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Dealing with SOX and the expansion of whistleblower litigation

Companies will need to be more proactive in its measures to prevent and avoid such litigation

More than a decade has passed since the passage of the Sarbanes-Oxley Act of 2002 (SOX) whereby employees are protected against retaliation after blowing the proverbial whistle for questionable and/or illegal corporate practices. While initially thought to extend only to those employed by publicly-traded companies, the March 2014 decision by the U.S. Supreme Court in Lawson v. FMR, LLC demonstrates otherwise. In Lawson, the Supreme Court held that employees of privately-held contractors or subcontractors who perform work for public companies also may receive the whistleblower protections under SOX for reporting fraud or other delineated wrongdoing by the publicly-traded company. As a result of the Lawson decision, now all individuals and businesses — whether public or private — who are contractors for a publicly-traded company are subject to SOX whistleblower protections for retaliation against an employee for reporting various types of fraud involving the public company.

While the Lawson decision did not touch upon the standard under which whistleblower claims are to be examined, many courts are deferring to the U.S. Department of Labor Administrative Review Board’s (ARB) decision in Sylvester v. Parexel Int’l., LLC as the standard under which SOX whistleblower claims are analyzed. In Sylvester, the ARB found that a SOX whistleblower does not need to show that an actual SOX violation occurred, but rather the whistleblower had a subjective and objective “reasonable belief” that the complained of conduct equated to a violation of SOX. With regard to the objective standard for this test, the Sylvester decision held courts must look at the “knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee.” The Sylvester ARB provided several key points, including indicating that summary judgment generally will not be appropriate as the objective reasonableness prong for the test is a question of fact.

Since the Sylvester decision, several appellate and district courts have utilized this “reasonable belief” test in analyzing whistleblower claims versus the previously standard of “definitively and specifically” related to one of the six categories of misconduct set forth in SOX’s Section 806. Indeed, in the past year, the 2nd, 3rd, 5th and 10th Circuits have issued decisions adopting the “reasonable belief” standard. That said, in 2012, the 6th Circuit expressed caution against the “reasonable belief” standard and instead, opted to follow the “definitively and specifically” related standard.

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Given the recent decisions and the ARB’s pronouncement of the “reasonable belief” standard, employers will need to brace for more litigation on whistleblower claims and understand that such claims likely will not withstand bids for dismissals. Together with the lucrative bounty payments to successful whistleblowers, including a recent payment of $300,000 award to a compliance and audit staffer who reported a matter to the Securities and Exchange Commission, SOX whistleblower litigation will not diminish anytime soon. As a result, companies will need to be more proactive in its measures to prevent and avoid such litigation.

One of the first things an employer can do to minimize the risk of retaliation claims and make the claims that are made easier to defend is to draft and circulate a code of conduct policy, which encourages employees to come forward with complaints or concerns. The code of conduct policy should provide alternative ways in which employees can raise concerns, including an anonymous hotline, email hotline and designated persons to receive such complaints. The code of conduct policy also should include a strong non-retaliation statement that encourages employees to come forward with complaints of unlawful conduct without fear of reprisal and provides a process for employees to report acts of retaliation.

In addition to circulating the code of conduct policy, employers should provide regular training on compliance. This training should include not only employees and senior leadership but also members of the company’s board of directors. Separate training for managers and supervisors also should be regularly conducted as to their obligations once a complaint is made and steps that must be taken in response to such. By having this regular compliance training and review of the code of conduct policy, employers are building a culture of compliance without fear of retaliation.

Employees who complain of unlawful conduct should not be ignored or treated poorly. Instead, the company should be proactive and meet with the employee about his or her complaint. Similar to a complaint of discrimination or harassment, the employer should investigate and take whatever corrective action is necessary. The employer also should work with the employee’s managers and supervisors about the complaint and have those individuals understand their non-retaliation obligations. The employer also should monitor the situation after the conclusion of the investigation to ensure there have been no further incidents or other problems, and this includes conducting various follow up meetings with the complaining employee.

Finally, if a complaining employee has performance issues and/or corrective action is required unrelated to the complaint, employers should proceed cautiously. Before taking any adverse employment action, an independent, neutral review should occur to ensure that no unlawful retaliation played a role in the decision. This neutral review includes understanding when the performance issues began, whether documentation of these performance issues occurred prior to the complaint, and what triggered the recent performance issues.

By understanding the developments and continued rise of SOX whistleblower litigation, following these proactive measures can aid companies in reducing its legal risks and financial exposure posed by such claims.

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Tina A. Syring

Tina A. Syring is a partner in Barnes & Thornburg LLP’s Minneapolis office and a member of the firm’s Labor and Employment Law Department.

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