John Bechtel and Willie Jacques were happy in their positions at Competitive Technologies Inc. (CTI), a company that helps its clients commercialize their inventions. Bechtel, the company's vice president of commercialization, and Jacques, vice president of marketing, had been in their positions for several years and got along well with their co-workers. Life at the Connecticut-based company was good for the two men.
But things started to go badly for Bechtel and Jacques in 2003. During a March disclosure meeting, the men raised concerns about the company's decision not to report on its SEC filing, an oral agreement it had entered into with an accounting consultant--an act they thought should have been disclosed. The company's CEO, John Nano, ignored their concerns. As a result, Bechtel and Jacques refused to sign off on the report. Two months later, Nano fired them.
The men filed suit, Bechtel v. Competitive Technologies Inc., in September 2003 claiming wrongful termination under Sarbanes-Oxley's whistleblower-protection rules. After completing its investigation, the Department of Labor (DOL) determined the company violated the Act by firing the men and ordered it to reinstate them. Claiming it fired the men for poor performance, CTI fought the decision for more than a year but ultimately reached a sealed settlement with the plaintiffs in June.
Although Bechtel may seem like any other retaliation suit, it goes a long way toward not only demonstrating the power the DOL has in a post-Enron corporate America, but also how difficult it will be for companies to prove their cases in whistleblower suits under SOX.
"Bechtel gives us the first real judicial interpretation of what the power of the Department of Labor will be in whistleblower suits under Sarbanes-Oxley," says Sheryl Willert, past president of the Defense Research Institute and a partner at Williams, Kastner & Gibbs in Seattle. "And that power is going to be significant."
Power To The DOL
Under SOX, anytime an employee files a whistleblower-type complaint against a company, the Occupational Safety and Health Administration (OSHA) must conduct an investigation into the allegations. In Bechtel, OSHA investigators found the employees had been fired in retaliation.
As a result of that finding, the company not only had to reinstate the employees, but also had to pay them the same salaries and benefits it had prior to their terminations. Furthermore, the Act required the company to reimburse the men for lost wages and benefits. That meant CTI would have to pay Bechtel and Jacques $349,786 and $390,835, respectively.
The company immediately filed an objection, asking an administrative law judge (ALJ) to hear the case. Under SOX, filing an objection suspends all provisions of OSHA's order, except reinstatement. In other words, the company didn't have to pay the plaintiffs just yet, but did have to give them back their jobs.
"This means you're litigating against an employee you have to reinstate," says Richard Cino, a partner at Jackson Lewis' New Jersey office. "That can create a tremendous amount of tension in
the workplace."
To avoid this, CTI filed an application with ALJ Janice K. Bullard to stay the reinstatement. But for the application to be successful, CTI had to prove that reinstating the employees would irreparably damage the company. Bullard rejected the request, stating, "the statutory mandate of reinstatement dictates that a stay be granted only for extraordinary reasons."
In her decision, Bullard said the company was unlikely to establish that it could succeed on the merits of its SOX defenses and hadn't demonstrated how reinstating the plaintiffs would irreparably harm the company.
Despite Bullard's decision, CTI refused to reinstate Bechtel and Jacques. The two men responded by filing suit in a federal district court to enforce OSHA's order. Under Sox, the district court said, the DOL makes the determination whether reinstatement is appropriate, and it wasn't the district court's place to do so. And because OSHA had already made its decision and the ALJ rejected CTI's request to prevent it, the company had to reinstate the former employees.
Before the reinstatement took effect and the men could return to work, however, the two parties came to an undisclosed settlement. But by then, the case had already become a topic of concern in corporate America.
"One of the most important things about this case is it clearly demonstrates how difficult it will be for an employer to stay a reinstatement award," Cino says. "The ALJ's decision and the decision of the district court underscore the broad powers granted to the DOL and OSHA under SOX."
That's Not All
But Bechtel does more than demonstrate the broad reach of the DOL's new enforcement powers. The case also illustrates that there is a more difficult burden for employers to justify their reasons for terminating an employee who may fall under whistleblower protection.
"This case is very different than other employment-type laws," says Doug Towns, a partner at Jones Day in Atlanta. For instance, under Title VII a company only has to show evidence of a business reason for terminating a protected employee.
According to SOX, employers need to show by a "clear and convincing" standard that their reasons for taking adverse action against potential whistleblowers were not related to the whistleblowing activity. Employees, on the other hand, only have to prove the action the company had taken against them was related to the whistleblowing.
"All the employee needs to do is prove he had a reasonable belief that a securities violation occurred, that he reported it to a supervisor and that the adverse action was taken against him in the not-too-distant aftermath," explains Mike Tankersley, partner at Bracewell & Giuliani in Dallas.
As a result, Towns believes employers may have a difficult time defending these types of claims.
"The burden of proof for an employee to establish a violation is very low," he says. "There is a greater liability for employers in these cases."
In Bechtel, for example, the plaintiffs claimed that after they expressed concern over the SEC filing, Nano began to treat them differently.
"[Nano] criticized and attempted to embarrass them at staff meetings and in front of co-workers," the complaint stated. "Nano's hostility continued until Bechtel and Jacques were terminated on June 30, 2003."
The DOL and the district court believed Bechtel's and Jacques' claims. But CTI--most likely not anticipating a victory--settled before the ALJ had her final say. (Counsel for both sides of this case didn't respond to requests for interviews.)
Play By The Rules
Although the DOL now holds a lot of power in these types of cases, there are some things companies can do to avoid whistleblower suits.
First, keep rigorous records of employee performance reviews.
"If you can prove there is a three-step process for terminating an employee," Tankersley says, "and an employee was already through step two and well on their way to step three when you fired him, you may have the evidence to prove by a clear and convincing standard that there was a reason to let that person go."
Second, put together an internal team that knows the company's policies on terminating an employee and is trained to work on SOX-type complaints.
"It's important the general counsel's office works closely with human resources and upper management when making a firing decision that could result in a whistleblower suit," Cino says. "Once a SOX complaint is filed by a former employee, employers need to understand the very real possibility OSHA might order you to reinstate that employee."
And finally, don't participate in illegal activity.
"I know it sounds obvious, but companies are still learning that it doesn't pay to engage in inappropriate financial accounting methods," Willert says. "These are tough lessons for companies to learn. And very expensive ones."
At the end of the day, CTI could have avoided this whole mess. The filing issues that Bechtel and Jacques expressed concern about were in fact material. And the company reported them in its 2004 SEC 10-K report.
Regardless, Tankersley believes the corporate world should thank CTI for taking on this case.
"There were some interesting due-process type questions here," he says, "and the judge answered those questions and clarified the provisions pretty convincingly in this case."