Whistleblower Digest
ARBITRATION AGREEMENTS; SEVERANCE AGREEMENTS
[Last Updated Feb. 26, 2014]
[ For the issue of whether arbitration proceedings or severance negotiations toll the limitations period for filing a SOX complaint, see Filing of Complaint . ]
Arbitration Agreements
FEDERAL COURT DECISIONS
ARBITRATION AGREEMENT FOUND INVALID AND UNENFORCEABLE AS TO BREACH OF CONTRACT CLAIMS WHERE THOSE CLAIMS AROSE FROM THE SAME NUCLEUS OF OPERATIVE FACTS AS SOX SECTION 806 CLAIM
In Stewart v. Doral Financial Corp. , 13-cv-1349 (D.Puerto Rico Feb. 21, 2014) (2014 WL 661587), the Plaintiff was a Senior Vice President and Principal Accounting Officer for a financial corporation who had filed a SOX Section 806 whistleblower complaint, and breach of contract claims. The Defendant sought dismissal of the breach of contract claims on the ground that they were subject to an arbitration agreement. The Plaintiff countered that the arbitration agreement was invalid and unenforceable as the breach of contract claims were "entangled with the SOX dispute and arise from the same nucleus of operative facts." Slip op. at 19. The court agreed with the Plaintiff. The court noted that an amendment to SOX from the Dodd-Frank Act in 2010 rendered predispute arbitration agreements invalid and unenforceable as to claims arising under Section 806. See 18 U.S.C. § 1514A(e)(2). The court found that the breach of contract claims were grounded in the same operative facts as the Section 806 claims. The court wrote:
Thus, compelling arbitration would require both sides to re-litigate the application of SOX's whistleblower provision in order to determine whether Doral did in fact breach its contractual obligations. Compelling arbitration would not only frustrate the purpose of 18 U.S.C. § 1514A(e)(2) but would also place a substantial financial and temporal burden on all parties involved.
Slip op. at 20.
SOX ANTI-ARBITRATION PROVISION CANNOT BE TRANSPLANTED TO THE DODD-FRANK ANTI-RETALIATION PROVISION WHICH DOES NOT CONTAIN AN ANTI-ARBITRATION PROVISION, EVEN IF PLAINTIFF MIGHT HAVE A COLORABLE CLAIM UNDER SOX SECTION 806
In Murray v. UBS Securities, LLC , No. 12-cv-05914 (SDNY Jan. 27, 2014) (2014 WL 285093), the court held that where the Plaintiff's claim arises under the Dodd-Frank Act anti-retaliation provision at 15 U.S.C. § 78u-6(h), even though the Plaintiff might have a cognizable claim under SOX Section 806 not before the court, the claim before the district court could not be converted in an effort to thwart an agreeement to arbitrate disputes with the Defendants. Moreover, SOX's anti-arbitration provision at 18 U.S.C. 1514A(e) could not be transplanted to statutes for which Congress did not include an anti-arbitration provision.
ARBITRABILITY OF SOX SECTION 806 COMPLAINT; DODD-FRANK AMENDMENT TO PROHIBIT ARBITRATION; COURT FINDS AMENDMENT IS NOT RETROACTIVE IN EFFECT
In Neal v. Asta Funding, Inc. , No. 13-cv-2438 (D.N.J. Dec. 4, 2013), the district court stayed court proceedings pending arbitration proceedings. The court noted that it would leave to the arbitrator the question of whether all of the Plaintiff's claims were arbitrable. The court stated, however:
I note one issue that, if meritorious, would pose a threshold legal bar to the arbitrability of one of Neal's claims. In 2010, Congress passed Dodd-Frank, which amended Section 1514(c) of SOX to prohibit arbitration of SOX claims. 18 U.S.C. §1514A(c)(2). The courts have "nearly uniformly" held, however, that the Dodd-Frank arbitration bar does not apply to SOX whistle blower claims that were arbitrable at the time the law was enacted. See Weller v. HSBC Mort. Services, Inc., 2013 WL 4882758 (D. Col. Sept. 11, 2013); Blackwell v. Bank of Am. Corp., No. 7: 11-cv-02475-JMC, 2012 WL 1229675 (D.S.C. April 12, 2012); Taylor v. Fannie Mae, 839 F. Supp. 2d 259 (D.D.C. 2012); Holmes v. Air Liquide USA LLC, No. H-11-2580, 2012 WL 267194 (S.D.Tex. Jan. 30, 2012); Henderson v. Masco Framing Corp., No. 3: 11-CV-00088-LRH, 2011 WL 3022535 (D. Nev. July 22, 2011); Ruhe v. Masimo Corp., SACV 11-00734-CJC, 2011 WL 4442790 (C.D. Cal. Sept. 16, 2011);. It must be noted, however, that at least two courts have applied the prohibition retroactively. See Wong v. CKX, Inc., 890 F. Supp. 2d 411, 423 (S.D.N.Y. 2012); Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011).
Here, the Consulting Agreement was signed in June 2009, before the enactment of the Dodd-Frank amendments. I agree with the majority, non-retroactivity rule, which preserves the arbitrability of claims as of the date of the arbitration agreement. That rule best respects settled expectations and the federal policy in favor of arbitration freely agreed upon by the parties. I note also that retroactivity is generally not "favored in the law." Landgraf v. USI Film Prods., 511 U.S. 244, 264, 271 (1994). Under the majority view, which I accept, the amendments would not bar arbitration of the SOX claims. In any event, however, I would stay this proceeding. See infra.
Slip op. at n. 6.
DISMISSAL BASED ON ARBITRATION; PLAINTIFF FORFEITED RELIANCE ON DODD-FRANK AMENDMENT TO SECTION 806, 18 U.S.C. 1514A(e) WHERE HE DID NOT RAISE THE ISSUE BEFORE THE DISTRICT COURT
In Raw v. Bank of New York Mellon Corp. , No. 10-4655-cv (2d Cir. 2012) (2012 WL 48175), the plaintiff-appellant appealed the district court's dismissal of his SOX whistleblower suit on the ground that the parties had agreed to arbitrate. The court found that the plaintiff-appellant forfeited his argument relying on the Dodd-Frank Act amendment to SOX, 18 U.S.C. 1514A(e), because he had not previously raised the argument before the District Court. Although the 2010 Dodd-Frank amendment to SOX had not taken effect until after briefing on the motion to dismiss concluded, the district court had not issued its decision until nearly three months after the provision took effect, the plaintiff did not file a motion for reconsideration, and the plaintiff did not seek relief under FRCP 62.1 once learning of § 1514A(e).
RETROACTIVE EFFECT OF DODD-FRANK ACT AMENDMENT TO SOX WHISTLEBLOWER PROVISION TO RENDER INVALID AND UNENFORCEABLE PRE-DISPUTE ARBITRATION AGREEMENTS
In Holmes v. Air Liquide USA LLC , No. H-11-2580 (S.D.Texas Jan. 30, 2012), aff'd Holmes v. Air Liquide USA, LLC , No. 12-20129, 2012 WL 5914863 (5th Cir. 2012), a case filed under the Americans With Disabilities Act and Title VII of the Civil Right Act, the plaintiffs argued that a pre-dispute arbitration agreement was rendered invalid by the Dodd-Frank Act provision adding a whistleblower provision to the Commodity Exchange Act, 7 U.S.C. 26(n)(2) and amending the Sarbanes-Oxley Act, 18 U.S.C. 1514A, both provisions having made invalid and unenforceable pre-dispute arbitration agreements if the agreement requires arbitration of disputes arising under those sections. Citing Henderson v. Masco Framing Corp. , 2011 WL 3022535 (D.Nev. July 22, 2011), the court determined that the Dodd-Frank Act did not have retroactive effect to render invalid the instant arbitration agreement because there was no unambiguous intent expressed by Congress that the arbitration ban be retroactive in effect, and because applying the ban would impair contractual rights that existed at the time that the parties acted.
[NB: This was not filed under the SOX whistleblower provision amended by Dodd-Frank. The court, however, analyzed the retroactive effect of that amendment as the Plaintiffs theory of why the ADA and Title VII complaints were not bound by an arbitration agreement depended on application of Dodd-Frank.]
DODD-FRANK ARBITRATION PROVISION DOES NOT APPLY TO INVALIDATE ALL BROADLY WORDED ARBITRATION AGREEMENTS
In Holmes v. Air Liquide USA, L.L.C. , No. 12-20129, 2012 WL 5914863 (5th Cir. 2012), the Plaintiff sued her former employer asserting claims under the Americans with Disabilities Act, a state civil rights law, Title VII of the Civil Rights Act of 1964, and the Family and Medical Leave Act. The Defendant moved to compel arbitration according to the terms of the parties' ADR agreement. The district court found the ADR agreement valid and enforceable. On appeal, the Plaintiff argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act renders the ADR agreement unenforceable. The Plaintiff argued that because the ADR agreement encompassed "all disputes," and because the Plaintiff could have brought Sarbanes-Oxley and Commodity Exchanges Act claims despite the agreement, the entire ADR agreement was invalid, even though she did not actually assert these claims. The court found this argument unavailing because the Plaintiff's theory would "lead to the untenable conclusion that the [Dodd-Frank] Act wholesale invalidates all broadly-worded arbitration agreements (of which there are many) even when plaintiffs bring wholly unrelated claims." Holmes , Slip op. at 4. The court held that it "must interpret the Act in a manner that avoids such unreasonable results." Id .
ARBITRATION OF SOX CLAIMS; COURT DETERMINED THAT DODD-FRANK ACT AMENDMENT TO SOX THAT PROHIBITS ARBITRATION OF SOX WHISTLEBLOWER COMPLAINTS DOES NOT APPLY RETROACTIVELY
In Taylor v. Fannie Mae , 839 F.Supp.2d 259 (D.D.C. Mar. 20, 2012), the plaintiff alleged that he was retaliated against after raising concerns that an employee was reporting fraudulent data to federal regulators, and therefore filed a SOX whistleblower complaint. The defendants, however, asserted that the plaintiff's employment agreement obligates him to submit such a dispute to arbitration. Because the arbitration agreement existed prior to the July 2010 amendments that prohibit arbitration of SOX complaints, the Court set out to determine if the Dodd-Frank Act applies retroactively to preexisting agreements.
The district court first acknowledged the Supreme Court's decision in Landgraf v. USI Film Products , 511 U.S. 244, 280, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994), which "reaffirmed the judicial presumption against applying a statute that 'would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to [completed] transactions.'" Taylor at 262. After agreeing with other federal courts' finding that the Dodd-Frank Act does not evidence an express intent from Congress to apply retroactively, the court then turned to the "key question," which is whether the Dodd-Frank Act "would affect the substantive rights of the parties." Id.
The defendant argued that the court should follow Henderson v. Masco Framing Corp. , 2011 WL 3022535 (D.Nev. July 22, 2011) and find that retroactive application of SOX would "fundamentally interfere with the parties' contractual rights and would impair the 'predictability and stability' of their earlier agreement." Id. The plaintiff, on the other hand, argued that "applying the statute retroactively would simply change the tribunal that is to hear the case," and cited the district court decision in Pezza v. Investors Capital Corp. , 767 F.Supp.2d 225 (D.Mass.2011) in support. Id. The district court ultimately sided with the defendant and the ruling in Henderson , stating that it "fail[ed] to see how a retroactive application would not impair the parties' rights possessed when they acted," and therefore granted the motion to compel arbitration. Id. at 263.
DODD-FRANK ACT AMENDMENT TO SOX PROHIBITING ARBITRATION OF SOX CLAIMS DOES NOT APPLY RETROACTIVELY, BUT INSTANT COMPLAINT ALSO FAILED FOR FAILURE TO EXHAUST ADMINISTRATIVE REMEDIES
In Blackwell v. Bank of America Corp. , CA No. 7:11-2475-JMC-KFM, 2012 WL 1229673 (D.S.C. Mar. 22, 2012) (magistrate's report), adopted Blackwell v. Bank of America Corp. , No. 7:11-cv-02475 (D.S.C. Apr. 12, 2012) , the plaintiff was employed by Merrill Lynch as a financial adviser, and his employment contract included an agreement to arbitrate claims arising between he and the firm. After he was discharged from Merrill Lynch, the plaintiff filed a claim under the whistleblower protection provision of SOX, and Merrill Lynch filed a motion to dismiss.
The plaintiff argued that Section 922 of the Dodd Frank Financial Reform Act of 2009, which amended Section 1514A to preclude arbitration of SOX claims, applies retroactively to prohibit arbitration of his claim. After acknowledging the presumption against statutory retroactivity that the Supreme Court announced in Landgraf v. USI Film Products , 511 U.S. 244, 264 (1994), the court followed the district court's decision in Henderson v. Masco Framing Corp. , 2011 WL 3022535, at *4 (D.Nev. July 22, 2011) in finding that "a retroactive application of Dodd-Frank's SOX provisions would "fundamentally interfere with the parties' contractual rights and would impair the 'predictability and stability' of their earlier agreement." Furthermore, "the plaintiff's complaint, amended complaint, and second amended complaint do not contain any allegation that the plaintiff exhausted his administrative remedies," and therefore the plaintiff's complaint appeared to fail on exhaustion grounds as well.
DODD-FRANK AMENDMENT TO SOX PROHIBITING ARBITRATION OF SOX CLAIMS APPLIES RETROACTIVELY
In Wong v. CKX, Inc. , No. 11 Civ. 6291, 2012 WL 3893609 (S.D.N.Y. Sept. 11, 2012), the plaintiff, Senior Tax Counsel for an entertainment company, repeatedly raised concerns to senior management that if its UK-based subsidiary was conducting business in the United States (as she believed it was), than the company needed to pay United States taxes on that subsidiary's income. She believed the company may owe the Unites States government nearly $100 million dollars in back taxes, and their failure to do so rendered false the company's SEC filings regarding their tax liabilities. Two months after she lodged her complaints, the plaintiff was terminated, and filed a complaint with OSHA alleging retaliatory termination in violation of SOX. OSHA dismissed the plaintiff's complaint, and after an ALJ held a three-day hearing on the merits, the plaintiff filed this action for de novo review in district court.
Alternatively, the defendant argued that the court should compel arbitration of the claim, as the plaintiff's employment contract with the company pre-dated the 2010 Dodd-Frank amendments to SOX, and the amendments do not apply retroactively. The court disagreed and, following the district court's decision in Pezza v. Investors Capital Corp. , 767 F.Supp.2d 225, 228 (D.Mass.2011), found that because "the right to have a dispute heard in an arbitral forum is a procedural right that affects the forum that will decide the substantive rights of the parties - applying the present law to this dispute would not have a disfavored retroactive consequence." Wong at *10. Consequently, "because the parties' substantive rights remain unaffected by this statute," the court found that the Dodd-Frank amendments applied retroactively to the suit, requiring that the court deny the motion to compel. Id.
RETROACTIVE APPLICATION OF THE DODD-FRANK ACT ARBITRATION BAN; FEDERAL COURT SUBJECT MATTER JURISDICTION
In Pezza v. Investors Capital Corp. , No. 10-10113-DPW (D. Mass. Mar. 1, 2011), the district court held that the provision of Dodd-Frank Wall Street Reform and Consumer Protection Act amended the whistleblower protection set forth in SOX by banning pre-dispute arbitration agreement and that the amendment applied to conduct that arose prior to the enactment of the Act. Before the Dodd-Frank Act became law, in January 2010 the plaintiff sued Investors Capital Corp., his former employer, and two co-defendants, alleging that they had violated SOX by firing him for reporting the defendants' alleged financial misconduct to state and federal regulators. The plaintiff had previously signed an employment agreement that required him to submit such disputes to arbitration. Citing those agreements, Investor's Capital moved to compel arbitration of the plaintiff's SOX claim and asked the district court to stay or dismiss his suit. The plaintiff, on the other hand, argued that Section 922 of the Dodd-Frank Act, which was enacted while his suit was pending, applied to his case and required the court to deny the motion to compel arbitration.
The judge applied a two-step analysis to determine if the statute should be applied retroactively: (1) whether Congress has expressly prescribed the statute's proper reach; and (2) in the absence of clear congressional intent, whether retroactively applying the statue to the plaintiff would undesirably affect the substantive rights, liabilities, or duties of the parties arising from conduct that occurred after the statute's enactment.
The court found that Congress did not clearly express intent to limit Section 922 of the Dodd-Frank Act to agreements signed or conduct arising after the date of the enactment. As to the retroactive consequence, while Section 922 affects the validity of the arbitration clause, a contractual term agreed upon by the parties, the judge found that Section 922 is better characterized as a statute that confers jurisdiction on the court, as it merely changes the forum in which the plaintiff can pursue the same substantive rights. The Supreme Court found that "jurisdictional statutes may be applied in suits arising before their enactment without raising concerns about retroactivity 'because statutes conferring or ousting jurisdiction 'speak to the power of the court rather than to the rights or obligations of the parties.'" Pezza at. 7. The district court held that the Section 922 may be applied retroactively, and therefore, federal court, rather than a Financial Industry Regulatory Authority arbitration panel, has subject matter jurisdiction over the plaintiff's whistleblower claims.
DODD-FRANK AMENDMENT PROHIBITING ARBITRATION OF SOX COMPLAINTS UNDER PREDISPUTE ARBITRATION AGREEMENTS DOES NOT APPLY RETROACTIVELY TO ARBITRATION AGREEMENTS THAT EXISTED PRIOR TO JULY 2010
In Henderson v. Masco Framing Corp. , No. 3:11-CV-00088-LRH, 2011 WL 3022535 (D.Nev. July 22, 2011) (case below 2010-SOX-11), the plaintiff's former employer was acquired by the defendant, and in the plaintiff's employment retention agreement with the defendant, he received a retention bonus, which was to be held in escrow and paid out in three annual installments. When the defendant paid the plaintiff the first installment of the bonus, the defendant withheld the employer portion of the FICA Medicare tax and reported the taxed amount as income on the plaintiff's W2. The plaintiff complained to the defendant about withholding this amount, and after the defendant terminated the plaintiff's employment several months later, the plaintiff filed a complaint under SOX, arguing that he was retaliated for complaining about the bonus payment. The dispute resolution policy contained in the plaintiff's employment contract with the defendant contained a clause mandating arbitration of all employment claims, and the plaintiff therefore moved to compel arbitration of his SOX complaint.
After finding the parties' arbitration agreement to be valid, the court reviewed the defendant's argument that the Dodd-Frank Act's amendment of SOX, which to prohibited arbitration of SOX claims under predispute arbitration agreements, 18 U.S.C. § 1514A(e)(2), applies retroactively and prohibits arbitration of SOX claims, even if the arbitration agreement was in place prior to July 2010. Acknowledging that retroactive application of legislative actions is generally disfavored, the court explained that a statute has "retroactive effect" if, when applied to previous actions or conduct, "impair[s] rights a party possessed when he acted, increase[s] a party's liability for past conduct, or impose[s] new duties with respect to transactions already completed." Henderson at *3. The court agreed with the plaintiff that application of Section 922 of Dodd-Frank would "fundamentally interfere with the parties' contractual rights and would impair the "predictability and stability" of their earlier agreement." Consequently, the court found that the Dodd-Frank amendments to SOX did not apply retroactively, and granted the plaintiff's motion to compel arbitration. Id. at *4.
DODD-FRANK AMENDMENT PROHIBITING ARBITRATION OF SOX COMPLAINTS UNDER PREDISPUTE ARBITRATION AGREEMENTS DOES NOT APPLY TO COMPLAINTS FILED UNDER THE FAIR LABOR STANDARDS ACT
In Carrell v. L & S Plumbing Partnership, Ltd. , CA No. H-10-2523, 2011 WL 3300067 (S.D.Tex. Aug. 1, 2011), the plaintiffs filed complaints under the FLSA, claiming that they were not paid for overtime hours, and the defendants motioned to compel arbitration pursuant to the arbitration agreements in the plaintiffs' employment contracts. Even though the plaintiffs filed complaints under FLSA, not SOX, they argued that § 922 of the Dodd-Frank Act, 18 U.S.C. § 1514A(e), prevented arbitration of their complaints. The defendants counter-argued that 18 U.S.C. § 1514A(e) applies only to SOX whistleblower complaints, and that because it is not a publicly traded company, they are not covered by SOX. The court agreed with defendants and granted their motion to compel arbitration.
ARBITRATION AGREEMENTS UNDER SOX
In Hill v. Ricoh Americas Corp . , No. 09-3182 (10th Cir. Apr. 19, 2010)(cases below D.C. No. 2:08-cv-02548; 2008-SOX-48), a former employee sued his former employer alleging that after he reported evidence of fraud he was fired in violation of the Sarbanes-Oxley Act. The Employer moved to stay action and compel arbitration pursuant to the arbitration clause in the parties' employment agreement. The District Court overruled the employer's motion. On appeal, the Court of Appeals reversed the District Court's refusal to compel arbitration. The Court held that (1) the employer did not waive its right to arbitration by failing to demand arbitration in its answer; (2) the employer did waive its right to arbitration by delaying its demand for arbitration until four months after it had answered employee's complaint; (3) the employee was not substantially prejudiced by employer's four-month delay in demanding arbitration; (4) the employment agreement's arbitration clause was not superseded by subsequent executed retention bonus agreements; and (5) the employment agreement's arbitration provision did not prevent the employee from vindicating his statutory rights under SOX.
DISTRICT COURT DISMISSED CLAIMS UNDER SOX HOLDING THAT THE CLAIMS ARE GOVERNED BY ARBITRATION AGREEMENT
In Raw v. Bank of New York Mellon Co. , No. 09-4341 (E.D.N.Y. Oct. 21, 2010), the plaintiff sued his employer for retaliation under the Sarbanes-Oxley Act, 18 U.S.C. § 1514A. The defendant filed a motion pursuant to FRCP 12(b)(1) and the Federal Arbitration Act ("FAA") to compel arbitration and dismiss plaintiff's complaint, or in the alternative to compel arbitration and stay the lawsuit to Section 3 of the FAA. The District Court granted the defendant's motion and dismissed the plaintiff's complaints. The court held that plaintiff's claims fell within the scope of the arbitration clause within his employment agreement, and therefore, the defendant's motion to compel arbitration was granted.
In determining whether or not the dispute is governed by an arbitration agreement, the District Court applied the four prong analysis provided by the Second Circuit: (1) whether the parties agreed to arbitrate; (2) the scope of the agreement; (3) if federal statutory claims are asserted, whether Congress intended those claims to be non arbitrable; and (4) if the court concludes that some, but not all, of the claims in the case are arbitrable, whether to stay the balance of the proceedings pending arbitration. Raw . at 3. (citing JLM Indus., Inc. v. Stolt-Nielson SA , 387 F.3d 163, 169 (2d Cir. 2004).
SOX CLAIMS ARE ARBITRABLE; PRIMARY PURPOSE OF SOX IS TO PROVIDE A PRIVATE REMEDY FOR THE AGGRIEVED EMPLOYEE, NOT TO PUBLICIZE ALLEGED CORPORATE MISCONDUCT
In Guyden v. Aetna Inc. , No. 06-4954 (2d Cir. Oct. 2, 2008), after OSHA failed to act on her SOX whistleblower complaint, the Plaintiff filed suit in federal district court. The district court granted the Defendant's motion to compel arbitration and to dismiss the federal proceedings. On appeal, the Plaintiff argued that SOX claims are not arbitrable because arbitration is inconsistent with the purpose and structure of the Act.
The court described the Plaintiff's theory as follows:
The premise of Guyden's inherent conflict argument is that the SOX whistleblower provision has a public purpose in addition to its private compensatory function. In Guyden's view, an individual who brings a SOX whistleblower claim is acting as a private attorney general, and the resulting litigation serves as a vehicle for transmitting to the public information about the corporation's fraudulent activity. Her argument thus connects the SOX whistleblower provision with the policies of SOX more generally, the purpose of which is to enforce the accountability and transparency needed for well-functioning capital markets. S. REP. NO. 107-146, at pt. II(E). In other words, Guyden sees her lawsuit against Aetna as having twin objectives: first, to compensate Guyden for her own injuries; and second, "to bring serious auditing and accounting issues to the attention of Defendant's Board of Directors, shareholders, and . . . the investing public." She points out that Aetna has not yet disclosed the accounting irregularities that she claims to have discovered while an employee, and she hopes to use this litigation "to make Defendant's shareholders and the investing public aware of Defendant's internal control problems and its misleading corporate disclosures, as well as its retaliatory termination of Plaintiff."
Slip op. at 9-10. The court disagreed:
Our review of the legislative history of the SOX whistleblower provision confirms that the result is the same here. The primary purpose of the statute is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct. Although Guyden correctly points out that the broad purpose of the Sarbanes-Oxley Act is to strengthen the integrity of capital markets, the whistleblower provision in particular fills a far narrower gap in the law - it protects "employees when they take lawful acts to disclose information or otherwise assist . . . in detecting and stopping actions which they reasonably believe to be fraudulent." S. REP. NO. 107-146, at pt. III. That protection, designed to "make [the] victim whole," takes the form of remedies that include "both reinstatement of the whistleblower, backpay, and compensatory damages . . .." Id. Remedies that "make [the] victim whole" protect and compensate whistleblowers, but they do little to publicize the conduct of the corporate defendant. Tellingly, and further undermining Guyden's argument that the public purpose of SOX should preclude arbitration, both Houses of Congress, acting separately, rejected versions of SOX that would have prohibited mandatory arbitration of whistleblower claims. See S. 2010, 107th Cong. § 1514A(d)(2) (March 12, 2002 version) ("No employee may be compelled to adjudicate his or her rights under this section pursuant to an arbitration agreement."); H.R. 4098, 107th Cong. § 1514A(d)(2) (Apr. 9, 2002 version) (same); S. Rep. No. 107-146, at pt. V (May 6, 2002) (reporting unanimous vote in favor of amendment that "removed the provision dealing with arbitration agreements").
Moreover, a whistleblower need not show that the corporate defendant committed fraud to prevail in her retaliation claim under § 1514A. The statute only requires the employee to prove that she "reasonably believe[d]" that the defendant's conduct violated federal law. 18 U.S.C. § 1514A(a)(1). The provision's focus on the plaintiff's state of mind rather than on the defendant's conduct is inconsistent with what Guyden argues is the statutory purpose to employ SOX retaliation litigation as a vehicle for publicizing corporate misconduct. It is far more consistent with a statutory purpose to provide a strong compensatory mechanism for employees subjected to adverse employment action as a result of their whistleblowing conduct. This compensatory scheme is entirely consistent with mandatory arbitration, and Guyden's ability to "vindicate [her] statutory cause of action in the arbitral forum" ensures that SOX "will continue to serve both its remedial and deterrent function." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. , 473 U.S. 614, 637 (1985). We recognize that arbitration is more private than litigation and that Guyden will not have the same opportunity to expose publicly Aetna's alleged wrongdoing. As Oldroyd makes clear, however, the loss of a public forum in which to air allegations of fraud does not undermine the statutory purpose of a whistleblower protection provision. 134 F.3d at 78-79.
Slip op. at 11-12. The court therefore held that SOX claims are arbitrable.
ARBITRATION PROCEDURES; CONFIDENTIALITY; BREVITY OF ARBITRATOR'S DECISION; LIMITED DISCOVERY
In Guyden v. Aetna Inc. , No. 06-4954 (2d Cir. Oct. 2, 2008), after OSHA failed to act on her SOX whistleblower complaint, the Plaintiff filed suit in federal district court. The district court granted the Defendant's motion to compel arbitration and to dismiss the federal proceedings. On appeal, the Plaintiff argued that the specific arbitration procedures established by the instant arbitration agreement had procedural limitations that would prevent her from vindicating her statutory rights. The Plaintiff raised three objections: (1) that the agreement's confidentiality clause would prevent other employees from learning about her allegations against the Defendant and thereby undermine one of the purposes of the SOX whistleblower protection provision; (2) that a requirement that the arbitrator provide a "brief summary" of his or her decision, would result in such brevity that effective review of the arbitrator's decision would be prevented; and (3) that the agreement did not provide for sufficient discovery.
Although acknowledging some support for the Plaintiff's contention that confidentiality in arbitration may systematically favor companies over individuals and may reduce whatever incentive the fact of publicity may instill in potential whistleblowers, the court held that "[b]ecause confidentiality is a paradigmatic aspect of arbitration, our determination that SOX whistleblower claims are arbitrable precludes Guyden's challenge to the privacy of the resulting arbitration." Slip op. at 14.
In regard to the Plaintiff's objection to the "brief summary" requirement, the court found that the objection "assumes that the arbitrator will knowingly refuse or fail to apply controlling law and then insulate that failure from review through the form of its written decision." Slip op. at 16. The court found that the Plaintiff had provided no basis for that speculation, and therefore would not rely on such fears to find the agreement unenforceable.
The arbitration agreement provided for limited discovery. Each party would be allowed to take one deposition and to depose anyone designated by the other as an expert witness. However, the agreement provided that "additional discovery may be permitted by the arbitrator upon a showing that it is necessary for that party to have a fair opportunity to present a claim or defense." The Plaintiff contended that such limited discovery was inadequate. The court, however, found that the agreement and the Federal Arbitration Act gave the Plaintiff "both a contractual and a statutory basis for further discovery should it prove necessary for her claim." Slip op. at 17. Although the Plaintiff asserted that she would be unable to make the required showing of necessity, the court found that such a challenge "assumes that, in violation of her contractual and statutory rights, an arbitrator will deny her needed discovery." Slip op. at 18. Since the Plaintiff had not introduced evidence that such fears were well-founded, the court found that it must enforce the agreement "unless and until the record proves otherwise." Id .
MANDATORY ARBITRATION; ALJ PROPERLY DISMISSED SOX COMPLAINTS AFTER COMPLAINANTS REPORTED THAT THEY WOULD NOT BE PURSUING ARBITRATION; LATER ARGUMENT THAT THE ARBITRATION WAS NOT MANDATORY WAS NOT CONSIDERED BECAUSE THE COMPLAINANTS' ATTORNEY HAD NOT ARGUED THAT POSITION PRIOR TO DISMISSAL
ANDATORY ARBITRATION; COMPLAINANTS FOUND TO HAVE THE BURDEN TO INITIATE ARBITRATION
In Ulibarri v. Affiliated Computer Services , ARB No. 07-003, ALJ No. 2005-SOX-46 and 2006-SOX-47 (ARB July 31, 2008), the Complainants filed SOX complaints, and the Respondent filed a motion with the ALJ to stay the proceedings arguing that the matter was governed by the company's Dispute Resolution Program (DRP), which compelled arbitration. The Complainants argued that the contract was void ab initio or, alternatively, that the Respondent had breached the DRP and thereby forfeited the right to compel arbitration. Following a hearing on the issue, the ALJ granted the stay. Months later, the Complainants had not proceeded to arbitration and the ALJ ordered them to show cause why the SOX complaints should not be dismissed. When they responded that they would not be pursuing arbitration, the ALJ dismissed the complaints. The Complainants then petitioned the ALJ to reconsider, arguing for the first time that their attorney had failed to highlight for them certain portions of the DRP that arguably excluded their SOX complaints from mandatory arbitration. They also argued for the first time that the dismissal was in error because the Respondent had not initiated the arbitration process. The ALJ denied the motion.
On appeal, the ARB found that the Complainants' attorney had specifically informed the ALJ that the challenge to the arbitration was limited to two grounds (void ab initio or breach). The ARB held that the new argument that the DRP did not mandate arbitration had not been presented by the Complainants' attorney and that they were bound by the attorney's argument. The ARB also found that the Respondent was under no obligation to initiate the arbitration under the language of the DRP or in the context of American jurisprudence generally. The Complainants were the aggrieved parties and it was their burden to initiate the arbitration process.
MOTION TO COMPEL ARBITRATION; PARTICIPATION IN DOL SOX PROCEEDINGS IS NOT A WAIVER OF THE RIGHT TO COMPEL
In Green v. Service Corp. Int'l , No. 4:06-CV-00833 (S.D.Tx. June 30, 2006) (case below 2006-SOX-35), the Plaintiff had removed his SOX whistleblower complaint to federal district court. The Respondent then moved to compel arbitration. Noting that U.S. Supreme Court has held that any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration, the court rejected the Plaintiff's claim that the Defendant had waived its right to compel arbitration when it defended itself in the administrative proceedings before DOL. The court did not find any Fifth Circuit case law on point, but found authoritative the decision of the First Circuit in Brennan v. King , 139 F.3d 258, 264 (1st Cir. 1998), which held that, in determining whether such a waiver occurred, reference is made to judicial rather than administrative proceedings. The court also rejected the Plaintiff's claim that the arbitration agreement was not enforceable because it did not identify the Defendant as the party which could enforce the agreement. Finally, the court denied the Plaintiff's request that his case be dismissed rather than stayed. In Green v. Service Corp. Int'l , No. 4:06-cv-00833 (S.D.Tx. Aug. 17, 2006), the court denied reconsideration. The court recognized that the DOL proceedings resembled the judicial process quite closely, but nonetheless found no authority that states that invoking a process that resemble a judicial process operates as a waiver of the right to compel arbitration. The Plaintiff appealed to the Fifth Circuit, which found that under 16(b) of the FAA, 9 U.S.C. § 16(b), it had no jurisdiction, the case being still pending before the district court. Green v. Service Corp. Int'l , No. 06-20732 (5th Cir. May 30, 2007).
SOX WHISTLEBLOWER JURISDICTION IN FEDERAL DISTRICT COURT DOES NOT EXEMPT EMPLOYEE FROM MANDATORY ARBITRATION AGREEMENT
In Boss v. Salomon Smith Barney Inc. , No. 02 Civ. 7539(RO) (S.D.N.Y. May 16, 2003) (available at 2003 WL 21146653), the Plaintiff filed suit seeking damages and reinstatement when his employer fired him allegedly for his failing to change a draft research report under pressure from the employer. Plaintiff, however, had signed a mandatory arbitration agreement as a term of employment, and Defendant moved to stay the litigation and compel arbitration. Plaintiff argued that because the Sarbanes-Oxley Act provides for Federal court jurisdiction to hear whistleblower complaints his suit was exempt from mandatory arbitration. The court rejected this argument and granted the relief requested by the Defendant.
[Editor's note: The text of the decision does not state whether the Plaintiff had filed a SOX complaint with OSHA.]
MANDATORY ARBITRATION; ARBITRATION AGREEMENTS ARE NOT IN INHERENT CONFLICT WITH THE PURPOSES OF THE SOX WHISTLEBLOWER PROVISION
In Guyden v. Aetna Inc. , 3:05-CV-1652 (D.Conn. Sept. 25, 2006), after OSHA failed to act on her SOX whistleblower complaint, the Plaintiff filed suit in federal district court, and the Defendant moved to compel arbitration and to dismiss the federal proceedings. The court granted the motion because the Plaintiff had signed an employment contract with a provision calling for mandatory arbitration of employment-related disputes. The court rejected the Plaintiff's argument that the arbitral forum inherently conflicts with the statutory purpose of the SOX, finding that it fell within a line of Supreme Court decisions upholding the enforcement of arbitration agreements over objections that such undermine the role served by a private attorney-general as a protector of the public interest. The court held:
The legislative history reveals that Congress created provisions of the SOX directed at the encouragement and protection of employees who report corporate misconduct. At the same time, the SOX's legislative history underscores the compensatory function of section 1514A to relieve whistleblowing employees from the vagaries of state law and to provide such litigants uniform civil remedies. Such private remedies of reinstatement and backpay can be provided through arbitration.
Slip op. at 8 (citations omitted). The court also rejected as grounds for attacking the arbitration agreement the Plaintiff's complaints that the arbitrator's decision would not be published (and thereby vitiate SOX's purpose of encouraging breach of the "corporate code of silence") and that arbitral discovery is extremely limited (which would cripple her ability to present a fact-intensive whistleblower claim).
ARBITRATION; CLAUSE IN ARBITRATION CONTRACT COVERING "ANY CLAIMS INVOLVING RIGHT PROTECTED BY ANY FEDERAL STATUTE" CAPTURES SOX WHISTLEBLOWER CLAIM, EVEN THOUGH CONTRACT PRECEDED ENACTMENT OF SOX
In Kimpson v. Fannie Mae Corp. , No. 1:06-cv-00018 (D.D.C. Mar. 31, 2007), the Plaintiff did not deny the existence of a valid agreement to arbitrate employment disputes with the Defendant, but argued that he did not consent to arbitrate SOX claims because SOX was not listed among the statutes stated to be covered by the dispute resolution policy. The Defendant responded that the comprehensive language of the policy applied to the Plaintiff's SOX claims. The court agreed with the Defendant. Even though SOX had not yet been passed when the arbitration contract was entered into, the court found that language in the agreement regarding the inclusion of "any claims involving rights protected by any federal statute" captured the Plaintiff's SOX claim. Pursuant to the Federal Arbitration Act, 9 U.S.C. § 3, the court stayed the district court suit pending the conclusion of arbitration.
ADMINISTRATIVE LAW JUDGE DECISIONS
Arbitration AgreementsMANDATORY ARBITRATION; STAY OF ALJ PROCEEDING FOR ARBITRATION TO BE INITIATED
In Ulibarri v. Affliated Computer Services , 2005-SOX-46 and 47 (ALJ Jan. 13, 2006), prior to the hearing the Respondent filed a motion to dismiss or to stay the proceedings and compel arbitration. The Complainants opposed the motion, arguing that the mandatory arbitration agreement had been breached by Respondent, and that there was never a valid enforceable contract to arbitrate based on unconscionability and a failure of mutuality of consideration. The ALJ first observed:
The Federal Arbitration Act (FAA) enforces contractual waivers of the right to judicial resolution of disputes in favor of arbitration. It provides that "[a] written provision in 'a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract' shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The FAA requires that any proceedings brought upon any issue referable to arbitration under the terms of such a contract shall be stayed pending arbitration upon application by a party who is not in default in the arbitration.
Slip op. at 17 (footnotes omitted). Upon review of the facts and circumstances of the case, the ALJ found that adequate consideration had been provided for the arbitration clause, that the clause was not unconscionable, and that the Respondent had not breached the contract. The ALJ issued an order staying the hearing in order for the parties to enter arbitration. The ALJ directed the Respondent to file periodic status reports.
In Ulibarri v. Affliated Computer Services , 2005-SOX-46 and 47 (ALJ July 24, 2006), after several months of failed communication, the Respondent filed a letter stating that the Complainant had yet to move forward with arbitration and requesting a dismissal with prejudice of the DOL proceeding. The Complainants responded, expressing frustration with their inability to be heard before DOL on the merits of the complaint, complaining that they had already spent $20,000 litigating their case, that in order to proceed with arbitration they would need an initial $7,000 for attorney fees, and therefore they could not pursue arbitration. The ALJ found no evidence that the Complainants would be required to have counsel to proceed with arbitration, and that the Complainant's stated intent not to pursue arbitration was not attributable to a breach by the Respondent of the agreement to arbitrate. The ALJ therefore dismissed the complaint.
The Complainants thereafter filed a motion to reconsider arguing that the mandatory arbitration clause in their employment contract did not apply to complaints filed with government regulatory agencies. In Ulibarri v. Affliated Computer Services , 2005-SOX-46 and 47 (ALJ Sept. 18, 2006), the ALJ denied the motion finding that that the argument that the clause did not apply to complaints before federal agencies was first raised in the motion to reconsider, and that their attorney at the time of the hearing had implicitly conceded this point with the knowledge and consent of the Complainants.
BINDING ARBITRATION AGREEMENT; ALJ PROCEEDING STAYED PENDING
In Ulibarri v. Affiliated Computer Services , 2005-SOX-46 and 47 (ALJ Jan. 13, 2006), the ALJ held that the Complainants entered into a binding agreement with the Respondent to arbitrate complaints arising out of federal law and that the Respondent had not breached that agreement. Accordingly, pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 2, 3, the ALJ stayed the SOX whistleblower proceedings pending arbitration. See 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).
ADMINISTRATIVE REVIEW BOARD DECISIONS
VALID SEVERANCE AGREEMENT AS GROUNDS BARRING SOX COMPLAINT
In Moldauer v. Canadaigua Wine Co. , ARB No. 04-022, ALJ No. 2003-SOX-26 (ARB Dec. 30, 2005), the ARB majority decided the case based on lack of a timely filing of a SOX complaint. One ARB member, although agreeing with the majority decision, wrote a concurring opinion to address his belief that a threshold issue in the matter was whether the Complainant's severance agreement with the Respondent had released the Respondent from liability under a SOX complaint. Reviewing applicable federal and state court decisions, and the facts surrounding the execution of the severance agreement, the concurring member concluded that "in executing a general release of all claims against [the Respondent], [the Complainant] also knowingly and voluntarily released any claim for discrimination he might have had under the SOX." The concurring member found that such a "valid release, knowingly and voluntarily entered into for valuable consideration, and not voidable in part because of concealed facts could end the matter" independent of the timeliness issues.
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