CFTC Issues $6 Million Whistleblower Award

On June 9, 2020, the U.S. Commodity Futures Trading Commission (CFTC) announced a $6 million whistleblower award to an individual under its Dodd-Frank whistleblower program.  The individual was rewarded for voluntarily providing specific, credible, and timely information that led the CFTC to bring a successful enforcement action.

The Director of the Whistleblower Office, Christopher Ehrman, said in the press release that the award reflects the impact of whistleblowers on the Agency’s enforcement program, noting “whistleblowers have led the CFTC to obtain nearly $900 million in monetary relief.”  The Director added that “sizeable awards like this one should signal to potential whistleblowers that there are real financial incentives to promptly reporting violations to the CFTC.”

This is the CFTC’s second award of 2020, and the largest so far this year.  A $2 million award was issued last month to four whistleblowers who provided a tip containing “synthesized information that highlighted the economic impact of the suspicious activity they identified,” as well as ongoing assistance during the CFTC’s invesgitation.  Per usual practice, the Agency did not provide details about the whistleblower or the information that led to the enforcement action.

COVID-19 Whistleblower Protection Bill Introduced Into Congress

On June 15, 2020, Senator Kamala Harris and Representatives Jackie Speier and Jamie Raskin introduced the COVID-19 Whistleblower Protection Act (the “Act”), which seeks to provide protections for employees who blow the whistle on employers who misuse federal funds received through various measures enacted by Congress aimed at mitigating the impact of the coronavirus pandemic.  (The text of the proposed bill can be found here.)  Many of the whistleblower protections in the Act echo those contained in the American Recovery and Reinvestment Act of 2009 – the economic stimulus bill signed by President Obama in the wake of the Great Recession.  (Our article on that bill can be found here).

Retaliation

If passed, the Act would prohibit employers from taking reprisals against protected individuals for “disclosing, being perceived as disclosing, or preparing to disclose . . . to an officer or entity [designated under the statute] information that the protected individual reasonably believes is evidence of misconduct that violates, obstructs, or undermines any statute, rule, or regulation with respect to any Coronavirus pandemic-related program, project, or activity,” including, among other things, gross mismanagement of agency contracts, grants, and covered funds, dangers to public health or safety, abuse of authority, and violations of laws, rules, or regulations.

In addition, the Act would prohibit employers from retaliating against any protected individual who refuses to obey orders that the individual “reasonably believes would require that individual to violate a statute, rule, or regulation with respect to any Coronavirus pandemic-related program, project, or activity.”  Under the Act, a “reprisal” is defined as “an action (or, as applicable, inaction) that is discharging, demoting, blacklisting, or acting or failing to take an action in a manner prejudicial against, or otherwise discriminating against in any way (including in the hiring process and including by the threat of any such action or inaction) a protected individual.”

The Act’s protections also extend to individuals who assist in disclosing or are preparing to assist in disclosing such information as well as employees who make such disclosures in the ordinary course of their duties.  Notably, the bill takes an expansive approach with respect to the types of individuals it protects, defining a “protected individual” as an employee, former employee, or applicant for employment.  Moreover, the bill defines an employee as “an individual performing services on behalf of an employer, including any individual working for an employer under a contract with such employer (including a contractor, subcontractor, or agent of an employer).”

The Act defines the phrase “Coronavirus pandemic-related program, project, or activity” as a “program, project or activity of the executive branch . . . authorized or carried out using amounts made available under an Act to respond to or to provide aid or assistance to address, relief from, or funding to address the outbreak of COVID-19 that is enacted before, on, or after the date of enactment of this Act.”  The phrase expressly includes programs, projects, or activities that are funded by any of the following: (i) the Paycheck Protection Program and Health Care Enhancement Act; (ii) the CARES Act; (iii) the Families First Coronavirus Response Act; or (iv) the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020.

Officers and entities to whom individuals can report include, but are not limited to, the Pandemic Response Accountability Committee, an inspector general, including the Special Inspector General for Pandemic Relief, the Congressional Oversight Commission, the Comptroller General of the United States, a member of Congress, and a congressional committee.

Administrative and Judicial Relief

The Act provides that protected individuals who believe they have been subjected to a reprisal may submit a complaint to the U.S. Department of Labor within 3 years after learning of the alleged reprisal.  The employer may then file an answer to the complaint within 60 days.  In evaluating the claims brought by a protected individual, the Secretary of Labor must determine whether the individual’s disclosure or protected activity was a contributing factor in the alleged reprisal.  If the Secretary of Labor does not issue a final decision within 180 days of the filing of the complaint, the individual may bring an action in federal court and is entitled to a jury trial.

Available relief includes reinstatement, compensatory damages, liquidated damages for double back pay, and attorneys’ fees and costs.

The Act also provides that pre-dispute arbitration agreements requiring arbitration of disputes under the Act will not be valid or enforceable.

Implications for Employers

This bill comes as no surprise, as whistleblower protections have proliferated in connection with a broad range of legislation.  Although the bill is only at the earliest stages of the legislative process, the right to a jury trial and availability of substantial damages raise significant risks for employers if the bill is signed into law.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

SEC Announces Record-Breaking $50 Million Award to Whistleblower

On June 4, 2020, the SEC announced a nearly $50 million award to a whistleblower who provided the SEC with detailed, first-hand information that assisted the agency in bringing a successful enforcement action.  While tipsters have previously shared a $50 million award, this is the largest amount ever awarded to a single whistleblower under the SEC’s whistleblower program and far surpasses the next-largest individual award of $39 million in September 2018.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said in a press release that “[t]his award marks several milestones for the whistleblower program,” and explained that the award “is the largest individual whistleblower award announced by the SEC since the inception of the program, and brings the total awarded to whistleblowers by the SEC to over $500 million, including over $100 million in this fiscal year alone.”  She added, “[w]histleblowers have proven to be a critical tool in the enforcement arsenal to combat fraud and protect investors.”

Since the inception of the whistleblower program in 2011, the SEC has received over 33,000 tips and awarded over $500 million to 83 individuals.  The order granting yesterday’s record-breaking award can be accessed here.

Reuters: SEC Eager to Prosecute COVID-19 Misconduct Amid Flurry of Whistleblower Complaints

A Reuters article published on May 26, 2020 reports that the SEC has experienced an uptick in complaints amid the COVID-19 pandemic.  According to the article, the SEC received about 4,000 complaints from mid-March through mid-May – a 35% increase from the previous year.  With an abundance of tips at its disposal, the SEC is eager to investigate and prosecute COVID-19 related misconduct.

The article discusses how the COVID-19 pandemic has incited a wave of misconduct, ranging from loan and healthcare fraud to the production of counterfeit and substandard medical supplies, across a wide range of industries.  The article quotes an SEC spokeswoman as stating: “Unfortunately, fraudsters often seek to exploit difficult situations like the ongoing pandemic for their own gain.  The SEC frequently relies on the tips that we receive from the public.”

According to the article, the SEC has already begun cracking down on COVID-19 misconduct.  For example, the SEC created a task force specifically designed to monitor the market and detect potential abuses.  With the help of that group, the SEC recently charged two companies for allegedly publishing false and misleading information about its COVID-19 testing products.  The article suggests that these charges will be the first of many COVID-19 related enforcement actions.  The SEC’s Co-Head of Enforcement, Steven Peikin, is quoted as stating: “We expect to see the SEC bring more actions as we continue to investigate suspected COVID-19 related scams.”

Notably, the Reuters article comes on the heels of our recent prediction that employers are likely to face a deluge of whistleblower claims under various laws and legal theories in the wake of the COVID-19 pandemic.  We will be monitoring these whistleblower cases closely and continue to report on key future developments.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

Pennsylvania Magistrate Judge Recommends Dismissal of SOX Whistleblower Claim for Lack of Protected Activity

On May 5, 2020, a Magistrate Judge in the U.S. District Court for the Western District of Pennsylvania issued a report and recommendation recommending that a defendant-employer’s motion for summary judgment dismissing a SOX whistleblower retaliation claim be granted, finding that the plaintiff had not engaged in protected activity.  Wutherich v. Rice Energy Inc, No. 18-cv-00200.

Background

Plaintiff was a manager at the defendant-employer, an energy company involved in fracking.  In July 2016, Plaintiff allegedly overheard a co-worker discussing data regarding wells that the co-worker had obtained from a previous employer.  Plaintiff reported this incident to his supervisor and told him that he thought his co-worker had done something illegal and could go to jail for his actions.  In August 2016, Plaintiff allegedly expressed concern about a conflict of interest regarding the company’s use of a service provider in which Plaintiff’s supervisor had a 25% ownership interest.  Plaintiff alleged that, in response to his two complaints, his employment was terminated.  Plaintiff filed suit against the defendant-employer, alleging, among other claims, that he was retaliated against for providing information about incidents that he reasonably believed constituted fraud against shareholders, in violation of Section 806 of SOX.

Ruling

The parties filed cross-motions for summary judgment.  The court recommended that the defendant-employer’s motion be granted, finding that Plaintiff did not engage in protected activity.  With respect to the first alleged whistleblower incident, the court found that Plaintiff did not demonstrate that he subjectively believed that his co-worker’s alleged data theft should have been disclosed to shareholders.  With respect to the second alleged whistleblower incident, the court found that Plaintiff did not show that he reasonably believed he was reporting conduct which constituted a securities violation.  Rather, Plaintiff merely stated that his supervisor’s purported conflict of interest was “wrong,” but did not raise any concerns about the defendant-employer potentially failing to disclose this information to shareholders.

The court also found that even if Plaintiff had shown that he had engaged in protected activity, he did not show that the defendant-employer was aware that he had engaged in such activity.  In addition, the court noted that SOX “is not a general anti-retaliation statute.”  Therefore, it was not enough for the defendant-employer to know that Plaintiff had reported something unethical; rather, it had to know or suspect that he had reported a Section 806 violation.

Implications

This decision reaffirms the principle that SOX does not extend whistleblower protection to complaints about any form of purportedly improper conduct, but only protects complaints that are related to one of the six categories of misconduct specified in Section 806 of SOX.

Whistleblower Claims on the Horizon Amid COVID-19 Pandemic

In recent weeks, there have been numerous widely reported incidents of employees, particularly those in the health care industry, claiming that they have been retaliated against for reporting health and safety concerns related to COVID-19.  Such complaints are indicative of the kinds of whistleblower and retaliation claims employers are likely to see in the near future as a result of the COVID-19 pandemic.

In fact, on April 8, 2020, the Occupational Health and Safety Administration (“OSHA”), which according to a recent Washington Post article has received thousands of complaints from employees regarding a lack of protections against COVID-19 in their workplaces, issued a press release “reminding employers that it is illegal to retaliate against workers because they report unsafe and unhealthful working conditions during the coronavirus.”  Below are some of the whistleblower protections and anti-retaliation statutes employers should be mindful of during the COVID-19 pandemic.

Occupational Health and Safety Act of 1970

Section 11(c) the Occupational Health and Safety Act of 1970 (“OSH Act”) prohibits employers from retaliating against employees for exercising their rights under the statute, including raising a health or safety complaint with OSHA.  29 U.S.C. § 660(c).  The protections contained in Section 11(c) apply to employees who report conduct they reasonably and in good faith believe violates the OSH Act.  Although Section 11(c) does not provide for a private cause of action, employees can submit a complaint to the Secretary of Labor.  After investigating the employee’s complaint, the Secretory of Labor can sue the employer in federal court on the employee’s behalf.  In court, the Secretary of Labor may seek relief including reinstatement, back pay with interest, compensatory damages, punitive damages and other appropriate relief.

Section 5(a)(1) of the OSH Act, which is referred to as the “General Duty Clause,” provides that employers must provide employees a workplace “free from recognized hazards that are causing or are likely to cause death or serious physical harm to [the employer’s] employees.”  29 U.S.C. § 654(a)(1).  Additionally, OSHA enforces regulations that are specific to health concerns associated with COVID-19, including:

  • 29 C.F.R. § 1910, Subpart I, which sets forth OSHA’s Personal Protective Equipment standards and requires the use of gloves, eye and face protection, and respiratory protection by employees in certain industries; and
  • 29 C.F.R. § 1920.134, which sets forth OSHA’s Respiratory Protection Standard and provides that when respirators are necessary to protect workers, employers must implement a comprehensive respiratory program. OSHA recently issued a temporary guidance related to the enforcement of respirator annual fit-testing requirements for health care workers during the COVID-19 pandemic.

OSHA recently published a document entitled Guidance on Preparing Workplaces for COVID-19, which contains recommendations to assist employers in providing a safe and healthful workplace during the COVID-19 pandemic.

An adverse employment action taken by an employer in response to an employee’s reasonable, good-faith complaint that the employer has violated any of the provisions discussed above, or any other relevant provision of the OSH Act, potentially could serve as a basis for a retaliation claim under Section 11(c).

National Labor Relations Act

Sections 8(a)(1) and 8(a)(3) of the National Labor Relations Act (“NLRA”) prohibit employers from retaliating against an employee for, among other things, participating in “concerted activities.”  29 U.S.C. § 158(a).  A recent National Labor Relations Board (“NLRB”) decision, Maine Coast Regional Health Facilities, NLRB, 01-CA-209105, 01-CA-212276 (March 30, 2020), indicates that healthcare workers who are terminated for voicing concerns about working conditions in health care facilities may have a retaliation claim under the NLRA.

In Maine Coast, a hospital employee submitted a letter to the editor of a local newspaper, “discussing staffing shortages at the hospital and the impact on her and her coworkers’ working conditions, and expressing support for the [local] nurses’ union’s efforts to improve staffing levels.”  After the newspaper published the letter, the hospital discharged the employee, citing a violation of its media policy as the reason for her termination.  The hospital’s media policy, which is similar to those of many health care facilities, provided in relevant part “[n]o [hospital] employee may contact or release to news media information about [the hospital] . . . without the direct involvement of the [hospital] Community Relations Department.”  The NLRB held that such a policy restricted the employee’s right to publicly complain about workplace issues of common concern to all employees, and therefore, the employee was “discharged for engaging in protected concerted union activity in violation of Section 8(a)(1) and 8(a)(3).”

New York Whistleblower Statutes

New York has two whistleblower statutes—New York Labor Law § 740 and New York Labor Law § 741—that may be relevant to claims arising from COVID-19, but differ from one another in significant respects, as discussed below.  As we have previously reported, the New York whistleblower statute, New York Labor Law § 740, protects employees from retaliation for reporting a violation of the law that “creates and presents a substantial and specific danger to the public health or safety.”  N.Y.L.L. § 740(2)(a).  Notably, an employee’s good-faith belief that his or her employer engaged in a violation of the law is not sufficient to sustain a claim under § 740.  Rather, the employee must show that the employer engaged in an “actual violation” of a safety statute or regulation.  Additionally, the harm that results from the violation of which the employee complains must affect the “public-at-large,” not just the individual employee.

New York Labor Law § 741 is specific to health care employees and protects such employees from retaliation for disclosing or objecting to “an activity, policy or practice of [the employee’s] employer . . . that the employee, in good faith, reasonably believes constitutes improper quality of patient care.”  N.Y.L.L. § 741(2).  Thus, § 741 differs from § 740 in that, under the former provision, health care employees are only required to show they had a reasonable, good-faith belief that the employer engaged in a violation of the law.  Additionally, whereas § 740 prohibits retaliation on the basis of complaints that affect the “public-at-large,” § 741 protects health care employees who report violations “which may present a substantial and specific danger to public health or safety or a significant threat to the health of a specific patient.”  N.Y.L.L. § 741(1)(d) (emphasis added).

California Whistleblower Statutes and Tameny Claims  

California has several statutes under which employees could potentially make a whistleblower or retaliation claim, some of which are specific to health care workers.  These statutes include the following:

  • California Health and Safety Code § 1278.5, which was enacted to “encourage . . . nurses, members of medical staff, and other health care workers to notify government entities of suspected unsafe patient care and conditions.” Health & Saf. Code § 1278.5(a).  To that end, the statute prohibits health care facilities from retaliating against an “employee, the medical staff, or other health care worker of the health facility” for presenting a complaint to the facility or an entity or agency responsible for accrediting or evaluating the facility or initiating an investigation related to “the quality of care, services, or conditions at the facility.”  Id. § 1278.5(b)(1).
  • California Labor Code § 6310, which prohibits employers from retaliating against employees for complaining about employee safety or health. Lab. Code § 6310(a)(1).
  • California Labor Code § 6311, which prohibits employers from retaliating against employees for refusing to perform work that would result in the violation of any occupational safety or health law and would “create a real and apparent hazard to the employee or his or her fellow employees.”

Additionally, employees in California may bring a common law claim for retaliation in violation of public policy, otherwise known as a Tameny claim.  The conduct underlying a Tameny claim must implicate a fundamental public policy that is embodied in constitutional or statutory provisions.  Among the policies that can give rise to a Tameny claim are protections against retaliation for reporting unsafe working conditions, including those encompassed in the California Health and Safety Code § 1278.5.  Thus, employers should be aware that California employees may bring a Tameny claim in addition to claims arising under California’s whistleblower statutes.

Additional State Whistleblower Protections

Other state statutes also protect employees against retaliation on the basis of reporting health and safety concerns.  Examples of such statutes include the following:

  • Illinois’ Hospital Report Card Act, which prohibits hospitals from retaliating against employees for reporting “any activity, policy or practice of a hospital that . . . the employee reasonably believes poses a risk to health, safety, or welfare of a patient or the public.” 210 ILCS 86/35.
  • Michigan’s Health Facility Whistleblower Protection Act, which prohibits health care facilities from retaliating against employees who make a good-faith complaint that their employer has violated a statute or rule. MCL 333.20180.
  • New Jersey’s Conscientious Employee Protection Act (“CEPA”), which prohibits employers from retaliating against an employee for objecting to, or refusing to participate in, any activity, policy or practice which the employee reasonably believes is in violation of a law, rule or regulation issued under the law, or if the employee is a licensed or certified health care professional, constitutes improper quality of patient care. J.S.A. § 34:19-3(c).
  • Texas Health and Safety Code § 161.134, which prohibits hospitals from retaliating against employees for reporting a violation of law or an agency rule, including prohibitions against unethical or unprofessional conduct.
  • Washington Code § 43.70.075, which prohibits health care facilities from retaliating against employees for making a good-faith complaint about improper quality of care provided by the facility.
  • Wisconsin’s Health Care Worker Protection statute, which prohibits health care employers from retaliating against employees for reporting violations of law or situations in which the quality of health care services provided by the facility violate any established clinical or ethical standard. WI Stat. § 146.997.

Common Law Retaliatory Discharge Claims In Various States

In addition to California, over half of the states recognize a common law cause of action for retaliatory discharge based on a violation of public policy.  Here are some examples of states that recognize such a claim:

  • As we have previously reported, Illinois recognizes a common law cause of action for retaliatory discharge in violation of public policy. The Illinois Supreme Court has recognized a retaliatory discharge cause of action where a plaintiff claimed he was discharged for refusing to engage in activity that allegedly violated safety-related regulations.  See Wheeler v. Caterpillar Tractor Co., 108 Ill.2d 502 (1985).
  • New Jersey has recognized a common law cause of action for retaliatory discharge. To sustain such a claim, a plaintiff must show his or her discharge was contrary to a clear mandate of public policy.  See Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58 (1980).
  • Washington, D.C. has recognized a common law cause of action for wrongful termination where an employee was discharged for refusing to engage in illegal activity. See Adams v. Cochran & Co., Inc., 597 A.2d 28 (1991).  The D.C. Court of Appeals expanded the applicability of this claim, allowing a plaintiff who alleged she had been discharged from her job as a nurse in violation of public policy because she advocated for patients’ rights to proceed on a wrongful termination claim.  See Carl v. Children’s Hospital, 702 A.2d 159 (1997).

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

SEC Awards Whistleblower More Than $27 Million

On April 16, 2020, the SEC announced payment of more than $27 million to a whistleblower who alerted the agency to misconduct that had occurred, in part, overseas.  (The order granting the award can be accessed here.)

In explaining the reason for its award determination, the SEC noted that the whistleblower had “repeatedly and strenuously raised [his or her] concerns internally.”  The SEC noted that it had considered whether the whistleblower had unreasonably delayed in reporting the information to the SEC, but declined to reduce the award due to the whistleblower’s repeated internal complaints.

This is the sixth largest award overall since the inception of the SEC’s whistleblower program in 2011 and brings the total amount awarded to whistleblowers by the SEC over the $400 million mark.

Since the inception of the program, the SEC has received over 26,000 whistleblower tips and awarded approximately $425 million to 79 individuals.

SDNY Dismisses Dodd-Frank Whistleblower Claim for Lack of Protected Activity and Causation

On February 28, 2020, the U.S. District Court for the Southern District of New York dismissed a former chief marketing officer’s claim of whistleblower retaliation under the Dodd Frank Act. Cellucci v. O’Leary No. 19-cv-02752 (S.D.N.Y. 2020).

Background

Plaintiff is one of several former chief executives of a closely-held infrastructure technology company who were terminated.  Plaintiff alleges that on March 7, 2019, he filed a complaint with the Securities Exchange Commission (SEC) concerning the conduct of the company’s chief executive officer, who is also its president and majority shareholder.  Plaintiff’s allegations did not include details regarding what conduct he complained about to the SEC, how any securities laws were violated or that he notified anyone at the company about his allegations.  Plaintiff was terminated approximately one week after making the complaint to the SEC.

Ruling

The company moved to dismiss, arguing that Plaintiff failed to state the requisite elements of a retaliation claim: 1) that he engaged in protected activity; 2) that he suffered an adverse employment action; and 3) that the adverse action was causally connected to the protected activity.  The court granted the company’s motion to dismiss, finding that the plaintiff failed to allege the first and third elements of a retaliation claim.

The court noted that to have engaged in protected activity, a plaintiff must have had an objectively reasonably belief that the defendant’s conduct violated one of the six enumerated provisions of law under 18 U.S.C. § 1514A(a)(1).  Not all conduct falls within the scope of Dodd-Frank’s whistleblower protection, and Plaintiff did not identify a specific provision or section of applicable law that may have been violated.  Nor did Plaintiff’s allegations mention the contents of his complaint to the SEC.  Finally, the court held that Plaintiff was not entitled to an inference that his SEC complaint included every allegedly improper action mentioned in his suit against the defendant, because he did not assert he had personal knowledge of any of those actions.  Thus, Plaintiff did not identify how he had engaged in activity protected under Dodd-Frank.

The court also held that Plaintiff had not pled any facts suggesting a causal connection between his termination and his complaint to the SEC.  Plaintiff did not allege that he communicated his concerns to anyone at the company, and it was undisputed that the SEC is obligated to maintain the confidentiality of all whistleblower reports.  Thus, Plaintiff did not plausibly plead facts sufficient to show how the company could have learned about his confidential SEC complaint and fired him because of it.

Implications

This decision is a helpful one for employers because it reaffirms that plaintiffs asserting Dodd-Frank whistleblower claims must plead factual allegations – and cannot rely upon inferences and speculative assertions – to satisfy their burden.

DOL Decision Confirms Extraterritorial Limits of SOX Whistleblower Provision

As we previously reported, the Department of Labor’s (DOL) Administrative Review Board has twice held that Sarbanes Oxley’s anti-retaliation provision does not apply extraterritorially.  See Hu v. PTC, Inc., ARB Case No. 2017-0068 (Sept. 18, 2019); Perez v. Citigroup, Inc., ARB Case No. 2017-0031 (Sept. 30, 2019).  An Administrative Law Judge (ALJ) of the DOL recently applied this precedent and dismissed a former in-house attorney’s whistleblower claims because he worked entirely outside of the United States.  Garvey v. Morgan Stanley, No. 2017-SOX-00030 (ALJ Feb. 13, 2020).

Background

Complainant Christopher Garvey worked entirely in Hong Kong for a foreign subsidiary of a U.S. company.  Garvey claimed that he was constructively discharged after he objected to certain conduct that he believed was in violation of the U.S. Foreign Corrupt Practices Act and other U.S. securities laws.  Garvey filed suit under SOX’s anti-retaliation provision (Section 806), and the company moved to dismiss the action on the grounds that the ARB’s recent decisions in Hu and Perez precluded extraterritorial claims under Section 806.

Ruling

The ALJ determined that Garvey’s claims were extraterritorial in nature and therefore were subject to dismissal under Hu and Perez.  Comparing the facts before him to those in Hu, the ALJ determined that Garvey was similarly situated to the Hu complainant – both were foreign-based employees of foreign subsidiaries of U.S. companies.  The ALJ explained that “the location of the employee’s permanent or principal worksite is the key factor to consider when deciding whether a claim is a domestic or extraterritorial application of Section 806,” and other factors “such as the employee’s U.S. citizenship” are “less critical, if not irrelevant” to determining whether Section 806 applies.  Because Garvey’s permanent or principal worksite was in Hong Kong, the ALJ determined that Section 806 could not apply to his claims.

Implications

In the wake of Hu and Perez, the Garvey decision confirms that SOX’s anti-retaliation provision does not apply extraterritorially.

SDNY: Directors Not Liable For Whistleblower Claims Under SOX

On December 9, 2019, the U.S. District Court for the Southern District of New York ruled that, as a matter of law, directors cannot be held liable under the anti-retaliation provisions of the Sarbanes-Oxley Act.  Zornoza v. Terraform Global Inc., No. 18-cv-11617.

Background

Plaintiff is the former President and CEO of the defendant companies which were owned and controlled by a third company (“Owner”) for the purpose of purchasing and operating its energy plants.  In 2015, Plaintiff allegedly became concerned that Owner was publicly overstating its liquidity.  Plaintiff alleged that he reported his alleged concerns to Owner’s CEO and CFO and certain board members.  Plaintiff alleged that, in response, he was removed from his position as president and CEO of the Companies, and replaced by an individual whom he claims diverted funds from the two companies to Owner in an attempt to mask its liquidity crisis.  Plaintiff filed suit against the CEO, CFO, the Companies and certain board members, alleging he was retaliated against in violation of Section 806 of SOX.

Ruling

The directors moved to dismiss the claims against them pursuant to Rule 12(b)(6), arguing they cannot be liable as directors.  The court dismissed the claims against the directors, concluding that Section 806 of SOX (Section 1514A(a)) does not provide for director liability.  Section 1514A(a) states that: “[n]o company…or any officer, employee, contractor, subcontractor, or agent of such company” may retaliate against an employee for reporting suspected violations of the securities laws.  Given that Congress had explicitly provided for director liability in other provisions, such as Section 7244(a)(1) (making it unlawful for “any director or executive officer of an issuer” to transact in securities during blackout periods) and Section 7242(a) (making it unlawful for “any officer or director. . . to take any action to fraudulently influence. . . any independent public or certified accountant . . .”), the court found its omission from Section 1514A(a) to be particularly significant.  Finding the plain language of SOX to be clear and unambiguous, the court declined to examine Congress’s intent in passing it, ruling that the directors could not be liable in their capacity as directors.

The court noted that in Wadler v. Bio-Rad Labs., Inc. (N.D. Cal. 2015) (which we blogged about here), a California court came to the opposite conclusion because it determined that the usage in Section 1514A(a) of the word “agent” was sufficiently ambiguous to include “directors” as well.  However, this court disagreed, noting that SOX had used “agents” and “directors” in Section 78u-3(c)(3)(A)(i) to denote separate categories of persons, thus precluding a broad definition of “agent” that could include “directors.”  The court drew additional support from agency law, noting that an individual director has no power to act on the corporation’s behalf, but instead directly controls the corporation as a member of its board.

Implications

Though there is now a division in district court authority as to whether directors can be held liable under Section 806, this decision provides useful and compelling reasoning upon which employers can be expected to rely.

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