The Department of Labor’s Administrative Review Board (ARB) recently held that a former employee of Exelis Systems Corporation who was employed in Afghanistan could bring a SOX claim even though he worked exclusively outside of the United States.  Blanchard v. Exelis Systems Corp./Vectrus Systems Corp., ARB Case No. 15-031 (August 29, 2017).  In so ruling, the ARB opened the door to the potential extraterritorial application of SOX, reversing course from its prior decision addressing this same issue.

Background

Complainant was formerly employed by Exelis as a Security Supervisor.  He was stationed in Afghanistan, where his duties included assessment of local or foreign nationals who sought access to a U.S. air force base.  Complainant alleged that his employment was terminated (while in Afghanistan) in retaliation for reporting to Exelis’ human resources staff that his supervisors had engaged in wire and mail fraud.  Specifically, Complainant reported that his supervisor had attempted to cover up the fact that another employee had allowed an unauthorized person to enter the air force base without the proper credentials, and directed an investigator to refrain from reporting the security breach to the U.S. military.  He believed that his supervisors withheld or falsified information relating to the breach, and that this false information, which was sent to U.S. military personnel, constituted a violation of U.S. law – specifically, mail and wire fraud.  He also reported that an indirect supervisor was working fewer hours than he was reporting on his timesheet, which he also believed constituted mail and wire fraud.  Complainant subsequently filed a complaint against the Company with the DOL, alleging that the company violated § 806 of SOX by retaliating against him because of his protected activities.

Holding

Relying upon Obama-era ARB precedent, an Administrative Law Judge dismissed the complaint on the grounds that the Complainant’s concerns arose from conduct that occurred in Afghanistan and SOX § 806 does not apply extraterritorially.   The ARB reversed, explaining that the issue of extraterritorial application was unnecessary in this case because the Complainant asserted allegations that fell within the domestic reach of the statute (i.e. violations of U.S. mail and wire fraud).   Accordingly, the ARB held that because the complainant’s alleged complaints involved “a U.S.-based corporation engaged in submitting false claims to the U.S. government in connection with U.S. security and military operation on a U.S. air force base,” his complaints “fall squarely within the type of malfeasance that both SOX and § 806 aimed to deter.”

 

ARB In Dicta Addresses The Potential Extraterritorial Application of SOX

 

As described in our prior post, the applicable standard in assessing the extraterritorial application of a statute arises from the Supreme Court’s decision in Morrison v. National Australian Bank, Ltd., 130 S. Ct. 2869 (2010).  There, the court applied a “two-step test” to determine (1) whether Section 10(b) of the Securities Exchange Act of 1934 (“SEA”) reached extraterritorial claims and, if not, (2) whether the facts alleged in the complaint require an impermissible extraterritorial application.  The Supreme Court held that, because the SEA did not give a “clear indication of an extraterritorial application, it has none.”

Relying upon Morrison, the ARB in Villanueva v. Core Labs. NV, Arb. Case No. 09-108 (ARB Dec. 22, 2011) held that SOX does not apply extraterritorially.  In Villanueva, the plaintiff (who was employed outside of the United States) alleged that he had been terminated for complaining about his employer’s alleged underreporting of taxes due to the Columbia government.  The ARB held that the complainant’s allegations of unlawful conduct were not protected activity under SOX because his complaints concerned solely violations of foreign laws.

In the Blanchard decision, the ARB (in dicta) described its prior holding in Villanueva as “suspect” in light of the Supreme Court’s recent ruling in RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016).  In RJR Nabisco, the Supreme Court applied the Morrison two-step process and held that the Racketeer Influenced and Corrupt Organizations Act (RICO) applies extraterritorially because it incorporates a number of predicates that apply to foreign conduct, which signaled that Congress intended for RICO to apply extraterritorially.

Citing RJR Nabisco, the ARB stated that because SOX’s anti-retaliation provision applies to all companies that register securities and those that are required to file reports under the SEA, its coverage includes “foreign private issuers” that are subject to U.S. securities laws because they elected to trade in the U.S.  Therefore, the ARB stated that it was “unlikely that Congress intended to limit enforcement of Section 806 to U.S. companies and exempt the misconduct of foreign issuers of securities in the U.S. financial market” because such a result would “give unfair advantage to foreign issuers” and “undermine the twin goals of SOX to protect both shareholders of publically-traded companies as well as the integrity of our increasingly global and interconnected U.S. financial system.”  The ARB further noted that the legislative history of SOX “contains repeated references to the interconnectedness and internationalization of national markets” and therefore concluded that limiting Section 806 to domestic activity “would severely undercut Congress’ remedial purpose.”   Finally, the ARB stated that at least three of the six enumerated forms of protected activity under SOX (wire fraud, securities fraud and fraud against shareholders) “extend to some foreign conduct.”

Significantly, the ARB recognized that SOX does not cover all foreign conduct of publicly-traded foreign companies and that “the misconduct of a foreign issuer/employer under the statute must still ‘affect in some significant way’ the United States.”

Implications

The ARB’s dicta in Blanchard  regarding the potential extraterritorial application of SOX is directly contrary to its prior decision in Villanueva (which was affirmed  by the 5th Circuit Court of Appeals) and other court decisions.  Notably, the ARB did not overturn its prior holding in Villanueva and made clear that a SOX whistleblower’s allegations of misconduct must have a “significant” impact in the United States.  It therefore remains to be seen whether courts will accord any deference to Blanchard in considering the extraterritorial application of SOX.  In addition, although not the focus of this blog post, employers should take note that the ARB in Blanchard continued to expand the notion of “protected activity” under SOX beyond any possible purpose associated with the statute’s enactment.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.

Photo of Rachel Fischer Rachel Fischer

Rachel S. Fischer is a senior counsel in the Labor & Employment Law Department.

Rachel represents employers in all types of employment-related disputes, including defending clients against claims of discrimination, harassment, retaliation, wrongful discharge, whistleblowing, breach of contract, and in wage and hour…

Rachel S. Fischer is a senior counsel in the Labor & Employment Law Department.

Rachel represents employers in all types of employment-related disputes, including defending clients against claims of discrimination, harassment, retaliation, wrongful discharge, whistleblowing, breach of contract, and in wage and hour matters. She represents employers in federal and state courts, arbitration tribunals, and before administrative agencies, and has litigated both single plaintiff and class action lawsuits. As an experienced trial lawyer, Rachel has successfully litigated numerous cases from complaint through jury verdict or arbitral award.

Rachel represents employers across a wide variety of industries, including banking and finance, law firms, media and entertainment, sports, and higher education.

Rachel also counsels clients on a broad range of employment law matters, including investigations, employee terminations and discipline, and employment policies and procedures.