By Gail E. Sharps[1]

Civil Whistleblower Retaliation Provisions

The Sarbanes-Oxley Act significantly expands the universe of individuals who can file federal whistleblower claims. Whistleblower protections already existed under the laws of certain states as well as under federal law for other categories of workers, including federal employees; workers in certain areas of the private sector (like the nuclear and aviation industries); employees who reveal certain public safety, civil rights, and Title VII violations; and individuals reporting certain violations of the civil False Claims Act.

Who is Protected?

Section 1514A of Title 18 of the United States Code (“Section 1514A”) applies not only to officers and employees of a publicly traded corporation, but also to its contractors, subcontractors, or agents.

Prohibited and Protected Conduct

Section 1514A prohibits discharging, demoting, suspending, threatening, harassing, or discriminating against an employee in any way relating to the terms and conditions of their employment because of any “lawful act” done by the employee in connection with two kinds of protected conduct. The two types of conduct protected under Sarbanes-Oxley’s civil whistleblower provisions are:

Remedies

Subsection 1514A(c)(1) entitles prevailing employees to any relief necessary to make them whole. Those remedies include reinstatement at the employee’s previous seniority status; back pay with interest; and compensation for any special damages that are the result of the discrimination, including litigation costs, expert witness fees and reasonable attorneys’ fees. Employees continue to have all other rights, privileges and remedies available to them under any Federal or state law, or under any collective bargaining agreements, which rights are not be preempted by the Act. 18 U.S.C.A. § 1514A(d).

Enforcement Mechanism

The Act’s civil whistleblower remedies may be sought under two avenues of relief, which are set forth in 18 U.S.C. § 1514A(2). The first avenue is by filing an administrative claim. The Act provides that an employee seeking whistleblower relief must file a complaint with the U.S. Secretary of Labor within 90 days of the alleged violation.

The procedures for the review of any civil whistleblower complaint are those set forth in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, 49 U.S.C. § 42,121. Once the complaint has been received, the Secretary is directed to notify the person named in the complaint and the employer of the allegations contained in the complaint, the substance of the evidence supporting the complaint, and the procedural opportunities provided under the administrative claims process.

Thereafter, the Secretary will conduct an investigation of the allegations no later than 60 days after the complaint is filed to determine whether there is reasonable cause to believe that the complaint has merit. Within that 60-day period, the employer will have an opportunity to file a written response to the complaint with the Secretary, and to provide witness testimony to a representative of the Secretary.

If the Secretary makes a finding that there is reasonable cause that the complaint has merit, the Secretary must notify the employee and employer of this finding, and provide a preliminary order prescribing relief (ordering the employer to take action to abate the violation, reinstate the plaintiff to his or her former position with compensation including back pay, and restore the terms and conditions of the pre-violation employment, or paying compensatory damages).

Either party has 30 days to object to the preliminary order and request a hearing on the record, but the statute provides that the objections do not stay the reinstatement remedy. 49 U.S.C.A. § 42121(b)(2)(A). If a hearing is requested and held, the Secretary must issue a final order no later than 120 days after conclusion of the hearing. Either party may petition for review of the final order in the U.S. Court of Appeals for the circuit in which the alleged violation occurred or in which the complainant resided at the time of the alleged violation.

The Sarbanes-Oxley Act whistleblower remedies differ from others administered by the Department of Labor, by providing that if no action has been taken by the Secretary of Labor on the administrative claim within 180 days of filing, and if the delay is not shown to be the result of the claimant’s bad faith, an employee pursuing a cause of action under Section 1514A may file suit in federal district court seeking legal or equitable relief.

With respect to burden of proof, the plaintiff is required to make a prima facie showing that protected conduct was a “contributing factor” in the alleged retaliation. Elements of prima facie case are defined as (i) the employee engaged in a protected activity or conduct; (ii) the named person knew, actually or constructively, that the employee engaged in the protected activity; (iii) the employee suffered an unfavorable personnel action; and (iv) the circumstances were sufficient to raise the inference that the protected activity was likely a contributing factor in the unfavorable action. 29 C.F.R. § 1979.104(b)(1).

Once this showing is made, the burden shifts to the employer to demonstrate by clear and convincing evidence that it would have taken the same action with regard to the employee even in the absence of protected conduct.

Rights of Employers Where a Claim is Frivolous

The procedures set forth in 49 U.S.C. § 42121(b) that are incorporated by reference in Section 1514A allow employers to be awarded a reasonable attorney’s fee of up to $1,000 if the plaintiff’s claim is determined to be frivolous or to have been brought in bad faith.

Audit Committee Requirements

Section 301 of the Sarbanes-Oxley Act requires audit committees to establish procedures for the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Rules of Professional Conduct for Lawyers Appearing and Practicing Before the SEC

The Rules of Professional Conduct for Lawyers Appearing and Practicing Before the SEC requires attorneys to report to the CEO or chief legal counsel (or their equivalents) evidence of a material violation of securities law, breach of fiduciary duty, or similar violation by the company or any of its agents. It also requires attorneys to report any evidence to the audit committee, to another committee of the board that is composed solely of independent directors, or to the full board if the chief legal counsel or officer does not respond appropriately to the evidence (i.e., adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation).

Conclusion

The protection provided by the Sarbanes-Oxley Act is a step forward in providing protection to employees reporting corporate misconduct and fraudulent activities at public companies. Employers should ensure that mechanisms are in place to comply with the Act by creating policies on non-retaliation for whistleblowers and a procedure under which whistleblowers can report such claims.

References

[1] Gail E. Sharps is in-house counsel for U.S. Foodservice, which is the 2nd largest food distributor in the U.S. and is a wholly owned subsidiary of Ahold. Ms. Sharps specializes in corporate law.