Court broadens whistleblower protection under SOX

Employee complaints don't need to relate to shareholder fraud to be protected by the law

In May 2006, Andrea Brown learned a juicy secret about her boss.

Brown, an employee at Lockheed Martin Corp., found out that her supervisor, Wendy Owen, was misusing the corporate pen-pal program, which was meant to boost the morale of soldiers deployed in Iraq. Owen was having multiple sexual affairs with soldiers she had met through the program. She was also using company funds to pay for transportation, hotels and gifts for her lovers, and she was passing these expenses on to Lockheed’s clients.

Brown notified human resources and the director of her department about Owen’s misconduct. Both promised to take action and keep her complaint anonymous, but instead, Brown says she started receiving unsatisfactory performance reviews and was demoted. The company moved her desk to a storage room. Brown became deeply depressed and eventually quit her job.

In January 2008, Brown filed a whistleblower complaint under the Sarbanes-Oxley Act (SOX), claiming Lockheed had retaliated against her for reporting Owen’s misconduct. An administrative law judge (ALJ) found that SOX protected her activity and awarded her $75,000 in compensatory damages, reinstatement, back pay and medical expenses.

Lockheed appealed, claiming SOX didn’t cover Brown’s complaints because they didn’t relate to shareholder fraud. But the Labor Department’s Administrative Review Board (ARB) affirmed the ALJ’s decision, and on June 4, in Lockheed Martin Corp. v. Administrative Review Board, the 10th Circuit affirmed the ARB’s decision.

The appeals court’s ruling marks the first time it has interpreted SOX, and it outlines a broad view of what constitutes protected whistleblower activity and retaliation under the act.

Wide Interpretation

Writing for the 10th Circuit, Judge Michael Murphy said that “an employee complaint need not specifically relate to shareholder fraud to be actionable under [SOX].”

“The court held that the current board correctly interpreted the statute consistent with the unambiguous language and intent of Congress to protect employees who report conduct that specifically relates to any of the enumerated federal fraud statutes,” says Mary Pivec, a partner at Williams Mullen.

According to James McQuade, of counsel at Orrick, the 10th Circuit’s broad interpretation is important because it “could have the effect of continuing to expand the scope of protected activity under SOX, which, in turn, could lead to an increase in SOX claims.”

The 10th Circuit’s affirmation of the ARB’s decision is also significant because the court held that even if the language of SOX was ambiguous about what constitutes protected whistleblower activity and retaliation, precedent set in the 1984 Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. required it to defer to the ARB’s interpretation. In that case, the Supreme Court established that courts must defer to a government agency’s interpretation of a statute if the interpretation is based on a permissible construction of the statute.

“Some employers have expressed shock that an executive branch institution like the ARB has such power,” Pivec says. “But it clearly does, and can exercise influence over the interpretation and application of the 23 whistleblower statutes under Depart- ment of Labor enforcement authority.”

Top Takeaways

In light of the 10th Circuit’s decision in Lockheed, in-house counsel should carefully consider whether employee complaints could be considered protected activity under SOX.

“Given the likelihood that the ARB interpretation of SOX will prove controlling for the indefinite future, it would be prudent for covered employers to review employee handbooks, compliance policies, supervisor manuals and SOX compliance training materials to ensure that the definition of protected activity is consistent with the ARB,” Pivec says.

Employers must be careful in making even the smallest personnel changes—including desk relocations and demotions, when an employee has raised a complaint about company activity to avoid charges of retaliation. If a company does make changes, it must be prepared to show that they would have happened regardless of the employee’s complaint.

“Employers should seek to not only prevent those employees who have knowledge of another employee’s protected activity from making any adverse decisions affecting that employee, but also should seek to prevent those employees from influencing any employment decisions affecting the protected employee,” McQuade says. “Second, if an adverse employment action is being taken against an employee who previously had engaged in protected activity, in-house counsel should determine whether the relevant decision maker has knowledge of the protected activity or was influenced by another who [did].”

Contributing Author

Ashley Post

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