First Circuit Narrows Whistleblower Protections Of Sarbanes-Oxley

• Published date: 19 August 2022
• Subject Matter: Corporate/Commercial Law, Employment and HR, Criminal Law, Compliance, Corporate and Company Law, Discrimination, Disability & Sexual Harassment, Securities, White Collar Crime, Anti-Corruption & Fraud, Shareholders
• Law Firm: Foley Hoag LLP
• Author: Mr Christopher E. Hart, Laura Gradel, Anthony Mirenda, John W.R. Murray and Daniel Zaleznik

On July 13, 2022, the United States Court of Appeals for the First Circuit ruled that the whistleblower protections contained in Section 806 of the Sarbanes-Oxley Act (SOX) do not apply to employees who report potential violations of the Foreign Corrupt Practices Act (FCPA). The ruling in Baker v. Smith & Wesson, Inc., 40 F.4th 43 (1st Cir. 2022) is the second recent decision narrowing the important whistleblower protections of the Act, coming on the heels of a recent Award in the 9th Circuit. While these decisions are significant and will likely generate further litigation as whistleblowers seek to avoid the impact, the practical effects for future whistleblower cases are likely to be limited as there may be workarounds. Regardless, we would not expect any change in the need for companies to maintain robust compliance programs that incentivize internal reporting by employees.

SOX Whistleblower Protections

Whistleblower protections are central to the suite of SOX oversight reforms, encouraging and protecting individual reports of potentially fraudulent conduct. SOX contains a number of whistleblower protections. For example, Section 301 of the Act sets out requirements for internal procedures employers must use to receive and process whistleblower complaints regarding accounting or auditing matters. Section 1107 criminalizes any retaliatory actions where a whistleblower has provided "truthful information" concerning the commission of a Federal offense to a law enforcement officer.

The most commonly invoked whistleblower protections in SOX are those in Section 806, which protects whistleblowers who report certain kinds of fraudulent activity internally from retaliation by their employer. Section 806, codified as 18 U.S.C. ' 1514A, grants whistleblowers, under certain conditions, a civil cause of action to recover compensatory and other damages resulting from retaliation. Section 806 provides these protections as long as the reported activity falls within one of three statutory categories: the report must (1) concern a rule or regulation of the U.S. Securities & Exchange Commission (SEC); (2) concern a violation of mail fraud, wire fraud, bank fraud, or securities fraud statutes, or (3) concern a provision of Federal law relating to fraud against shareholders. Such protections are intended to work hand in hand with other provisions of SOX which require organizations to build out internal procedures for compliance and incentivize executive leadership to...