ALI-ABA Course of Study

LITIGATING EMPLOYMENT DISCRIMINATION AND EMPLOYMENT-RELATED CLAIMS AND DEFENSES IN FEDERAL AND STATE COURTS

Whistleblowing, Sarbanes-Oxley, and Retaliation Claims

Debra S. Katz ¹
Katz, Marshall & Banks, LLP
Washington, D.C.
July 6, 2007

I. Sarbanes-Oxley: Whistleblower Protection

A. Introduction.

Undoubtedly the most widely discussed federal whistleblower statute is the enacted provision of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 (July 30, 2002) that protects certain corporate whistleblowers who report financial or securities-related wrongdoing.² As of March 21, 2006, 714 Sarbanes-Oxley whistleblower cases had been filed with the Department of Labor (285 of those coming in FY2005, an increase of 101 over FY2004). Six hundred nineteen cases have been completed, resulting in 642 determinations (the difference in number is due to the fact that some cases have multiple complainants, each of whom receives a separate determination). Of these, the Occupational Safety and Health Administration reports that 454 were dismissed, 92 were withdrawn, and 96 were determined to have merit (resulting in 81 settlements).³ Given increased media exposure and employee education about this law, and the breadth of the coverage and protections afforded, one can only anticipate a proliferation in the number of cases filed.

B. What Whistleblowing is Covered?

This statute provides a new civil remedy to employees of publicly traded companies who allege that they were retaliated against because they provided information about, or participated in an investigation relating to what they reasonably believed to be violations of securities statutes and regulations. See Pub. L. No. 107-204, § 806, codified at 18 U.S.C. § 1514A.

The investigation prong protects those who provide, or cause to be provided, information, or otherwise participate in an investigation regarding any conduct that the employee reasonably believes constitutes a violation of specified federal securities and fraud law. The information or assistance must have been provided to, or the investigation must be conducted by, (1) a federal regulatory or law enforcement agency; (2) a member of Congress or any committee of Congress; (3) a person with supervisory authority over the employee; or (4) a person working for the employer who has the authority to investigate, discover, or terminate the misconduct.

The proceedings prong protects those who file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed, or about to be filed, relating to an alleged violation of federal securities and fraud laws. The Department of Labor has historically interpreted "proceedings" broadly to encompass internal reports to management, and potentially employee leaks to the media, on the grounds that such contacts were a "preliminary step" towards causing a proceeding to be filed or initiated.

C. What Employers are Covered Under SOX?

1. Companies

SOX whistleblower provisions apply to publicly traded companies with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 ("Exchange Act") (15 U.S.C. § 78l) or subject to the periodic reporting requirements of Section 15(d) (e.g., required to file forms 10-K and 10-Q). (15 U.S.C. § 78o(d)). See 18 U.S.C. 1514A(a).

a. Domestic

The Act applies to all companies that have obtained a listing in the United States or have registered securities with the SEC. However, coverage under the whistleblower provisions is narrower than coverage under SOX Section 402 (enhanced conflict of interest provisions) in that it does not cover companies that have filed a registration statement but do not yet have a class of securities registered under Section 12 or report under Section 15(d) of the Exchange Act.

The requirement that a respondent be subject to the registration or reporting requirements of the Exchange Act has been strictly construed. For example, in Flake v. New World Pasta Co., 2003-SOX-18 (ALJ July 7, 2003), aff'd, ARB No. 03-126 (ARB Feb. 25, 2004), an ALJ addressed the issue of whether the respondent was a company subject to jurisdiction under Section 806. It was undisputed that the respondent had no publicly traded securities. Therefore, the only issue was whether it was required to file reports under Section 15(d) of the Exchange Act. The ALJ found that the respondent fell within an exception to Section 15(d)'s reporting requirements because its public debt had been held by less than 300 persons in each year since its registration and offering. According to the ALJ, the fact that the respondent voluntarily filed some reports required by Section 15(d) in order to comply with a contractual agreement did not transform it into an issuer "required to" make such filings. Therefore, the ALJ granted the respondent's motion for summary decision. See also SEC Division of Corporation Finance, Sarbanes-Oxley Act of 2002 – FAQ #1 (Nov. 8, 2002) (company that voluntarily files reports under the Exchange Act but is not required to because it had fewer than 300 security holders of record at the beginning of its fiscal year is not an "issuer" within the meaning of SOX).

In Stevenson v. Neighborhood House Charter Sch., 2005-SOX-87 (ALJ Sept. 7, 2005), complainant argued that respondent, a non-publicly traded charter school, should be covered under Section 806 because it was subject to reporting under SEC Rules 10b5 and 15c2-12, had a retirement plan with benefits subject to reporting and disclosure requirements under ERISA, and received funds from public companies. The ALJ rejected these arguments, reasoning that whether or not a company is covered by Section 806 "is determined solely by whether the company has a class of stock registered under Section 12 of the [Exchange Act] or whether it is required to make reports pursuant to Section 15(d)."

See also Paz v. Mary's Center for Maternal & Child Care, 2006-SOX-7 (ALJ Dec. 12, 2005) (dismissing complaint against non-profit health organization which neither had a class of securities registered under Section 12 of the Exchange Act nor was required to file reports under Section 15(d)); Fiedler v. Compass Group USA, Inc., 2005-SOX-38 (ALJ July 15, 2005); Gibson-Michaels v. Federal Deposit Ins. Corp., 2005-SOX-53 (ALJ May 26, 2005) (FDIC is not a covered employer under Section 806); Weiss v. KDDI America, Inc., 2005-SOX-20 (Feb. 11, 2005); Roulett v. American Capital Access, 2004-SOX-78 (ALJ Dec. 22, 2004) (respondent not covered under Section 806 where it withdrew its registration before any approval by an exchange or the SEC was effected and, therefore, never registered a class of securities under Section 12); Ionata v. Nielsen Media Research, Inc., 2003-SOX-29 (ALJ Oct. 2, 2003) (ALJ lacked jurisdiction because the respondents were not companies "with a class of securities registered under Section 12 of the Securities Exchange Act of 1934").

Consistent with this strict construction of the requirement that the respondent be subject to the registration or reporting requirements of the Exchange Act, an ALJ in Gallagher v. Granada Entertainment USA, 2004-SOX-74 (ALJ Apr. 1. 2005), found no liability where the employer was not subject to the requirements of Sections 12 or 15(d) at the time the adverse employment action was taken. The ALJ reasoned that the adverse action occurred on January 22, 2004, but the company did not become subject to Section 12 until after a merger on February 2, 2004.

b. Foreign

The Act's whistleblower protections apply to foreign private issuers (as defined by Rule 36-4(c) of the Exchange Act) subject to SEC reporting and registration obligations. Foreign issuers that are exempt from SEC filing requirements under Rule 12g3-2(b) of the Exchange Act are excluded from coverage under SOX.

Foreign corporations doing business in the United States are subject to Section 806 whistleblower provisions. See Ward v. W & H Voortman, Ltd., 685 F. Supp. 231, 232 (M.D. Ala. 1988). Whether SOX whistleblower provisions apply to U.S. residents working abroad has been an open issue. Statutory whistleblower provisions generally do not apply extraterritorially absent clear language by Congress in the statute to extend the statute's protections abroad. See, e.g., EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991); Mendonca v. Tidewater, Inc., 2001 U.S. Dist. LEXIS 3486, at *7 (E.D. La. Mar. 4, 2001). Still, courts have held that U.S. courts do, in certain circumstances, have jurisdiction over violations of the Exchange Act, although the violations take place outside the U.S. See, e.g., Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1336-37 (2d Cir. 1972) (statute applicable when foreigner made substantial misrepresentations in the United States for transactions executed in England); Schoenbaum v. Firstbrook, 405 F.2d 200, 208 (2d Cir. 1968). In its Final Rule, OSHA declined to clarify this issue, despite requests by commentators, on the ground that the purpose of the regulations is procedural and not to interpret the statute. 69 Fed. Reg. 52104, 52105 (Aug. 24, 2004).

Nonetheless, most courts and ALJs have refused to afford SOX whistleblower protection to employees working outside the United States. For instance, in Carnero v. Boston Scientific Corp., 2004 U.S. Dist. LEXIS 17205 (D. Mass. Aug. 27, 2004), the court refused to apply Section 806 to a foreign national working for Argentinean and Brazilian subsidiaries. According to the court, "[n]othing in Section 1514A(a) remotely suggests that Congress intended it to apply outside of the United States." The court noted, as well, that application of Section 1514A overseas might conflict with foreign laws, particularly where a plaintiff seeks reinstatement. The First Circuit, citing the presumption against the extraterritorial application of Congressional statutes, affirmed. Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006). See also O'Mahony v. Accenture Ltd., 2005-SOX-72 (ALJ Jan. 20, 2006) ("[a]s a matter of statutory construction, the whistleblower provision of the Act applies only to employees who work within the United States"); Ede v. Swatch Group, 2004-SOX-68 & 69 (ALJ) (Jan. 14, 2005) (SOX does not apply extraterritorially to employees working outside of the United States); Concone v. Capital One Finance Corp., 2005-SOX-6 (ALJ Dec. 3, 2004) (no applicability to persons employed outside the United States).

However, in Penesso v. LLC International, Inc., 2005-SOX-16 (ALJ Mar. 4, 2005), respondent, citing Carnero and Concone, moved for summary decision on the grounds that Section 806 does not have extraterritorial application. The ALJ denied summary decision and distinguished Carnero and Concone, finding "this case has a substantial nexus to the United States, and it is appropriate for the complainant to bring this claim under §1514A of the Sarbanes-Oxley Act." The ALJ reasoned that the complainant was a U.S. citizen, much of the protected activity took place in the U.S. when complainant came to respondent's U.S. headquarters to inform corporate officers of the financial improprieties he believed were taking place in Italy, and at least one of the alleged retaliatory actions took place in the U.S.

c. Extraterritorial Application Prohibited

In the first Circuit Court decision issued on the whistleblower protections under the Sarbanes-Oxley Act, the First Circuit Court of Appeals recently held that the whistleblower provision of the SOX applies only to employees who work within the United States. See Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006) (case below 2004-SOX-18), (denying coverage where complainant was an Argentinian citizen resident in Brazil working for two Brazilian subsidiaries.) See also O'Mahony v. Accenture Ltd., 2005-SOX-72 (ALJ Jan. 20, 2006). But see Penesso v. LLC International, Inc., 2005-SOX-16 (ALJ Mar. 4, 2005) (finding SOX jurisdiction where the US citizen complainant was employed in Italy by the Italian subsidiary of a corporation headquartered in McLean, Virginia, and distinguishing Carnero on the basis of a substantial nexus to the United States, where protected activity and at least one retaliatory act occurred in the US).

2. Agents/Contractors

SOX whistleblower provisions cover not only publicly traded companies, but also "any officer, employee, contractor, subcontractor or agent" of a covered company. 18 U.S.C. § 1514A(a). Therefore, private companies that are not publicly traded, as well as other entities or individuals, that serve as "agents" or "contractors" of the publicly traded employer, may be subject to the whistleblower provisions. OSHA specifies that a small accounting firm acting as a contractor of a publicly traded company could be liable for retaliation against an employee who provides information to the SEC regarding a violation of SEC regulations (e.g., accounting irregularities). OSHA Whistleblower Investigations Manual (2003), at 14-1 ("OSHA Manual").

SOX also might be found to apply to publicly traded companies for acts committed by them against employees of their agents or contractors. In an environmental whistleblower case, the ARB held that a government agency could be subject to a discrimination charge filed by the employee of a private-sector government contractor when the agency banned the contractor's employee from entering the government workplace. Stephenson v. NASA, ARB No. 96-080, ALJ No. 94-TSC-5 (ARB Feb. 3, 1997). In its Final Rule, OSHA, citing Stephenson, confirmed that "a respondent may be liable for its contractor's or subcontractor's adverse action against an employee in situations where the respondent acted as an employer with regard to the employee of the contractor or subcontractor by exercising control of the work product or by establishing, modifying or interfering with the terms, conditions, or privileges of employment." "Conversely," OSHA added, "a respondent will not be liable for the adverse action taken against an employee of its contractor or subcontractor where the respondent did not act as an employer with regard to the employee." 69 Fed. Reg. at 52017.

The analysis used in Stephenson suggests that the scope of SOX may apply freely across contractual arrangements. Yet, the scope of contractor or agent coverage generally has been limited to cases where the contractor or agent is acting in such a role with respect to the complainant's employment relationship. See, e.g., Brady v. Calyon Securities (USA), 2005 U.S. Dist. LEXIS 27130 (S.D.N.Y. Nov. 8, 2005); Brady v. Direct Mail Mgmt., Inc., 2006-SOX-16 (ALJ Jan. 5, 2006); Roulett v. American Capital Access, 2004-SOX-78 (ALJ Dec. 22, 2004); Judith v. Magnolia Plumbing Co., Inc., 2005-SOX-99 & 100 (ALJ Sept. 20, 2005).

The scope of contractor or agent coverage also has generally been limited to cases where the complainant was employed by the publicly traded company, not by the agent or contractor. For example, in Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005), appeal dismissed, ARB No. 05-074 (ARB July 29, 2005), an ALJ, interpreting SOX's "any officer, contractor, subcontractor or agent" language, concluded that, although a privately held entity could engage in discrimination prohibited by Section 806 with regard to an employee of a publicly traded company when acting in the capacity as an agent of the publicly traded company, Section 806 does not protect employees of the privately-held contractors, subcontractors and agents from discrimination. See also Goodman v. Decisive Analytics Corp., 2006-SOX-11 (ALJ Jan. 10, 2006) (employee of a private contractor or subcontractor of a publicly traded company is not afforded SOX whistleblower protection); Kalkunte v. DVI Financial Servs. Inc., 2004-SOX-56 (ALJ July 18. 2005).

3. Subsidiarie

The Act's retaliation provisions have been applied to private subsidiaries of publicly traded companies, but not under all circumstances. The cases have addressed three distinct, albeit often intertwined, inquiries: (1) whether the employee of the subsidiary is a covered "employee" under SOX; (2) if so, whether the subsidiary/employer is a covered entity subject to suit; and (3) if the employee names the parent as a respondent, whether the existence of separate corporate identities insulates the parent from liability.

4. Whether The Employee Of The Subsidiary Is A Covered "Employee"

The first inquiry – whether the employee of the subsidiary is a covered "employee" under SOX – has been consistently answered in the affirmative. For example, in Platone v. Atlantic Coast Airlines Holdings Inc., 2003-SOX-27 (ALJ Apr. 30, 2004), an ALJ held that an employee of a non-publicly traded subsidiary was a covered "employee" where the company's parent/holding company was publicly traded. The ALJ in Platone reasoned that, under the facts of the case, the holding company was the alter ego of the subsidiary and that it certainly had the ability to affect the complainant's employment. In Collins v. Beazer Homes USA, Inc., 334 F. Supp.2d 1365 (N.D. Ga. 2004), the first reported federal district court decision on point, a federal district court in Georgia held that where the officers of a publicly traded parent company had the authority to affect the employment of the employees of the subsidiary, an employee of the subsidiary was a "covered employee" within the meaning of the SOX whistleblower provision. Both Platone and Collins looked to the interrelatedness of the corporate structures to ultimately conclude the employee of the subsidiary was a covered "employee."

An ALJ in Morefield v. Exelon Servs. Inc., 2004-SOX-2 (ALJ Jan. 28, 2004), held that the Vice President-Finance of a non-publicly traded subsidiary of a publicly traded company was covered under SOX, regardless of the parent company's role in affecting the employment of the subsidiary's employees. The ALJ concluded that, based on the legislative intent and purpose of SOX, the term "employee of publicly traded company," within the meaning of SOX, "includes all employees of every constituent part of the publicly traded company, including, but not limited to, subsidiaries and subsidiaries of subsidiaries which are subject to its internal controls, the oversight of its audit committee, or contribute information, directly or indirectly, to its financial reports."

Similarly, in Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 20, 2004) (Gonzalez III), an ALJ concluded that Congress intended to provide whistleblower protection to employees of subsidiaries of publicly traded companies. Therefore, the ALJ held that the complainant, an employee of a non-publicly traded subsidiary of a publicly traded bank holding company, set forth a cause of action sufficient to withstand a motion for summary decision. The ALJ also reasoned that evidence reflected that the holding company's actions affected the complainant's employment and shared management and function with the subsidiary.

In Klopfenstein v. PPC Flow Technologies Holdings, Inc., 2004-SOX-11 (ALJ July 6, 2004), an ALJ, citing Morefield, agreed with the complainant that employees of non-public subsidiaries of publicly traded companies can be covered by the SOX whistleblower provisions.

In Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006), the First Circuit suggested that an employee of a subsidiary of a publicly traded company could be a covered employee not only due to the parent company's role in affecting the employment of the subsidiary's employees but also because the subsidiary could be considered an "agent" of the parent. Therefore, the court opined, "the fact that [complainant] was employed by [the parent's] subsidiaries may be enough to make him a BSC 'employee' for purposes of seeking relief under the whistleblower statute." However, the court ultimately held that Section 806 did not protect the plaintiff foreign national due to its lack of extraterritorial effect.

5. Whether A Non-Publicly Traded Subsidiary Is A Covered Entity

The second inquiry – whether a subsidiary of a publicly traded parent company, standing alone, is a covered entity subject to suit – is a much debated issue.

In Klopfenstein, 2004-SOX-11 (ARB May, 31, 2006) (remanding the case to the ALJ for further findings based on erroneous legal analysis as to the standards used for determining who is covered by SOX provisions), an executive of a subsidiary of a non-publicly traded holding company that, in turn, was owned by a publicly traded parent company filed a complaint naming only the holding company and a vice president of the subsidiary as respondents. Initially, the ALJ held that the non-publicly traded subsidiary was not a proper respondent, because SOX does not "provide[] a cause of action directly against such subsidiary alone." On review, however, the ARB found that the ALJ's holding was erroneous. The ARB held that it was necessary to that particular case to discuss whether SOX provisions covered non-public subsidiaries of its public parent. Instead, the ARB emphasized that "whether a particular 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." Because the legal concept of agency relies on the underlying factual elements, the ARB made a point to charge the ALJ with the function of determining whether an agency relationship exists based on the specific facts in that case.

Notably, the ARB in Klopfenstein specifically rejected the ALJ's reasoning that the named respondents did not fall within the scope of agency principles. It was previously unclear what position the DOL would take on this issue, as the SOX whistleblower provision prohibits retaliation not only by publicly traded companies, but also by "any officer, employee, contractor or agent" of a covered company. 18 U.S.C. § 1514A(a). The Klopfenstein ALJ had found that the subsidiary holding company did not fall within the category because the compnay was more than na "agent" of the parent within the meaning of SOX. The ARB, however, disagreed and found that both the fact that there were overlapping officers between them and due to the involvement of PCC officers and employees in overseeing the named respondents' investigation made it more probable that an agency relationship existed "because one characteristic of an agent is that it acts on behalf of the principal."

In its amicus brief filed in Ambrose v. U.S. Foodservice, Inc., ALJ No. 2005-SOX-105, ARB Case No. 06-096, the Secretary of Labor for OSHA took a strong position on this issue. It clearly recommended the "integrated employer" test for determining whether employees of subsidiaries of publicly traded companies are protected under the SOX whistleblower provisions. In cases under labor and employment statutes, federal courts have used this test to determine if "two or more companies may be considered so interrelated that they constitute a single employer subject to liability or coverage under the particular statute." Amicus Curiae Br. of the Secretary of Labor for OSHA In Matter of: John Ambrose v. U.S Foodservice, Inc., ARB Case No. 06-096, p. 15 (XXXX). The four factors used to make this determination include: "(1) the interrelation of operations; (2) centralized control of labor or employment decisions; (3) common management; and (4) common ownership or financial control." Id. The Secretary emphasized that this is a case-by-case factual determination and that "[n]one of these factors are conclusive, and all four need not be met in every case." Id.

On the other hand, an ALJ in Powers v. Pinnacle Airlines Corp., 2003-AIR-12 (ALJ Mar. 5, 2003), dismissed a complaint brought against the employer, a non-publicly traded subsidiary of a non-publicly traded subsidiary of a publicly traded airline, on the basis that the subsidiary was not a proper respondent under SOX. The appeal of this decision was dismissed in Powers v. Pinnacle Airlines, Inc., ARB No. 04-035, ALJ No. 2003-AIR-12 (ARB Sept. 28, 2004). Citing Klopfenstein and Powers, the respondent in Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 17, 2004) (Gonzalez II), moved for summary decision on the ground that it was not a publicly traded company. However, the issue did not have to be decided as the ALJ permitted the complainant to amend his complaint to include as a respondent the publicly traded holding company.

In Dawkins v. Shell Chemical, LP, 2005-SOX-41 (ALJ May 16, 2005), the ALJ granted summary decision for the employer because the complaint identified only the employer, a non-publicly traded subsidiary, as respondent and did not name the parent companies. The ALJ noted that there was no evidence that the parent companies were sufficiently involved in the management and employment relations of the respondent to justify piercing the corporate veil. However, it does not appear that the ALJ considered this factor in deciding whether the complainant could proceed against the subsidiary, but rather addressed this issue only in relation to whether the complainant successfully could have pursued the parent companies if they had been properly included or were added as respondents.

In contrast to the above cases, an ALJ in Hughart v. Raymond James & Associates, Inc., 2004-SOX-9 (ALJ Dec. 17, 2004) suggested that a case under Section 806 may proceed solely against a subsidiary if the parent company and its wholly owned subsidiary are "so intertwined as to represent one entity." Ultimately, the ALJ dismissed the complaint because the two corporate entities had a sufficient degree of separation such that they "were not one entity for consideration of the applicability of SOX."

In Grant v. Dominion East Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005), an ALJ rejected the reasoning in Hughart and concluded (consistent with what appears to be the majority view) that the plain language of Section 806 provides no cause of action against a non-public subsidiary standing alone, regardless of whether complainant could produce evidence to justify piercing the corporate veil. The ALJ reasoned that even if complainant could establish that the parent company was liable for the acts of its subsidiary, this "does not cure the deficiency of not naming a company covered by the Act as Respondent. In other words, neither the doctrine of piercing the corporate veil, nor agency law principles generally, operate to pull a parent company into litigation if the parent company is not named as a party in the first place."

6. Whether The Existence Of Separate Corporate Identities Insulates The Parent From Liability.

The third inquiry – whether the existence of separate corporate identities insulates the parent corporation from liability for acts of the subsidiary – has proven a more difficult issue for ALJs, requiring evaluation of specific facts to determine whether piercing the corporate veil or some other basis for ignoring corporate separateness is warranted.

For instance, in Powers, 2003-AIR-12, an ALJ dismissed a SOX complaint where the employee was employed by a non-publicly traded subsidiary of a non-publicly traded subsidiary of a publicly traded airline. The ALJ reasoned that the complainant's attempt to hold the parent liable "ignores the general principle of corporate law that a parent corporation is not liable for the acts of its subsidiaries. In other words, the mere fact of a parent-subsidiary relationship between two corporations does not make one company liable for the torts of its affiliate." The ALJ continued that the complainant had not alleged any facts that would justify piercing the corporate veil and ignoring the separate corporate entities. Specifically, the ALJ noted that the subsidiary's impact on the parent was "questionable at best."

Likewise, in Hasan v. J.A. Jones-Lockwood, 2002-ERA-5 (ALJ Sept. 17, 2002), an ALJ held that a parent company was not an "employer" under the analogous ERA retaliation provision merely because it was the parent of another company that employed a complainant. The ALJ reasoned that no evidence showed that the parent had the power to hire, promote, discipline or give raises or had input in those decisions.

In contrast, in Platone, 2003-SOX-27, an ALJ held that the parent/holding company was a proper respondent in an action by an employee of a non-publicly traded subsidiary where the ALJ found the subsidiary to be a "mere instrumentality" of the holding company. The ALJ reasoned that the holding company had no employees; the companies disregarded the separate identity of the subsidiary in its dealings with the public, the SEC, and its employees; there was a great degree of commonality between the senior management of the two corporate entities, including those responsible for labor relations within the subsidiary; and the holding company had the ability to affect the complainant's employment, including making the ultimate termination decision.

Likewise, in Gonzalez III, 2004-SOX-39, the complainant, an employee of a non-publicly traded subsidiary, was permitted to amend his complaint to add the publicly traded holding company as a respondent. The ALJ denied summary decision for the holding company because evidence suggested that the holding company had shared management and function with the subsidiary and that the holding company's actions affected the complainant's employment.

Similarly, in McIntyre v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2003-SOX-23 (ALJ Sept. 4, 2003), the ALJ permitted complainant to amend his complaint to include as a respondent the publicly traded parent company. The ALJ reasoned that complainant had alleged facts regarding commonality of management and operations which arguably justified piercing the corporate veil. The ALJ also noted that there was a genuine issue of material fact as to whether the subsidiary and parent company constituted a "joint employer." See also Clemmons v. Ameristar Airways, Inc., 2004-AIR-11 (ALJ Jan. 14, 2005) (in AIR21 case, finding joint employment based on interrelation of operations, common management, centralized control of labor relations and common ownership).

In Mann v. United Space Alliance, LLC, 2004-SOX-15 (ALJ Feb. 18, 2005), Boeing and Lockheed Martin established the employer USA as a joint venture. All three entities were named as respondents. The ALJ, citing Gonzalez, Platone, and Morefield, found that "shared management and control and unity of operations have been key factors in holding the parent company and its subsidiary to be covered by the Act." Finding a lack of such shared functions, the ALJ concluded that USA was not a covered respondent under the Act. The ALJ reasoned that neither Boeing nor Lockheed affected, nor was USA acting as an agent with respect to, the complainant's employment. The ALJ also found that Boeing and Lockheed Martin could not be held liable for any violation of the Act by USA.

In Bothwell v. American Income Life, 2005-SOX-57 (ALJ Sept. 19, 2005), an ALJ granted summary decision on the grounds that complainant's employer, a non-public subsidiary of a publicly traded company, was not a covered employer subject to SOX's whistleblower provisions. The complainant failed to name the parent company in the complaint, and the ALJ refused to permit amendment to add the parent because the parent was not given notice of the action prior to expiration of the 90-day statute of limitations. The ALJ further ruled that, even if the parent had been timely named, complainant was unable to provide sufficient evidence of commonality of management and purpose to justify piercing the corporate veil and holding the parent liable for the subsidiary's actions. The ALJ reasoned that there was no indication that the subsidiary was acting as an agent for its parent company "with respect to employment practices towards Complainant or any other employee," e.g., the parent took no part in hiring or terminating complainant and had no role in payment of complainant's salary, and complainant had no interaction with the parent's employees.

7. Individual Liability.

Section 806's prohibition of retaliation by "officers, employees, contractors, subcontractors or agents of covered companies" could be construed as providing for individual liability for wrongful retaliation. This conclusion is supported by the summary and discussion in the Final Rule, which provides "the definition of 'named person' will implement Sarbanes-Oxley's unique statutory provisions that identify individuals as well as the employer as potentially liable for discriminatory action." 69 Fed. Reg. 52104, 52105 (Aug. 24, 2004).

However, in Williams v. Lockheed Martin Energy Systems, Inc., 1995-CAA-10 (ARB Jan. 31, 2001), a case dealing with liability under CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9610) and SDWA (Safe Drinking Water Act, 42 U.S.C. § 300j-9(I)), the ALJ dismissed individual supervisors from the case because they were not the complainant's employer despite statutory language providing that no "person" shall discriminate against whistleblowers. The complainant did not appeal, nor did the ARB decision address, this issue.

The only decision to date addressing this issue under SOX found that Section 806 does provide for individual liability. In Gallagher v. Granada Entertainment USA, 2004-SOX-74 (ALJ Oct. 19, 2004), an ALJ, citing the above Federal Register quote, permitted amendment of the complaint to add as respondents the executives who terminated the complainant's employment. However, the ALJ rejected complainant's effort to join "any person or business entity . . . whose acts in concert with or at the direction of the Employer . . . lead to" his termination. The ALJ reasoned that "[o]nly individuals who were Complainant's superiors . . . could discriminate against him 'in the terms or conditions of his employment' . . ." The ALJ concluded that "[t]he availability of damages does not convert this statutory proceeding into a common law tort action, permitting joinder of persons or entities who were not the Complainant's superiors as if they were joint tortfeasors."

D. What Employees are Covered Under SOX?

29 C.F.R. § 1980.101 defines "employee" as "an individual presently or formerly working for a company or . . . an individual applying to work for a company or . . . whose employment could be affected by the company. . . ." As discussed in Section III.B., supra, courts and ALJs generally have included employees of subsidiaries within this definition. Whether the following other categories of persons fall within Section 806's definition of "employee" also has been addressed:

1. Former Employees.

In Robinson v. Shell Oil Co., 519 U.S. 337 (1997), the U.S. Supreme Court held that the term "employees" as used in Title VII's retaliation provisions includes former employees. There is no reason to believe this holding will not be adopted under SOX.

Yet, in Harvey v. The Home Depot, Inc., 2004-SOX-36 (ALJ May 28, 2004), the ALJ refused to allow a complaint by a former employee to proceed where the protected activity occurred after plaintiff's termination. The complaint alleged that the employer violated SOX's whistleblower provision where, after the complainant had filed a professional responsibility complaint against the company's attorney, the attorney's representative filed a response to the state committee contending that the complainant's grievances were "part of an ongoing campaign by Mr. Harvey to harass Home Depot and its employees." The complainant no longer was employed by the company when this statement was made. The ALJ found that "with the exception of blacklisting or other active interference with subsequent employment, the SOX employee protection provisions essentially shelter an employee from employment discrimination in retaliation for his or her protected activities, while the complainant is an employee of the respondent."(Emphasis in original; footnote omitted). Compare Anderson v. Jaro Transp. Serv., 2004-STA-2 & 3 (ARB Nov. 30, 2005) (assuming that blacklisting in retaliation for protected activity which occurred while complainant was employed by respondent is prohibited under the STAA, but rejecting claim where complainant provided no evidence that his employer had provided information to a potential employer).

2. Independent Contractors.

In Bothwell v. American Income Life, 2005-SOX-57 (ALJ Sept. 19, 2005), respondent argued that complainant was not protected under Section 806 because he was an independent contractor, not an employee. In evaluating whether complainant was an independent contractor, the ALJ adopted the common law agency test, which, as set forth in Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992), focuses on the hiring party's right to control the manner and means by which the product is accomplished. The ALJ refused to grant summary decision for the respondent on this issue because complainant presented evidence demonstrating that respondent retained control over the means by which his work was performed. For instance, there was evidence that complainant was required to report to his superiors every day at a specific time, was given a specific list of daily contacts and appointments, was not allowed to alter his sales presentation or decide how to accomplish any tasks without first receiving input, had no control over his work hours or appointment schedule, and was required to complete all of his work at respondent's office.

3. Officers and Directors.

In Vodicka v. DOBI Medical Int'l, Inc., 2005-SOX-111 (ALJ Dec. 23, 2005), respondent moved for summary decision on the grounds that complainant was a member of its board of directors and therefore was not an employee protected under Section 806. The ALJ, noted that, although corporate officers have been held to be employees under SOX, whether directors are "employees" under SOX was an issue of first impression. While an "interesting and difficult issue," the ALJ was able to resolve the case on other grounds.

4. Third Parties.

In Davis v. United Airlines, Inc., 2001-AIR-5 (ALJ Apr. 23, 2002), an ALJ denied derivative protection to spouses of whistleblowers based solely upon their status as a spouse.

E. What Constitutes Protected Activity?

1. Scope of Protected Activity

The scope of protected activity under the statute has been narrowly construed. In Marshall v. Northrup Gruman Synoptics, 2005-SOX-0008 (ALJ June 22, 2005), the Administrative Law Judge granted summary judgment against a plaintiff who had complained about violations of internal ethics policies and financial accounting methods. The ALJ interpreted the statute to mean that "an element of intentional deceit that would impact shareholders or investors is implicit" in a claim. Id. at 4. Thus, since the complainant had failed to raise any issues of fraud (but only violations of internal policies), he had not engaged in protected activity under the statute. Id. at 4-5. In Getman v. Southwest Securities, Inc., ARB Case No. 04-059 (ARB July 29, 2005), the Administrative Review Board reversed a finding that the Respondent had retaliated against the complainant. The ARB held that an equity research analyst had not engaged in protected activity by refusing to change a recommendation on a stock. Id. at 9. Rather, because she never complained that she had been pressured to change her recommendation, she did not engage in "whistleblowing." Id.

"General inquires" have been found insufficient to support a claim for protected activity under the statute. See Lerbs v. Buca Di Beppo, Inc., 2004-SOX-8 (ALJ June 15, 2004), at 11. See generally Fraser v. Fiduciary Trust Co., 2006 WL 399468 (S.D.N.Y.) (Feb. 16, 2006). In Fraser, the court found that certain emails and memos written and distributed by complainant involving financial losses to the company that he believed could have been avoided were mere complaints that his advice or recommendations were not followed. Since the complainant failed to specify allegations of conduct that would alert Defendants that he believed the company was violating any federal rule or law related to fraud on shareholders the court found these complaints inadequate. In contrast, the court found that other complaints by the same plaintiff, though they did not particularly specify concerns about illegality, when taken in context, were sufficient to constituted protected activity. Fraser v. Fiduciary Trust Co., 2006 WL 399468 (S.D.N.Y.) (Feb. 16, 2006).

Efforts to bring complaints about a company's employment practices under the protection of the statute have failed. In a recent case the ALJ found that an employees complaints about longstanding institutional discriminatory practices, accompanied by warnings that if corrective action was not taken the employee would report the company to the EEOC, Department of Labor and other agencies, did not constitute protected activity because it was not a violation of federal law directly related to fraud against shareholders. Smith v. Hewlett Packard, 2005-SOX-88 to 92 (ALJ Jan. 19, 2006). See also Harvey v. The Home Depot, Inc., 2004 SOX 20 (ALJ May 28, 2005) (finding that neither general allegations of a violation of federal labor law, nor specific allegations of racial discrimination, are covered by the Act). In another case, the ALJ held that a plaintiff seeking protection for complaints that his salary did not comply with the requirements of the Fair Labor Standards Act did not constitute protected activity under the Act. Harvey v. Safeway Inc., 2004 SOX 21 (ALJ Feb. 11, 2005). However, the ALJ in this case also noted that, "complaints of systemic violations of the FLSA might reach the necessary magnitude to effectively perpetrate a fraud on shareholders because of the potential for influencing shareholder value." Id.

2. Reasonable Belief Requirement

In order gain protection under the whistleblower provisions of Sarbanes-Oxley, an employee must act upon a "reasonable belief" that a specified federal securities or fraud law was violated.⁴ ALJs have found that the belief must be objectively reasonable and it must be the actual belief of the complainant. See, e.g., Grant v. Dominion E Ohio Gas, 2004 SOX 63 (ALJ March 10, 2005). The belief must also pertain to federal law violations. In one case involving state insurance law violations, where no evidence of related federal law violations was presented, an employees' refusal to participate and provide allegedly false answers in a random telephone interview conducted the California Department of Insurance did not constitute protected activity supportive of a SOX claim. Williams v. Sirva, Inc., 2006-SOX-6 (ALJ Feb. 13, 2006). While an employee who acts on a reasonable belief is protected even if that belief later turns out to be wrong, where the complainant's belief is unreasonable from the outset, their activity will not be protected. Bechtel v. Competitive Technologies, Inc., 2005-SOX-33 (ALJ Oct. 5, 2005) (finding the employee's belief that his employer was attempting to purchase company stock based on advance knowledge of the outcome of a lawsuit based on a draft press release, an overheard portion of a telephone conversation, and rumor insufficient basis for a reasonable belief).

For example, in Tuttle v. Johnson Controls Battery Div., 2004-SOX-76 (ALJ Jan. 3, 2005), an ALJ explained:

Protected activity is defined under SOX as reporting an employer's conduct which the employee reasonably believes constitutes a violation of the laws and regulations related to fraud against shareholders. While the employee is not required to show the reported conduct actually caused a violation of the law, he must show that he reasonably believed the employer violated one of the laws or regulations enumerated in the Act. Thus, the employee's belief "must be scrutinized under both subjective and objective standards." Melendez v. Exxon Chemicals Americas, ARB No. 96-051 (July 14, 2000).

The "reasonable belief" standard has generated some anomalous results to date in several cases in which some ALJs have required that the plaintiff show that the reasonable belief was about "fraud" of shareholders and not simply about violations of any rule or regulations of the SEC or any provision of Federal law relating to fraud against shareholders. See the following:

Grant v. Dominion East Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005) (ALJ held that raising concern about mere "day-to-day accounting irregularities" could not support a SOX claim without some reasonable belief the company was committing fraud against its shareholders. The ALJ explained that the complainant's belief "must be scrutinized under both subjective and objective standards, i.e., he must have actually believed the employer was in violation of the relevant laws or regulations and that the belief must be reasonable." Reasonableness is "determined on the basis of the knowledge available to a reasonable person in the circumstances with the employee's training and experience." The ALJ also explained that the mere fact that a company investigates a complaint does not establish that complainant had a reasonable belief of unlawful conduct. Additionally, the ALJ rejected plaintiff's expert testimony on the reasonableness of plaintiff's belief that fraud occurred. The ALJ stated that SOX protects only "employees who report reasonable beliefs based in articulable fact of illegal activity designed to defraud shareholders."

Walton v. Nova Information Systems and Bancorp., 2005-SOX-107 (Mar. 29, 2006), relied on a N.D. GA decision, Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365 (N.D. Ga. 2004) (disclosures alleging attempts to circumvent the company's systems of internal accounting controls violate Section 13 of the Security Exchange Act and are protected by SOX).

In Walton, the plaintiff, a former database administrator for NOVA, the third largest credit card processor in the United States, complained that she was terminated in retaliation for raising concerns about "security lapses" in the company's data bases which could "foreseeably result in large scale criminal fraud against cardholders, merchants and their banks, customers and shareholders." She further contended that the security lapses violated the company's obligation to comply with statutory and regulator requirements mandated by SOX and other federal laws. The Company filed a 12(b) (6) motion to dismiss, arguing that the complaint merely reported violations of internal procedures and did not implicate fraud against a company's shareholders. The Company argued that it is not enough to report a violation of a rule or regulation of the SEC – that the rule or regulation of the SEC that is reported must relate to fraud against the shareholder.

The ALJ rejected this argument, concluding that SOX does in fact protect a whistleblower who has provided information of a violation of a rule or regulation of the SEC. The AlJ also concluded that the filing of SOX complaint is in fact protected activity; and declined to limit the Act's protection for whistleblowers "who do nothing more than perform the job for which they were hired.

In Lerbs v. Buca Di Beppo, Inc., 2004-SOX-8 (ALJ June 15, 2004), an ALJ granted the employer's motion for summary decision because the complainant, a "cash manager" for the restaurant chain, failed to show he engaged in protected activity, largely because he did not show he reasonably believed the employer engaged in illegal activity that misled investors or potential investors. The ALJ found that although the employee may have felt that certain practices "compromised the validity of the annual audit, which shareholders rely on to make investment decisions," he did not have an actual belief at the time of the complaint that the practice was illegal. The complainant also contended that the company inappropriately attempted to inflate the sales of one of its restaurants, which provided reduced-price lunches to employees at corporate headquarters, by increasing the prices of the lunches, thereby inflating its "same store sales" figures released to shareholders. The ALJ found that complainant failed to show it was reasonable to believe this practice was illegal, as "there is simply nothing unlawful or improper about a decision by Buca to adjust upward the amount it paid for employees" meals to bring the cost into line with the cost of meals for non-employee consumers." Id. at 13.

In Harvey v. Safeway, Inc., 2004-SOX-21 (ALJ Feb. 11, 2005), complainant contended his complaints that discrepancies in his weekly paychecks violated the FLSA constituted protected activity. The ALJ found that the employee's "personal experience over the course of a couple of weeks with Safeway and an anecdotal report of one other employee's wage concerns did not provide an objectively reasonable factual foundation for a . . . complaint about systematic wage underpayment."

In Barnes v. Raymond James & Assoc., 2004-SOX-58 (ALJ Jan. 10, 2005), complainant voiced concerns that her supervisor was conducting improper "switches" of mutual fund accounts in order to generate unnecessary client fees. The ALJ held that complainant's belief that her supervisor engaged in improper switches was not reasonable in light of the absence of any evidence of such transactions, the fact that complainant failed to raise her complaints earlier, a subsequent company investigation concluding no improper switches occurred, and her own sworn statements stating that her supervisor engaged in more "exchanges" than switches.

In Allen v. Stewart Enter. Inc., 2004-SOX-60 (ALJ Feb. 15, 2005), complainant inquired into whether respondent was taking steps to comply with securities regulations. The ALJ found that complainant did not have a reasonable belief that respondent had violated a SEC rule where the relevant documents were internal working documents not intended for submission to the SEC and complainant admitted that she was not aware of any law making the SEC rule applicable to those internal documents. Additionally, the ALJ reasoned that respondent already knew about the problem before complainant reported it and was making it a priority to remedy the problem.

In

Nixon v. Stewart & Stevenson Servs., Inc., 2005-SOX-1 (ALJ Feb. 16, 2005), an ALJ granted summary decision for respondent because there was no evidence that complainant reasonably believed the conduct he reported could have been mail fraud. The ALJ reasoned that not only was there was no evidence that the letters to which complainant referred, even if false, were part of a scheme or artifice to obtain money or property, but also there was no evidence that complainant actually considered respondent's conduct to constitute mail fraud, because the first mention of mail fraud was made before the ALJ. The ALJ also found that there was no evidence that complainant reasonably believed the conduct he reported could have been a violation of SEC Rule S-K. The ALJ reasoned that there was no evidence of any pending legal proceeding or that governmental authorities were contemplating any legal proceeding that would have needed to have been reported under Rule S-K.

In Bechtel v. Competitive Technologies Inc., 2005-SOX-33 (ALJ Oct. 5, 2005), an ALJ found that reporting alleged insider trading was not protected activity because his conclusions were not "objectively supported" and because he failed to act in a way that would lead one to believe he thought fraud was taking place. The ALJ noted that complainant did not report the alleged conduct to any authority and did not follow the company's procedures for making allegations regarding insider trading. The ALJ concluded that this "failure to bring such a serious allegation to anyone's attention is inconsistent with his expressed concerns for how his disclosure would affect shareholders and the company's compliance with SOX disclosure rules." However, the ALJ did find that complainant's refusal to sign disclosure forms and his expressed concerns about the disclosure committee were protected activity under Section 806.

In contrast, in Platone, 2003-SOX-27, the ALJ ruled that a former airline labor relations manager engaged in protected activity by raising concerns about financial irregularities within the company. Specifically, the complainant complained of discrepancies in the "flight loss" pay system, an arrangement which effectively shifted the cost of paying pilots from the company to the union by requiring the union to reimburse the company for portions of a pilot's pay when the pilot was called away from flight duty to attend to official union business. Complainant reported that some members of the union leadership were improperly taking advantage of the flight loss system for their own monetary gain. After her reports went unheeded, complainant concluded that members of company management, who needed bargaining leverage to obtain concessions from the union in upcoming negotiations, had devised a plan to improperly funnel the airline's money to members of the union through the flight loss compensation arrangement.

Despite an absence of evidence reflecting that the company was ever reimbursed by the union or that this purported arrangement ever resulted in any financial loss to the company, the Platone ALJ determined that the complainant's "suspicions were reasonable, and that she had good grounds to believe that a fraud was being perpetrated" on the company and its stockholders. Curiously, the ALJ did not address the materiality requirement and did not specify which predicate federal fraud or securities provision may have been violated.

Similarly, in Welch v. Cardinal Bankshares Corp., 2003-SOX-15 (ALJ Jan. 28, 2004), an ALJ found that complainant had a reasonable belief that improper entries totaling $195,000 on the company's financial statements were improper, were material and could mislead potential investors.

In Kalkunte v. DVI Financial Servs. Inc., 2004-SOX-56 (ALJ July 18, 2005), complainant, an attorney, alleged that respondent improperly commingled funds and its senior management altered delinquency reports and incorporated those altered reports into disclosure statements made to the public. The ALJ determined that complainant had a reasonable belief that the alleged conduct constituted a covered violation. The ALJ reasoned that the alleged conduct plainly violated SEC rules and regulations and constituted fraud against shareholders and, therefore, an attorney with complainant's experience and background "would easily discern these activities as potential violations of the Sarbanes-Oxley Act." The ALJ also noted that complainant had documentary evidence to support her allegations.

In Jayaraj v. Pro-Pharmaceuticals, Inc., 2003-SOX-32 (ALJ Feb. 11, 2005), complainant alleged that respondent was using an unregistered broker to solicit investors in exchange for a commission. Under the Exchange Act, it is unlawful for any "broker or dealer" to use interstate commerce to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security" unless the individual is registered as a broker/dealer. The ALJ found that complainant's belief that respondent's conduct violated the Exchange Act was reasonable. The ALJ reasoned that complainant was aware that the broker was not a licensed broker, knew that one could not sell securities unless one were registered as a broker or broker dealer, knew the broker was trying to bring private investors to the company, knew he would not assist the company without payment for his efforts, overheard company officials discuss paying him a commission, participated in a call in which the broker asked for a commission, and, unbeknownst to complainant, the company had entered into a consulting agreement with the broker.

In Taylor v. Wells Fargo, Texas, 2004-SOX-43 (ALJ Feb. 14, 2005), an ALJ found that complainant reasonably believed that her supervisor's practice of backdating letters of credit could have involved mail, wire and bank fraud. Although respondent argued that there was no specific evidence that it was committing fraud, the ALJ noted that an actual violation of the law is not required. The ALJ reasoned that complainant reasonably believed that backdating the letters of credit constituted falsifying a bank document, which she believed "would constitute an illegal and criminal act," and when complainant raised her concern, respondent "admitted it must be careful to not deceive any government regulators or creditors of the applicant when backdating letters of credit."

See also Gonzalez III, 2004-SOX-39 (complainant's persistence in his concerns, including multiple conversations with company officials, demonstrated his reasonable belief); Henrich v. Ecolab, Inc., 2004-SOX-51 (ALJ Nov. 23, 2004) (complainant reasonably believed that company's shareholders may be subjected to fraud by alleged "cheating" in accounting for inventory, material losses and labor costs) aff'd 2004-SOX-51 (ARB June 29, 2006) (finding that the ALJ properly focused on whether complainant had a reasonable belief that the practice was a violation of a law or regulation listed in the SOX provisions); Halloum v. Intel Corp., 2003-SOX-7 (ALJ Mar. 4, 2004) (complainant reasonably believed that he had been asked to commit an illegal activity even though a subsequent investigation concluded otherwise).

Sometimes, a complainant may have initially engaged in protected conduct by raising concerns about fraud or violations of SEC rules, but intervening circumstances caused continued concern regarding such violations to become unreasonable. For example, in Williams v. U.S. Dep't of Labor, 2005 U.S. App. LEXIS 25011 (4th Cir. Nov. 18, 2005) (per curiam), the Fourth Circuit, addressing a complaint filed with the DOL under various environmental protection statutes, agreed with the DOL that the complainant engaged in protected activity in raising concerns about lead in schools, but after respondent, in response to those concerns, undertook significant activity to ensure that the environment was safe, that any potential problems were corrected, and that a plan was in place to ensure the safety of students and staff, "it was no longer reasonable for her to continue claiming that these schools were unsafe . . ." Accordingly, the court concluded that "her activities lost their character as protected activity."

3. Fraud

To constitute protected activity, the subject matter of a SOX complaint must implicate a purported violation of "section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders." 18 U.S.C. § 1514A(a). SOX's legislative history reflects that fraud is an integral element of a cause of action under the whistleblower provision. See, e.g., Cong. Rec. S7418 (daily ed. July 26, 2002) (statement of Sen. Leahy) (whistleblower provision to protect "those who report fraudulent activity that can damage innocent investors in publicly traded companies"); S. Rep. No. 107-146, 2002 WL 863249 (May 6, 2002) (the relevant section "would provide whistleblower protection to employees of publicly traded companies who report acts of fraud to federal officials with the authority to remedy the wrongdoing or to supervisors or appropriate individuals within their company").

While some ALJs have narrowly interpreted the scope of Sarbanes-Oxley to protect only complaints relating to matters of potential securities fraud, other ALJs have found the statute, as it language would appear to mandate, to cover a broader range of fraudulent activity including mail and wire fraud.⁵ Some ALJs have upheld claims on this basis. See , e.g., Taylor v. Wells Fargo Texas, 204 SOX 43 (ALJ Feb. 14, 2005) (complaints that a coworker has been backdating letters of credit are protected activity under the Act, since mail fraud, wire fraud, and bank fraud may be implicated.)

The ARB recently addressed this issue in Platone v. FLYi, Inc., ALJ No. 2003-SOX-27, ARB No. 04-154 (ARB Sept. 29, 2006), holding that, "when allegations of mail or wire fraud arise under the employee protection provision of the Sarbanes-Oxley Act, the alleged fraudulent conduct must at least be of a type that would be adverse to investors' interests." See also, Mozingo v. S. Financial Group, Inc., 2007-SOX-4, slip. op. at 11 (ARB Dec. 6, 2006)(claim dismissed where complainant unable to show that the transfer of a customer's account, even if fraudulent, would have adverse impact on shareholders).

a. Violation of Enumerated Fraud Provisions.

Section 806 protects against retaliation for reports implicating the enumerated federal fraud statutes (mail, wire, bank or securities fraud), SEC rules, or federal law "relating to fraud against shareholders." For example, in Allen v. Stewart Enterprises, Inc., 2004-SOX-60, 61 & 62 (ALJ Feb. 15, 2005), complainant raised concerns about possible violations of state laws which could result in sanctions and revocation of respondent's state licenses. The ALJ found that this was not protected activity because Section 806 only provides protection for reporting violations of the enumerated fraud provisions.

Similarly, in Rogus v. Bayer Corp., 2004 U.S. Dist. LEXIS 17026 (D. Conn. Aug. 25, 2004), plaintiff asserted causes of action for common law wrongful discharge and violation of the state whistleblower statute. Plaintiff contended that she suffered retaliatory discharge for internally complaining that her supervisor allowed production yields to be over-reported and production workers were overpaid bonuses that would not have been paid had the true number been reported. The court stated in a footnote that plaintiff's complaint would not be protected under SOX "because the conduct she complained of did not 'constitute[] a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.'"

Merely raising complaints about violations of internal policy is not protected activity. For example, in Reddy v. Medquist, Inc., 2004-SOX-35 (ARB Sept. 30, 2005), the complainant, a medical transcriptionist, had expressed concerns to management by e-mail regarding management's policy of decreasing line counts in her transcriptions thereby reducing her rate of pay. In one e-mail, complainant referred to this policy as an "Enron-type" accounting practice. The ARB held that complainant failed to show she engaged in protected activity where the evidence demonstrated that the complaints concerned internal company policy as opposed to actual violations of federal law.

In Marshall v. Northrup Gruman Synoptics, 2005-SOX-8 (ALJ June 22, 2005), complainant alleged that he reported to management his supervisor's misclassification of internal expenses, use of company contractors to provide personal home remodeling, and falsification of internal reports. The ALJ found that complainant did not engage in protected activity because his allegations merely implicated violations of internal company policies and ethical standards rather than SOX's enumerated laws or regulations related to fraud against shareholders. Although some of his allegations related to accounting irregularities, there was no evidence of misrepresentation of the company's financial situation or fraudulent conduct. The ALJ concluded that "[t]he fact that the concerns involved accounting and finances in some way does not automatically mean or imply that fraud or any other illegal conduct took place."

In Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005), an ALJ granted summary decision, concluding that complainant's reports concerning air quality were unrelated to fraud or the protection of investors. The ALJ rejected complainant's contention that poor air quality could result in financial loss to respondent, reasoning that SOX "was enacted to address the specific problem of fraud in the realm of publicly traded companies and not the resolution of air quality issues, even if there is a possibility that poor air quality might ultimately result in financial loss."

In Heaney v. GBS Properties LLC d/b/a Prudential Gardner Realtors, 2004-SOX-72 (ALJ Dec. 2, 2004), complainant, on separate occasions, expressed concerns over a purchaser's use of an unlicensed home inspector and concerns over a condominium project which he thought a developer had built in violation of certain codes. The ALJ found that neither communication constituted protected activity under SOX.

In Barnes, 2004-SOX-58, complainant voiced concerns that her supervisor was conducting improper "switches" of mutual fund accounts in order to generate unnecessary client fees. The ALJ found that complainant did not engage in protected activity, in part because complainant acknowledged that she raised the issue of improper switches only as an example of unethical conduct and not as an example of fraud against shareholders or investors.

In Armstrong v. Wal-Mart Stores, Inc. (OSHA Jan. 27, 2006),⁶ complainant alleged that he reported that managers were having workers perform personal services while on the clock, that a supervisor was using company resources for personal use, that employees falsified financial reports to increase employee bonuses, and that managers misappropriated money raised for charity. OSHA concluded that complainant's reported evidence of favoritism by managers, violations of company policy, and other issues, was not protected activity under 806.

In contrast, in Morefield v. Exelon Servs. Inc., 2004-SOX-2 (ALJ Jan. 28, 2004), an ALJ broadly construed the catchall "any provision of Federal law relating to fraud against shareholders." The ALJ held that this provision "may provide ample latitude to include rules governing the application of accounting principles and the adequacy of internal accounting controls implemented by the publicly traded company in compliance with such rules and regulations." Id. at 5.

Likewise, in Mann v. United Space Alliance, LLC, 2004-SOX-15 (ALJ Feb. 18, 2005), an ALJ denied summary decision to respondents on the issue of protected activity because complainant's allegation of a perpetuation of a fraud on NASA by improperly favoring certain vendors in violation of federal acquisition regulations, although less than direct, could also perpetrate a fraud on shareholders under certain circumstances. See also Kalkunte v. DVI Financial Servs. Inc., 2004-SOX-56 (ALJ July 18. 2005) (where complainant alleged that respondent improperly commingled funds and its senior management altered delinquency reports and incorporated those altered reports into disclosure statements filed to the public, ALJ found that these activities "plainly violate SEC rules and regulations, and constitute fraud against shareholders").

b. Intent to Deceive or Defraud.

Some ALJs have held that, because an essential element of fraud is an intent to defraud or deceive, a Section 806 complaint must allege a degree of intentional deceit or fraud. For example, in Hopkins v. ATK Tactical Systems, 2004-SOX-19 (ALJ May 27, 2004), an ALJ found that a complaint that did not address any kind of fraud and did not allege that the activities involved intentional deceit or resulted in a fraud against shareholders or investors did not fall within the purview of the SOX whistleblower provision. The employee's complaint questioned whether the employer's systems illegally resulted in the release of sludge water into the ground water system due to poor maintenance and overdue inspections. The ALJ found that such an activity failed to state a cause of action because "an element of intentional deceit that would impact shareholders or investors is implicit" under the SOX whistleblower provision.

In Allen, 2004-SOX-60, 61 & 62, an ALJ found that complainants did not engage in protected activity by reporting accounting irregularities because they did not actually believe that the respondent had acted intentionally when an unintentional mistake within the computing system resulted in incorrect interest calculations. The ALJ observed that a complainant must reasonably believe the reported activity was fraudulent, and "a fraudulent activity cannot occur without the presence of intent."

Similarly, in Grant, 2004-SOX-63, complainant voiced concerns that her supervisor was conducting improper "switches" of mutual fund accounts in order to generate unnecessary client fees. The ALJ held that complainant did not engage in protected activity where none of his expressed concerns "contained any reference to fraud or implication that the company had acted intentionally to mislead shareholders or misstate the company's bottom line."

c. Effect on Shareholders or Investors.

ALJs have noted that, although the fraud provisions enumerated in Section 806 go beyond those specifically relating to securities fraud, to constitute protected activity, the alleged conduct must impact shareholders or investors. For example, in Tuttle, 2004-SOX-76, complainant alleged he was terminated because he complained that significant numbers of its batteries were defective. The ALJ granted summary decision because complainant did "not address any kind of fraud or any transactions relating to securities. Moreover, there has been no allegation that the activities complained of involved intentional deceit or resulted in a fraud against shareholders or investors." The ALJ reasoned that, although fraud under SOX is broader than merely securities fraud, "an element of intentional deceit that would impact shareholders or investors is implicit."

In Stojicevic v. Arizona-American Water Co., 2004-SOX-73 (ALJ Mar. 24, 2005), an ALJ found that complainant did not engage in protected activity when he complained about poor project decisions and that the company's sub-par year-end earnings were caused by failure to make necessary capital investments. The ALJ reasoned that "[a]n allegation that Respondent made financially unsound choices . . . is quite distinct from an allegation that Respondent engaged in fraud." The ALJ noted that complainant offered no evidence that respondent made any false statements to shareholders or investors regarding its earnings such that its conduct could constitute fraud.

4. 1.Materiality.

Under section 806, employees need only demonstrate, by a preponderance of the evidence, that they had a "reasonably belief" that they were reporting a violation of securities fraud statutes or SEC rules. This "reasonable belief" standard under section 806 has generated anomalous results in several cases in which the employer defended on the ground that the alleged fraud complained about by employees did not satisfy the "materiality" standard under federal securities law. The ARB in Platone, ARB No. 04-154, stated "A fact is material if there is a substantial liklihood that a reasonable shareholder would consider it important in deciding how to vote."

While "materiality" is an element of the predicate fraud provisions, see, e.g., Neder v. United States, 527 U.S. 1, 4 (1999), some ALJs have applied a materiality element under the "any rule or regulation of the Securities and Exchange Commission" and "any provision of Federal law relating to fraud against shareholders" provisions of the SOX whistleblower provision.

Other ALJs have placed little emphasis on the materiality requirement. For example, in Morefield, 2004-SOX-2, an ALJ denied respondent's motion to dismiss despite the fact that the amounts involved totaled less than .0001% of the annual revenues of the parent company. The ALJ reasoned that "[w]hether or not 'materiality' is a required element of a criminal fraud conviction as Respondents contend, we need be mindful that Sarbanes-Oxley is largely a prophylactic, not a punitive measure." Id. at 5. Therefore, "[t]he mere existence of alleged manipulation, if contrary to a regulatory standard, might not be criminal in nature, but it very well might reveal flaws in the internal controls that could implicate whistleblower coverage for seemingly paltry sums." Id.; Halloum v. Intel Corp., 2003-SOX-7 (ALJ Mar. 4, 2004) (complainant reasonably believed that he had been asked to commit an illegal activity even though a subsequent investigation concluded otherwise.)

In Halloum, the plaintiff worked in the accounts payable department and alleged that he had been instructed to delay payments of invoices until later quarters of the fiscal year. The employer used the accrual method of accounting, which meant that invoices were reflected on the company's books at the time the invoices were received, not when they were paid. The Company argued that it was therefore legally impossible for there to have been any securities fraud, because delaying the payments of the invoices until later quarters could not have had any effect on the financial statements of the Company. The ALJ rejected this argument, finding that the employee had satisfied his burden of proving that he had a "reasonable belief" that a violation of the statute or regulation had occurred.

Yet, others have stressed the need for some degree of materiality, particularly in the context of cases involving the issue of whether traditional employment discrimination or FLSA wage and hour claims can constitute fraud against shareholders and therefore give rise to a Section 806 cause of action. For example, in Harvey v. Home Depot, Inc., 2004-SOX-20 (ALJ May 28, 2004), an ALJ discussed the materiality requirement under 18 U.S.C. § 1514A(a)(1)'s catchall, "any provision of Federal law relating to fraud against shareholders." The ALJ concluded that an employee complaint about alleged race discrimination that had "a very marginal connection with" (e.g., did not materially affect) a corporation's accurate accounting and financial condition did not constitute activity protected under SOX. Initially, the ALJ found that the only federal law directly related to fraud against shareholders that could possibly be implicated was the SOX statute itself, which requires certification that a financial disclosure is accurate and does not contain any untrue statement of material fact. The ALJ concluded that, although a reported incident of discrimination within a publicly traded company that represents itself to be non-discriminatory may conceivably adversely affect the accuracy of corporate disclosures, "the connection becomes tenuous upon close examination of SOX." Id. For example, the ALJ found that individual discrimination does not reach the "materiality threshold in terms of a corporation's financial condition." Id. at 13. Additionally, the ALJ noted that the discrimination complaints at issue centered on the alleged existence of discrimination, not the company's failure to report such discrimination to the public. However, the ALJ suggested that "[p]erhaps, the failure to disclose a class action lawsuit based on systemic racial discrimination with the potential to sufficiently affect the financial condition of a corporation might become the subject of a SOX protected activity if an individual complained about the failure to disclose that situation." Id.

Similarly, in Smith v. Hewlett Packard, 2005-SOX-88 (ALJ Jan. 19, 2006), complainant, an employee relations staffer, alleged that he engaged in protected activity when he threatened to take allegations of a potential race discrimination class action to the EEOC. The ALJ rejected this argument, reasoning that "[m]ere knowledge that an employee-evaluation process adversely affected minorities (without knowing whether this result was intentional), coupled with an insider's access to disgruntled employees' conversations about 'external' resolutions, is not enough." The ALJ noted that, although there was a rumor of a class-action lawsuit, there was no such litigation, therefore there was nothing for the company to disclose to its shareholders. The ALJ did note, however, that a disclosure of company-wide discrimination could form the basis of SOX whistleblower claim, explaining: "[h]ad such a suit actually been filed, and if HP had prevented that information from reaching its shareholders, and if the Complainant learned of this omission and if he had reported it, then he would have engaged in protected activity under the Act."

In Harvey v. Safeway, Inc., 2004-SOX-21 (ALJ Feb. 11, 2005), the ALJ found that an employee's reports of discrepancies in his weekly paychecks, even if they violated the FLSA, were not protected activities under SOX because they did not involve violations of a federal law relating to fraud on the shareholders. The ALJ reasoned that a single employee's shortages did not rise to the requisite level of materiality, particularly where respondent remedied the shortfalls, because "its financial reports were not likely affected by the temporary wage shortages" and the effect on the financial reports "would have been microscopic." The ALJ noted, however, that although the complainant did not make any factually viable complaints of company-wide wage underpayments, systemic violations of FLSA could alter the accuracy of a company's financial disclosures mandated by SOX and therefore "might reach the necessary magnitude to effectively perpetuate a fraud on shareholders."

F. What Retaliation is Prohibited?

1. Retaliation Defined.

This statute prohibits such companies and their officers, employees and agents, from discharging, demoting, suspending, threatening, harassing, "or in any other matter discriminat[ing] against an employee because of any lawful act done by the employee" relating to such alleged violations. Id. Successful claimants can obtain make-whole relief, including reinstatement, along with back pay with interest, and compensation for special damages, including litigation costs, expert witness fees, and reasonable attorney's fees. 18 U.S.C. § 1514A(c); see generally "Sarbanes-Oxley Act of 2002," H. Rept. No. 107-610 (July 24, 2002).

2. Adverse Action Requirement.

Department of Labor ALJs have differed as to whether an adverse action sufficient to support a Sarbanes-Oxley whistleblower claim, must produce some tangible job consequence. Some ALJs have required such tangible job actions. See, e.g., Bechtel v. Competitive Technologies, Inc., 2005-SOX-33 (ALJ Oct. 5, 2005) (finding that the Respondent had not engaged in adverse action when it removed the Complainant's status as an officer of the company and failed to conduct an employment evaluation where there was no evidence of a loss of pay, raises, bonus, benefits, or other negative impact on employment conditions). Other ALJs have used a broader approach to the adverse action requirement, finding actions that are "reasonably likely to deter employees from making protected disclosures," sufficient. See Halloum v. Intel Corp., 2003 SOX 7, 15-16 (ALJ Mar. 4, 2004) (dismissed on other grounds and affirmed by ARB).

In a recent case arising not under Sarbanes-Oxley but under the employee-protection provisions of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century ("AIR 21"), 49 U.S.C. § 42121, the ARB issued a ruling that expressly adopted the broad definition of retaliatory acts that the U.S. Supreme Court enunciated last summer in Burlington Northern & Santa Fe Ry. Co. v. White, --- U.S. ----, 126 S. Ct. 2405, 2409 (June 22, 2006). In Burlington Northern, the Supreme Court held that in order to trigger a violation of Title VII's anti-retaliation provision, "the employer's actions must be harmful to the point that they could well dissuade a reasonable worker from making or supporting a charge of discrimination." The ARB applied this new standard in a case arising under AIR 21, and suggested in doing so that the broader standard would apply in cases arising under the employee-protection provisions of SOX and the other statutes enforced by the DOL. See Hirst v. Southeast Airlines, Inc., ALJ No. 2003-AIR-47, ARB Nos. 04-116, 04-160, (ARB Jan. 31, 2007), slip op. at 9 – 11.

G. The Litigation Process

1. Arbitration and Settlement Agreements.

As with other federal employment law statutes, employers may seek to avoid civil suit in federal court under Sarbanes-Oxley through settlement agreements releasing all claims and/or agreements to arbitrate. See, e.g., Ulibarri v. Affiliated Computer Services, 2005-SOX-46 and 47 (ALJ Jan. 13, 2006); Boss v. Salomon Smith Barney Inc., 263 F. Supp. 2d 684,685 (S.D.N.Y. 2003) (nothing in the text or legislative history of the SOX evinces an intent to preempt the FAA); Moldauer v. Canadaigua Wine Co., ARB No. 04-022, ALJ No. 2003-SOX-26 (ARB Dec. 30, 2005) (case dismissed on timeliness grounds, but one board member but wrote separately that the severance agreement releasing all claims against the respondent should control the outcome).

2. Filing a Claim.

To qualify for relief under the statute, the employee must file a complaint with OSHA within 90 days after the alleged violation. The 90 day requirement is strictly enforced. See, e.g., Halpern v. XL Capital, Ltd. ARB No. 04-120, AlJ No. 2004-SOX-54 (ARB Aug. 31 2005) (rejecting complainants argument that he was entitled to tolling because he was unaware of unlawful motive for retaliatory action within the limitations period); but see, Corbett v. Energy East Corp., 2006-SOX-00065 (ALJ Nov. 03, 2006)(finding that the tolling of the statute of limitations began when plaintiff was terminated rather than when plaintiff lost his job benefits because his complaint was based on his termination, not his removal as Director of Human Relations, even though the judge ultimately found the two happened on the same day). An Administrative Law Judge has recently dismissed a case as untimely holding that a tolling agreement entered into by the parties in furtherance of settlement negotiations was ineffective. See Szymonik v. TyMetrix Inc., Case No. 2006-SOX-50, (March 8, 2006). There is no written form required, but the complaint must be in writing, and should include a full statement of the allegations, with relevant dates.

3. The Litigation Process.

After a claim has been filed, OSHA will then conduct an investigation if it determines that the employee has stated a prima facie case that his protected conduct was a contributing factor in an unfavorable employment action, and the employer has failed to rebut the claim by clear and convincing evidence. Otherwise, OSHA will dismiss the complaint.

Either party may appeal an adverse decision by OSHA to the Department of Labor's Office of Administrative Law Judges, which then conducts an administrative hearing preceded by discovery. The ALJ's decision can be appealed by the unsuccessful party to the Department of Labor's Administrative Review Board, with further appeal to the U.S. Circuit Court of Appeals for the circuit in which the employee resided or the violation allegedly occurred.⁷
This statutory enforcement scheme is comparable to those of other federal whistleblower statutes administered by the U.S. Department of Labor, with one significant exception: a party can remove the claim to federal court if the Department of Labor does not resolve the claim within 180 days.⁸
Jurisdiction vests with the district court when the case is filed. Stone v. Duke Energy Corp., 432 F.3d 320 (4th Cir.2005) (case below 2003-SOX-12).

4. Department of Labor Reporting to SEC.

One key provision of Sarbanes-Oxley is that the Department of Labor must supply the details of the employee's charge to the Securities & Exchange Commission (SEC), to allow that agency the opportunity to conduct its own investigation. See 29 C.F.R. § 1980.1034(a). This provision provides a powerful incentive for the employer to settle a claim before it is filed with the Department of Labor.

5. Burdens of Proof.

The statute provides that the burdens of proof in a Sarbanes-Oxley whistleblower case are identical to the burdens in cases arising under AIR 21's whistleblower provisions.9
The ARB reiterated the procedures and burdens of proof applicable to an AIR21 whistleblower complaint in Brune v. Horizon Air Industries, Inc., ARB No. 04-037, ALJ No. 2002-AIR-8 (ARB Jan. 31, 2006). In Brune the Administrative Review Board differentiated the approach taken by OSHA at the investigatory stage, where a complainant need only raise an inference of the violation, from the approach at the hearing stage, where a complainant must prove by a preponderance of the evidence that protected activity contributed to the adverse action. If the complainant establishes a claim by a preponderance of evidence, the employer then faces a burden of proof and can avoid liability if it demonstrates by "clear and convincing evidence" that it would have taken the same adverse action absent the protected activity.

Several recent SOX decisions have reached results in favor of employees that appear to have been driven by these differing burdens of proof. In Platone v. Atlantic Coast Airlines, 2003-SOX-27, at 28 (ALJ Apr. 30, 2004), and Welch v. Cardinal Bankshares Corp., 2003 SOX 15, at 47 (ALJ Jan. 28, 2004), the employees were found to have met their burdens by providing by a preponderance of the evidence that they had a reasonable, good-faith belief that they had raised concerns about financial fraud. The defendants were found not to have satisfied the "clear and convincing" standard. In both cases, the defendants argued that they had good reasons to terminate the plaintiffs.

In "Platone", the plaintiff's job was to represent management's position in dealings with the company's labor unions. The defendant argued that Ms. Platone was terminated because she had concealed that she was having a romantic relationship with a representative of the union. The ALJ ruled that the defendant had failed to demonstrate by clear and convincing evidence that the romantic relationship was the true reason for the termination.

In Welch, the plaintiff was the chief financial officer of a small bank who raised concerns about potential financial fraud. The bank terminated his employment when the plaintiff refused to talk with the bank about his concerns unless his attorney was present. The ALJ ruled that the plaintiff had proven by a preponderance of the evidence that he had a good faith belief in his report. The ALJ further ruled that the defendant bank had not proven its defense of failure to cooperate in the bank's investigation by clear and convincing evidence. But see, Leak v. Dominion Resources Serv., Inc., 2006-SOX-12 (ALJ Jan. 26, 2007)(holding that a causal connection was not established because the plaintiff's refusal to attend a meeting that his employer had told him he had to attend but could not tape-record constituted an "intervening event that independently could have caused the adverse action." The key inquiry was "whether the employee has upset the balance that must be maintained between protected activity and shop discipline").

Further supporting the "proponderance of evidence standard, Klopfenstein, 04-SOX-11 (ARB May 31, 2006), emphasized that "a complainant is not required to prove pretext, because a complainant alternatively can prevail by showing 'that the defendant's reason, while true, is only one of the reasons for its conduct, and another "motivating factor" is the plaintiff's protected activity.'" (Citing Rachid v. Jack in the Box, Inc., 376 F.3d 305, 312 (5th Cir. 2004). The "ultimate question" is whether the complainant can prove that the protected activity was a contributing factor in the adverse employment action. Id.

6. Limitations on Coverage.

Most Sarbanes-Oxley whistleblower cases are litigated through Department of Labor Administrative Courts. The Department of Labor provides the latest ALJ decisions at http://www.oalj.dol.gov/PUBLIC/WHISTLEBLOWER/REFERENCES/CASELISTS/SOX3LIST.HTM. Among early decisions of the Administrative Law Judges (ALJ) of the Department of Labor were rulings that Sarbanes-Oxley did not apply retrospectively, see Gilmore v. Parametric Tech. Corp., ALJ No. 2003-SOX-1 (ALJ Feb. 6, 2003), and where the alleged protected activity occurred prior to its effective date, see Kunkler v. Global Futures & Forex, Ltd., ALJ No. 2003-SOX-12 (ALJ Apr. 24, 2003); see generally "ALJ Rejects Retroactive Application of New Corporate Whistleblower Protections," BNA Daily Labor Report, Mar. 10, 2003, at A-1; but see Lerbs v. Buca di Beppo Inc., 2004 SOX 68 11 (ALJ June 15, 2004) (claim actionable where retaliation occurred after enactment of SOX but protected activity occurred before enactment). More recently, ALJ decisions have dismissed claims where the complainant has failed to name the public parent of a non-public subsidiary. See e.g., Dawkins v. Shell Chem., LP, ALJ No. 2005-SOX-41 at 4 (ALJ May 16, 2005); see also Minkina v. Affiliated Physician's Group, ALJ No. 2005-SOX-00019 at 5-6 (ALJ Feb. 22, 2005) (discussing the Act's definition of "covered entity" and the publicly traded requirement).

Sarbanes-Oxley covers large and small publicly traded companies.¹⁰ See Jayaraj v. Pro-Pharmaceuticals, Inc., 2003 SOX 32 (ALJ Feb. 11, 2005) (holding that high-tech start-up company with only five employees is covered by the Act since it has registered and its shares are traded on the OTC market). Numerous efforts to bring SOX whistleblower claims where the respondent is not a publicly traded company have been unsuccessful. See e.g., Judith v. Magnolia Plumbing Co., Inc., 2005-SOX-99 and 100 (ALJ Sept. 20, 2005) (contracts with municipal and federal governments insufficient); Goodman v. Decisive Analytics Corp., 2006-SOX-11 (ALJ Jan. 10, 2006) (engineering consulting contracts with publicly traded companies insufficient), Smith v. Hewlett Packard, 2005-SOX-88 to 92 (ALJ Jan. 19, 2006) (direct mail service provider for publicly traded company not covered). See also Brady v. Calyon Securities (USA), 406 F. Supp. 2d 307 (S.D. N.Y. Nov. 8, 2005) (granting defendants motion to dismiss SOX claims brought by research analyst at non-publicly traded securities broker-dealer that acts as an agent or underwriter for publicly traded companies in limited financial contexts.), Roulett v. American Capital Access, 2004 SOX 78 (ALJ Dec. 22, 2004) (a publicly traded companies reliance on services purchase of products from non-publicly traded company insufficient to support SOX claim by employee of non-publicly traded company against publicly traded company).

It is important to note that corporate parent liability may attach in SOX cases under some circumstances. Kalkunte v. DVI Fin. Servs., Inc., No.2004-SOX-56 (ALJ July 18, 2005) (non-publicly traded company was hired to operate a publicly traded company and was deemed an agent of the publicly traded company for SOX liability where main principal acted as non-publicly traded company's Executive Officer and admitted that he had made the decision to fire the claimant.). However, dismissal is likely where there is insufficient evidence of commonality of management and purpose presented to justify parent liability for actions of subsidiary. McIntyre v. Merrill Lynch, Pierce, et. al. and Merrill Lynch & Co., 2003-SOX-23 (ALJ Sept. 4, 2003) sets out criteria for determining whether a parent company is actually covered by the act including, enterprise "are: 1) interrelation of operations; 2) common management; 3) centralized control of labor relations; and 4) common ownership." Id. at 5¹¹.

H. What are the Available Remedies?

Some recent cases illustrate the range of remedies made available by the Department of Labor in successful cases. In one case, the ALJ awarded, back pay, expenses of commuting to the new job, pre-judgment interest, expenses of finding a new job, and the cost of an air conditioner needed while living close to the new job. See Welch v. Cardinal Bankshares Corp., 2003 SOX 15 (ALJ Supplemental Recommended Decision, Feb. 15, 2005). In another, the ALJ noted that successful plaintiff's may be entitled able to recover the value of lost stock options if pled with specificity. See Jayaraj v. Pro-Pharmaceuticals, Inc., 2003 SOX 32 (ALJ Feb. 11, 2005). Punitive damages are not available under Sarbanes-Oxley. Murray v. TXU Corp., No. Civ.A.3:03-CV-0888-P, 2005 WL 1356444, at *4 (N.D. Tex. June 7, 2005) (reviewing the legislative history and noting that the omission of punitive damages from the statute is clear and unequivocal).

I. Problems with Remedies and Reinstatement Enforcement.

In Welch v. Cardinal Bankshares Corp., 2005 WL 990535 (U.S. Dept. of Labor), 22 IER Cases 1197 2003-SOX-15 (Feb 15, 2005), which was one of the first SOX whistleblower cases to issue a reinstatement order, the claimant was to receive a range of relief including, reinstatement, back pay, costs associated with his job search, and other expenses. The respondents' attempt to avoid reinstatement by re-electing the board and re-terminating the employee on the grounds of poor performance was rejected. However, this success on the administrative level was recently deflated by a Virginia federal district court decision granting the employer's motion to dismiss the plaintiff's complaint without prejudice, which sought to enforce the AJJ's reintstatement order. Welch v. Cardinal Bankshares Corp., 407 F. Supp. 2d 773 (2006). The Court did not comment on the appropriateness of the reinstatement itself, but rather based its decision on the ALJ's failure "to follow technical requirements that would indicate that his [Supplemental Recommended Decision and Order] was a preliminary order of reinstatement at the time it was filed." Id. At 776. The Court was particularly concerned that the defendant had no notice that the ALJ intended the reinstatement to be effective during the ARB's review of the board's appeal. Id.

In March 31, 2006, the ARB in the Welch case entered an order that ALJ's Order was clear on reinstatement but gave the employer ten (10) days to seek a stay of the order of reinstatement because of the confusion. Then on June 9, 2006, the ARB denied the motion for a stay and issued an order that Welch should be reinstated, although it still had not ruled on the merits of the case. Welch v. Cardinal Bankshares, Inc., ARB Case No. 06-062 (June 9, 2006).

After still not receiveing reinstatement, the plaintiff in Welch filed another petition in Virginia federal district court to enforce the reinstatement. The Court again denied this petition by granting the defendant's motion to dismiss, holding that it did not have jurisdiction over the matter because the reinstatement order was not final. Welch v. Cardinal Bankshares Corp., 2006 WL 2838894 (W.D. Va. Oct. 5, 2006). In coming to this decision, the court relied on traditional rules of statutory interpretation, finding that Congress' intent was clear in the language of the statute and that it overrides the CFR provision providing for judicial enforcement. Id. at 3-4. The Court acknowledged that this ruling resulted in "a departure from the adjudication scheme envisioned by Congress," but it put the blame for this departure on the Department of Labor and the delay in the administrative process. Id. at 5. The Court also noted that the plaintiff still had remedy in this situation because the statute grants the district court de novo review to overcome a Secretary's delay in reviewing a case. Id. at 6; 18 U.S.C. § 1514A(b)(1) (confering jurisdiction to federal courts "if the Secretary has not issued a final decision within 180 days of the filing of the complaint and there is no showing that the delay is due to the bad faith of the complainant.")

J. Some Notable Cases.

While federal district courts have had little opportunity to issue substantive decisions on Sarbanes-Oxley claims some early decisional law is emerging. One court denied the employer's motion for summary judgment, since the two-week gap between the employee's complaints and her termination were sufficient to show causation, i.e., that her protected activity was a contributing factor for the employer's termination, and there were factual issues relating to whether the employer would have terminated her anyway, thereby precluding summary judgment. Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365 (N.D. Ga. 2004). The court found that plaintiff's allegations that her employer was overpaying invoices to a company owned by a friend of the president of her employer, was overpaying sales agents based on personal friendships, and that kickbacks were paid for the purchase of lumber, thereby "circumvent[ing] the company's system of internal accounting controls in violation of Section 13 of the Exchange Act," was sufficient to set forth a claim that she engaged in protected activity. Id. at 1376-77. Moreover, the burden on defendants in a Sarbanes-Oxley case is to show, by "clear and convincing evidence that they would have fired Plaintiff absent her participation in protected activity," which is a higher standard than the ordinary preponderance of the evidence standard. Id. at 1380 (citing Stone & Webster Eng'g Corp. v. Herman, 115 F.3d 1568, 1572 (11th Cir. 1997)); see also Romaneck v. Deutsche Asset Mgmt., et al., 2006 WL 2385237 (N.D. Cal. Aug. 17, 2006) (holding that summary judgment on the basis of lack of causation was inappropriate when it was up to the jury whether to believe plaintiff's story that he was fired because of his anticipated testimony before the SEC). A court has held that the retaliatory removal of an employee's job responsibilities is sufficient to state a claim. Willis v. Vie Fin. Group, Inc., No. Civ.A. 04-435, 2004 WL 1774575, at *6 (E.D. Pa. Aug. 6, 2004).

1. SOX's "Kick-Out" Provisions – Removal to Federal Court on or after 180 Days.

If the DOL has not issued a final decision within 180 days and the delay is not a result of the complainant's bad faith, the complainant may withdraw his or her administrative complaint and file an action for de novo review in federal district court. 18 U.S.C. & 1514A(b)(1)(B). See Roulett v. American Capital Access Corp., ARB No. 05-045, ALJ No. 2004-SOX-78 (ARB Aug. 30, 2005); Allen v. Stewart Enterprises, Inc., ARB No. 05-059, ALJ Nos. 2004-SOX-60, 61 & 62 (ARB Aug. 17, 2005); McIntyre v. Merrill Lynch, ARB No. 04-055, ALJ No. 2003-SOX-23 (ARB July 27, 2005); Heaney v. GBS Properties LLC, d/b/a/ Prudential Gardner Realtors, ARB No. 05-039, ALJ No. 2004-SOX-72 (ARB May 19, 2005). The district court has jurisdiction without regard to the amount in controversy. Moreover, the same burdens of proof that apply before the ALJ apply in the district court. 18 U.S.C. § 1514A(b)(2)(C).

In Hanna v. WCI Cmtys., Inc., 2004 U.S. Dist. LEXIS 25651 (S.D. Fla. Nov. 18, 2004), a federal district court in Florida explained that OSHA's "preliminary findings" do not constitute a "final" order even if issued within 180 days, rather a "final" order is obtained only when the ARB issues a final decision or if the plaintiff fails to appeal the preliminary order.

In Nixon v. Stewart & Stevenson Servs., Inc., 2005-SOX-1 (ALJ Feb. 16, 2005), complainant's delay constituted "bad faith," and his motion to withdraw his complaint and stay the proceedings was denied. First, complainant requested the proceeding be delayed for financial reasons. The ALJ granted that request over respondent's objections, explaining to complainant the 180-day limitations period would be tolled. Complainant was granted another delay for incomplete discovery. The ALJ again explained the tolling of the limitations period. Respondent then delayed the proceeding because of the unavailability of a witness, and again the limitations period was tolled. Complainant asked to withdraw his complaint to file the action in district court and filed a motion to stay the proceeding, pending filing with the district court. The ALJ refused both motions stating, "his attempt to invoke the 180 limit after having informed the parties he waived such a right and obtaining a delay based on that representation, constitutes bad faith under the regulations."

In Murray v. TXU Corp., 279 F. Supp. 2d 799 (N.D. Tex. 2003), a federal district court in Texas held that the defendant bears the burden of showing that the Secretary's failure to timely issue a final decision was due to the claimant's bad faith. See also Collins v. Beazer Homes USA, Inc., 334 F. Supp.2d 1365 (N.D. Ga. September 2, 2004) (evidence that plaintiff did not fully cooperate with OSHA investigators and that delay in issuance of OSHA's final determination was due in some part to settlement negotiations alone was insufficient to defeat federal court jurisdiction based on plaintiff bad faith; plaintiff's ability to file in federal court is not premised on showing of good faith, but on a failure to show that delay in OSHA's final determination was a result of bad faith).

Fifteen (15) days in advance of filing an action in district court, the complainant must file a notice with the ALJ or ARB of his or her intention to file such a complaint, and serve such notice upon all parties. 29 C.F.R. § 1980.114(b).

Standard pleading requirements apply in district court actions. For instance, in Stone v. Duke Energy Corp., No. 3:03-CV-256 (W.D.N.C. Feb. 11, 2004), the court dismissed the plaintiff's SOX complaint for failure to contain "a short and plain statement of the claim" and failure to present claims in separate counts for clear presentation of the matters set forth. The court reasoned that it would "not waste its time searching through Plaintiff's disorganized and indefinite Complaint for a prima facie case."

In Stone v. Duke Energy Corp., 432 F.3d 320 (4th Cir. 2005), the plaintiff filed a SOX complaint in district court after 180 days had passed following his filing of an administrative complaint with DOL. While the district court action was pending, the ALJ entered an order in the administrative proceeding stating that the district court had assumed jurisdiction and the case no longer was before the OALJ. Subsequently, the district court dismissed the complaint for failing to meet pleading requirements. Rather than amend his complaint to satisfy those requirements, the plaintiff filed a new complaint. The employer argued that the ALJ order had been a "final order" so that the plaintiff's new complaint was, in actuality, an appeal of a final decision of the DOL and, thus, had to be brought in the circuit court. The district court agreed, and dismissed the complaint for lack of subject matter jurisdiction. The Fourth Circuit disagreed, and remanded the case back to the district court. It found the ALJ's order was not a final decision. Rather, the ALJ simply was stating the administrative complaint no longer was before him. Moreover, the new complaint really was just a restatement of the prior complaint, and the prior complaint had been filed before the ALJ issued his order.

Complainants must exhaust their administrative remedies before filing a complaint in federal court. 18 U.S.C. § 1514A(b)(1)(A). In McClendon v. Hewlett-Packard Co., 2005 WL 2847224 (D. Idaho Oct. 27, 2005), plaintiff's complaint alleging defendant took awa