ADVISORY Ddd-Frank Act July 29, 2010 ENHANCED PROTECTION FOR WHISTLEBLOWERS AGAINST EMPLOYER RETALIATION On July 21, 2010, President Obama signed int law the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act (Ddd-Frank Act r Act). Amid the Act s hundreds f pages is a sectin, Sectin 922, that significantly enhances the prtectins available t whistleblwers. Nt nly will Sectin 922 frtify existing prtectins available t whistleblwers under the Sarbanes-Oxley Act f 2002 (Sarbanes-Oxley Act), but als, and perhaps mre imprtantly, it will create an entirely new retaliatin-prtectin regime. Althugh much attentin has been paid t the bunty prvisins f the Ddd-Frank Act, less has been fcused n the retaliatin prvisins, which culd ptentially impact relatins between cmpanies and their emplyees in significant ways. Histrical Significance f Sarbanes-Oxley Act Prtectins The Sarbanes-Oxley Act fr the first time prvided specific whistleblwer prtectin against emplyer retaliatin based n the reprting f securities-related vilatins and varius federal fraud crimes. 1 Thrugh July 2010, mre than 600 whistleblwer cmplaints alleging retaliatin have been adjudicated within the Department f Labr in accrdance with the administrative framewrk established by the Sarbanes-Oxley Act. 2 The vast majrity f these cases were vluntarily withdrawn by the whistleblwers r summarily decided r dismissed by the administrative law judges tasked with handling them. Of the small percentage f cases actually decided by the administrative law judges n the merits, nly a handful f the decisins were favrable t the whistleblwers. It is, f curse, impssible t knw hw many whistleblwer retaliatin cases have settled in the shadw f these administrative prceedings. Impact f Ddd-Frank Act The Ddd-Frank Act establishes an entirely new categry f whistleblwers thse wh give the SEC riginal infrmatin (as defined in the Act) and thereby qualify fr a newly-enacted whistleblwer bunty prgram. Under this prgram, whistleblwers are eligible t receive cash awards f 10% t 30% f the sanctins cllected by the SEC. The precise requirements and parameters f the new bunty prgram are utside the scpe f this advisry, which fcuses n whistleblwer retaliatin claims. 1 Fr a mre cmplete discussin f the whistleblwer prtectin prvisins in the Sarbanes-Oxley Act, see David Martin, Barbara Hffman, et al., Prtectin fr Whistleblwers Under the Sarbanes-Oxley Act, Cvingtn & Burling Securities Update (Aug. 3, 2004), reprinted with mdificatins in BNA s Crprate Accuntability Reprt Analysis & Perspective, as Prtectin fr Whistleblwers Under the Sarbanes-Oxley Act, Vl. 2, N. 33 at 889 (Aug. 13, 2004) and Wall Street Lawyer, as Whistleblwer Prtectin Under the Sarbanes-Oxley Act, Vl. 8, N. 5 (Oct. 2004). 2 Infrmatin n whistleblwer retaliatin cases brught under the Sarbanes-Oxley Act is available n the Department f Labr s website. See http://www.alj.dl.gv/libwhist.htm (last visited July 28, 2010). BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON www.cv.cm
The Ddd-Frank Act als establishes a new retaliatin-prtectin regime fr such claims. The Act des nt cmpletely usurp the administrative adjudicatin prcess prvided fr under the Sarbanes- Oxley Act but, instead, creates a separate enfrcement mechanism that parallels the existing regime. The Sarbanes-Oxley Act prtects whistleblwers wh prvide infrmatin abut certain vilatins f federal securities laws r varius frms f fraud, including fraud against sharehlders. The Ddd- Frank Act, in cntrast, cvers reprts required r prtected by the Sarbanes-Oxley Act, reprts abut vilatins f ther laws subject t the SEC s jurisdictin, and reprts t law enfrcement fficers abut the cmmissin f federal ffenses. Prtectin fr Whistleblwers Under the Sarbanes-Oxley Act and the Ddd-Frank Act The fllwing table cntains a cmparisn f the main prvisins f the Sarbanes-Oxley Act and the Ddd-Frank Act. 3 In sme cases, the Sarbanes-Oxley Act s prtectins have been amended by the passage f the Ddd-Frank Act. Scpe f Prtected Reprting Sarbanes-Oxley Act (as amended t date) Whistleblwers are prtected frm retaliatin fr reprting vilatins f: any rule r regulatin f the SEC; federal criminal prvisins relating t securities, bank, mail, r wire fraud; r any federal law relating t fraud against sharehlders. Whistleblwers are prtected frm retaliatin if they have prvided such infrmatin t: a federal regulatry r law enfrcement agency; a member r cmmittee f Cngress; r a persn with supervisry authrity ver the whistleblwer. Ddd-Frank Act Whistleblwers are prtected frm retaliatin fr making disclsures that are required r prtected under: the Sarbanes-Oxley Act; the Securities Exchange Act f 1934 (Exchange Act), including Sectin 10A(m), which requires each public cmpany audit cmmittee t establish prcedures fr receiving and handling cmplaints regarding accunting r auditing matters and cnfidential, annymus submissins by emplyees regarding questinable accunting r auditing matters; 18 U.S.C. 1513(e), which prhibits retaliatin, including in cnnectin with emplyment, against individuals fr prviding infrmatin t a law enfrcement fficer abut the pssible cmmissin f a federal ffense; and any ther law, rule, r regulatin subject t the SEC s jurisdictin. Whistleblwers are als prtected fr making disclsures t the SEC 3 This sectin summarizes the relevant prvisins f the Ddd-Frank Act, as signed int law n July 21, 2010. It shuld be nted, hwever, that the SEC is required by the Act t prmulgate additinal regulatins implementing the whistleblwer prvisins f the Act within 270 days f its passage. Mrever, the Office f the Inspectr General f the SEC is directed t issue a reprt n the efficacy f the Act s whistleblwer incentive prvisins within 30 mnths f the Act s passage. 2
Statute f Limitatins Jurisdictin ver Cmplaints Remedies Amendments t Sarbanes-Oxley Act by Ddd- Frank Act 180 days after the date f the vilatin r after the emplyee became aware f the vilatin. 5 Whistleblwers must file an initial cmplaint with the Occupatinal Safety and Health Administratin (OSHA) within the Department f Labr. If the Secretary f Labr fails t issue a final decisin with respect t the cmplaint within 180 days, the whistleblwer may bring an actin in federal district curt. Reinstatement with equivalent senirity and back pay with interest. Reasnable attrneys fees and related csts are als recverable. The Ddd-Frank Act amended the Sarbanes-Oxley Act as fllws: increases statute f limitatins frm 90 t 180 days, as described abve (see nte 5); eliminates an emplyer s ability t enfrce waivers f whistleblwers rights r remedies, r t require arbitratin f claims f retaliatin thrugh pre-dispute agreements; grants parties t retaliatin cases in federal district curt a right t trial by jury; and pursuant t the new Ddd-Frank whistleblwer bunty prgram. 4 N mre than six years after the vilatin; r three years after facts material t the right f actin are knwn r reasnably shuld have been knwn by the emplyee. In any event, n actin may be brught mre than 10 years after the date f the vilatin. Whistleblwers may file an initial cmplaint in federal district curt. There is n preliminary OSHA adjudicatin f these cmplaints. Reinstatement with equivalent senirity and tw-times back pay with interest. Reasnable attrneys fees and related csts are als recverable. N/A 4 The Ddd-Frank Act als cntains prvisins prtecting whistleblwers frm retaliatin fr, amng ther things, prviding infrmatin t the Cmmdities Futures Trading Cmmissin r the Bureau f Cnsumer Financial Prtectin. See Ddd-Frank Act 748 and 1057. These prvisins are utside the scpe f this advisry. 5 The Sarbanes-Oxley Act riginally cntained a statute f limitatins f 90 days. The Ddd-Frank Act increased this 90-day perid t 180 days and extended the frmulatin t include the time perid after the date n which the emplyee became aware f the vilatin. 3
clarifies that the Sarbanes-Oxley Act s retaliatin prvisins cver emplyees f subsidiaries and affiliates f public cmpanies whse financial infrmatin is included in the cnslidated financial statements f such public cmpany. Cmparisn f Prvisins and Implicatins Scpe f Prtected Reprting Significantly Expanded The scpe f the prtected disclsures underlying the retaliatin cause f actin in the Ddd-Frank Act is significantly brader than the scpe f the prtected disclsures set frth in the Sarbanes- Oxley Act. The Ddd-Frank Act s cause f actin cvers retaliatin due t any disclsures required r prtected under the Sarbanes-Oxley Act, the Exchange Act, 18 U.S.C. 1513(e), and any ther law, rule, r regulatin subject t SEC regulatin. Thus, any claim f retaliatin that culd have been brught by a whistleblwer under the Sarbanes-Oxley Act can still be brught under either the Sarbanes-Oxley Act r the Ddd-Frank Act. Mrever, varius claims f retaliatin which culd nt have previusly been brught (because they fall utside the scpe f the Sarbanes-Oxley Act s prtectins) can nw be brught under the Ddd-Frank Act. A few examples illustrate the pint. Suppse a whistleblwer disclsed t his r her supervisr a ptential vilatin f the securities laws and was later terminated fr this disclsure. This set f facts culd give rise t a claim f retaliatin under the Sarbanes-Oxley Act. It culd als give rise t a claim f retaliatin under the Ddd-Frank Act. Suppse, instead, a whistleblwer prvided infrmatin t an FBI agent abut a cnspiracy hatched by his r her emplyer t create a mnply in vilatin f the Sherman Antitrust Act and was later terminated fr this disclsure. This culd give rise t a claim f retaliatin under the Ddd-Frank Act (because the disclsure was prtected by 18 U.S.C. 1513(e)), but culd nt be the basis fr a retaliatin claim under the Sarbanes-Oxley Act. Whereas the Sarbanes-Oxley Act fcuses n prtecting whistleblwers making disclsures f vilatins f the securities and varius fraud laws, the Ddd-Frank Act significantly expands that fcus t encmpass a hst f disclsures required r prtected by additinal federal statutes. Finally, the Sarbanes-Oxley Act s prvisins apply t public cmpanies (i.e., cmpanies with a class f securities registered under Sectin 12 f the Exchange Act r required t file reprts with the SEC under Sectin 15(d) f the Exchange Act) and, as clarified in the Ddd-Frank Act, the subsidiaries and affiliates whse financial infrmatin is included in the public cmpanies cnslidated financial statements. The Ddd-Frank Act s prvisins, n the ther hand, apply t all cmpanies. This means, fr example, that an emplyee f a small, nn-public cmpany wh reprts t the SEC that individuals at the cmpany are engaging in wire fraud and suffers an adverse emplyment actin at the hands f his r her emplyer culd bring a claim f whistleblwer retaliatin in vilatin f the Ddd-Frank Act in federal district curt. This srt f lawsuit culd cme as quite a shck t the cmpany, given that it was nt therwise subject t the SEC s versight. 4
Statute f Limitatins Extended The time perid during which a whistleblwer may bring a cmplaint alleging retaliatin has been increased frm 180 days under the Sarbanes-Oxley Act (as amended by the Ddd-Frank Act) t as lng as 10 years under the Ddd-Frank Act. This lengthy statute f limitatins may bring with it a hst f issues. Fr example, there is a greatly increased pssibility that whistleblwers bringing these claims n lnger wrk fr the emplyer alleged t have engaged in retaliatin. Mrever, ther persnnel with knwledge f the alleged retaliatin may n lnger be emplyees, and the emplyer may n lnger have the relevant emplyment and ther recrds, making it difficult t determine whether the alleged retaliatin actually ccurred. Imagine a retaliatin case brught by a frmer emplyee, five years after the emplyee left the cmpany, and eight years after the allegedly retaliatry emplyment actin. If, fr example, the allegedly retaliatry actin invlved a denied prmtin, it may be extremely difficult t find the recrds, and persnnel with sufficient recllectin f events, t establish why the frmer emplyee was nt prmted eight years befre. Jurisdictin Remved Frm OSHA Whereas OSHA serves as a gatekeeper fr cmplaints under the Sarbanes-Oxley Act s retaliatinprtectin regime, whistleblwers nw have the pprtunity t g straight int district curt with their allegatins under the Ddd-Frank Act. The implicatins f this change fr cmpanies culd be significant. The rules f civil litigatin in federal district curt allw fr extensive discvery and mtin practice. This culd result, amng ther things, in higher litigatin csts, greater risk f cnfidential infrmatin being publicly disclsed, and an increased pssibility f spin-ff securities and ther litigatin. Remedies Increased Under the Sarbanes-Oxley Act, a whistleblwer wh succeeds in his r her claim f retaliatin is entitled, amng ther remedies, t back pay with interest. Under the Ddd-Frank Act, a successful claimant can btain up t tw-times back pay with interest. This increase, cupled with the lnger statute f limitatins during which whistleblwers may bring claims (i.e., up t 10 years instead f up t 180 days), may result in much higher awards f back pay fr successful claimants. Successful claimants als remain entitled t reimbursement f reasnable attrneys fees and ther csts f litigatin. These attrneys fees and related csts will likely be higher due t the federal curt venue and the higher back-pay awards (upn which attrneys fees may be based). Finally, reinstatement is a remedy under bth the Sarbanes-Oxley Act and the Ddd-Frank Act. The much lnger statute f limitatins prvided by the Ddd-Frank Act may make the prspect f reinstatement, already difficult fr emplyers, even mre difficult given the lnger passage f time. Whistleblwer Claims Increased The Ddd-Frank Act s new whistleblwer bunty prgram prviding fr the payment f cash awards t whistleblwers will likely increase the number f whistleblwers and, therefre, the number f emplyees wh culd claim that they were retaliated against fr their whistleblwing activities. 5
Key Takeaways The Ddd-Frank Act enhances the retaliatin prtectins available t whistleblwers fr reprting vilatins f federal securities, fraud, and ther laws. It enhances certain parts f the Sarbanes- Oxley whistleblwer regime, while creating a whlly independent, parallel enfrcement mechanism. Sme key takeaways fr emplyers regarding these changes are: The whistleblwer-prtectin prvisins f the Ddd-Frank Act apply t all emplyers, nt just public cmpanies. Therefre, all cmpanies (including subsidiaries f public cmpanies) shuld ensure a cmpliance culture with rbust prcesses in place t handle whistleblwer grievances. A whistleblwer alleging retaliatin fr reprts that fall within the prtectins f the Ddd-Frank Act may bring an actin in federal district curt withut first filing a cmplaint with OSHA. Therefre, cmpanies shuld maintain prcedures whereby whistleblwers wh believe they have been retaliated against can cmplain internally, thereby reducing the likelihd they will take their retaliatin claims directly t federal curt. The prcedures established by public cmpany audit cmmittees fr handling accunting and related cmplaints pursuant t Sectin 10A(m) f the Exchange Act shuld be evaluated and perhaps bradened t pick up the kinds f reprts prtected by the Ddd-Frank Act. The new SEC bunty prgram creates a pwerful financial incentive fr whistleblwers t prvide riginal infrmatin directly t the SEC. In respnse, cmpanies shuld cnsider establishing (r blstering) mechanisms that encurage and reward emplyees wh internally reprt ptential prblems early, thereby preventing small prblems frm grwing and minimizing the SEC s interest in enfrcement actins dwn the rad. Of sme cmfrt fr emplyers dealing with whistleblwers wh, despite these mechanisms, g straight t the SEC with infrmatin is that until the whistleblwer s identity is revealed, the emplyer cannt be said t have engaged in retaliatry cnduct. Attrneys in Cvingtn s White Cllar, Emplyment, Crprate, and Securities Litigatin practice grups advise a range f clients n legislative and regulatry develpments. Yu may cntact any member f these practice grups r the undersigned, shuld yu have any questins. David Martin 202.662.5128 dmartin@cv.cm Nancy Kestenbaum 212.841.1125 nkestenbaum@cv.cm Barbara Hffman 212.841.1143 bhffman@cv.cm James Wawrzyniak 202.662.5663 jwawrzyniak@cv.cm This infrmatin is nt intended as legal advice. Readers shuld seek specific legal advice befre acting with regard t the subjects mentined herein. Cvingtn & Burling LLP, an internatinal law firm, prvides crprate, litigatin and regulatry expertise t enable clients t achieve their gals. This cmmunicatin is intended t bring relevant develpments t ur clients and ther interested clleagues. Please send an email t unsubscribe@cv.cm if yu d nt wish t receive future emails r electrnic alerts. 2010 Cvingtn & Burling LLP, 1201 Pennsylvania Avenue, NW, Washingtn, DC 20004-2401. All rights reserved. 6