The Supreme Court’s Somers decision limiting the scope of whistleblower protection under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is a loss for corporate whistleblowers, but it is not a game changer. Corporate whistleblowers retain a potent remedy under Section 806 of the Sarbanes-Oxley Act (SOX), albeit without some of the advantages offered by Section 922 of Dodd-Frank, which post-Somers will only apply where the whistleblower has already disclosed corporate fraud to the SEC. In addition, Somers clarifies that a SEC whistleblower’s internal disclosure is protected even when the employer is unaware of the whistleblower’s prior disclosure to the SEC.
Click here to learn more about anti-retaliation protections for SEC whistleblowers under the Dodd-Frank Act and Sarbanes-Oxley Act.
Corporate Whistleblowers Have Lost an Important Arrow in Their Quiver
As discussed in more detail below, SOX whistleblower protection is a superior remedy to Dodd-Frank whistleblower protection. But there are some advantages offered by Section 922 of Dodd-Frank that will no longer be available to most corporate whistleblowers post-Somers. The statute of limitations under Dodd-Frank is about five and a half years longer than that of SOX, there is no administrative exhaustion requirement under Dodd-Frank (the whistleblower can file directly in federal court), and most importantly, Dodd-Frank authorizes an award of double back pay.
SOX, however, offers strong protection for whistleblowers, including: 1) a far more generous burden of proof (“contributing factor” causation rather than “but for” causation under Dodd-Frank); 2) uncapped “special damages” for emotional distress and reputational harm (whereas Dodd-Frank does not authorize any recovery of non-economic damages); 3) an unequivocal exemption from mandatory arbitration; and 4) preliminary reinstatement for SOX whistleblowers that prevail in an OSHA investigation. As the likelihood of getting to trial and prevailing at trial is far better under SOX than under Dodd-Frank, the main value of a Dodd-Frank whistleblower protection is to bring a claim that is beyond the short 180-day statute of limitation and to supplement a SOX claim to recover double back pay.
Somers Protects Internal Whistleblowing Following a Disclosure to the SEC Absent Proof of the Employer’s Knowledge of the Disclosure to the SEC
According the most recent annual report of the SEC Office of the Whistleblower, approximately 83 percent of whistleblowers that filed TCRs with the SEC disclosed their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms before reporting wrongdoing to the SEC. As SEC whistleblowers are unlikely to inform their employers that they blew whistle to the SEC (indeed, 1 in 5 whistleblowers file anonymously with the SEC through an attorney to protect against retaliation), Somers might appear to render Section 922 of Dodd-Frank a nullity.
But the Somers majority points out that it is not limiting Dodd-Frank whistleblower protection solely to a whistleblower that can prove that their employer knew of their whistleblowing to the SEC at the time that the employer took an adverse employment action. The Court expressly held that where an employee blows the whistle to the SEC and subsequently reports the misconduct to the employer and then suffers retaliation because of the internal disclosure (not because of the disclosure to the SEC, which the retaliating employer is unaware of), the internal disclosure is protected under Dodd-Frank.
For example, if Sally reports to the SEC that her employer ABC Corp is committing accounting fraud and Sally subsequently reports the fraud to her supervisor at ABC Corp, she would be protected under Dodd-Frank even though ABC Corp is unaware of her whistleblowing to the SEC. Or if ABC Corp performs an internal investigation of Sally’s disclosure to the SEC (e.g., as a result of a request for information from the SEC), Sally would be protected under Dodd-Frank if she discloses her concerns when she is interviewed during the internal investigation, even though ABC Corp does not know that Sally reported wrongdoing to the SEC. Similarly, Sally is likely protected under Dodd-Frank if she can prove that ABC Corp retaliated against her because they perceived her to be the whistleblower whose disclosure initiated an SEC investigation, even if she lacks proof that ABC Corp knew that she was in fact the whistleblower.
While Somers narrows Dodd-Frank whistleblower protection, it also expressly protects internal whistleblowing following a disclosure to the SEC.
SOX Whistleblower Protection Remains a Potent Remedy
Although Somers has reduced protection for corporate whistleblowers, Section 806 of SOX remains a potent remedy. As SOX will now be the primary remedy for corporate whistleblowers, it is worth noting some of the key facets of the statute. For a more detailed overview of SOX, download our guide Sarbanes-Oxley Whistleblower Law: Robust Protection for Corporate Whistleblowers.
Broad Scope of Coverage
The whistleblower protection provision of SOX protects:
- employees, officers and agents of publicly traded companies (companies issuing securities registered under section 12 of the Securities Exchange Act of 1934 or required to file reports under section 15(d) of the Securities Exchange Act of 1934);
- employees of any subsidiary or affiliate of a publicly traded company whose financial information is included in the consolidated financial statements of such company;
- employees of contractors or subcontractors of public companies, including the attorneys and accountants who prepare public companies’ SEC filings;[i] and
- employees of nationally recognized statistical rating organizations (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c).
There are, however, some limitations on SOX coverage for employees of contractors of publicly traded companies:
- “Contractor” is limited to business relationships where “performance of a contract will take place over a significant period of time.”
- SOX “protects contractor employees only to the extent that their whistleblowing relates to ‘the contractor … fulfilling its role as a contractor for the public company, not the contractor in some other capacity.’” In other words, SOX protects a contractor employee who is in a position to detect and report securities violations — for example, the lawyers and accountants in the Enron scandal who were either directly or indirectly witness to the fraud.
- SOX does not cover contractor employees who experience retaliation that is unrelated to the provision of services to a public company. [ii] A contractor’s fraudulent practices do not become subject to § 1514A merely because that company incidentally has a contract with a public company.[iii]
SOX Protected Whistleblowing
Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation regarding any conduct disclosing conduct that they reasonably believe violates:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders
when the information or assistance is provided to or the investigation is conducted by:
- a federal regulatory or law enforcement agency;
- any Member of Congress or any committee of Congress; or
- a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).
Significantly, SOX protects internal disclosures, such as an employee raising a concern to a supervisor about misleading financial data in a SEC filing.
SOX also prohibits retaliation for filing, causing to be filed, or otherwise assisting in a proceeding filed or about to be filed relating to:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders.
A SOX retaliation plaintiff need not demonstrate that they disclosed an actual violation of securities law; only that they reasonably believed that their employer was defrauding shareholders or violating an SEC rule.[iv] Indeed, a reasonable but mistaken belief is protected under SOX. “To demonstrate that a plaintiff engaged in a protected activity, a plaintiff must show that [s]he had both a subjective belief and an objectively reasonable belief that the conduct [s]he complained of constituted a violation of relevant law.”[v]
Complaints about potential securities law violations may be protected under the whistleblower-protection provision of SOX. “A whistleblower complaint concerning a violation about to be committed is protected as long as the employee believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern.”[vi]
Prohibited Forms of Retaliation
The SOX whistleblower-protection provision prohibits a broad range of retaliatory acts, including:
- termination;
- demotion;
- suspension;
- harassment; and
- any other form of discrimination that might dissuade a reasonable employee from whistleblowing.
The final catch-all category includes non-tangible employment actions, such as “outing” a whistleblower in a manner that forces the whistleblower to suffer alienation and isolation from work colleagues. SOX also proscribes a threat to retaliate.
Termination goes beyond “You’re fired!” Constructive discharge also constitutes an adverse employment action. This occurs where an employer has created “working conditions so intolerable that a reasonable person in the employee’s position would feel forced to resign,” or where the employer “acts in a manner so as to have communicated to a reasonable employee that [s/he] will be terminated, and the . . . employee resigns.” Under the latter standard, an employee facing “imminent discharge” may establish constructive discharge.[vii]
Favorable Burden of Proof for SOX Whistleblowers
To prevail, a SOX whistleblower must demonstrate that their protected activity was a contributing factor in the decision to take an adverse action. “A contributing factor is any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision.” Klopfenstein v. PCC Flow Techs. Holdings, Inc., ARB No. 04-149, 2006 WL 3246904, at *13 (DOL May 31, 2006)). And “any role whatsoever” is no exaggeration—the protected activity need not amount to a “significant, motivating, substantial or predominant” factor in the adverse action.[viii]
In proving that protected activity was a contributing factor in the adverse action, a complainant need not prove that the respondent’s articulated reason was a pretext. See Henderson v. Wheeling & Lake Erie Railway, ARB No. 11-013, ALJ No. 2010-FRS-12 (ARB Oct. 26, 2012) (citing Klopfenstein v. PCC Flow Techs. Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-011, slip op. at 18 (ARB May 31, 2006)). A complainant can prevail by showing that the respondent’s reason, while true, is only one of the reasons for its adverse conduct and that another reason was the complainant’s protected activity. Klopfenstein, ARB No. 04-149 at 19.
Onerous Affirmative Defense
Once a whistleblower proves “contributing factor” causation by a preponderance of the evidence, the employer can avoid liability only if it proves clearly and convincingly that it would have taken the same adverse action in the absence of the employee’s protected activity.
The operative phrase here is “would have.” An employer fails to meet its burden if it establishes merely that it could have taken the same adverse action. “Clear and convincing” evidence can be quantified as establishing the probability of a fact at issue “in the order of above 70%.”[ix]
Remedies
A prevailing SOX whistleblower can recover “all relief necessary to make the employee whole,” which includes:
- back pay (lost wages and benefits);
- reinstatement with the same seniority that the employee would have had, were it not for the retaliation;
- special damages (damages for impairment of reputation, personal humiliation, mental anguish and suffering, and other non-economic harm that results from retaliation); and
- attorney’s fees, and costs.[x]Back pay includes promotions and salary increases that the whistleblower would have obtained but for the retaliation. Note that back pay is offset by interim earnings.
Uncapped special damages can be substantial where the retaliation has derailed the whistleblower’s career. “When reputational injury caused by an employer’s unlawful discrimination diminishes a plaintiff’s future earnings capacity, [they] cannot be made whole without compensation for the lost future earnings [they] would have received absent the employer’s unlawful activity.”[xi]
Although reinstatement is the preferred and presumptive remedy to make an employee whole, some SOX whistleblowers have recovered front pay in lieu of reinstatement. In Hagman v. Washington Mutual Bank, Inc., an ALJ awarded $640,000 in front pay to a banker whose supervisor became verbally and physically threatening when the banker disclosed concerns about the short funding of construction loans.[xii]
Unfortunately, SOX does not authorize punitive damages, but in some states, a whistleblower can supplement a SOX whistleblower claim with a common law wrongful discharge claim and potentially recover punitive damages.
[i] See Lawson v FMR LLC, 134 S.Ct. 1158 (2014).
[ii] See Anthony v. Nw. Mut. Life Ins. Co., 130 F. Supp. 3d 644 (N.D.N.Y. 2015); see also Gibney v. Evolution Mktg. Research, LLC, 25 F. Supp. 3d 741 (E.D. Pa. 2014).
[iii] Fleszar v. U.S. Dep’t of Labor, 598 F.3d 912, 915 (7th Cir. 2010)
[iv] Wiest v. Lynch, 710 F.3d 121, 132 (3d Cir. 2013)
[v] Leshinsky v. Telvent GIT, S.A., 942 F.Supp.2d 432, 444 (S.D.N.Y.2013) (internal quotation marks and citations omitted).
[vi] Sylvester v. Parexel, ARB Case No. 07-123, 2011 WL 2165854 at *13 (DOL May 25, 2011).
[vii] Dietz v. Cypress Semiconductor Corp., ARB Case No. 15-017, 2016 WL 1389927, at *7(ARB Mar. 30, 2016).
[viii] Allen v. Stewart Enters., Inc., ARB Case No. 06-081, slip op. at 17 (U.S. Dep’t of Labor July 27, 2006).
[ix] Palmer v. Canadian National Railway, ARB No. 16-035 at 57.
[x] 18 U.S.C. § 1514A(c).
[xi] Mahony v. KeySpan Corp., No. 04 Civ. 554 (SJ), 2007 WL 805813, at *1 (E.D.N.Y. Mar. 12, 2007).
[xii] Hagman v. Washington Mutual Bank, Inc., ALJ Case No. 2005-SOX-00073, at 26–30 (ARB Dec. 19, 2006), appeal dismissed, ARB Case No. 07-039 (ARB May 23, 2007).
