[Last Updated Mar. 5, 2015]
- Employee of Non-Publicly Traded Company
- Employee of Non-Publicly Traded Subsidiary of Publicly Traded Parent
- Employee Whose Work Was Outside the United States
- Former Employee
[ See Covered Respondent for additional relevant caselaw. ]
Employee of Non-Publicly Traded Company
COVERED EMPLOYEE; EMPLOYEE OF NON-PUBLICLY TRADED COMPANY; MERE AGENCY IN LIMITED FINANCIAL TRANSACTIONS
In Brady v. Calyon Securities (USA) , No. 05 Civ. 3470 (GEL) (S.D. N.Y. Nov. 8, 2005) (available at 2005 WL 3005808), the court granted the Defendants' FRCP 12(b)(6) motion to dismiss the Plaintiff's Sarbanes-Oxley Act complaint for failure to state a claim upon which relief can be granted.
The Plaintiff had been employed by the Defendant, a broker-dealer incorporated in New York, as an equity analyst. The Plaintiff alleged that he was discriminated against by his former employer and its French parent company and two individual officers and managers for his complaints about violations of various securities laws, rules and regulations.
The Plaintiff had not alleged that any of the Defendants were publicly traded companies, and had not disputed their contentions that they were neither publicly traded companies nor "issuers of securities" as defined by the SOX. Rather, the Plaintiff argued that the Defendants were liable as "agents and/or underwriters of numerous public companies." The court rejected this argument:
The mere fact that defendants may have acted as an agent for certain public companies in certain limited financial contexts related to their investment banking relationship does not bring the agency under the employment protection provisions of Sarbanes-Oxley. Section 806's reference to "any officer, employee, contractor, subcontractor, or agent of such company," 18 U.S.C. 1514A(a), "simply lists the various potential actors who are prohibited from engaging in discrimination on behalf of a covered employer." Minkina v. Affiliated Physicians Group , No. 2005-SOX-19, at 6 (ALJ Feb. 22, 2005, appeal dismissed , (ARB July 29, 2005). The Act makes plain that neither publicly traded companies, nor anyone acting on their behalf, may retaliate against qualifying whistleblower employees. Nothing in the Act suggests that it is intended to provide general whistleblower protection to the employees of any employer whose business involves acting in the interests of public companies. On plaintiff's theory, the Sarbanes-Oxley Act, by its use of the word "agent," adopted a general whistleblower protection provision governing the employment relationships of any privately-held employer, such as a local realtor or law firm, that has ever had occasion, in the normal course of its business, to act as an agent of a publicly traded company, even as to employees who had no relation whatsoever to the publicly traded company.
Slip op. at 15-16 (footnote omitted). The court, therefore, found that as an employee of non-publicly traded companies, the Plaintiff was not covered by SOX and that the count of the complaint alleging a SOX violation must be dismissed.
Employee of Non-Publicly Traded Subsidiary of Publicly Traded Parent
FEDERAL COURT DECISIONS
COVERED EMPLOYEE; AUTHORITY OF PUBLICLY TRADED PARENT TO AFFECT THE EMPLOYMENT OF EMPLOYEES OF A SUBSIDIARY
In Ciavarra v. BMC Software, Inc. , No. 4:07-CV-00413 (S.D.Tex. Feb. 7, 2008), the court, in ruling on a motion for summary judgment, applied the ruling in Carnero v. Boston Scientific Corp. , 433 F.3d 1, *6 (1st Cir. 2006), that an employee of a subsidiary is a covered employee for § 1514A purposes where the officers of the publicly-traded parent company have the authority to affect the employment of the subsidiaries' personnel. Thus, where there was a fact issue as to whether the publicly traded parent company had the authority to affect the Plaintiff's employment with the non-publicly traded subsidiary, summary judgment was denied.
COVERED EMPLOYEE; EMPLOYEE OF NON-PUBLICLY TRADED SUBSIDIARY
In Rao v. Daimler Chrysler Corp. , No. 2:06-CV-13723 (E.D.Mich. May 14, 2007) (case below 2006-SOX-78), the district court granted summary judgment against the Plaintiff in a SOX whistleblower suit where the Defendant was not itself a public company, but only the subsidiary of its publicly traded parent, and the publicly traded parent had not been named in the complaint. The court reviewed ALJ decisions on this issue, and while recognizing some merit to the position that the background to enactment of SOX might support the view that subsidiaries should be covered, observed that the clear statutory text of section 1514A only lists employees of public companies as protected individuals. The court stated it was not its job to rewrite the statute, especially in light of the corporate law principle that parent companies are not ipso facto liable for the actions of their subsidiaries, and that Congress had specifically overrode this principle in other portions of SOX.
The court then looked to common law agency principles to determine whether the Defendant was acting as an agent for its parent company in its actions towards the Plaintiff. The court granted summary judgment in favor of the Defendant on this issue because the Plaintiff's amended complaint only mentioned employees of the Defendant as those who were aware of the situation and his complaints, and did not assert that anyone at the parent company had such knowledge.
COVERED EMPLOYEE; EMPLOYEE OF SUBSIDIARY OF PUBLICLY TRADED PARENT COMPANY
Where the officers of a publicly traded parent company have the authority to affect the employment of employees of a subsidiary, an employee of the subsidiary is a "covered employee" within the meaning of the SOX whistleblower provision. Collins v. Beazer Homes USA, Inc. , __ F.Supp.2d __, 2004 WL 2023716 (N.D.Ga. Sept. 2, 2004).
ADMINSTRATIVE REVIEW BOARD DECISIONS
COVERED EMPLOYER/EMPLOYEE; SUMMARY DECISION IMPROPER WHERE DISPUTED FACTS EXISTED AS TO COVERAGE OF EMPLOYEE OF NON-PUBLICLY TRADED COMPANY UNDER BASES SUCH AS CONTRACTOR RELATIONSHIP, AGENCY, AND COMPANY REPRESENTATIVE STATUS
In Charles v. Profit Investment Management , ARB No. 10-071, ALJ No. 2009-SOX-40 (ARB Dec. 16, 2011), the Complainant named several business entities and two individuals as Respondents to her SOX Section 806 whistleblower complaint. The ALJ granted summary decision on behalf of the Respondents on the ground that the Complainant was not a covered employee under the SOX because her employer was a privately held company. The ARB held that the ALJ's conclusion was incorrect.
The ARB stated that "[t]he plain language of Section 806(a) identifies several categories of potentially covered entities beyond the registration and reporting requirements of SOX (i.e., "any officer, employee, contractor, subcontractor, or agent of such company")" and observed that the Second and Sixth Circuits had concluded that "the use of the term "any" preceding the listing of the several entities identified in Section 806(a) is an indication that Congress intended the clause "officer, employee, contractor, subcontractor, or agent" to be interpreted in an all-encompassing manner." USDOL/OALJ Reporter at 6 (citing in a footnote Johnson v. Siemens Bldg Techs., Inc ., ARB No. 08-032, ALJ No. 2005-SOX-015, slip op. at 22 (ARB Mar. 31, 2011)). The ALJ had concluded that only one of the Respondents was a covered entity, as it was the only entity required to file reports under the Securities Exchange Act of 1934, and that it would be an exceptionally broad interpretation of the SOX to sweep in any privately held company under contract with a publicly traded company. The ARB found it incorrect to conclude that "no contractor" is ever covered, and that summary decision was improper in the instant case given disputed facts and relevant pending discovery disputes.
The ARB also disagreed with the ALJ's conclusion that there were no genuine issues of material fact with regard to whether one of the individuals and one of the business entities named as Respondents were agents of the publicly traded company or any other covered employer. The ARB found evidence in the record suggesting possible coverage.
The ARB rejected the Respondents' assertion that the Complainant was not covered by the SOX because she was employed by a private company that had sole control over the terms and conditions of employment. The ARB observed that under the regulations an employee is defined as "an individual presently or formerly working for a company or company representative . . . or an individual whose employment could be affected by a company or company representative." The ARB further observed that a "company representative" is "any officer, employee, contractor, subcontractor, or agent of a company" and that the Complainant had alleged in her complaint that she was a Vice President and the office administrator for each of the named business entities and well as others. The ARB found that the employment and agency relationships were disputed in the record, that if the Complainant had an employment relationship with the publicly traded company, de facto or otherwise, she may be a covered employee. The ARB found that factual issues remained about the contractual and agency relationships involved. Moreover, the ARB found that it was possible that one or more of the Respondents may have acted as a representative of the publicly traded company, and that if the Complainant's employment "could be affected by" any such company representative, she may be considered a covered employee under Section 806.
ADMINSTRATIVE LAW JUDGE DECISIONS
COVERED EMPLOYEE; AUDITOR OF WHOLLY OWNED SUBSIDIARY ESTABLISHED TO BE EMPLOYEE OF PARENT COMPANY'S INTERNAL AUDIT DEPARTMENT
In Robinson v. Morgan Stanley , 2005-SOX-44 (ALJ Mar. 26, 2007), the Respondent Morgan Stanley was a publicly traded company, while the Respondent "Discover" was a wholly owned subsidiary. The ALJ found that he had jurisdiction over the Complainant's SOX whistleblower complaint because -- although the Complainant worked in the Discover office facilities, audited its credit card service functions, and was compensated by Discover's holding company -- she was principally employed as a senior auditor for Morgan Stanley's Internal Audit Department ("IAD"). The ALJ found that the IAD had a supervisory chain descending from the Audit Committee of the Morgan Stanley Board of Directors down to the Complainant's immediate supervisor, that the Complainant's work was assigned by IAD supervisors which had ultimate authority for her level of compensation, and that the termination decision underlying the SOX complaint resided with a senior executive officer of Morgan Stanley.
COVERED EMPLOYEE; EMPLOYEE OF WHOLLY OWNED PRIVATE SUBSIDARY NOT SPECIFICALLY AFFORDED SOX PROTECTION; CONTROL OF PARENT OVER SUBSIDIARY'S WORK ENVIRONMENT OR TERMINATION DECISIONS
In Neuer v. Bessellieu , 2006-SOX-132 (ALJ Dec. 5, 2006), the Respondent argued that the complaint should be dismissed under FRCP 12(b)(1) for lack of jurisdiction based on the Complainant's status as an employee of a wholly owned, private subsidiary. Noting that several ALJs had determined that SOX whistleblower protection extends down an employee of a private, wholly owned subsidiary of a publicly traded company, but that ALJ decisions do not have precedence value and that no definitive appellate interpretation had yet been established, the ALJ concluded that - based on the caption Congress chose for 18 U.S.C. § 1514A(a) - "WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES" -- "absent unique circumstances, employees of privately held subsidiaries are not specifically afforded SOX whistleblower protection," and that the Complainant was not a covered employee. Slip op. at 4. The ALJ went on, however, to observe that SOX whistleblower protection may reach down to employees of privately held subsidiaries where the publicly traded parent company and the subsidiary are so intertwined to represent one entity. "Consequently, in an employment discrimination case, the parent company may be held liable where it controlled or influenced the work environment of, or termination decision about, an employee of its subsidiary company." Slip op. at 4. Based on these principles, the ALJ found that the complaint survived the 12(b)(1) motion based on the Complainant's allegation that the subsidiary president's termination action had the approval of the parent company's CEO, and based on information that a work visa application described the "petitioner" in terms that made little distinction between the parent and the subsidiary.
COVERED EMPLOYEE; ANALYSIS OF JURISDICTIONAL ISSUES UNDER FRCP 12(b)(1); WHETHER EMPLOYEE OF PRIVATE, WHOLLY OWNED SUBSIDARY IS A SOX COVERED EMPLOYEE
In Ambrose v. U.S. Foodservice, Inc. , 2005-SOX-105 (ALJ Apr. 17, 2006), the Respondents' argued that the complaint should be dismissed because the Complainant is not a SOX protected employee. The ALJ found this to be a jurisdictional challenge which is analyzed under FRCP 12(b)(1). See 29 C.F.R. § 18.1(a) (OALJ rule referencing FRCP for situations not covered by the OALJ rules). The ALJ related that the courts recognize two approaches in considering a 12(b)(1) motion. The first consideration of a 12(b)(1) motion is whether the pleading, or complaint, on its face is sufficient. In reviewing a "facial" motion to dismiss, the allegations in the complaint are considered to be true. The second consideration under 12(b)(1) concerns a factual evaluation of the complaint, where no presumption of truthfulness applies to the allegations in the complaint. In the instant case, both parties presented supportive affidavits, so the ALJ applied the factual analysis. It was undisputed that the Complainant was not a direct employee of the publicly traded parent company, but rather of a private, wholly owned subsidiary. The ALJ took into consideration that ALJs had split on the legal issue of whether SOX whistleblower protection extends down an employee of a private, wholly owned subsidiary of a publicly traded company, but finding that no definitive appellate interpretation had yet been established, the ALJ concluded that - based on the caption Congress chose for 18 U.S.C. § 1514A(a) - "WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES" -- employees of privately held subsidiaries are not specifically afforded SOX whistleblower protection. The ALJ went on, however, to consider whether SOX whistleblower protection may nevertheless be extended because the publicly traded parent company and the subsidiary were so intertwined to represent one entity. The ALJ concluded that in an employment discrimination case, the parent company will only be held liable where it controlled or influenced the work environment of, or termination decision concerning, an employee of its subsidiary company.
The ALJ found that there were indicia of interrelatedness, such as use of the same attorney during an SEC investigation, and the vetting of the subsidiary's CEO by the executives with the parent company prior to the CEO's appointment. However, the ALJ found that in regard to the actual specifics of the Complainant's employment situation, the parent held at most only a non-active, informational role and exerted no control over the terms, conditions, or eventual termination of the Complainant.
COVERED EMPLOYEE; EMPLOYEE OF SUBSIDIARY OF PUBLICLY TRADED COMPANY; WHERE THE SUBSIDIARY WAS A MERE INSTRUMENTALITY OF THE PARENT COMPANY
In Platone v. Atlantic Coast Airlines , 2003-SOX-27 (ALJ Apr. 30, 2004), the ALJ found that the Complainant was a covered employee under the whistleblower provision of the Sarbanes-Oxley Act, although she worked for a non-publicly traded subsidiary, where the publicly-traded parent holding company controlled the subsidiary to such a degree as to make it a mere instrumentality of the parent company.
EMPLOYEE OF NON-PUBLICILY TRADED SUBSIDIARY OF PUBLICLY TRADED COMPANY
In Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004), the Repondents argued that the Complainant was not protected by the SOX whistleblower provision because he was the employee of a relatively small subsidiary of a huge publicly traded company, and because the subsidiary is not publicly traded. The ALJ reviewed the context of enactment of the Sarbanes-Oxley Act and concluded that it was clear that Congress intended the term "employees of publicly traded companies" to include employees of subsidiaries. The ALJ wrote: "A publicly traded corporation is, for Sarbanes-Oxley purposes, the sum of its constituent units; and Congress insisted upon accuracy and integrity in financial reporting at all levels of the corporate structure, including the non-publicly traded subsidiaries. In this context, the law recognizes as an obstacle no internal corporate barriers to the remedies Congress deemed necessary. It imposed reforms upon the publicly traded company, and through it, to its entire corporate organization."
The ALJ distinguished recent ALJ decisions in Flake v. New World Pasta Co. , 2003 SOX 18 (ALJ July 7, 2003) and Powers v. Pinnacle Airlines, Inc. , 2003 AIR 12 (ALJ Mar. 5, 2003). The ALJ found that Flake was not decided based on the issue of coverage of an employee of a subsidiary of a publicly traded company. He also found that Pinnacle Airlines was decided on the basis that no publicly traded company was named as a party respondent, whereas in the case sub judice the Complainant did name the publicly traded entity in the complaint. The ALJ respectfully disagreed with the ALJ in Pinnacle Airlines to the extent that dicta in that case suggested that employees of a subsidiary of a publicly traded company must "pierce a corporate veil" within their own chain of command before they are entitled to SOX whistleblower protection.
Employee Whose Work Was Outside the United States
FEDERAL COURT DECISIONS
COVERED EMPLOYEE; WORK OUTSIDE THE U.S.
In Carnero v. Boston Scientific Corp. , No. 04-10031-RWZ (D.Mass. Aug. 27, 2004), the court agreed with OSHA's preliminary determination that the whistleblower provision of the Sarbanes-Oxley Act does not cover employees working outside the U.S. In Carnero , the Plaintiff was a foreign national working for the defendant's Argentinean and Brazilian subsidiaries.
ADMINSTRATIVE LAW JUDGE DECISIONS
JURISDICTION; EXTRATERRITORIAL APPLICATION; FOREIGN NATIONAL EMPLOYED BY FOREIGN DIVISION OF U.S. COMPANY
In Beck v. Citigroup, Inc. , 2006-SOX-3 (ALJ Aug. 1, 2006), the ALJ held that the Complainant, who was a foreign national employed by a German division of Citigroup and who worked exclusively in Germany, was not afforded the protection of the whistleblower provisions of Section 806 of the SOX. The ALJ acknowledged that there may be extraterritorial situations which give rise to jurisdiction under SOX, but found that the facts in the instant case were not one of them. The ALJ set out the fact alleged in the complaint, and reviewed the text of the SOX, the SOX's legislative and regulatory history, court decisions involving Title VII and other laws, the SOX decisions of other ALJs, and - most significantly -- the SOX decision of the federal district court in Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006), cert. denied No. 05-1397 (June 26, 2006). The Complainant contended that Carnero supported a finding of jurisdiction, while the Respondent contended that Carnero was factually similar and mandated dismissal of the complaint. The found no jurisdiction:
Specifically, despite Complainant's allegations of the interrelationship of the various subsidiaries of Citigroup, Inc., it is undisputed that he was a German national employed in Germany by a German subsidiary of Citigroup, Inc. This is not a situation involving an American employee assigned to work overseas, which the First Circuit has suggested might provide an exception to the general rule. I find it to be of no import that, in his capacity as an investment banker, Complainant had multiple contacts with employees of Citigroup or its other subsidiaries based in the United States and London, that he traveled to the United States on business, or that Citigroup, Inc. was involved in overseeing the work of its subsidiaries. Such facts, which are undoubtedly to be expected in a global economy, do not change the essential nature of the employment relationship concerned here, which was a foreign employment relationship, based in Germany. Nor do the allegations of misconduct being reported to parent company officials in the U.S. or the possible participation by U.S.-based company officials in the decision to terminate Complainant change the outcome, as they do not alter the foreign nature of the employment relationship.
Slip op. at 9-10.
JURISDICTION; EXTRATERRITORIAL APPLICATION; COMPLAINANT WHO WORKED EXCLUSIVELY IN THE U.K. FOR THE U.K. DIVISION OF AN INTERNATIONAL COMPANY BASED IN THE U.K.
In Di Giammarino v. Barclays Capital, Inc. , 2005-SOX-106 (ALJ July 7, 2006), the Complainant, who had dual U.S. and Italian citizenship, was employed by a U.K. company, but claimed that he was really an employee of a U.S. branch, and that the entity that employed him was merely an "accounting vehicle." OSHA found no jurisdiction under SOX because the Complainant worked in the Respondent's London offices and was discharged in London. The ALJ ordered preliminary briefing on the jurisdiction issue. The parties filed briefs, but later presented the supplemental authority of the decision of the federal district court in Carnero v. Boston Scientific Corp. , 433 F.3d 1 (1st Cir. 2006), cert. denied No. 05-1397 (June 26, 2006). Later, the Complainant, through counsel, sought to withdraw the hearing request. Because it was unclear whether a settlement was involved, the ALJ had her legal technician contact the Complainant's counsel, who advised that a settlement in fact was involved. The ALJ then issued an order directing the parties to either submit the settlement for approval or show cause why the case should not be dismissed for lack of jurisdiction. Neither party responded. Since the parties did not submit the settlement, the ALJ found that upon the withdrawal of the objection to the OSHA findings, those findings became final. Moreover, the ALJ found that under Carnero , the finding of a lack of jurisdiction was correct. The Complainant worked exclusively in the U.K. for a division of an international company based in the U.K.
COVERED EMPLOYEE; WORK EXCLUSIVELY OUTSIDE THE UNITED STATES
In Ede v. Swatch Group , 2004-SOX-68 and 69 (ALJ Jan. 14, 2005), the ALJ dismissed the complaints of two Complainants because their work for the Respondent occurred exclusively outside of the United States. The ALJ cited agreement with Carnero v. Boston Scientific Corp ., No. Civ.A.04-10031 RWZ, 2004 WL 1922132 (D.Mass. Aug. 27, 2004), appeal docketed , No. 04-2291 (1st Cir. Sept. 30, 2004), in regard to the proposition that the whistleblower provision of the SOX "applies only to employees working within the United States."
[Editor's note: The Assistant Secretary for OSHA has filed an appellate amicus brief before the ARB urging the Board to hold that "section 806 does not apply extraterritorily to employees who work overseas and are subjected to adverse action overseas." Brief at 14.]
COVERED EMPLOYEE; ALL WORK PERFORMED OUTSIDE THE UNITED STATES
In Concone v. Capital One Financial Corp. , 2005-SOX-6 (ALJ Dec. 3, 2004), the ALJ ruled that a foreign national whose entire employment was outside the United States was not a covered "employee" under the whistleblower provision of the Sarbanes-Oxley Act. Noting that the drafters of the regulations were intentionally silent as to this issue, the ALJ agreed with the Respondent's contention that, because Congress did not explicitly make the whistleblower provision at § 806 apply extraterritorially, but did expressly make the criminal provision at § 1107 extraterritorial in reach, Congress revealed a clear intention not to extend the protection of § 806 to persons who were employed wholly outside the U.S. In a footnote, the ALJ, noted that the similar ruling in Carnero v. Boston Scientific , Civ. No. 04-10031-RWZ, 2004WL1922132 (D. Mass. Aug. 27, 2004), did not turn on the fact that the complainant was a foreign national, but on the fact that he worked outside the U.S. (implying thereby that the ALJ's decision, likewise, did not turn on the citizenship status of the employee). The ALJ also observed that there appeared to be no reason why the Act should not protect foreign nationals who work in the U.S.
FEDERAL COURT DECISIONS
COVERED EMPLOYEE; EMPLOYEES OF CONTRACTORS TO PUBLICLY TRADED COMPANIES
See Lawson v. FMR, LLC , 670 F.3d 61, 68 (1st Cir. 2012), cert. granted , No. 12-3 (U.S. May 20, 2013) (Section 806 provides whistleblower protection only to employees of publicly traded companies).
ADMINSTRATIVE REVIEW BOARD JUDGE DECISIONS
COVERED EMPLOYEE; EMPLOYEES OF CONTRACTORS TO PUBLICLY TRADED COMPANIES; ACCOUNTANT EMPLOYED BY PRIVATE ACCOUNTING FIRM THAT PROVIDES SERVICES TO PUBLICLY TRADED COMPANY IS A COVERED EMPLOYEE UNDER SOX, SECTION 806
In Spinner v. David Landau and Associates, LLC , ARB Nos. 10-111 and -115, ALJ No. 2010-SOX-29 (ARB May 31, 2012), the ARB held that "that accountants employed by private accounting firms who in turn provide SOX-compliance services to publicly traded corporations are covered as employees of contractors, subcontractors, or agents under Section 806. " Although Spinner specifically involved an accountant, the ARB's decision was expressly for the purpose of explaining why it declined to acquiesce to the First Circuit Court of Appeals decision in Lawson v. FMR, LLC , 670 F.3d 61, 68 (1st Cir. 2012), where the court held that Section 806 provides whistleblower protection only to employees of publicly traded companies. The ARB looked to the text of Section 806 and explained why it concluded that the First Circuit's construction of the statute was implausible. The ARB, however, acknowledged that because the statute failed to define "employee" there was some ambiguity about the scope of coverage, and therefore it was necessary to turn to other rules of statutory construction.
The ARB first acknowledged that Section 806's caption referred to "employees of publicly traded companies" but cited Supreme Court authority to the effect that statutory heading are not controlling. The ARB looked to the legislative history, and particularly to the context in which SOX was enacted (the Enron scandal in which outside professionals such as accountants and lawyers were implicated), to conclude that Congress had the objective of protecting both employees of publicly traded companies and employees of private firms that work with, or contract with, publicly traded companies when such employees blow the whistle on fraudulent corporate practices. The ARB also looked to the overall statutory framework of SOX and the framework of analogous whistleblower statutes as support for coverage of employees of contractors under SOX Section 806.
Noting the concern expressed by the Respondent and some caselaw that finding such coverage would go beyond the scope of Act, the ARB responded first, that it is obliged to interpret Section 806 broadly both because it is a remedial statute and the legislative history encourages it to do so, and second, that "although the theoretical coverage of employees of any contractors, subcontractors, or agents of public companies might be broad, Section 806 contains built-in limitations including (1) its specific criteria for employees to have a reasonable belief of violations of specific anti-fraud laws or SEC regulations and (2) its requirement that the protected activity was a causal factor in the alleged retaliation." USDOL/OALJ Reporter at 16.
One member of the Board reiterated and expanded on the majority's discussion to more fully respond to the First Circuit's Lawson decision. That member of the Board made a point of expressing his opinion that SOX's coverage would extend to investment advisors to mutual funds. See USDOL/OALJ Reporter at 26-27 and 30.
[Editor's note: See also Lawson v. FMR, LLC , 670 F.3d 61, 68 (1st Cir. 2012), cert. granted , No. 12-3 (U.S. May 20, 2013) (granting cert. in case presenting this issue).
ADMINSTRATIVE LAW JUDGE DECISIONS
COVERED EMPLOYEE; CONTRACTOR ENGAGED AS A PROJECT MANAGER ON SOX COMPLIANCE
In Deremer v. Gulfmark Offshore Inc. , 2006-SOX-2 (ALJ June 29, 2007), the Complainant was engaged by the Respondent as an independent contractor to serve as a project manager coordinating SOX compliance. The contract was for a set period. The Respondent took the position that the Complainant was not a covered employee or person under the SOX whistleblower provision. The ALJ found that the Complainant was not a covered "employee." Applying the common-law master-servant principles, the ALJ found that the testimony uniformly showed that the Complainant had been hired with the understanding that he would work on a contract basis on a specific task with an estimated time of completion. The nature of the assignment compelled access to the Respondent's financial records for testing and analysis; the ALJ found that his physical presence and guidance from the controller in completion of his assignment were not indicia of employment, but rather incidental to his assignment. Rather, the Complainant was paid as a contractor, and enjoyed no formalities associated with employment as an employee.
The Complainant also contended that he was an "individual applying to work for a company" - an internal-audit position -- as evidenced by conversations with his supervisor concerning future employment. The ALJ rejected this contention, finding that the Complainant never made formal application for the position, and that his conversations with the controller and CFO did not constitute application for a position. The Complainant was aware that the controller did not have the authority to hire for the internal-audit position, and that the job did not exist at the time he had the conversations with the controller and the CFO. The ALJ found that an employer does not have a duty to inform contractors of job openings.
The ALJ, however, agreed with the Complainant's contention that he was "an individual whose employment could be affected by a company or company representative" and therefore an employee as defined in 29 C.F.R. § 1980.101. The ALJ observed that the regulation was purposely broad, and that found that consistent with SOX purpose of protecting investors, found that "the term "employment' as used in 29 C.F.R. § 1980.001 [sic] includes any service or activity for which an individual was contracted to perform for compensation. Therefore, a contractor or sub-contractor may be 'an individual whose employment could be affected by a company or company representative.' 29 C.F.R. § 1980.001. [sic] Under this definition, the only "employment" which the employer is capable of affecting, in its terms and conditions, is the contracted for services or assignment." Slip op. at 44.
In view of his finding that the Complainant was a covered employee within the meaning of section 1980.101, the ALJ did not reach the Complainant's argument that failure to extent coverage to him would lead to an impermissible loophole in coverage that would subvert the intent of Congress.
FEDERAL COURT DECISIONS
SOX COVERS POST-TERMINATION PROTECTED ACTIVITY BY FORMER EMPLOYEE; PLAINTIFF'S DEPOSITION TESTIMONY IN LAWSUIT INVOLVING DEFENDANT COMPANY FOUND COVERED
In Kshetrapal v. Dish Network, LLC , No. 14-cv-3527 (S.D.N.Y. Feb. 27, 2015) (2015 WL 857911; 2015 U.S. Dist. LEXIS 24573) (case below 2014-SOX-23), the Defendants filed a Rule 12(b)(6) motion to dismiss the Plaintiff's post-termination SOX whistleblower claim. The court denied the motion. The Plaintiff's complaint alleged that the Plaintiff was a Vice President for International Marketing and Programming for the Defendant company. He reported his belief that a marketing agency retained by the Defedant company was submitting fraudulent invoices, and later refused to sign off on invoices he believed to be fraudulent. The Plaintiff alleged that the officers to whom he reported his belief of fraudulent invoicing were aware of the fraud, but continued to work with the agency in return for bribes, and reprimanded the Plaintiff. Following a later investigation, the Plaintiff's concerns were validated. The Plaintiff was later forced to resign.
The Defendant company's General Manager of Programming for International Department, who was one of the officers to whom the Plaintiff had initially reported his concerns, stayed on with the company and repeatedly referred to the Plaintiff's 'shady' business ethics" during conversations with other employees.
The Plaintiff was deposed in litigation between the Defendant company and the agency that allegedly engaged in fraudulent invoicing and bribery.
The Plaintiff later obtained a job with another marketing firm. The Defendant company placed online advertising with that firm; but the General Manager subsequently instructed against further business with the firm. The Plaintiff was offered a job as the head of a new cricket channel, but that offer was rescinded after an official with the Defendant company informed the channel that it did not want the Plaintiff at the helm. The Plaintiff alleged that the Defendant company provided a negative reference in violation of the company's neutral reference policy. Later, the Plaintiff's firm was informed by an official with the Defendant company that it was unwilling to work with the firm because it employs the Plaintiff, and that if the Defendant company placed advertisements with the firm, an extra layer of audit would be required because of the Plaintiff's prior unethical behavior.
In its motion before the court, the Defendant argued that the Plaintiff's SOX claim is limited to his pre-termination protected activities. The court disagreed. The court found that the statute was ambiguous as to whether "employee" included a former employee, and thus turned to other sources. The court noted:
The SOX regulations specifically define "employee" to include "an individual presently or formerly working for a covered person." 29 C.F.R. 1980.101 (emphasis added). Similarly, the Administrative Review Board ("ARB") recently held that an employee's post-termination whistleblowing can constitute protected activity under SOX. See Levi v. Anheuser Busch Inbev , 2014 DOLSOX LEXIS 42, at * 5 (ARB July 24, 2014)....
The court noted that it was unclear whether DOL interpretations were entitled to Chevron or Skidmore deference, but stated that it agreed with the DOL's assessment regarding coverage of former employees. The court found that the DOL interpretations comport with the purpose of SOX to combat corporate culture that discourages reporting of fraudulent conduct, and is consistent with the Supreme Court's broad construction of the term "employee" in Lawson v. FMR LLC , 134 S. Ct. 1158 (2014).
The court found that the third element of a SOX whistleblower claim, whether the plaintiff suffered an unfavorable personnel action, did not limit the scope of protected activity, and thus did not prevent coverage of the Plaintiff's deposition testimony under SOX. The court noted that the Defendants conceded that SOX coverage includes blacklisting.