Sarbox contains whistleblowing provisions which protect employees who speak out against corporate improprieties.
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Anti-Retaliation Law:
Sarbox Whistleblowers
By Christopher W. Olmsted
What is Sarbox?
The Sarbanes-Oxley Act of 2002, sometimes called Sarbox or SOX, is a federal law enacted in 2002, as a reaction to a number of major corporate and accounting scandals including Enron and WorldCom. Sarbox set new or enhanced standards for public company boards, management and their public accounting firms. It does not apply to privately held companies. The act contains a number of provisions ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.
How Does Sarbox Affect Human
Resources and Employment Law?
Sarbox contains whistleblowing provisions which protect employees who speak out against corporate improprieties.
Section 1514A(a)(1) of Title 18 prohibits employers of publicly-traded companies from “discriminat[ing] against an employee in the terms and conditions of employment” for “provid[ing] information . . . regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.”
The U.S. Department of Labor promulgated regulations relating to this Sarbox section. These regulations set forth four required elements of a prima facie case under § 1514A: (a) “[t]he employee engaged in a protected activity or conduct”; (b) “[t]he named person knew or suspected, actually or constructively, that the employee engaged in the protected activity”; (c) “[t]he employee suffered an unfavorable personnel action”; and (d) “[t]he circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.” 29 C.F.R. § 1980.104(b)(1)(i)-(iv).
Have there been any court cases
regarding Sarbox Whistleblowing?
In August 2009, the Ninth Circuit Court of Appeals reviewed its first Sarbox whistleblower case. The case is titled Van Asdale v. International Game Technology.
The case involved two in house attorneys employed by International Game Technology (IGT) a Nevada-based company specializing in computerized gaming machines and similar products. IGT merged with another gaming company who purported to hold the patent rights to a special Monte Carlo style slot machine. The gist of the lawsuit is that the Van Asdales contended they were terminated for reporting possible shareholder fraud in connection with that merger. They claimed that the principals of the acquired company withheld information indicating that the company’s rights were invalid. Soon after, IGT terminated the attorneys. The attorneys sued for retaliation under Sarbox. The district court ruled in favor of the company in a summary judgment motion, but the Ninth Circuit reversed the ruling and reinstated the case, finding sufficient evidentiary support for a whistleblowing case.
What does it take to become a whistleblower?
The employee must engage in protected activity and the employer must take retaliatory action.
The Ninth Circuit court determined that the in house attorneys were protected whistleblowers, even though they did not directly refer to Sarbox when they raised their concerns to management. “An employee need not cite a code section he believes was violated to trigger the protections of Sarbox,” noted the court. Their statements to management, wrote the court, “reported conduct that definitively and specifically related to shareholder fraud. That is all that § 1514A requires.”
The court further noted that the whistleblowing employees need not actually be correct about the fraud. Rather, they only need to have a reasonable belief that a fraud had taken place. “To encourage disclosure,” reasoned the court, “Congress chose statutory language which ensures that ‘an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six numerated categories is protected.’” The court determined that in this case, given the central importance of the patented technology in the merger, the attorneys were reasonable in believing that the owners of the acquired company intentionally withheld the information.
As to retaliation, the court found that the company terminated both attorneys shortly after they raised the fraud concerns. Moreover, the attorneys had recently been promoted and been given high marks on their performance reviews. These factors led the court to rule that the employer might have been motivated by retaliation (though it would be up to a jury to decide for sure).
Practical Tips
Sarbox covers publically traded companies, and so these employers must take added precautions to avoid retaliation against whistleblowers.
Avoiding Sarbox whistleblowing claims can be challenging, particularly given that employees need not specifically mention Sarbox when complaining about conduct. Therefore, it may not be apparent, when taking adverse action against an employee, that he or she has registered a relevant complaint.
Ideally, covered companies should promulgate a written policy specifically addressing Sarbox complaints, providing guidance and protocols to employees who wish to complain. Managers and supervisors should be trained to identify potential complaints and ensure that they are forwarded to the proper channels to assure prompt attention and investigation. Any adverse action proposed to be taken against whistleblowers should be carefully scrutinized.
Download entire September 2009 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2009 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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