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The Scope Of Protected Activity Under SOX

Friday, Aug 10, 2007 --- Section 806 of the Sarbanes-Oxley Act, 18 U.S.C §1514A, creates a civil cause of action to protect “whistleblowing” employeesagainst retaliation for reporting securities law violations or fraud against theshareholders of a public corporation.

The Department of Labor’s interpretive regulations state that “[a]determination that a violation has occurred may only be made if thecomplainant had demonstrated that protected behavior or conduct was acontributing factor in the unfavorable personnel action alleged in thecomplaint.”

Thus, to succeed under § 806, a complainant must first establish that he hasengaged in protected activity.

One unsettled question about the scope of protected activity is whether itshould include conduct that is already within the scope of an employee’snormal job duties.

Although such persons may, strictly speaking, “provide information, causeinformation to be provided, or otherwise assist in an investigation regardingany conduct which the employee reasonably believes constitutes” fraud, asthe Act requires, there is a certain interpretive logic to the notion thatemployees should never automatically meet the “protected activity”requirement by virtue of doing their jobs.

Instead, protected whistleblowing should be the act of going “above andbeyond,” of sticking one’s neck out for the good of the shareholders.Examined another way, because it is counterintuitive that an employer woulddischarge an employee for competently performing the very duties andresponsibilities the employee was hired to perform—for doing his job, ratherthan not doing his job—it makes sense that Congress did not intend thisspecial whistleblower cause of action to extend to employees who areessentially being paid to be whistleblowers.

Some decisions have expressly held, and others have at least suggested,that complaints that occur within an employee’s normal job duties do notconstitute protected activity. Although some of this case law involvedwhistleblower provisions of federal statutes other than SOX, the sameprinciple has been expressly adopted by at least one Administrative LawJudge in a SOX case.

In Grant v. Dominion East Ohio Gas, 2004-SOX-63, 2005 DOLSOX LEXIS79 (ALJ March 10, 2005), the complainant, an “engineering technician” for an

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energy utilities provider, alleged that he had been suspended by hisemployer for questioning his supervisors about “accounting irregularities,”namely, whether certain accounting entries and billing summaries wereaccurate.

The company countered that he had been suspended for violating companypolicy concerning employee conduct.

The complaint was dismissed because the utility was not a publicly tradedcompany covered by SOX. Nevertheless, the Administrative Law Judgeproceeded to rule on the merits of the claims as well, finding, among otherthings that Grant had not engaged in any protected activity, primarilybecause none of his complaints raised the specter or even hinted at thepossibility of fraud on the shareholders.

Significantly, however, the Administrative Law Judge also noted that becausepart of the claimant’s duties as an engineering technician was to monitorproject accounts for errors, complaints in this area arose within the context ofhis job and were not protected activity; otherwise, “any time [Claimant] raiseda question about the company’s accounting programs or procedures or aboutanything else regarding the everyday functioning of the company, he wouldbe engaging in protected activity.” Id. at *112-13, *129 n.46.

In Getman v. Southwest Securities, Inc., ARB No. 04 059, 2005 DOLSOXLEXIS 18 (ARB July 29, 2005), the Administrative Review Board overturnedan Administrative Law Judge’s decision in favor of a stock analyst whoclaimed that her manager had pressed her to make a more favorable ratingon a stock than she had given it, and terminated her employment thereafter.

As part of the normal course of her duties, the analysts ratings weresubjected to examination by a “review committee,” which asked questions,requested further research, suggested additions, and tested the analyst’sknowledge and conclusions.

The Administrative Review Board held that “[i]n the context of a reviewcommittee meeting..., where disagreement over a rating may be a normalpart of the process, the analyst must communicate a concern that theemployer’s conduct constitutes a violation in order to have whistleblowerprotection.” Id. at *18. (emphasis added).

Thus, Getman suggests a conclusion similar to that in Grant, that employeeswho complain or object in the normal course of their job duties are notengaged in protected activity.

Compelling support for the notion that complaints within the context of anemployee’s normal job duties should not be considered protected activity canalso be found in cases decided under statutes other than SOX.

In Sassé v. Dep’t of Labor, 409 F.3d 773, 777 (6th Cir. 2005), the plaintiffwas an Assistant United States Attorney (“AUSA”) whose job was to

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investigate and prosecute environmental crimes under the Clean Air Act,Solid Waste Disposal Act, and Water Pollution Control Act, each of whichcontain whistleblower protections that prohibit employers from dischargingemployees for engaging in protected activity, i.e., reporting environmentalviolations or instituting proceedings resulting from the administration orenforcement of the statutes.

After a successful indictment against a particular polluter, Sassé determinedthat NASA might be engaged in illegal dumping of hazardous waste at alandfill adjacent to the site at issue in the indictment, and proceeded toinvestigate.

Sassé claimed that the Department of Justice subsequently retaliated againsthim for these prosecutions and investigations by giving him less favorableperformance ratings, a heavier case load, and a “drunken secretary,” anddenying him training and office supplies.

Sassé filed a claim with the Department of Labor, but an Administrative LawJudge dismissed the claim as pled, finding that “because Sassé had a dutyas an AUSA to prosecute and investigate environmental crimes, theseactivities were not protected by the whistleblower provisions of the pertinentstatutes.” Id. at 778.

After an unsuccessful appeal to the Administrative Review Board, Sasséappealed to the Sixth Circuit, which held that he had not engaged inprotected activity under the whistleblower provisions of the variousenvironmental statutes because his activity was within the scope of hisnormal job duties.

The court relied on precedent under the Whistleblower Protection Act(“WPA”), in which the Federal Circuit had held that the WPA “‘is intended toprotect government employees who risk their own personal job security forthe advancement of the public good.’” Id. at 779-80 (quoting Willis v. Dep’t ofAgriculture, 141 F.3d 1139, 1145 (Fed. Cir. 1998)).

Because Sassé had not “risked his personal job security by performing theduties required of him” as an AUSA employed to investigate and prosecuteenvironmental crime, he could not use such conduct as the basis for a claimthat he had been engaged in protected activity. See also Huffman v. Office ofPersonnel Mgmt, 263 F.3d 1341, 1352 (Fed. Cir. 2001) (“an employee whomakes disclosures as part of his normal duties cannot claim the protection ofthe WPA”).

One Administrative Law Judge has expressly adopted the Sixth Circuit’sposition. In Robinson v. Morgan Stanley/Discover Financial Servs., No.2005-SOX-44 (March 26, 2007), the claimant was a senior internal auditorresponsible for identifying significant financial and securities issues related toSOX. In the course of one of her audits, she submitted a report to auditmanagement regarding, among other things, potentially fraudulent conductwith respect to a bankruptcy reporting problem.

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Dissatisfied with management’s lack of responsiveness in taking correctiveaction, she proceeded to draft a memorandum to the President and CFO ofDiscover, describing the problems and management’s failure to takecorrective action. She was terminated several months later.

Applying Sassé, the Administrative Law Judge found that, for someone inclaimant’s position, one of the components of establishing protected activityis showing that the report or complaint involved actions “outside thecomplainant’s assigned duties.” Slip. Op. at 116.

The Administrative Law Judge proceeded to hold that the presentation of herreport to audit management was not protected activity because it came withinthe scope of her normal job duties. “She bore no employment risk,” theJudge noted, “in reporting the deficiency as an auditor.” Id. at 117. Byelevating her complaint to the President / CFO, however, the claimant “wentwell beyond her assigned duties,” and thus, was engaged in protectedactivity, but only to that extent. Id. at 118.

There is, however, some contrary precedent. In a recent case, anotherAdministrative Law Judge found that “activities that fall within one’s job dutiesmay constitute protected activity if other requisite factors are met”—forexample, having an objectively and subjectively reasonable belief that aviolation has been or is being committed, and reporting it to the correctpersons or groups specified in the Act. Deremer v. Gulfmark Offshore, Inc.,2006-SOX-2, 2007 DOLSOX LEXIS 46, *93 (ALJ June 29, 2007).

Observing that the passage of SOX itself was largely the result of a case ofwhistleblowing that was within the scope of the employee’s normalduties—the accountant Sherron Watkins and her internal complaintsregarding, and ultimately testimony about, “creative” accounting proceduresat Enron—the Administrative Law Judge reasoned that to exclude conductwithin the scope of an employee’s normal job functions from the definition of“protected activity” would be “contrary to Congressional intent.” Id. at *94,114.

Nevertheless, there is a logical appeal to the distinction drawn by theAdministrative Law Judge in Robinson between normal reporting duties andgoing “above and beyond” to bring a potential violation to the attention ofthose to whom one does not normally report.

Further, even if those working directly in accounting or finance, areasarguably most fertile for fraud against the shareholders, were to be carvedout of the exception, there is support for the argument that certain othertypes of employees who work in an oversight role—internal auditors,compliance officers and certain types of in-house attorneys—do not risk theirpersonal job security by performing the duties required of them, but rather,are specifically employed to, among other things, prevent a company fromviolating the law by engaging in fraud on the shareholders.

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Such employees arguably should not be viewed as engaged in protectedactivity even when they report a reasonable belief that the company isengaged in fraud on the shareholders, at least absent special circumstancesin which they have gone above and beyond the normal scope of their dutiesin the interest of shareholders and the public good.

--By John F. Fullerton III, Sullivan & Cromwell LLP

John Fullerton joined Sullivan & Cromwell in 2005 as Special Counsel in theLitigation Group, where he concentrates his practice on labor andemployment law.

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