DOL ARB Clarifies Broad Scope of Protected Conduct for SOX Whistleblowers in Sylvester v. Parexel International LLC

Image via Wikipedia

The DOL Administrative Review Board has issued a very significant en banc decision on the whistleblower provision of the Sarbanes-Oxley Act (SOX) that significantly strengthens the statute by clarifying the broad scope of protected conduct.  The ARB’s opinion in Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-039, 042 (May 25, 2011) represents a substantial departure from the extraordinarily narrow construction of SOX in the opinions issued by the ARB appointed by Secretary Chao.  Read in conjunction with the ARB’s recent Johnson v. Siemens Bldg. Techs. decision broadening the scope of SOX coverage and the recent Dodd-Frank amendments to SOX (exempting SOX whistleblower claims from mandatory arbitration, clarifying that SOX claims can be tried before a jury, broadening the scope of coverage, and increasing the statute of limitations), SOX is becoming a robust remedy for whistleblowers.  The primary effect of Sylvester will be a significant increase in the number of SOX retaliation claims that get past motions to dismiss and motions for summary judgment.  The ARB has now removed ridiculous hoops that SOX complainants were required to jump through, which hoops were plainly inconsistent with the plain meaning of the statute.  And the decision will enable OSHA to rule for more complainants during the investigative stage.  Hopefully, federal courts will accord Chevron deference to the decision.  The ARB held:

  1. Twombly/Iqbal heightened pleading standards do not apply to SOX claims initiated with OSHA.
  2. A complainant need only express a “reasonable belief” of a violation to engage in SOX-protected activity,
  3. The reasonable belief standard requires an examination of the reasonableness of a complainant’s beliefs, but not whether the complainant actually communicated the reasonableness of those beliefs to management or the authorities.
  4. Protected activity need not describe an actual violation of law.  A whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern and consistent with this line of authority, an employee’s whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer’s conduct constitutes a violation of one of the six enumerated categories of law under Section 806.
  5. The holding in Platone that an employee’s communication must “definitively and specifically” relate to the listed categories of fraud or securities violation under Section 806 “has evolved into an inappropriate test and is often applied too strictly.”  Instead, the focus should be on whether the employee reported conduct that he or she reasonablybelieves constituted a violation of federal law.
  6. SOX protected conduct is not limited to disclosures about shareholder fraud and instead includes disclosures about mail fraud, fraud by wire, radio, or television, and bank fraud.  When an entity engages in mail fraud, wire fraud, or any of the six enumerated categories of violations set forth in Section 806, it does not necessarily engage in immediate shareholder fraud. Instead, the violation may be one which, standing alone, is prohibited by law, and the violation may be merely one step in a process leading to shareholder fraud.  Additionally, a reasonable belief about a violation of “any rule or regulation of the Securities and Exchange Commission” could encompass a situation in which the violation, if committed, is completely devoid of any type of fraud.
  7. A SOX complainant need not establish the various elements of criminal fraud to prevail on a Section 806 complaint.  A complainant can have an objectively reasonable belief of a violation of the laws in Section 806, i.e., engage in protected activity under Section 806, even if the complainant fails to allege, prove, or approximate specific elements of fraud, which would be required under a fraud claim against the defrauder directly. In other words, a complainant can engage in protected activity under Section 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation.  The purposes of the whistleblower protection provision will be thwarted if a complainant must, to engage in protected activity, allege, prove, or approximate that the reported irregularity or misstatement satisfies securities law “materiality” standards, was done intentionally, was relied upon by shareholders, and that shareholders suffered a loss because of the irregularity.

There are two concurring opinions.  Judges Corchado and Royce opine that thePlatone “definitive and specific requirement” is incompatible with the plain meaning of the statute and therefore should be abandoned.  Judge Brown opines that (i) Rule 12(b)(6) does not apply to SOX complaints, but ALJs can use OALJ summary decision procedure (29 C.F.R. § 18.40) to test the sufficiency of the complainant’s evidence; (ii) the Platone “definitive and specific requirement” should not be applied to SOX but the complainant must establish a basis for concluding that the employer’s conduct of concerns relates to the laws listed under Section 806; (iii) violations of SOX need not relate to fraud against shareholders; and (iv) a SOX complainant alleging that he disclosed shareholder fraud need not prove the specific elements of fraud.

Related articles