Unlocking the Mysteries of SOX Whistleblower Claims

Unlocking the Mysteries of SOX Whistleblower Claims By Eden P. Sholeen and Rebecca L. Baker

I. Introduction to the Act A. Overview The Sarbanes-Oxley Act ( the Act or SOX ), 1 effective July 30, 2002, seeks to protect investors and to improve corporate responsibility in the wake of recent major corporate accounting scandals. The Act also seeks to protect employees who blow the whistle on their corporate employers. The whistleblower protection provision applies to companies with securities registered under section 12 of the Securities Exchange Act of 1934 ( 34 Act ), or that are required to file reports under section 15(d) of the 34 Act. 2 The Act forbids companies from discriminating against employees who engage in protected whistleblowing activity. 3 Prohibited retaliatory acts include discharge, demotion, suspension, threats, and harassment. 4 To be protected, an employee must: 1) provide information to a federal regulatory or law enforcement agency, Congress, or a supervisor; or, 2) file, testify, participate in, or assist in proceedings regarding conduct he reasonably believes is or is related to shareholder fraud. 5 The criminal prohibition against employee retaliation provides: Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined... or imprisoned not more than 10 years, or both. 6 This section of the Act does not distinguish between public and private entities, but rather applies to all employers. B. Covered Employers SOX applies to all public companies that maintain a listing in the United States or have registered securities with the Securities and Exchange Commission ( SEC ). 7 The Act does not cover a company that has filed a SEC registration statement that has not yet become effective. 8 Less clear is the Act s applicability to United States residents working abroad or foreign residents working abroad for a covered employer. Most courts and administrative law judges ( ALJs ) have held that SOX whistleblower protections do not extend to employees working outside of the United States. In a recent case, Carnero v. Boston Scientific Corp., the U.S. Court of Appeals for the First Circuit held that the anti-retaliation provisions do not protect foreign citizens working abroad for foreign subsidiaries of companies covered by SOX. 9 The Carnero court reiterated the well-established presumption against extraterritorial application of congressional legislation absent clear indication from Congress. However, at least one ALJ has applied SOX protections to an American citizen working abroad. 10 The ALJ held that the employer engaged in much of the protected activity in the United States (while in the United States informing corporate officers of the fraud alleged to have occurred in Italy), and one allegedly retaliatory decision was made in the United States, thus finding a substantial nexus to the United States. Another thorn in employer s side has been whether SOX applies to employees of non-public subsidiaries or companies related to public companies. Generally, ALJs have held that an employee of a nonpublic subsidiary is protected by the Act, but whether the employer is covered by the Act is a separate question. 11 Many of the cases read the Act narrowly and limit coverage to public companies and their immediate employees. 12 Others, however, apply the Act more broadly, holding parent companies responsible for their subsidiaries acts under certain circumstances. 13 Often in these cases, the subsidiary and the parent company maintained shared management and control, unity of operations, and a high degree of interconnectivity. 14 Other cases impose SOX liability if a subsidiary acted as a company representative or an agent acting on behalf of the publicly-traded company. 15 No United States District Court has addressed the issue directly nor has the Department of Labor s Administrative Review Board ( ARB ), the final administrative stop for a SOX retaliation claim. 16 Because the law in this area is developing and rapidly evolving, private subsidiaries of public companies cannot be certain how a judge may construe this issue. In a recent decision, the ARB held that non-public subsidiaries of a public company can be subjected to SOX, even if the parent is not a named respondent, as long as an employee names at least one respondent who is an officer, employee, contractor, subcontractor, or agent of a public company. 17 Notably, the ARB did not hold that non-public subsidiaries of public companies always can be liable under SOX, but looked for an agency relationship between the employer and the publicly-traded parent, even if neither the employer nor its direct parent was publicly traded. 18 In so holding, the ARB found that typical agency principles are proper in determining whether a non-public subsidiary of a publicly traded company can be liable. 19 Another issue awaiting clarification is the exposure of privately owned contractors of publicly traded companies. While the Act lists contractors and subcontractors among those who cannot discriminate, it does not specifically address whether the contractor itself must be publicly traded to incur liability. The ALJ in Goodman v. Decisive Analytics Corp., concluded that the contractor itself must be public, noting that the terms contractor and subcontractor in the provision reference two of various entities of a publicly traded company that may not adversely affect the terms and conditions of an employee of a publicly traded company. 20 The Act did not protect employees of private contractors and subcontractors because any private company engaged in a contractual relationship with a public

entity would suddenly be subsumed under the Act. At present, the caption and language of the SOX employee protection provision does not extend its jurisdictional reach that far. 21 C. Individual Liability SOX covers the actions of officers, employees, contractors, subcontractors or agents of public companies, 22 thus indicating that liability extends to individuals as well as employers. One ALJ held that executives who terminated the complainant s employment may be properly named as parties. In Gallagher v. Granada Entertainment USA, the ALJ noted, The Sarbanes- Oxley statute and regulations are broader than previous whistleblower protections, and do not limit the parties to a complainant and his employer. 23 Because SOX defines named person to include individuals as well as employers, 24 a decision-maker may be held individually liable. 25 II. The Scope of the Protected Activity A. Coverage The Act s civil protection extends to two types of employee activity: internal or external whistleblowing, and participation in investigations regarding the company. First, SOX protects an employee who provides information, or otherwise helps with an investigation regarding any conduct that an employee reasonably constitutes mail fraud, wire fraud, bank fraud, or securities fraud; any SEC rule or regulation; or any federal law relating to shareholder fraud. 26 The employee must provide this information to a federal law enforcement or regulatory agency, a committee or member of Congress, or a person with supervisory authority over the employee. 27 Supervisory authority includes employees who have the authority to investigate, discover, or terminate the misconduct. 28 Second, SOX covers acts done by an employee to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to alleged mail, bank, wire or securities fraud, any SEC rule or regulation, or Federal law relating to shareholder fraud. 29 B. Reasonable Belief Claims involving protected whistleblower activity often turn on the issue of whether the complainant has a reasonable belief that the company violated one of the laws and regulations in the Act. 30 While the Act does not define reasonable belief, ALJs and courts examine the reasonableness of the belief based on the knowledge available to a reasonable person in the circumstances, given the employee s training and experience. 31 The accuracy or the falsity of a complainant s allegations is irrelevant. Courts analyze reasonable belief under both subjective and objective rubrics: the employee actually must have believed that the employer violated the law or regulation, and that belief must be reasonable. 32 The lack of actual fraud, subsequent investigations, and the employee s job duties and/or training or education may lead an ALJ or court to conclude the employee lacks reasonable belief. In Allen v. Stewart Enter. Inc., the ALJ ruled that the employee lacked an actual belief of illegal conduct. In that case, the complainant based her SOX claim on her reporting to her supervisor of unintentional mistakes in an internal accounting system that resulted in faulty interest calculations for clients. 33 The ALJ found that the employee did not have an actual belief of illegal conduct because: (1) she was aware that the problems resulted from computer programming errors, and (2) she did not believe any documents containing the calculations were to be submitted to the SEC. 34 Furthermore, the employee knew that the company was aware of the problem and was taking corrective measures. 35 An employee cannot have a reasonable belief that her employer is violating the law if she knows that the company is working to address the potentially illegal conduct. 36 In Barnes v. Raymond James & Assoc., the ALJ found no reasonable belief because the employee could provide no evidence of allegedly fraudulent conduct and the timing of the complaint was suspicious. 37 Moreover, a subsequent company investigation revealed no fraudulent conduct had occurred. 38 The ALJ thus held that the complainant s belief was not reasonable. 39 C. Traits of Protected Activity To assert a successful SOX retaliation claim, a whistleblower must demonstrate he reported his complaint with some degree of specificity, and must state particular concerns that reasonably identify the employer s conduct that he believes is shareholder fraud. 40 General questions about the propriety of a transaction are not protected activity because such action, without more, would not put the employer on notice that the employee believed it had violated any particular law. 41 Similarly, merely reporting violations of internal policy is not enough to trigger SOX. In Reddy v. Medquest, the employee complained to management regarding manipulation of the line count in its documents, which resulted in a loss of income for transcriptionists. 42 The ALJ ruled that this action was not protected activity under SOX because it challenged an internal company policy instead of alleging a violation of federal law. 43 Similarly, in Marshall v. Northrup Grumman Synoptics, 44 the ALJ, emphasizing the lack of evidence implicating shareholder fraud, ruled that the complainant did not have a viable SOX claim because his reporting of internal accounting irregularities and ethical breaches did not relate to federal securities law. 45 Another example of unprotected activity is disclosing violations of a law that might result in the revocation of a state license. The complainant in Allen v. Stewart Enter. Inc., raised concerns over the company s delays in issuing refunds to customers, explaining that such delays might violate Texas and Missouri statutes and cause the loss of licensing. 46 The ALJ determined this was not protected activity because it did not allege fraud defined in the Act. 47 Along those same lines, internal re-

porting of systemic discrimination is not SOX protected activity. In Smith v. Hewlett Packard, the complainant raised concerns with management about an internal performance system that disproportionately affected minorities. 48 Smith claimed that minority employees were dissatisfied with the process, but acknowledged that there was no current litigation regarding the matter. Without pending litigation, there was nothing for HP to disclose to its shareholders. 49 The ALJ noted that not disclosing a class action lawsuit based on systemic racial discrimination has the potential to affect a company s financial condition, but mere knowledge that an employee-evaluation process adversely affected minorities coupled with an insider s access to disgruntled conversations about external resolutions was not protected activity. 50 Likewise, in Harvey v. Home Depot U.S.A., Inc., the complainant wrote to the Secretary of Labor alleging that the respondent had engaged in race discrimination. 51 The ALJ dismissed his SOX claim based on this conduct, explaining: Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions, or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is not protected conduct under SOX. 52 Instead, an employee s complaint must relate directly to the listed categories of fraud or securities violations. 53 While the ALJ noted that engaging in discriminatory conduct may not be in the shareholders best interests, such activity does not equate to fraud. 54 Other types of concerns do not trigger SOX. In Rogus v. Bayer Corp., an employee raised concerns regarding the over-reporting of production yields that resulted in employee s productivity-plus bonuses. 55 The District Court noted this was not protected activity because the conduct she complained of did not violate the referenced fraud statutes. 56 In Minkina v. Affiliated Physician s Group, the complainant alleged retaliation because she told the company and OSHA about a workplace ventilation problem. 57 The ALJ denied her claim because her reports concerned air quality and had nothing to do with fraud or investor protection. 58 Similarly, in Hopkins v. ATK Tactical Sys., the complainant told her employer and OSHA about the illegal release of sludge water, which was not SOX protected activity. 59 An employee s refusal to perform an act is not protected conduct. 60 In Getman v. Southwest Securities, Inc., the employee alleged retaliation because she would not change her recommended rating of a stock report. 61 The ALJ disagreed, explaining that Congress distinguished between notifying the employer of a violation and refusing to commit a violation, thus ruling that her inaction was not protected activity under SOX. 62 The ALJ, however, clarified that there may be times where only a refusal to act is sufficient. 63 For example, in Bechtel v. Competitive Technologies Inc., a refusal to sign disclosure forms constituted protected activity. 64 In that case, the employee told the company s disclosure committee that he could not certify a disclosure form because he could not certify that he was not aware of any other company contracts. 65 While the disclosure committee had determined that these issues did not require disclosure, he did not believe that his issues had been addressed and thus refused to sign the forms. 66 Likewise, in Jayaraj v. Pro-Pharmaceuticals, Inc., the complainant s refusal to attend a meeting was protected activity because prior to the meeting, she had expressed concern that dealing with individuals scheduled to attend the meeting would violate securities law. 67 Finally, an employee s disclosure must be related to illegal activity that, at its core, involved shareholder fraud. 68 In addition to requiring evidence of shareholder fraud, courts also look for an el- ement of intentional deceit that would impact shareholders or investors. 69 Intentional deceit is implicit in the definition of fraud, 70 but the Act s protections apply not only to SEC rules relating to shareholder fraud but also to the violation of... any [SEC] rule or regulation. 71 A recent case before the United States Supreme Court may cast a shadow on the future application of section 806 of the Act. In Garcetti v. Ceballos, the Supreme Court ruled that because the employee complainant did not speak as a citizen, but rather spoke pursuant to his official duties as a deputy district attorney, his speech was not protected by the First Amendment. 72 The court held that when public employees make statements pursuant to their official duties, they are not speaking as citizens for First Amendment purposes, and the Constitution does not insulate their communications from employer discipline. 73 In striking a balance between the compelling interests surrounding free speech and the importance of employer oversight in official speech, the court noted that a controlling factor in the case was that the complainant s expressions were made pursuant to his duties as a calendar deputy. 74 While this holding directly affects only public employers, it may allow ALJs and federal courts to hold that an employee s identification of concerns and/or issues falls within his or her job duties and is not protected activity. D. Establishing a Prima Facie Case An employee who seeks to pursue a SOX claim must establish the four elements of a prima facie case, or OSHA will dismiss his complaint prior to conducting an investigation. 75 The complainant must demonstrate that he engaged in a protected activity ; that the employer was aware (or should have been aware) of the protected activity; that he suffered an unfavorable personnel action; and, that the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action. 76

The prima facie complaint must establish that a nexus existed between the protected activity and the adverse action, or sufficient circumstances to raise an inference that the protected activity was likely a contributing factor in the adverse action. 77 Causation requires an employee to prove his activity was a contributing factor in an unfavorable employment action. 78 Proximity in time between the alleged protected activity and adverse employment action can raise an inference of causation. 79 A contributing factor is any factor, alone or in connection with other factors, that tends to affect in any way the outcome of the decision. 80 A whistleblower is not required to prove that his protected conduct was a significant, motivating, substantial, or predominant factor in a personnel action. 81 III. Raising a SOX Retaliation Claim: The Process A. General Standards An employee making a SOX claim must file a complaint with the OSHA Area Director responsible for enforcement activities in the geographical area where he resides or was employed (or with any OSHA officer or employee). 82 No particular complaint form is required, except that it must be written and should include a full statement of the acts or omissions, with pertinent dates, that allegedly constitute the violations. 83 The employee must file a claim within 90 days after he is aware, or reasonably should be aware, of the employer s action against him. 84 SOX cases allow for equitable tolling in limited circumstances. 85 The restrictions on equitable tolling must be scrupulously observed. Equitable tolling is not an open-ended invitation to disregard limitations periods merely because they bar what may otherwise be a meritorious cause. 86 Moreover, the burden is on the complainant to justify the application of equitable tolling principles in his or her case. 87 Generally, under three scenarios, tolling may be proper: (1) if the defendant affirmatively misleads the plaintiff regarding the cause of action; (2) if the plaintiff has in some extraordinary way been prevented from asserting his or her rights; (3) if the plaintiff has raised the precise statutory claim in issue but has mistakenly done so in the wrong forum. 88 The OSHA Whistleblower Investigations Manual (2003) lists examples of circumstances that justify equitable tolling, including the employer s concealment of the existence of the adverse action or the discriminatory grounds therefore; the employee s inability to file within 90 days due to debilitating illness or injury; inability to timely file due to natural disaster; or the employee mistakenly filed a timely discrimination complaint with another agency. 89 Circumstances that do not justify tolling include ignorance of the filing period; filing an unemployment or worker s compensation claim; filing a private negligence or damage suit; filing a grievance or arbitration action; or filing a discrimination complaint with a state or other agency that has authority to grant the requested relief. 90 B. In the Hands of OSHA OSHA will initiate an investigation only if the complaint meets appropriate jurisdictional requirements, timeliness of filing, and the presence of a prima facie allegation 91 OSHA then will notify the employer of the complaint, the allegations, and the substance of the supporting evidence. 92 Upon receiving this notice, the company has 20 days to submit a written statement and any affidavits or supporting documents to OSHA. 93 The employer bears the burden of demonstrating, by clear and convincing evidence, that it would have taken the same adverse employment action in the absence of the protected activity. 94 If the employer cannot produce a legitimate, non-discriminatory reason for the decision, OSHA will investigate and issue a notice of its preliminary conclusion. 95 If OSHA has reasonable cause to believe the company has violated the Act and that preliminary reinstatement is warranted, it will notify the respondent in advance, which has ten days to respond. 96 OSHA s investigation must be completed within 60 days of the filing of the complaint, and it must issue written findings as to whether there is reasonable cause to believe the company violated SOX. 97 1. Preliminary Orders If OSHA finds retaliation by the employer, it will issue a preliminary order providing relief, which serves to make the complainant whole and may include: reinstatement of the complainant (unless the company can demonstrate the employee is a security risk); back pay with interest; or compensation for any special damages, including attorneys fees. 98 The findings and preliminary order are effective 30 days after the company s receipt, unless it files an objection and a request for a hearing. 99 Regardless, any preliminary order requiring reinstatement takes effect immediately upon receipt. 100 An employer may petition the chief ALJ to stay the preliminary reinstatement if it can demonstrate irreparable injury, a likelihood of success on the merits, and the proper balancing of harms to the public and the parties involved. 101 The current state of preliminary reinstatement orders is in flux. In a recent development, the Second Circuit ruled that United States district courts lack jurisdiction to issue an injunction enforcing OSHA s preliminary order of reinstatement. 102 In the Bechtel case, OSHA had ordered reinstatement based on its opinion that the company fired two vice presidents in retaliation for raising concerns with the CEO regarding disclosures to the SEC and shareholders. 103 The employer, however, refused to rehire the vice presidents, who then obtained a district court s preliminary injunction ordering reinstatement. 104 On appeal, the Second Circuit reversed, holding no SOX provision authorized the enforcement of preliminary orders, explaining: It seems improbable that Congress would have chosen to confer federal judicial enforcement power over pre-

liminary orders by indirection and opacity when it easily could have modified the jurisdictional provisions I therefore conclude that the plain text of the provisions granting enforcement power cannot support a reading that confers on federal courts the power to enforce orders that are preliminary. 105 The court s opinion also rested on the failure of due process for the employer before imposing the reinstatement order. 106 Yet, in Welch v. Cardinal Bankshares Corp., decided just a month after Bechtel, OSHA denied an employer s request to stay a preliminary reinstatement order for the former CFO, stating that the employer had offered no evidence establishing it would succeed on appeal. 107 OSHA distinguished Welch from Bechtel, noting that the Welch ALJ had conducted a full evidentiary hearing and issued an order on the merits, which was not the case in Bechtel. 108 Alternatives to reinstatement may be available to companies required to make an employee whole while maintaining favorable working conditions. 109 Such alternatives, noted in Welch, include placing the employee in a different position, allowing him to use his skills in other ways, or simply paying the employee as if he had returned to work without actually rehiring the employee. 110 While Welch does not offer employers as much hope as Bechtel, it does allow alternative ways to comply with orders without the disruption to the workplace potentially caused by reinstatement of a disgruntled employee. 2. Requests for Review Any party who seeks review of the findings and preliminary order must file any objections and/or a request for a hearing on the record within 30 days of receipt of the findings and preliminary order. 111 A timely objection stays the preliminary order, except a preliminary reinstatement order. 112 Without timely objections, the findings and preliminary order become the final decision, immune from judicial review. 113 Following a request for review, an ALJ will conduct a hearing de novo, on the record, 114 and will issue a final decision containing findings, conclusions, and an order stipulating the employee s remedies, if any. 115 This evidentiary burden framework is somewhat different from the burden-shifting frameworks in other bodies of employment law. The court in Collins v. Beazer noted, while reference to the general body of employment discrimination law may provide guidance in some areas, where the statute provides a specific framework the Court follows the statute. 116 A number of ALJs have adopted a mixed-motive framework for analyzing SOX cases. The regulations state that an ALJ may determine that a violation has occurred only upon demonstration that protected activity was a contributing factor in the unfavorable personnel action alleged in the complaint. 117 If the employer can demonstrate by clear and convincing evidence that it would have taken the same adverse action in the absence of any protected activity, then no relief is warranted. 118 Remedies available to the employee include reinstatement to the employee s former position with equal seniority status; back pay with interest; and compensation for any special damages, including litigation costs, expert witness fees, reasonable attorney s fees, and emotional distress. 119 An ALJ may reconsider its decision within ten days following the issuance of the initial decision and order. 120 3. Appeal to the Administrative Review Board ( ARB ) Any party that seeks review, including judicial review, of the ALJ s decision must file a written petition for review with the ARB within ten business days of the date of the decision. 121 Without a timely petition, the ALJ s decision becomes the final order of the Secretary of Labor. 122 It is not mandatory that the ARB grant review. 123 If, after 30 days of the filing of the petition, the ARB has not issued an order notifying the parties that the case has been accepted for review, the ALJ s decision will become final. 124 Should the ARB accept the case for review, it will issue its final decision within 120 days after its hearing. 125 The remedies available to a successful complainant are the same as are available in the ALJ stage of the proceeding. 126 C. Judicial Review Judicial review is available to any person adversely affected or aggrieved by a final order of the ARB. 127 That person may, within 60 days after the final order, file a petition for review in the United States Court of Appeals for the circuit where the violation allegedly occurred or in the circuit in which the complainant resided on the date of the alleged violation. 128 D. Removal to District Court If the Department of Labor ( DOL ) has not issued a final decision within 180 days of the filing of the original OSHA complaint, and the delay is not the result of complainant s bad faith, he may remove his claim to the appropriate district court. 129 The district court s review is de novo. 130 An employer that challenges the removal must prove that the claimant s bad faith led to the DOL s failure to issue a timely decision. 131 The complainant is required to provide fifteen days notice of his intent to remove to federal district court. 132 During this time, the DOL retains jurisdiction over the matter. 133 Moreover, the mere filing of a notice of intent to file a lawsuit in federal district court does not terminate the DOL s jurisdiction. 134 Nor does the expiration of the 180-day period described above terminate the Secretary s jurisdiction over the matter, which is extinguished only when the complainant files in federal district court. 135 Removal after the ALJ issues a substantive decision that is appealed creates novel legal issues. As the comments to the regulations state, the DOL encourages the federal district courts to use collateral estoppel and res judicata to ensure judicial

efficiencies and economies. 136 Moreover, the review by the federal district court is de novo. 137 Accordingly, the court s initial inquiry should be limited to the review of the administrative record created and review of the ALJ s decision. Because the standard is not trial de novo, no additional evidence or discovery should be needed. While the employee will remove to federal district court by filing a complaint, employers should seek judicial notice of the administrative record and a ruling on the ALJ s decision. 138 Additionally, if the ALJ s decision is on appeal and/or the ALJ has had a bench trial but not issued an opinion, the regulations encourage the court to treat the removal as a petition for mandamus and order the DOL to issue a decision. 139 IV. Practical Issues and Concerns A. State Whistleblower Claim An employer may simultaneously face a SOX whistleblower claim and a claim for wrongful discharge under Sabine Pilot. 140 While an employer may argue that SOX preempts any state law claims, the Act provides that it does not diminish an employee s rights under any federal or state law, or under any collective bargaining agreement. 141 Because a Sabine Pilot claim provides for punitive damages, not available under a SOX whistleblower claim, there may be strategic reasons for a plaintiff to pursue both. 142 B. Alternative Dispute Resolution Programs In the event an employee is under an arbitration obligation, current case law provides for staying any administrative proceeding and compelling an employee to submit his SOX whistleblower complaint to arbitration. For instance, in Boss v. Salomon Smith Barney, Inc., the court compelled an ex-employee to submit his SOX claim to arbitration, noting that nothing in the text or legislative history evinces an intent to preempt arbitration claims under the Act. 143 The Boss decision recently was reaffirmed in Ulibarri v. Affiliated Computer Services, where the ALJ stayed the whistleblower proceedings pending arbitration. 144 The Solicitor of Labor also issued an advice memorandum that enforcement agencies like OSHA can stay enforcement of whistleblower claims in deference to private arbitration agreements, expressing a general approval for SOX claims to be addressed through alternative dispute resolution as opposed to administrative proceedings. 145 However, the Solicitor General noted that where the DOL is able to seek immediate provisional relief (such as temporary reinstatement), that relief should be sought even if the decision is made to defer to arbitration on the ultimate merits of the complaint. 146 This statement is consistent with the theory that deferral to the company s arbitration program may not be appropriate in cases where immediate reinstatement, a SOX remedy, may be unavailable in arbitration. 147 The memorandum identifies a series of factors to be reviewed by lawyers with the Solicitor General s office when determining whether to stay a SOX complaint and defer to the company arbitration program. C. Managing the Response to a SOX Complaint While corporations have complied with the numerous reporting requirements of SOX, in many instances managers and/ or human resource ( HR ) personnel have not received additional training to recognize an employee s SOX whistleblower complaint. An effective response from a manager and/or HR department will assist a corporation in defending against an employee retaliation claim. Additionally, before responding to a SOX whistleblower complaint, legal and executive management should take time to discuss all the issues that may be raised by the allegations and how the company may respond. For example, are all SOX whistleblower complaints brought to the attention of one department? How will the company determine if the audit committee will be informed about the alleged fraud? If the audit committee will be informed - when and by whom? What is the current relationship with the audit committee, and does it need to be strengthened before any allegations of fraud are brought by an employee in a SOX whistleblower complaint? In many instances, the audit committee will seek to conduct its own investigation into the alleged fraud, creating further questions: Who will conduct the investigation for the audit committee? Does the audit committee have confidence in the company s internal audit group? Should an external audit group be engaged? The audit committee may retain its own counsel as well. What is the role of the audit committee counsel vis a vis company counsel defending against the SOX whistleblower complaint? Additional questions are raised regarding the company s independent auditors: What if the SOX whistleblower complaint is raised before significant SEC filings? Counsel and executive management must be prepared to weigh requests for documents and/or information from the independent auditors and to consider the impact of the disclosure of information and/or documents on the attorney-client privilege related to the ongoing defense of the SOX whistleblower claim. It also is prudent to prepare for media coverage of the employee s complaint. Given the heightened scrutiny in the wake of recent corporate scandals, corporations should have a media response plan and should instruct employees about where to direct such inquiries. Moreover, a company should be prepared to respond to the SEC. The Act provides for the DOL to notify the SEC of any SOX whistleblower complaints. 148 Depending upon the allegation(s), the SEC may conduct its own investigation. D. Settlement of a SOX Whistleblower Complaint Settlement of a SOX whistleblower complaint requires government approval. 149 The current DOL practice is for a settlement to cover only the SOX whistleblower

claim no global settlements. Additionally, confidentiality is not possible, as disclosure of the consideration paid and the terms of the settlement agreement are required. V. Conclusion Defending a SOX whistleblower claim is consuming. The deadlines are compressed, and there are many moving parts from the audit committee to the independent auditors to the financial condition and/or health of a company. However, the case law is developing rapidly, and it is an exciting time to be practicing in this area. Eden P. Sholeen is a partner at Bracewell & Giuliani LLP where she practices in the labor and employment section. She is board certified in labor and employment law. Rebecca L. Baker is an associate in the firm s labor and employment section. Endnotes 1. Pub. L. No. 107-204, 116 Stat. 745. 2. 18 U.S.C. 1514A(a). 3. Id. 4. Id. 5. 18 U.S.C. 1514A(a)(1)-(2). 6. 18 U.S.C. 1513(e). 7. 18 U.S.C. 1514A(a). 8. Stalcup v. Sonoma College, 2006 DOLSOX LEXIS 6, *16, 2005-SOX-00114 (ALJ Feb. 7, 2006). 9. Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006). 10. Penesso v. LCC Int l, Inc., 2005 DOLSOX LEXIS 95, 2005-SOX-00016 (ALJ March 4, 2005). 11. Gonzales v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 20, 2004); Platone v. Atlantic Coast Airlines Holdings, Inc., 2003-SOX-27 (ALJ Apr. 30, 2004). 12. Johnson v. Mechanics & Farmers Bank, 2006 DOLSOX LEXIS 69, *6-7, 2006-SOX-0019 (ALJ June 9, 2006) (citing Bothwell v. American Income Life, 2005-SOX- 00057 (ALJ Sept. 19, 2005); Powers v. Pinnacle Airlines, Inc., 2003-AIR-12 (ALJ Mar. 5, 2003)); Ambrose v. U.S. Foodservice, Inc. & Royal Ahold, 2006 DOLSOX LEXIS 37, *26, 2005-SOX- 105 (ALJ Apr. 17, 2006). 13. Johnson, 2006 DOLSOX LEXIS at *8 (citing O.Keefe v. TIAA-CREF, 2005-SOX-0086 (ALJ Oct. 19, 2005) slip op.; Mann v. United States Alliance, LLC et al., 2004-SOX-15 (ALJ Feb. 18, 2005); Morefield v. Exelon Services, Inc., 2004-SOX-2 (ALJ Jan. 28, 2004)). 14. Gale v. World Financial Group, 2006 DOLSOX LEXIS 68, *17, 2006-SOX-43 (ALJ June 9, 2006). 15. Id. at *18. 16. Johnson, 2006 DOLSOX LEXIS 69, *6-7, 2006-SOX-0019 (ALJ June 9, 2006). 17. Klopfenstein v. PCC Flow Technologies Holdings, 2006 DOLSOX LEXIS 59, *30, ARB No. 04-419 (ARB May 31, 2006). 18. Id. at *31. 19. Id. 20. 2006 DOLSOX LEXIS 3, *24, 2006-SOX-11 (ALJ Jan. 10, 2006). 21. Id. 22. 18 U.S.C. 1514A(a). 23. 2004 DOLSOX LEXIS 95, *4, 2004-SOX- 00074 (Oct. 19, 2004) (citing 18 U.S.C. 1514A(b)(2)(B)). 24. Id. (citing 69 Fed. Reg. 52104, 52105 (Aug. 24, 2004)). 25. Id. at *8. 26. 18 U.S.C. 1514A(a)(1). 27. 18 U.S.C. 1514A(a)(1)(A)-(C). 28. Accordingly, an employee s complaint to a supervisor who does not have direct supervisory authority over the individual is probably sufficient to trigger the Act s protections. Id. 29. 18 U.S.C. 1514A(a)(2). 30. Lerbs v. Buca Di Beppo Inc., 2004 DOLSOX LEXIS 65, *31, 2004-SOX-8 (ALJ June 15, 2004) (citing Melendez v. Exxon Chemicals Americas, ARB No. 96-051, ALJ No. 193-ERA-6 (ARB July 14, 2000)). 31. Id. (quoting Minard v. Nerco Delamar Co., 92-SWD-1 (Sec y Jan. 25, 1995), slip op. at 7, n.5). 32. Id. at 7, 20. 33. 2006 DOLSOX LEXIS 87, 2004- SOX-60, 61, & 62 (ALJ July 27, 2006). 34. Id. at *25. 35. Id. 36. Id. at *27. 37. 2005 DOLSOX LEXIS 2, 2004-SOX-58 (ALJ Jan. 10, 2005). 38. Id. at *17. 39. Id. 40. Lerbs, 2004 DOLSOX LEXIS at *33-34 (citing Bechtel Constr. Co. v. Sec y of Labor, 50 F.3d 926, 931 (11th Cir. 1995)). 41. See Allen, 2006 DOLSOX LEXIS at *31-33. 42. 2004 DOLSOX LEXIS 48, 2004-SOX-00035 (ALJ June 10, 2004). 43. Id. at 7. 44. 2005 DOLSOX LEXIS 63, 2005-SOX-0008 (ALJ June 22, 2005). 45. Id. 46. Allen, 2006 DOLSOX LEXIS at *27. 47. Id. at *27-28. 48. No. 2005-SOX-00088, 89, 90, 91, & 92 (ALJ Jan. 19, 2006). 49. Id. 50. Id. 51. 2006-DOLSOX LEXIS 65, *30, ARB Nos. 04-114 & 115 (ARB June 2, 2006). 52. Id. at *32. 53. Id. 54. Id. 55. No. 3:02cv1778 (MRK), 2004 U.S. Dist. LEXIS 17026 (D. Conn. 2004). 56. Id. at *18 n.6. 57. 2005 DOLSOX LEXIS 41, 2005-SOX-00019 (ALJ Feb. 22, 2005). 58. Id. at *17. 59. No. 2004-SOX-00019, at *5 (ALJ Wood, May 27, 2004). 60. 2005 DOLSOX LEXIS 18, ARB No. 04-059 (ALJ July 29, 2005). 61. Id. 62. Id. 63. Id. 64. 2005 DOLSOX LEXIS 44, 2005-SOX-00033 (ALJ Oct. 5, 2005) 65. Id. 66. Id. 67. 2005 DOLSOX LEXIS 5, *72, 2003-SOX- 00032 (ALJ Feb. 11, 2005). 68. Livingston v. Wyeth, 2006 U.S. Dist. LEXIS 52978, *30 (M.D.NC July 28, 2006). 69. Tuttle v. Johnson Controls, 2004-SOX-76 (ALJ Jan. 3, 2005). 70. Id. at 3. 71. Klopfenstein, 2006 DOLSOX LEXIS at *39 (citing 18 U.S.C. 1514A(a)(1)). 72. 126 S. Ct. 1951 (2006). 73. Id. at 1960. 74. Id. 75. 29 C.F.R. 1980.104(b). 76. Id. 77. See Taylor v. Express One Int l, Inc., 2001-AIR-2 (ALJ Feb. 15, 2002). 78. Id. 79. Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365, 1376 (N.D. Tex. 2004). 80. Davis v. United Airlines, Inc., 2001-AIR-5 (ARB Apr. 25, 2002). 81. Id. 82. 29 C.F.R. 1980.103(c). 83. 29 C.F.R. 1980.103(b). 84. 29 C.F.R. 1980.103(d); Murray v. TXU Corp., 279 F. Supp. 2d 799. 802 (N.D. Tex. 2003) (interpreting filed to mean the date the Department of Labor receives the complaint). For complaints sent by mail, the date of filing is the date of the postmark. 29 C.F.R. 1980.103(d). See also, Halpern v. XL Capital, Ltd., 2005 DOLSOX LEXIS 24, No. 04-120 (ARB Aug. 31, 2005) (90-day limitations period runs from the date an employee is told of the adverse employment action). 85. Lotspeich v. Starke Memorial Hosp., 2005 DOLSOX LEXIS 51, *9-10, 2005-SOX-14 (ALJ March 3, 2005) (citing Doyle v. Alabama Power Co., 1987-ERA- 43 (Sec y Sept. 29, 1989)). 86. Id. 87. See Harvey v. Home Depot, 2006 DOLSOX LEXIS 65, *37-38, ARB Nos. 04-114 & 115 (ARB June 2, 2006). 88. Lotspeich, 2005 DOLSOX LEXIS at *8-*9. 89. OSHA Manual at 2-4 (2003). 90. OSHA Manual at 2-4 2-5 (2003). 91. 29 C.F.R. 1980.104(b); OSHA Manual at 2-2 (2003). 92. 49 U.S.C. 42121(b)(2). 93. 29 C.F.R. 1980.104(c). 94. 29 C.F.R. 1980.104(c). 95. 49 U.S.C. 42121(b)(2)(B)(ii); 29 C.F.R. 1980.104(c); OSHA Manual at 14-2. 96. 29 C.F.R. 1980.104(e). 97. 29 C.F.R. 1980.105(a). 98. 29 C.F.R. 1980.105(a)(1). 99. 29 C.F.R. 1980.105(c). 100. Id. 101. 69 Fed. Reg. at 52109 (2004). 102. Bechtel, 448 F.3d 469 (2nd Cir. 2006). 103. Id. at 471. 104. Id. 105. Id. at 473. 106. Id. at 474. 107. 2006 DOLSOX LEXIS 66, ARB No. 06-062 (June 9, 2006). 108. Id. at *5. 109. Id. at *10. 110. Id. 111. 29 C.F.R. 1980.106(a). 112. 29 C.F.R. 1980.106(b)(1). 113. 29 C.F.R. 1980.106(b)(2). 114. 29 C.F.R. 1980.107(b). 115. 29 C.F.R. 1980.109(a). 116. Collins, 334 F. Supp. at 1375, n.11. 117. 29 C.F.R. 1980.109(a); Collins, 334 F. Supp. at 1375. 118. 29 C.F.R. 1980.109(a). 119. 29 C.F.R. 1980.109(b). 120. 29 C.F.R. 1980.110(c). 121. 29 C.F.R. 1980.110(a). 122. Id. 123. 29 C.F.R. 1980.110(b). 124. Id. 125. 29 C.F.R. 1980.110(c). 126. 29 C.F.R. 1980.110(d). 127. 29 C.F.R. 1980.112(a). 128. Id. 129. 18 U.S.C. 1514A(b)(1)(B). 130. Id. 131. Murray v. TXU Corp., 279 F. Supp. 2d at. 132. 29 C.F.R. 1980.114(b). 133. Powers v. Pinnacle, ARB No.05-138, ALJ No. 2005-SOX-65 (ARB Oct. 13, 2005) (holding the ALJ retained jurisdiction until the complainant filed in federal district court); McIntyre v. Merrill Lynch & Co., ARB No. 04-055, ALJ No. 2003-SOX-23 (ARB July 27, 2005) (only dismissing complainant s petition for review after complainant filed in federal district court). 134. Rusick v. Merrill Lynch & Co., 2006 DOLSOX LEXIS 25 *4-5, 8 No. 2006-SOX-00045 (ALJ March 22, 2006) (holding that the filing of a notice of intent to file in federal court did not remove the matter from the Secretary s jurisdiction). 135. Id.; Powers v. Pinnacle, ARB No.05-138, ALJ No. 2005-SOX-65 (ARB Oct. 13, 2005) (holding the ALJ retained jurisdiction until the complainant filed in federal district court); McIntyre v. Merrill Lynch & Co., ARB No. 04-055, ALJ No. 2003-SOX-23 (ARB July 27, 2005) (only dismissing complainant s petition for review after complainant filed in federal district court). 136. 69 Fed. Reg. 52111 (2004). 137. 18 U.S.C. 1514A(b)(1)(B). 138. See McClendon v. Hewlett-Packard Co., 2005 U.S. Dist. LEXIS 43579, *6 ( D. ID June 9, 2005). 139. 69 Fed. Reg. 52111 (2004). 140. Sabine Pilot v. Hauck, 687 S.W.2d 733 (Tex. 1985). 141. 18 U.S.C. 1514A(d). 142. Sabine Pilot, 687 S.W.2d at 736. 143. 263 F. Supp. 2d 684 (S.D. N.Y. 2003). 144. No. 2005-SOX-46 and 47 (ALJ Jan. 13, 2006). 145. eugene scalia, consideration of employment arbitration agreements (Aug. 9, 2002). 146. Id. 147. michael delikat, corporate whistleblowing in the sarbanes-oxley era 4:4 (2006). 148. 29 C.F.R. 1980.108(b); OSHA Manual at 14-5 (2003). 149. 29 C.F.R. 1980.111.