JURIST Guest Columnist David J. Marshall of Katz, Marshall & Banks, LLP says that a broad reading of the Sarbanes-Oxley Act's whistleblower provision must be adopted ...
n the years to come, many appellate courts will face a similar decision to the one faced by the US Court of Appeals for the Third Circuit in Wiest v. Lynch
. In that case, the Third Circuit decided to adopt the standard set by the Administrative Review Board (ARB) of the US Department of Labor in the case of Sylvester v. Parexel International LLC
overturned Platone v. FLYi, Inc.
, a 2006 ARB decision, and significantly lowered the bar for what constituted "protected activity" in the context of the whistleblower-protection provision of the Sarbanes-Oxley Act of 2002
Sylvester altered the standard from one defining "protected whistleblower activity" as a communication that "definitively and specifically" relates to certain fraud and Securities and Exchange Commission (SEC) regulations to one that defines "protected activity" as a communication that reflected a "subjective and objectively reasonable belief" that the employer's conduct constituted a violation of one of those laws. This loosened standard more accurately reflects the important policy that underlies whistleblower laws. When we use the term "protected activity" in this context, we are referring to communication (or, in some cases, action) by an employee for which any adverse action taken by the employer as a result will constitute illegal retaliation.
While the sort of parsing of language in the paragraph above may seem like splitting hairs, the effect it will actually have in this context is extremely significant. If an employee is not protected from retaliation for reporting to their supervisor certain concerns like, "I think this practice constitutes fraud," or, "What we are doing here is going to end up costing our shareholders," but instead must report with the specificity of, "I believe that our financial department is engaged in violations of SEC Rule 10b-5," then the standard is effectively eliminating an entire class of employees without specialized knowledge from being able to report fraud without fear of reprisal. This creates a chilling effect even to those employees with specialized knowledge, but who may not have enough information to report with sufficient specificity.
That sort of narrowly targeted protection is not what the drafters of SOX had in mind, nor is it what the drafters of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank)[PDF] had in mind when they included amendments to SOX increasing protections for SOX whistleblowers. Senator Patrick Leahy stated during the floor discussion [DOC] on SOX that the legislation's whistleblower protection provisions were "intended to include all good faith and reasonable reporting of fraud, and [that] there should be no presumption that reporting is otherwise, absent specific evidence." As Senator Leahy correctly noted:
Unfortunately, companies with a corporate culture that punishes whistleblowers for being "disloyal" and "litigation risks" often transcend state lines, and most corporate employers, with help from their lawyers, know exactly what they can do to a whistleblowing employee under the law. US laws need to encourage and protect those who report fraudulent activity that can damage innocent investors in publicly traded companies.
Nowhere in Senator Leahy's remarks does he express the sentiment of, "Now we have to be careful, because we do not want to make it too difficult for these companies to fire their employees." Notwithstanding the absence of that sort of commentary, the dissent in the Wiest
case ends with this conclusory statement:
If it is unnecessary to measure a SOX complainant's reasonable belief against at least some of the elements of securities fraud, like materiality, then virtually any internal questioning of an accounting mistake or a judgment call turns the questioner into a SOX whistleblower, and that cannot be right.
But why not? As the majority in Wiest
[T]he whistleblower's communication need not ring the bell on each element of one of the stated provisions of federal law to support an inference that the employer knew or suspected that the plaintiff was blowing the whistle on conduct that may fall within the ample reach of the anti-fraud laws listed in § 806.
The whistleblower protection provision of the SOX is not the permanent get-out-of-jail-free card that its opponents seek to characterize it as. SOX simply makes it illegal for an employer to retaliate against an employee on the basis of such reporting. For all the policy benefits gained by allowing employees to report conduct which they believe is or may be illegal without fear of reprisal, the lone drawback that companies may face some difficulty in terminating employees because they reported so-called "accounting mistakes" without raising the specter of a SOX retaliation claim seems a trade-off worth accepting. I am hopeful that as more of these cases reach appellate courts across the country, other jurisdictions will follow the lead of the Third Circuit and offer broad protections to employees who blow the whistle on their employer's misconduct.
David J. Marshall is a founding partner of Katz, Marshall & Banks, LLP and was appointed in 2012 to serve as the whistleblower-side co-chair of the American Bar Association Labor and Employment Section's Subcommittee on the Sarbanes-Oxley Act of 2002. Mr. Marshall has successfully represented hundreds of whistleblowers and other employees, including those in the nuclear, financial, pharmaceutical and medical-device industries, as well those alleging fraud in government contracts.
Suggested citation: David J. Marshall, Broad Construction of Whistleblower Provision Fulfills Congressional Intent, JURIST - Sidebar, July 29, 2013, http://jurist.org/sidebar/2013/07/david-marshall-whistleblower-provision.php.
This article was prepared for publication by Stephen Krug, an associate editor for JURIST's professional commentary service. Please direct any questions or comments to him at firstname.lastname@example.org