lower court’s ruling that Sarbanes-Oxley claims are subject to arbitration.

In that case, Linda Guyden worked as Aetna’s Director of Internal Audit. At numerous points throughout her employment, Guyden allegedly expressed concerns over Aetna’s Internal Audit Department, describing it as “ineffective, demoralized, and without independence or objectivity.” Guyden allegedly raised her concerns with senior management and advocated the need for an outside audit. Eventually, Aetna agreed to an outside audit to review its internal controls. According to Guyden, however, senior management delayed the release of the outside auditor’s report. Aetna terminated Guyden’s employment shortly before she was scheduled to meet with the company’s Audit Committee and review the outside report.

Guyden filed her lawsuit for wrongful termination pursuant to Section 1514A of SOX, which prohibits public companies from “discharg[ing] . . . an employee . . . because of any lawful act done by the employee . . . to provide information . . . regarding any conduct which the employee reasonably believes constitutes a violation of [federal securities law], when the information or assistance is provided to . . . a person with supervisory authority over the employee . . ..” In response, Aetna requested that the court dismiss the complaint and compel arbitration based on an arbitration agreement that Guyden had executed.

The trial court agreed and the Second Circuit affirmed the lower court’s decision, stating:

The primary purpose of the statute is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct. Although Guyden correctly points out that the broad purpose of the Sarbanes-Oxley Act is to strengthen the integrity of capital markets, the whistleblower provision in particular fills a far narrower gap in the law–it protects employees when they take lawful acts to disclose information or otherwise assist in detecting and stopping actions which they reasonably believe to be fraudulent.

The Second Circuit further noted the legislative history surrounding the passage of the Sarbanes-Oxley Act:

Tellingly, and further undermining Guyden’s argument that the public purpose of SOX should preclude arbitration, both Houses of Congress, acting separately, rejected versions of SOX that would have prohibited mandatory arbitration of whistleblower claims.

Although her claim is not lost, arbitration in general favors employers over employees. The Second Circuit’s ruling presents yet another sobering lesson for employees: If you have any doubt about the implications of a document that your employer requests you to sign, run it by an employment lawyer first.

Whistleblowers Under the Sarbanes-Oxley Act: Overcoming the Private Subsidiary Sham

One of the main purposes of the Sarbanes-Oxley Act (“SOX”) of 2002 is to protect whistleblowers who speak out against a company’s financial improprieties. Section 1107 of SOX states:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offence, shall be fined under this title, imprisoned not more than 10 years, or both.

Since its inception, however, whistleblowers have not fared particularly well before the Department of Labor, the agency responsible for interpreting and enforcing SOX claims:

The government has ruled in favor of whistleblowers 17 times out of 1,273 complaints filed since 2002 …. Another 841 cases have been dismissed. Many of the dismissals were made on the grounds that employees worked for a corporate subsidiary ….

Many cases hinge on whether SOX should apply to whistleblowers who work for subsidiaries of public companies. Department of Labor spokesperson, Sharon Worthy, doesn’t think so: “The plain language of the statute only applies to publicly traded corporations.” But Senator Patrick Leahy (D-Vermont), who helped draft SOX’s whistleblower clause, sharply disagrees: “Otherwise, a company that wants to do something shady, could just do it in their subsidiary.”

While Section 806 does not expressly include subsidiaries of publicly traded companies, consistent with its intent, the law has been correctly applied to private subsidiaries of publicly traded companies in a number of cases:

In Klopfenstein v. PCC Flow Technologies Holdings, Inc., the Administrative Review Board ruled that a Section 806 cause of action may proceed directly against a non-publicly traded subsidiary under an agency theory, reasoning that the subsidiary is an “agent” of the parent company.
In Savastano v. WPP Group, PLC, an Administrative Law Judge adopted the reasoning in Klopfenstein, while also clarifying that the agency relationship must pertain to employment matters. In other words, the fact that the companies share an agency relationship for other purposes, such as collecting and reporting financial data, is insufficient to establish subsidiary coverage under SOX.

Other cases applying an “agency” theory to protect whistleblowers working for private subsidiaries of publicly traded companies include: Johnson v. Siemens Building Technologies, Inc.; Lowe v. Terminix International Co.; Gale v. World Financial Group; Mann v. United Space Alliance, LLC.

The Sarbanes-Oxley Act is a complex statute. Where used correctly, SOX can be an effective tool for protecting whistleblowers who are courageous enough to speak out against a company’s illegal conduct. If you are or will soon become a whistleblower, finding an attorney to effectively represent your interests may require that you invest some time. To ensure that your rights are fully protected, choose a law firm that specializes in employment law.

For more information, please visit The Wall Street Journal article entitled, Whistleblowers Are Left Dangling.

Whistleblower Claim by Health Care Worker Dismissed Creating Questionable Public Policy

Several different whistleblower laws protect Massachusetts employees. In particular, M.G.L. c. 149, §187 protects health care providers from retaliation for disclosing problems within health care facilities. In Romero v. UHS of Westwood Pembroke, al., the Massachusetts Court of Appeals recently issued a ruling dismissing a health care provider’s wrongful termination claim after she objected to a proposed policy that she believed was unlawful if implemented.

Unfortunately, the Appeals Court construed the health care whistleblower statute narrowly. Section 187(b)(3) prohibits retaliation against a health care provider who:

[O]bjects to or refuses to participate in any activity, policy or practice of the health care facility or of another health care facility with whom the health care provider’s health care facility has a business relationship which the health care provider reasonably believes is in violation of a law or rule or regulation promulgated pursuant to law or violation of professional standards of practice which the health care provider reasonably believes poses a risk to public health.

In dismissing the employee’s whistleblower claim, the court reasoned that an employee who objects to a proposed unlawful activity, policy, or activity is not protected under Section 187(b)(3).

The ruling creates an obvious disincentive for health care providers to speak out against and oppose proposed policies, which they reasonably believe will pose a risk to public health. Rather, as the court’s decision makes clear, an employee’s conduct is only protected where there is opposition to an existing policy.

Retaliation Claims Recognized: Employees Victimized by Discrimination Gain Victory Before Supreme Court

Employees recently scored two major victories before the United States Supreme Court. Both cases involved allegations of workplace discrimination. In each case, the Supreme Court recognized an employee’s right to bring claims for retaliation where reports of unlawful discrimination result in a backlash by the employer.

In Gomez-Perez v. Potter, Myrna Gómez-Pérez worked as a clerk for the United States Postal Service in Puerto Rico. During her employment, Gómez alleged that she was subject to retaliatory treatment after filing an age discrimination complaint against her supervisors under the Age Discrimination in Employment Act (ADEA). The federal district court of Puerto Rico granted summary judgment to USPS, reasoning that the United States had not waived sovereign immunity as to retaliation claims under the ADEA. Gómez appealed to the First Circuit Court of Appeals, which disagreed on the sovereign immunity issue but dismissed the retaliation on the basis that the ADEA does not recognize such claims by federal employees.

In CBOCS West, Inc. v. Humphries, Hendrick Humphries, who is African-American, worked as an associate manager at Cracker Barrel. Following his termination, Humphries filed suit based on race discrimination and retaliation under Section 1981 of the Civil Rights Act of 1866. The main issue was whether Section 1981 recognizes a claim for retaliation. While Humphries lost his case in federal district court, the Seventh Circuit Court of Appeals held that Section 1981 protects against retaliation.

In both cases, the Supreme Court refused to restrict employee rights, and affirmed the viability of workplace retaliation claims under the Age Discrimination in Employment Act and Section 1981 of the Civil Rights Act of 1866. For more information about the Supreme Court’s decisions, please visit the New York Times article entitled, Justices Favor Workers in Cases of Bias Retaliation.

Whistleblowers Working Abroad Gain Protection under the Sarbanes-Oxley (SOX) Act

Whistleblowers working abroad for American subsidiaries just scored a major victory. The Southern District of New York in O’Mahony v. Accenture et al. recently ruled that the plaintiff, Rosemary O’Mahony, states a valid claim under the Sarbanes-Oxley Act (SOX). O’Mahony, a British citizen, worked at Accenture in France for 14 years before being suddenly demoted after alerting her superiors in both the United States and France that the company failed to make more than $3 million in social security payments to France.

The main issue before the Southern District of New York was whether the Sarbanes-Oxley Act applies to employees, like O’Mahony, working overseas. The court held that SOX applied to O’Mahony because: (1) she was employed and compensated by a United States subsidiary of a foreign corporation; (2) the alleged retaliation and cover-up implicated Accenture employees working in the United States; and (3) the suit was being brought against a “foreign parent and its United States subsidiary for the alleged misconduct of the United States subsidiary in the United States.”

To read more about the case, please visit’s article entitled, N.Y. Judge Applies SOX Protections to Ex-Partner of Global Firm’s French Office.

Fifth Circuit Clarifies What Constitutes Protected Conduct under Sarbanes-Oxley

The Fifth Circuit Court of Appeals issued an important opinion last week in Allen v. Administrative Review Board clarifying the definition of protected conduct under Section 806 of the Sarbanes-Oxley (SOX) Act. SOX prohibits a publicly-traded company from retaliating against an employee who reports information to a supervisor “regarding any conduct which the employee reasonably believes constitutes” various types of fraud (mail, wire, bank or securities fraud), a violation of any rule or regulation of the Securities and Exchange Commission, or a violation of any provision of federal law relating to fraud against shareholders.

Although the Fifth Circuit in Allen held that the employees did not engage in protected conduct, the opinion provided guidance on what exactly constitutes such conduct. Among other things, the court opined that an employee’s whistleblowing activity must be “definitively and specifically” related to prohibited conduct defined under §1514A ; the whistleblower’s belief of improprieties will be scrutinized under both the subjective and objective standards; a whistleblower’s mistaken, but reasonable, belief that an employer engaged in prohibited conduct still constitutes protected activity.

A whistleblower under SOX will need to also show a nexus between the protected conduct and the adverse employment action. Suspicious timing is typically sufficient to carry this burden. In Collins v. Beazer Homes USA, Inc., the District Court of Georgia held that a two-week temporal proximity between reporting improprieties and termination is sufficient to suggest that the employee’s protected activity was a contributing factor to unfavorable personnel action. The Company may only avoid liability where it demonstrates by “clear and convincing” evidence that it would have taken the same unfavorable personnel action in the absence of the employee’s protected conduct.

Supreme Court Grants Certiorari in Retaliation and Age Discrimination Cases

The Supreme Court has granted certiorari in two promising cases. In both cases, the Court of Appeals ruled against the plaintiff-employee. One case involves the protection of employees from retaliation. We wrote about this case in a post on January 14, 2007 entitled, Title VII Sexual Harassment Case May Find Itself on the Supreme Court Docket. The other case involves evidentiary burdens in age discrimination suits where the employer alleges legitimate, nondiscriminatory reasons for a layoff.

In the first case, the employer asked an employee to cooperate in an investigation regarding sexual harassment in the workplace, who was fired after telling investigators that she had seen her co-worker engage in a series of inappropriate acts. In what has been criticized as a cramped interpretation of Title VII, the Sixth Circuit Court of Appeals held that cooperating with the investigation did not constitute “opposition” to sexual harassment. Click here for the Sixth Circuit’s decision.

The second case deals with age discrimination under the Age Discrimination in Employment Act. There, the employer conducted a reduction in force in which 31 employees were let go. All RIF’d employees, save for one, were 40 years old or older. The Second Circuit Court of Appeals ultimately overturned the jury verdict in favor of the employees on the basis that they failed to disprove the employer’s business necessity defense. Click here for the Second Circuit’s decision.

The New York Times reported on both cases in an article entitled, Justices Add More Cases on Job Discrimination.