By Daniel P. Westman and Jeremy B. Merkelson, Morrison Foerster
1. Understand the Employee-Friendly Legal Landscape under Section 806
The Lawson ruling aligned federal courts with the employee-friendly interpretations of the SOX whistleblower provisions previously made by the U.S. Department of Labor's Administrative Review Board (ARB). The Lawson decision reaches the same result as the ARB's decision in Spinner v. David Landau & Assoc., LLC, No. 10-111, ALJ No. 2010-SOX-029 (May 31, 2012), holding that Section 806 affords whistleblower protection to employees of privately held contractors that render services to public companies. Even before Lawson, Section 806 created an uneven playing field by requiring that employees prove their cases by a preponderance of the evidence, while employers must prove their cases by the higher standard of clear and convincing evidence. In addition, a complainant must have both a subjective, good faith belief and an objectively reasonable belief that the complained-of conduct violates one of the listed categories of law. Those categories include not only shareholder fraud, but also mail fraud, wire fraud, and bank fraud. In Spinner, the ARB has held that the objective "reasonableness" of a complainant's belief is typically determined "based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee." However, the complainant need not show that the conduct complained of constituted an actual violation of law. Thus, pursuant to this standard, an employee's whistleblower activity is protected where it is based on a reasonable, but mistaken, belief that a violation of the relevant law has occurred.
2. Become Familiar with the Dodd-Frank Act Amendments to SOX
The Dodd-Frank Act of 2010 amended the SOX whistleblower provisions in several employee-friendly ways. Sections 922(b) and (c) lengthen the statutory filing period for SOX retaliation complaints from 90 to 180 days, give parties a right to a jury trial in district court actions, exclude SOX whistleblower claims from the reach of pre-dispute arbitration agreements, and extend protection from retaliation to employees of nationally recognized statistical rating organizations. In addition, Section 929A expands the coverage of SOX 806 to include subsidiary entities of publicly traded corporations.
3. Beware of Reinstatement
Unlike most federal and state employment legislation, the preferred remedy under SOX is immediate reinstatement of employment. Reinstatement may be ordered after an administrative investigation by the federal Occupational Safety and Health Administration (OSHA), and before a full hearing on the merits before an Administrative Law Judge from the U.S. Department of Labor. The standard for overturning an OSHA reinstatement order is difficult to satisfy.
4. Revise Company Policies
Privately owned companies that have contracts or subcontracts with publicly traded companies should consider revising any policies against retaliation to include protection for employees who raise concerns about shareholder fraud at the publicly traded companies with which they do business. An up-to-date written policy may help to deter whistleblower claims.
5. Train Management
Front-line managers often are blind-sided by legal developments. Human resources or legal personnel at privately owned businesses would be wise to train management about the Lawson ruling to ensure that negative personnel actions are not based on retaliation for raising concerns about fraud at publicly traded companies. Managers also need to be trained about the "context matters" standard for retaliation set forth by the U.S. Supreme Court in employment discrimination cases. See Burlington Northern & Santa Fe Railway v. White, 548 U.S. 53, 126 S. Ct. 2405, 165 L. Ed. 2d 34 (2006). Under that standard, the measure of retaliation is whether the "employer's challenged action would have been material to a reasonable employee," and likely would have "dissuaded a reasonable worker from making or supporting a charge of discrimination." Managers can be surprised that adverse employment action short of actual discipline, let alone termination, may rise to the level of retaliation.
6. Foster a Culture of Compliance
The best compliance program on paper is undermined when employees perceive that corporate action is inconsistent with corporate policy. Companies should ask themselves how they think their employees would answer questions such as the following (or to conduct an employee survey along the same lines):
- Are you aware of the company's policy against retaliation? Do you believe that the company's executive management wishes all of its employees to comply fully with the policy against retaliation? Are you aware of the mechanisms the company has in place for employees to raise any concerns about violations of law or company policy? Do you believe that the company takes seriously concerns raised by employees about compliance with the policy against retaliation? Do you believe that employees may raise concerns about violations of company policy or law without fear of retaliation?
7. Weave Compliance into the Fabric of Corporate Life
While appropriate compliance mechanisms will vary depending on the nature of each company's business, size, geographic locations, and other factors, every company has regular practices that touch their employees' lives. Policies against retaliation can be mentioned in practices such as the following:
- New hire orientation, including training (for managers and non-managers);
- Distribution of employment agreements (e.g. confidentiality agreements) and employment manuals;
- Performance evaluations, including awarding bonuses, incentive compensation and equity;
- Annual or other regular refresher training (for managers and non-managers);
- Messages from executive management ("setting the tone from the top");
- Postings on internal websites; and
- Distribution of annual reports to shareholders.
8. Persuade Employees that Retaliation is Not Tolerated
Well-crafted policies about compliance may be skeptically received unless employees perceive that they may safely raise concerns about compliance without suffering retribution. The tone of dealing with employee concerns about compliance may be equally if not more important than the words on paper. Employees may judge their employers' commitment to compliance based on the following:
- Is there a specific person (such as a Compliance Officer) or department that is responsible for compliance, and is that person viewed as being effective? This is important because the Federal Sentencing Guidelines provide that the existence and adequacy of a corporation's compliance program is a factor to be considered in reaching a proper decision as to the proper treatment of a corporate target found guilty of wrongdoing. See United States Sentencing Commission, GUIDELINES MANUAL, §8B2.1(b)(2)(C) (Nov. 2007) ("Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program."). Are there multiple channels for employees to report their compliance concerns? (E.g., ombudsman's office; telephonic hotline; web-based hotline.) What happens to employees who raise concerns about compliance? (E.g., are they thanked for raising their concerns, commended in their performance evaluations, or do they disappear from the company?) Does the company incentivize employees by providing recognition or rewards to those who immediately report instances of fraud or misconduct inside the company?
9. Examine Hotline Procedures
Companies should consider implementing anonymous reporting channels, or "Hotlines," available to employees for reporting concerns under the anti-retaliation policy. While often viewed skeptically prior to SOX, anonymous channels have become more accepted since 2002 because public companies have been required to implement an anonymous channel for their employees to report directly to their Audit Committees.
10. Timely Feedback
The best-intentioned company that conducts an immediate and thorough investigation of an employee's concerns may still lose credence if the employee never hears back after raising the concern.
Extra Tip 11. Regularly Reassess
The legal and business climates can change quickly, and businesses need to adapt to such changes. Companies should regularly re-examine Hotline reports and other sources in developing and updating their compliance programs. Regular compliance audits and risk assessments should be conducted to in areas where risks arise more frequently. Since 2002, publicly traded companies have realized that receiving and investigating whistleblower concerns is the price of having access to the public markets. Now, private companies need to understand that accommodating whistleblower concerns is the price of doing business with public companies. The oft-repeated advice remains valid today: Don't shoot the messenger who carries bad news.
