Before The Whistle Blows: Understanding And Addressing The Expanding Scope Of Whistleblower Protections Under Sarbanes-Oxley And Dodd-Frank

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") was enacted following the accounting scandals of the early 2000s involving Enron, WorldCom and other public companies. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") in 2010 following the global credit crisis that began a few years earlier. Both statutes offer protections for employees who face retaliation for "blowing the whistle" on corporate misconduct, and Dodd-Frank also provides enhanced monetary incentives to the employees who do so. Given the SEC's recent and often-stated commitment to strict enforcement of the securities laws,1 coupled with the fact that the SEC has received over 6,000 whistleblower complaints in the past two years (and has made six awards since inception of its whistleblower reward program in 2011),2 whistleblowing activity now is a fact of corporate life that is likely to become even more prevalent as awareness spreads of the Dodd-Frank whistleblower reward program.

The task of formulating a plan for responding to whistleblower activity has been complicated by the fact that Sarbanes-Oxley and Dodd-Frank, complex in and of themselves, address similar conduct. Not surprisingly, numerous questions have arisen regarding the proper interpretation of and interaction between various provisions of both Acts. Receiving particular attention recently from courts and commentators are the Sarbanes-Oxley and Dodd-Frank provisions prohibiting retaliation against those who report (i.e., blow the whistle on) suspected misconduct (the "Anti-Retaliation Provisions"). Taken together, these decisions significantly expand the universe of companies and types of conduct covered by the Anti-Retaliation Provisions, which in turn has significant implications for corporations and their in-house and outside legal and compliance advisors. As discussed below:

Pursuant to an April 2014 Supreme Court decision, private company employees who report misconduct involving a public company client or vendor now clearly are subject to the Sarbanes-Oxley Anti-Retaliation Provision. These private companies, which include professional service providers such as law and accounting firms, need to be prepared to address Sarbanes-Oxley whistleblowing activity by their employees. A split has developed in the lower courts as to whether the Sarbanes-Oxley Anti-Retaliation Provision only applies to reports of fraud on shareholders, or covers a wider range of fraudulent activity. Obviously, the prevalence of whistleblower complaints could significantly increase if this Anti-Retaliation Provision covers reports of more than just shareholder fraud. Likewise, there is a split among federal courts as to whether the Dodd-Frank Anti-Retaliation Provision applies where a whistleblower reports internally, but not to the SEC or other government agency. A rule requiring employees to report out in order to ensure anti-retaliation protection has significant implications for the effectiveness of any whistleblower protections a company puts in place. The Anti-Retaliation Provisions rarely apply to conduct occurring abroad, although the issue remains unsettled. Companies with employees in the U.S. and abroad need to consider how to deal with the possibility that employees may be treated differently for anti-retaliation purposes depending on where they are located, and whether company policy should permit that result. In light of the foregoing, we suggest practical steps that companies and their advisors can consider in order to be prepared to effectively address whistleblowing activity.

BACKGROUND

Sarbanes-Oxley's Anti-Retaliation Provision prohibits: (i) public companies (and their officers, employees, contractors, subcontractors and agents) (ii) from retaliating "against an employee . . . because of any lawful act done by the employee" to provide information or assistance, (iii) "which the employee reasonably believes constitutes a violation of [18 U.S.C. §] 1341, 1343, 1344 or 1348,3 any rule or regulation of the [SEC], or any provision of Federal law relating to fraud against shareholders," (iv) when the information or assistance is provided to a federal regulatory or law enforcement agency, any member or committee of Congress or an employment supervisor. See 18 U.S.C. § 1514A(a). These protections were intended to combat "a culture, supported by law, that discourages employees from reporting fraudulent behavior." See The Corporate and Criminal Fraud Accountability Act of 2002, S. Rep. No. 107-146, at 4 (May 6, 2002). In the event an employee pursues a claim for retaliation, Sarbanes-Oxley requires he or she do so within 180 days of the violation by filing a complaint with the Secretary of Labor. Only if the Labor Secretary fails to issue a final decision within 180 days after commencement of the proceeding may the employee sue in federal court. Typical civil damages are available to a prevailing employee.

Like Sarbanes-Oxley, Dodd-Frank provides certain protections to whistleblowers, defined as any person who provides "information relating to a violation of the securities law to the [SEC]." 15 U.S.C. § 78u-6(a)(6). It prohibits retaliation by employers (whether public or private) "because of any lawful act done by the whistleblower—(i) in providing information to the [SEC] in accordance with this section; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the [SEC] based upon or related to such information; or (iii) in making disclosures that are required or protected under [Sarbanes-Oxley], this chapter . . . and any other law, rule or regulation subject to the jurisdiction of the [SEC]." 15 U.S.C. § 78u-6(h).

Dodd-Frank also (unlike Sarbanes-Oxley) permits employees claiming retaliation to commence actions in federal court without first seeking administrative relief, provides more time to do so (six years from the violation or three years from discovery of the violation, so long as such claim based on discovery is not asserted more than ten years from the violation itself) and permits certain enhanced recoveries, including two times back pay with interest and attorney and expert fees. Dodd-Frank also created a bounty program, backed by a $450 million investor protection fund, to incentivize corporate whistleblowing. The relevant provision provides that in any action by the SEC resulting in monetary sanctions exceeding $1 million, the SEC "shall pay an award," in an amount between 10-30% of the monetary sanctions collected, to whistleblowers who "voluntarily provided original information to the [SEC] that led to the successful enforcement" of the action. 15 U.S.C. § 78u-6(b).

EVOLVING SCOPE ISSUES

1. Sarbanes-Oxley's Anti-Retaliation Provision Covers Employees Of Private Companies Working For A Public Company

   There is no dispute that employees of public companies are protected by the statute's Anti-Retaliation Provision. Due to ambiguity in the statutory text, however, courts had been divided as to whether it applies to private company employees engaged by a public company. Sarbanes-Oxley's Anti-Retaliation Provision states that "[n]o [public] company . . . or any officer, employee, contractor, subcontractor, or agent of [that public] company . . . may [retaliate] against an employee." 18 U.S.C. § 1514A. Until recently, it was not clear whether "an employee" referred only to the employees of the public company, or if it also protected employees of the "officer[s], employee[s], contractor[s], subcontractor[s] or agent[s]" of that public company.

   The Supreme Court resolved this issue in Lawson v. FMR LLC, 134 S. Ct. 1158 (2014), finding that Sarbanes-Oxley's Anti-Retaliation Provision "shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors." Id. at 1161.4 Lawson involved claims of retaliation by two former employees of private companies that managed and advised publicly-held mutual funds. The Lawson defendants argued that private company employees were not covered by Sarbanes-Oxley because the phrase "an employee" should be interpreted as "an employee of a public company." Id. at 1164-65. The Court rejected this argument, noting that "Congress installed whistleblower...