The Sarbanes-Oxley Act of 2002: Expanded Whistleblower Protection
November 2002
Paul Siegel discusses the employment-related
provisions, procedures, and implications of the recently enacted "whistleblower"
act, which became law July 30.
by Paul
J. Siegel, Esq.
Jackson Lewis
LLP
The Sarbanes-Oxley Act of 2002 was signed into law by President George W.
Bush on July 30, 2002. While the Act, which is applicable only to publicly traded
companies, focuses mainly on securities law reforms, it contains certain employment-related
provisions and implications which are summarized below.
Expanded Whistleblower Protection
The Act significantly expands protection under federal law for employees
who report certain allegations of corporate misconduct. Specifically, Section
1514A of the Act, entitled “Civil Action To Protect Against Retaliation in Fraud
Cases,” provides in relevant part as follows.
- WHISTLEBLOWER PROTECTION FOR EMPLOYEES
OF PUBLICLY TRADED COMPANIES—No company with a class of securities
registered under section 12 of the Securities Exchange Act of 1934
(15 U.S.C. 781), or that is required to file reports under section
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d)),
or any officer, employee, contractor, subcontractor, or agent of
such company, may discharge, demote, suspend, threaten, harass,
or in any other manner discriminate against an employee in the terms
and conditions of employment because of any lawful act done by the
employee—
- to provide information, cause information to be provided,
or otherwise assist in an investigation regarding any conduct
which the employee reasonably believes constitutes a violation
of section 1341, 1343, 1344, or 13481,
any rule or regulation of the Securities and Exchange Commission,
or any provision of Federal law relating to fraud against shareholders,
when the information or assistance is provided to or the investigation
is conducted by—
- a Federal regulatory or law enforcement agency;
- any Member of Congress or any committee of Congress;
or
- a person with supervisory authority over the employee
(or such other person working for the employer who has the
authority to investigate, discovery, or terminate misconduct);
or
- to file, cause to be filed, testify, participate in, or
otherwise assist in a proceeding filed or about to be filed
(with any knowledge of the employer) relating to an alleged
violation of section 1341, 1343, 1344, or 13481,
any rule or regulation of the Securities and Exchange Commission,
or any provision of Federal law relating to fraud against shareholders.”
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Accordingly, employees who engage in either of the protected activities set
forth above are protected from adverse employment actions because of such activity.
Requirement To Establish Reporting Procedures
The Act requires each public company’s Board of Directors’ Audit Committee
to establish procedures to permit employees to file confidential and anonymous
internal complaints concerning “questionable accounting or auditing matters.”
This may require modifying policies to provide for such procedures.
Filing a Claim and Claim Processing Procedure
An employee who is subject to a prohibited adverse action in violation of
the statute must file a complaint with the United States Department of Labor
(the “DOL”) within 90 days after the date of the alleged unlawful action. The
secretary of labor will then conduct an investigation and issue an order. If
the secretary finds “reasonable cause” to believe a violation occurred, the
secretary will issue a preliminary order mandating relief. Either party may
then appeal the order. If an order is appealed, the DOL will conduct an expeditious
hearing and issue a final order within 120 days of the hearing. This final order
can be appealed to the applicable U.S. Court of Appeals within 60 days of its
issuance. However, if the secretary does not issue a final decision within 180
days of the filing of the complaint, and this failure is not due to any bad
faith of the employee, the employee may commence an action for de novo review
in U.S. District Court.
Burdens of Proof
In any proceeding, it is the employee’s burden to prove that his or her protected
activity was a “contributing factor” for the adverse employment action. If the
employee meets this burden, an employer must then demonstrate by “clear and
convincing evidence” that it would have taken the same unfavorable personnel
action in the absence of the protected conduct.
Potential Remedies and Penalties
Violators of the Act are subject to both civil remedies and criminal penalties.
Civil remedies include reinstatement, back pay and interest, and “special damages,”
such as litigation costs and attorney’s fees. Neither punitive damages nor a
jury trial appear to be available under the statute. Criminal penalties, including
fines and imprisonment of up to 10 years, also may be issued against individuals
who knowingly take any “action harmful” against a person who has provided truthful
information relating to the commission (or possible commission) of a violation
of the Act to a law enforcement officer. “Actions harmful” include any interference
with such individual’s “lawful employment or livelihood.”
Miscellaneous Procedures
Employees most likely cannot waive their right to a DOL proceeding by executing
a mandatory arbitration agreement. However, the language of the statute may
permit waiver of federal court lawsuits in favor of DOL proceedings or arbitration.
The new federal law does not preempt stronger state whistleblowing provisions.
Any privately reached settlement of an administrative claim will require DOL
approval.
Attorney Professional Responsibility
By August 29, 2003, the SEC will issue rules of professional responsibility
for attorneys who appear and practice before the SEC. These rules are to include
a provision requiring attorneys, including in-house attorneys, to report to
the company’s chief legal counsel or CEO evidence of both material violations
of securities law and breaches of fiduciary duty. If the company’s chief legal
counsel or CEO does not appropriately respond, the attorney must provide such
evidence to the audit committee or the company’s board of directors.
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