I’ll be the first to admit that the words “Sarbanes-Oxley Act” are likely to induce a big collective yawn from many of you out there. Even the acronym “SOX” doesn’t liven things up. (Then there are people, like Doug Cornelius at the Compliance Building blog who eat this stuff up.)
But here’s what you need to know as an employer: Terminated employees can bring a whistleblowing claim under SOX without using the words “fraud” but just by complaining about what they perceive to be as a violation of federal law. Indeed, the caselaw on these claims is starting to mirror the pattern of retaliation claims — and we all know how notoriously difficult it is to defend against those types of claims.
A relative new case out of the federal court in Connecticut illustrates this issue. In Barker v. UBS AG (download here), the employer’s motion for summary judgment was denied on a SOX whistleblower claim.
What does a terminated employee (who, the employer contends, was terminated during a reduction in force) have to show to get her case to trial? Initially, to establish a prima facie case, the plaintiff must demonstrate by a preponderance of the evidence that: (1) she engaged in protected activity; (2) the employer knew of the protected activity; (3) she suffered an unfavorable personnel action; and (4) circumstances exist to suggest that the protected activity was a contributing factor to the unfavorable action.
If the plaintiff meets her burden, the employer can then avoid liability if it can prove by clear and convincing evidence [a much higher standard of proof] that it would have taken the same personnel action in the absence of the protected activity.
And what is “protected activity”? This is where things differ slightly from retaliation claims. Here, as the court explains it. the employee must she “had both a subjective belief and an objectively reasonable belief that the conduct [s]he complained of constituted a violation of relevant law” and the employee’s communications “must definitively and specifically relate to [one] of the listed categories of fraud or securities violations” in SOX.
Importantly, the court said, the employee doesn’t have to know of actual fraud or use the words “fraud” in her complaint. According to the court, a jury could conclude that the employee had a “subjectively reasonable belief that [the employer] had violated the law by reporting inaccurate information to its shareholders and adequately conveyed those concerns to various members of management.”
It does not matter, as the employer had argued, that the employee should have known that the discrepancies she discovered were not material to the shareholders. The employee must just have an objectively reasonable belief that the conduct she complained of was a violation of federal law (even if she is ultimately wrong), according to the court. Thus, an employee’s education level and training may be considered in that determination.
Ultimately, the court concluded that there was enough evidence to send the case to a jury for a final determination.
For employers, the case raises some interesting points including worrying about employees who, because of inexperience or lack of training, complain of a violation of federal law that isn’t actually such a violation. Those employees may still be entitled to protection under SOX given the court’s findings above.
As employers conduct risk assessment on reductions in force, employers should not just worry about the typical protected categories (race, gender, disability, age, etc.) but also retaliation and SOX claims as well.
SOX may be new, but it’s growing up quickly. Time to pull your company’s SOX compliance up.