Sarbanes-Oxley Interpreted by First Circuit for First Time

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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.

Ledbetter Fair Pay Act Gains Traction Quickly

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Unequal pay victims are quickly realizing the benefits of the Lilly Ledbetter Fair Pay Act (FPA). The District Court of New Jersey’s recent decision in Gilmore v. Macy’s Retail Holdings is believed to be the first case in the country to recognize the applicability of the Fair Pay Act in unequal pay act cases under Title VII. In that case, the plaintiff filed a charge with the Equal Employment Opportunity Commission (EEOC) on July 7, 2005 on the basis of alleged race discrimination. The court noted the FPA’s retroactive application:

The FPA takes effect as if enacted on May 28, 2008 and applies to all claims of discrimination in compensation under Title VII and the Civil Rights Act of 1964 (42 U.S.C. et seq.) … that are pending on or after that date. The FPA therefore applies to this case. (internal quotations omitted) (emphasis added)

The court further noted that the FPA allows victims of unequal pay to recover back pay for up to 2 years preceding the filing of the charge.

Unequal Pay Victims Gain Protection through the Ledbetter Fair Pay Act

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Gender discrimination just became more expensive. On January 29, 2009, President Obama signed the Lilly Ledbetter Fair Pay Act of 2009. After approximately 19 years as an employee of Goodyear Tire and Rubber Company, Lilly Ledbetter learned that she earned less than her male colleagues. A jury found Goodyear liable for gender discrimination. In a controversial decision, the United States Supreme Court reversed, ruling that Ms. Ledbetter should have filed her claim within 180 days of the date that Goodyear first paid her less than her male counterparts. (For more information about the Supreme Court’s decision, please visit our blog post entitled, Supreme Court Routs Title VII in 2007: Goodyear Wins Right to Discriminate Based on Gender.)

The Ledbetter Fair Pay Act of 2009 has three key features. First, the statute not only applies to gender discrimination, but also to unequal pay based on the following types of discrimination: (a) race, color, religion, and national origin under Title VII; (b) age under the Age Discrimination in Employment Act (ADEA); and (c) handicap discrimination under the Americans with Disabilities Act (ADA). Second, the statute allows employees who have suffered these types of unequal pay discrimination to recover back pay for up to two years preceding the filing of a charge with the Equal Employment Opportunity Commission. Third, the Act takes effect retroactively as if enacted on May 28, 2007.

The Fair Pay Act is a welcome change for employees who suffer pay discrimination. For more information on this issue please visit the New York Times article entitled,Obama Signs Equal Pay Legislation.

Commissioned Employees in a Tough Economy: Will You Get Paid?

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Employees who receive commissions based on their work performance may face difficulty in securing payments from employers in this tough economy. Under certain circumstances, however, legal recourse exists to secure payment from unscrupulous employers who attempt to cut corners by depriving employees of legally earned commissions.

The Massachusetts Wage Act, namely M.G.L. c. 149, §148, explicitly defines the term “wages” to equal “commissions” where certain parameters are satisfied:

This section shall apply … to the payment of commissions when the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due and payable to such employee ….

Where commissions are “due and payable” and “definitely determined,” the caselaw in Massachusetts makes clear that the Wage Act applies to highly paid executives, and not just hourly workers. In Wiedmann v. Bradford Group, Inc., the Supreme Judicial Court upheld a claim of pay to a professional who had earned an irregular commission which had been held, by the trial court, to have been unprotected. Thereafter, the Massachusetts Appeals Court in Okerman v. VA Software Corp. followed the Wiedmann decision, and explicitly held it was reversible error to dismiss wage claims of highly paid executives claiming irregular, contingent commissions, above and beyond a “healthy” base salary. The Appeals Court further opined that to exclude the recovery of such commissions would “vitiate the entire paragraph in the Wage Act addressing commissions,” and render the commissions paragraph meaningless.

It is illegal for an employer to in any way penalize an employee who attempts to recover unpaid commissions. The Supreme Judicial Court in Smith v. Winter Place, LLC has interpreted this provision to cover internal complaints: “Complaint made to an employer (or a manger of the employer) by an employee who reasonably believes that the wages he or she has been paid violate such laws readily qualifies as” protected conduct.

When seeking to recover unpaid commissions, its important to determine first whether the commissions can be construed as “wages” under the Massachusetts Wage Act, and second to ensure that you are protected from retaliation.

Age Discrimination Mixed Motive Standard Before the Supreme Court

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Employment discrimination claims will continue to garner the Supreme Court’s attention in 2009. On December 5, 2008, the Supreme Court granted certiorari in Gross v. FBL Financial to decide the following issue:

Must a plaintiff present direct evidence of discrimination in order to obtain a mixed motive instruction in a non-Title VII discrimination case?

Gross asserted an age discrimination claim under the Age Discrimination in Employment Act (ADEA) and prevailed before a jury. At trial, Gross was required to prove that his age was a “motivating factor” in his employer’s decision to demote him. In doing so, Gross relied on circumstantial evidence. The 8th Circuit Court of Appeals, however, reversed on the basis that the trial court should have required Gross to use direct evidence to prove age discrimination under the ADEA.

The Supreme Court and Massachusetts courts are no strangers to mixed motive issues. In Price Waterhouse v. Hopkins, which involved gender discrimination under Title VII, the United States Supreme Court held that the burden of persuasion shifts to the employer once mixed motives have been shown. Justice O’Connor’s concurring opinion in Price Waterhouse, however, required an employee to produce “direct evidence” of discrimination where mixed motive is at issue. Congress later amended Title VII to make “motivating factor” — and not “direct evidence” — the standard required in mixed motive cases.

The Supreme Judicial Court (SJC) of Massachusetts faced a similar issue in Wynn & Wynn, P.C. v. Massachusetts Commission Against Discrimination, which involved gender discrimination claims under the Fair Employment Practices Act (M.G.L. c. 151B, s. 4). There, the SJC followed the Supreme Court’s reasoning in Price Waterhouse, holding that the burden shifts to the employer once mixed motives are shown. Once the burden shifts, the employer can avoid liability only by proving that it would have made the same decision even without the illegitimate motive.

In Wynn & Wynn, the SJC also discussed the quality of evidence needed in mixed motive cases, noting that an employee must “demonstrate with a high degree of assurance” that the challenged employment decision was a “mixture of legitimate and illegitimate motives.” The SJC ultimately applied a direct evidence standard, stating there must be “some strong (direct) evidence of discriminatory bias.” The SJC made clear that direct evidence “consists of statements by a decisionmaker that directly reflect the alleged animus and bear squarely on the contested employment decision.”

Subsequent to Price Waterhouse and Wynn v. Wynn, Congress amended Title VII to make “motivating factor” — and not “direct evidence” — the standard required in mixed motive cases. The Supreme Court noted this change in deciding Desert Palace, Inc. v. Costa, where it held that “[i]n order to obtain [a mixed motive instruction under Title VII], a plaintiff need only present sufficient evidence for a reasonable jury to conclude, by a preponderance of the evidence, that ‘[protected class] was a motivating factor for any employment practice.’”

Unlike Title VII, Congress has not detailed the quality of evidence needed under the ADEA. As Professor Paul Secunda of Marquette University Law School has commented, “this case is going to be a tough one to predict.”

Non-Compete Dispute Pits IBM Against Apple

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Don’t be fooled: Non-compete agreements are enforceable. I say this because the following exchange has been all too typical over the past several months:

Client: “I just landed a new job, with better pay and more room for growth. Can you look at my new employment agreement?”
Me: “Sure. Did you happen to sign a non-compete with your old employer?”
Client: “I think so, but I’ve heard that non-competes are pretty much unenforceable in Massachusetts.”
Me: “Unfortunately, that’s not the case. Non-competes are enforceable in Massachusetts, albeit under limited circumstances.”

In Massachusetts, non-competes are in fact enforceable where they protect a legitimate business interest and are reasonably limited in both temporal and geographic scope. If your employer has asked you to sign a non-compete, its a safe bet that the company’s counsel has crafted the agreement to give it the best chance of standing up in court.

One of Apple Inc.’s newest executives, Mark Papermaster, recently fell victim to the non-compete he signed with his former employer, International Business Machines Corp. (IBM). After leaving for Apple in October, IBM sued Papermaster, claiming that the move violated his non-compete agreement in which he agreed not to work for a competitor within one year after leaving his job.

On October 22, 2008, IBM filed its Complaint in the Southern District of New York in which, among others requests for relief, it petitioned the court for a preliminary injunction preventing Papermaster from working at Apple. In particular, IBM claimed that the agreement is enforceable because it protects a legitimate business interest since Apple is a competitor.

In his Affidavit, Papermaster challenged IBM’s assertion that Apple competes with its business. Specifically, Papermaster noted that “IBM focuses on high-performance business systems such as information technology infrastructure, servers and information storage products, and operating systems software” (Para. 13). Papermaster went on to state that “Apple, on the other hand, is in the business of designing, manufacturing and marketing consumer-oriented hardware and related products” (Para. 14). In the end, IBM’s argument resonated with U.S. District Judge Kenneth Karas, who ordered Papermaster to immediately “cease his employment with Apple Inc. until further order of this court.”

Non-competes have fueled a growing debate in Massachusetts over the last year. As reported in Boston.com’s article entitled, Why ‘noncompete’ means ‘don’t thrive ‘, making non-competes illegal in Massachusetts could greatly benefit the local economy:

The partners at Spark Capital, a Boston venture capital firm, began a campaign … to get rid of noncompetes in Massachusetts. They sent a letter to Governor Deval L. Patrick in which they predicted that the result would be “more start-ups originating in the Commonwealth, a reduction in the exodus of talented people, and the ability for Massachusetts to better compete nationally and globally as a hub of innovation.”

While businesses may oppose such a move, such a position could be short-sighted. Its not unreasonable to assume that IBM has found itself in Apple’s shoes before, hoping to a hire a key employee whose talents and ideas could be fully realized. In the long run, promoting the free flow if ideas and labor is good for employees and employers alike. Some companies seem to be catching on. As reported in the same article, Google’s Cambridge office does not require its employees to sign non-competes. Hopefully, this mindset will continue to gain traction.

The bottom line: If your employer asks you to sign a non-compete, YES it can be enforceable and YES you should have it reviewed beforehand to protect the career to which you have devoted countless late nights, early mornings, and weekends.

Retaliation Sarbanes-Oxley Whistleblower

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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

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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.

Non-Competes Presumptively Illegal as to Certain Professions: Social Workers Newest Category

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In Massachusetts, non-compete agreements are presumptively unenforceable as to certain professions: physicians; nurses; lawyers; broadcasters; and just recently, social workers.

Under M.G.L. c. 112, s. 12X, non-compete agreements are null and void as to physicians. In Falmouth Ob-Gyn Assocs., Inc. v. Abisla, the Supreme Judicial Court struck down a doctor’s contractual obligation to pay $250,000 in liquidated damages after leaving to compete against his former practice. In a similar vein, M.G.L. c. 112, s. 74D nullifies non-competes as to registered or licensed practical nurses.

Under the Massachusetts Rules of Professional Conduct, non-competes are unenforceable as to lawyers. However, in Pettingell v. Morrison, Mahoney & Miller, the Supreme Judicial Court considered the enforceability of a forfeiture-for-competition clause contained in a law firm’s partnership agreement. The clause required partners who withdraw from the firm, and who later compete, to forfeit certain payments. Although the Supreme Judicial Court ruled that the clause was unenforceable in that particular case, it noted that forfeiture-for-competition clauses are not per se illegal and may be upheld if a law firm could demonstrate that its survival and well-being justified such a clause.

In 1998, the Massachusetts legislature exempted individuals in the broadcasting industry, including television stations and radio stations. In particular, M.G.L. c. 149, s. 186, nullifies non-compete agreements in the broadcasting industry where: (1) the employer terminates the employee, (2) the employment relationship is terminated by mutual agreement, or (3) the employee’s contract expires. Notably, Section 186 does not prohibit the enforcement of non-compete agreements where the employee voluntarily terminates his or her employment prior to the expiration of an employment contract.

Recently, in 2008, the Massachusetts legislature made non-competes unenforceable with respect to social workers under M.G.L. c. 112, s. 135C:

A contract or agreement creating or establishing the terms of a partnership, employment, or any other form of professional relationship with a social worker licensed under this chapter that includes a restriction of the right of the social worker to practice in any geographic area for any period of time after termination of the partnership, employment or professional relationship shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

Beyond these exemptions, a court will refuse to enforce a non-compete against any employee where the non-compete is not: (1) necessary to protect a legitimate business interest, (2) reasonably limited in time and geographic scope, (3) consonant with the public interest, and (4) supported by consideration. The burden of proof as to the enforceability of a non-compete agreement lies with the employer. For more information, please visit our previous blog post entitled, Massachusetts Non-Compete Agreements in a Nutshell.

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

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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.