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Vedder Thinking | Articles Whistleblower Update: Sarbanes-Oxley Now Really Means Business

Newsletter/Bulletin

Ever since the Sarbanes-Oxley Act (SOX) became law in 2002, publicly traded companies have fared quite well when defending “whistleblower” retaliation complaints brought by employees claiming to have suffered retaliatory personnel actions for reporting or cooperating in investigations of corporate fraud or violations of Securities and Exchange Commission (SEC) rules or regulations. During this ten-year period, corporate whistleblowers have prevailed on only 21 out of 1,455 complaints (less than 2 percent), while another 996 cases have been dismissed. The rest of the cases were withdrawn or settled or remain pending. This all figures to change, however, thanks to a series of recent changes that make it easier for an aggrieved employee to plead and prevail on whistleblower retaliation claims.

When an employee files a SOX whistleblower complaint (employees have 180 days to file from the date of the alleged discrimination or when the employee learned of the alleged discrimination), the Occupational Safety and Health Administration (OSHA—yes, OSHA!) will conduct an investigation and issue findings and a preliminary order. Either party may then request a full hearing before a U.S. Department of Labor (DOL) administrative law judge. The administrative law judge’s decision and order may be appealed to the DOL’s Administrative Review Board (ARB).

To prevail on a SOX claim, a complainant must prove by a preponderance of the evidence that (1) he or she engaged in activity or conduct protected by Section 1514A, (2) the employer took an unfavorable personnel action against him or her, and (3) the protected activity was a contributing factor in the adverse personnel action.

In the past year and a half, however, the ARB has taken the following actions:

  • Recognized a more pro-claimant pleading standard by disavowing a complainant’s obligation to prove that an employer’s proffered non-retaliatory reasons for terminating the complainant were mere pretext.
  • Expanded its interpretation of “protected activity,” dispensing with the requirements that a complainant must (a) allege shareholder fraud to obtain SOX whistleblower protection and (b) definitively and specifically plead the company’s violation; it also held that protected activity may include allegations of SOX violations that have not yet occurred.
  • Broadened the definition of an unfavorable personnel action to include any “non-trivial” employer action, regardless of whether it was employment related.
  • Extended SOX whistleblower protections to employees of private companies in certain circumstances. For example, the ARB has held that an employee of a privately owned accounting firm fell under SOX’s whistleblower protections when he reported SOX violations of a publicly traded company for which he was performing full-time auditing services.

Given these significant changes to well-established pleading requirements, public companies—and even some private employers that have dealings with public companies—should expect to see an increase in the number of SOX whistleblower complaints and find it more difficult to secure their dismissal. As such, covered employers should consider reviewing their SOX/whistleblower polices and determining whether they have adequate internal controls in place to address and respond when someone blows the whistle.

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