THE WHISTLEBLOWER PROVISION OF SARBANES-OXLEY

THE WHISTLEBLOWER PROVISION OF

SARBANES-OXLEY: DISCERNING THE SCOPE

OF “PROTECTED ACTIVITY”

By: Robert P. Riordan & Leslie E. Wood, Alston & Bird LLP

I. INTRODUCTION

In response to Enron and numerous other corporate business

scandals, Congress enacted the Sarbanes-Oxley Act of 2002 (“SOX”)

combat fraudulent accounting practices and other conduct defrauding

shareholders. The stated purpose of SOX is “to protect investors by

improving the accuracy and reliability of corporate disclosures made

pursuant to the securities laws,” and SOX mandates corporate

responsibility, public disclosure, and improved methods of auditing and

financial reporting to effectuate this goal.

This article focuses on section 806 of SOX, the “whistleblower

provision,” which protects employees of publicly traded companies from

retaliation for bringing certain perceived corporate wrongdoings to light,

thereby encouraging disclosure of such information and serving SOX’s

overarching goal of protecting shareholder assets. Specifically, this

article attempts to analyze the trends that are emerging as courts and

administrative tribunals consider what types of employee actions

constitute activities protected under section 806 and seeks to discern the

boundaries of what constitutes protected activity under current law. In

performing this exercise, the ultimate goal is to arm employers with the

information necessary to avoid potential whistleblower claims under

Sarbanes-Oxley in the future, and to discourage unfounded claims that

can cause substantial harm despite the absence of legal merit.

Robert P. Riordan is a partner at the Atlanta, Georgia, based law firm of Alston & Bird LLP and

the leader of its Labor & Employment Practice Group. Leslie E. Wood is an associate in the group

and joined the firm recently following a clerkship in the United States District Court for the Western

District of Virginia.

1. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

2. Id. at 745.

96 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

II. SECTION 806—NUTS AND BOLTS

Section 806 prohibits covered employers from dismissing or

discriminating against an employee who files, causes to be filed,

testifies, participates in, provides information, or assists in an

investigation regarding employer conduct that the employee reasonably

believes constitutes a violation of (1) mail, bank, wire, or securities law;

(2) any rule or regulation of the Securities and Exchange Commission

(“SEC”); or (3) any provision of Federal law relating to fraud against

shareholders.

To qualify as an employer, the company must be publicly

traded.

That is, the prohibition of section 806 only applies to

companies that either hold a class of securities registered under section

12 or are required to file reports under section 15(d) of the Securities

Exchange Act of 1934, as well as “any officer, employee, contractor,

subcontractor, or agent of such company.”

If a plaintiff can

successfully mount a whistleblower claim, both civil and criminal

penalties may be sought.

An employee wishing to initiate a civil enforcement action under

section 806 must file a complaint with the Secretary of Labor within

ninety days of the alleged violation.

The Secretary has designated the

Occupational Safety and Health Administration (“OSHA”) as the agency

responsible for initially investigating the complaints, and thus OSHA

performs any necessary investigation and works to issue written findings

within sixty days of the complaint being filed.

Either party can file

objections to the written findings and request a de novo hearing with an

Administrative Law Judge (“ALJ”).

After the ALJ renders a decision,

the parties can seek review by the Administrative Review Board

(“ARB”).

If still unsatisfied, a party can file a petition for review with

the United States Court of Appeals.

While this is the normal course of

3. 18 U.S.C. §§ 1514A(a)(1)-(2) (Supp. 2006).

4. 18 U.S.C. § 1514A(a).

5. Id.

6. 18 U.S.C. §§ 1514A(b), 1513(e); see also John F. Fatino, The Sarbanes-Oxley Act of 2002

and the New Prohibition on Employer Retaliation Against Whistleblowers: For Whom the Bell Tolls

or Tooting One’s Own Horn?, 51 S.D. L. REV. 450, 450-54 (2006) (discussing the Act’s civil and

criminal remedies).

7. 18 U.S.C. § 1514A(b)(2)(D).

8. 29 C.F.R. §§ 1980.104-.105 (2005); Delegation of Authority and Assignment of

Responsibility to the Assistant Secretary for Occupational Safety and Health, 67 Fed. Reg. 65008

(Dep’t of Labor Oct. 22, 2002).

9. 29 C.F.R. § 1980.106 (2005).

10. 29 C.F.R. §§ 1980.109-.110 (2005).

11. 29 C.F.R. § 1980.112 (2005).

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 97

complaints under section 806, a complainant can obtain de novo review

of his claim in federal district court if the Secretary fails to issue a final

decision within 180 days of the filing of the complaint and there is no

showing that the delay is due to the complainant’s bad faith.

Whether the employee’s civil enforcement claim is heard through

the administrative channel or by a district court under the 180-day rule,

the elements of proof are the same. The plaintiff must make a prima

facie case by establishing by a preponderance of the evidence that: (1)

the employee engaged in protected activity as defined by SOX; (2) the

employer was aware of the protected activity; (3) the employee suffered

an adverse employment action; and (4) circumstances exist which are

sufficient to raise an inference that the protected activity was likely a

contributing factor in the unfavorable action.

Once the employee

meets this burden, he is entitled to relief unless the employer can show

by clear and convincing evidence that it would have taken the same

unfavorable personnel action even in the absence of such protected

activity.

III. PROTECTED ACTIVITY LITIGATION

Although there has been litigation over many aspects of SOX

whistleblower claims, including the 180-day rule,

the exhaustion

requirement,

the ninety-day time period for filing complaints,

and the

“contributing factor” element,

this article zeroes in on litigation over

the question of what exactly constitutes a protected activity.

Unfortunately, it is impossible to glean any bright-line rule from the

existing decisional authority. Nonetheless, guiding principles are

developing, and construing “protected activity” narrowly, and thus

favorably to employers, certainly seems to be the current trend.

a. The Basics

While there is clearly some uncertainty as to the scope of protected

activity under section 806 of SOX, the statute itself sets forth the basic

12. 18 U.S.C. § 1514A(b) (Supp. 2006).

13. Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365, 1375-76 (N.D. Ga. 2004).

14. Id. at 1376.

15. See, e.g., Murray v. TXU Corp., 279 F. Supp. 2d 799, 802 (N.D. Tex. 2003).

16. See, e.g., Zhu v. Fed. Hous. Fin. Bd., 389 F. Supp. 2d 1253, 1272 (D. Kan. 2005).

17. See, e.g., Halpern v. XL Capital, Ltd., 2005 DOL Ad. Rev. Bd. LEXIS 98, at *5, ARB

No. 04-120, ALJ No. 2004-SOX-00054 (ARB Aug. 31, 2005).

18. See, e.g., Collins, 334 F. Supp. 2d at 1376.

98 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

definition of what employee actions will be covered. Section 806

protects an employee who provides information that the employee

“reasonably believes constitutes a violation” of the enumerated laws to

(1) a federal law enforcement agency or regulatory agency, (2) a

committee or member of Congress, (3) a person with supervisory

authority over the employee, or (4) a person working for the employer

who has the authority to investigate, discover, or terminate misconduct.

This definition has been further expounded in both administrative and

federal court decisions.

The ARB elaborated on what qualifies as “providing information”

in the context of determining whether an employee’s conduct is a

protected activity in Getman v. Southwest Securities, Inc.

In Getman, a

stock analyst for a broker-dealer/investment adviser claimed that she

engaged in a protected activity when she refused to raise a stock rating

under pressure from her employer’s Review Committee.

Reversing the

ALJ, the ARB held that the refusal to change a rating did not, by itself,

constitute a protected activity.

In so holding, the ARB explained that

“[i]n drafting whistleblower protection laws, Congress . . . has drawn the

distinction between notifying the employer of a violation and refusing to

commit a violation.”

The ARB explained that to qualify as a protected

activity, an employee must actually communicate a concern that the

employer’s conduct constitutes one of the enumerated violations.

The

19. 18 U.S.C. § 1514A(a)(1) (Supp. 2006).

20. Jeffrey S. Klein and Nicholas J. Pappas, Defining ‘Whistleblower’ Under the Sarbanes-

Oxley Act, N.Y.L.J. Aug. 7, 2006 at 3 (discussing Fraser v. Fiduciary Trust Co., 417 F. Supp. 2d

310 (S.D.N.Y 2006) and Bishop v. PCS Admin., No. 5 C. 5683, 2006 WL 1460032 (N.D. Ill. May

23, 2006)).

21. ARB Case No. 04-059, 2005 DOLSOX LEXIS 18 (Dep't of Labor July 29, 2005).

22. Id. at *9-10.

23. Id. at *19.

24. Id. at *18-19.

25. Id. at *18. In the recent decision of Platone v. FLYI, Inc., 2006 DOL Ad. Rev. Bd. LEXIS

89, ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB again analyzed the

communication aspect of SOX whistleblower claims. The ARB explained the principle that “an

employee’s protected communications must relate ‘definitively and specifically’ to the subject

matter of the particular statute under which protection is afforded.” Id. at *32. Indeed, the Board

stated that “the relevant inquiry is not what [an employee alleges in her complaint], but what she

actually communicated to her employer . . . prior to the termination.” Id. at *34. In Platone, the

employee had sent a series of emails and engaged in conversations with her superior and others

addressing a potential billing issue between her company and the Air Line Pilots Association

(ALPA). Id. at *11-16, *33. The court found that none of these communications “include[d] any

specific revelations about fraudulent activity affecting shareholder interests.” Id. at *39. Thus,

contrary to what she alleged in her complaint, she had not informed her superior that the company

had either created or acquiesced in a scheme to funnel improper payments to members of ALPA’s

master executive counsel. Id. at *43. Accordingly, there was no protected activity. Id. at *45.

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 99

ARB did note that “[t]here may be times where only refusal is sufficient

to provide information,” but found that Getman’s refusal did not do so.

A more difficult question than what constitutes “provid[ing]

information”—and the key to adequately defining the scope of protected

activity under SOX—is the question of what types of conduct employees

can “reasonably believe[] constitute[]” violations of the enumerated

laws.

As is clear from the statute and as has been repeatedly

emphasized by ALJs, the ARB, and the courts, “[a]n employee can

engage in §1514A protected activity even if the reported conduct did not

actually constitute a violation of one of the laws or regulations

enumerated” so long as he or she reasonably believed a violation

occurred.

Thus, we know that an employee’s communication can

qualify as a protected activity only if it communicates either (1) an

actual violation of one of the enumerated laws or (2) some other conduct

that one could reasonably believe was a violation of one of the

enumerated laws.

Accordingly, the key to gaining an understanding of

the scope of protected activity under section 806 is to familiarize oneself

with the conduct that decision-makers have thus far concluded is of the

type one could “reasonably believe” to be a violation.

b. Beyond the Basics—Decisions Reigning in the Scope of Protected

Activity

As a starting point in analyzing what decision-makers have found

(and will in the future find) to be conduct that one could reasonably

believe to be a violation, it should be noted that Congress “intended to

impose the normal reasonable person standard used and interpreted in a

wide variety of legal contexts.”

Additionally, it is clear that “[t]he

26. Getman, 2005 DOLSOX Lexis 18, at *18.

27. 18 U.S.C. § 1514A(a)(1) (Supp. 2006).

28. Bishop v. PCS Admin., No. 05 C. 5683, 2006 WL 1460032, at *5 (N.D. Ill. May 23,

2006) (citing Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365, 1376 (N.D. Ga. 2004)).

29. Id. at *5, *8.

30. While it is necessary for a complainant to have both a subjective and an objective belief

that the reported conduct was a violation, see id. at *5; see also Livingston v. Wyeth Inc., No.

1:03CV00919, 2006 WL 2129794, at *9 (M.D.N.C. July 28, 2006) (noting a whistleblower must

“not only subjectively believe that the reported conduct . . . constitute[s] fraud on shareholders,” but

that “there must also be a reasonable, objective basis for suspecting such fraud”), as a practical

matter, it is the decisions analyzing the objective-belief requirement that create the boundaries of

what may be considered a protected activity in the future. Accordingly, the objective standard is the

focus of this article.

31. Collins, 334 F. Supp. 2d, at 1376 (quoting Legislative History of Title VIII of H.R. 2673:

The Sarbanes-Oxley Act of 2002, Cong. Rec. S7418, S7420 (daily ed. July 26, 2002), available at

2002 WL 32054527).

100 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

employee’s access to information, experience, and background are

considerations in determining whether he or she had a reasonable

belief.”

With these considerations in mind, this article will now

consider several recent administrative and district court decisions that

are instructive as to the range of conduct that constitutes a protected

activity.

1. Complaints Over Internal Policy

Several recent cases support the proposition that raising complaints

about internal policy is not protected under SOX. In Bishop v. PCS

Administration (USA), Inc.,

the plaintiff, who was the former in-house

attorney for PCS Administration, claimed that she was terminated for

notifying her employer that its compliance program was deficient under

sentencing guidelines regarding corporate compliance and ethics and

that this deficiency put the company at risk for liability of future

violations.

Plaintiff argued that simply “raising the specter of potential

fraud” constituted protected activity, but the district court disagreed.

The district court explained that the statute’s plain language refers to

providing information that is reasonably believed to “constitute a

violation” of one of the enumerated statutes or regulations and that

“[t]he word ‘constitute’ should be understood to mean an actual

violation has occurred, which could include an attempt (in the criminal

sense).”

Thus, “[t]o the extent there is a reasonable (but incorrect)

belief, it must be a reasonable belief that an actual violation has occurred

or is being attempted.”

The court held that it was not reasonable for

the plaintiff, as an attorney, to believe that simply because the

company’s compliance program was legally deficient and an increased

potential and risk of violations or penalties was thus present, an actual

violation had occurred or was being attempted.

Admittedly, the court clearly considered the fact that the plaintiff

was an attorney when it concluded that her subjective belief was not

objectively reasonable.

Thus, practitioners would likely be challenged

32. Bishop, 2006 WL 1460032, at *5.

33. 2006 WL 1460032 (N.D. Ill. May 23, 2006).

34. Id. at *1, *3.

35. Id. at *6.

36. Id. at *8.

37. Id.

38. Id.

39. Id. “If the law itself does not establish that a deficient compliance program is a violation

of the pertinent statutes or regulations concerning fraud, then the subjective belief of plaintiff (an

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 101

in an attempt to rely on Bishop in situations where the reporting

employee does not have such specialized knowledge. Nonetheless,

Bishop lends at least some support to the proposition that complaints

regarding deficiencies or noncompliance with purely internal safeguards

will not constitute a protected activity when failure to comply with those

safeguards does not itself violate statutes or regulations relating to fraud

on shareholders (or any other rule or regulation of the SEC).

Other

cases lend support to this proposition as well. In Marshall v. Northrop

Grumman Synoptics,

the ALJ held that complaints about internal

controls being inconsistent with general accounting principles and

complaints that financial records for the internal use of a department

were incorrect could not constitute a protected activity when such errors

did not affect any public report or other document that could be the basis

of actual fraud on shareholders.

The ALJ explained that “raising a

concern about a violation of an ethics policy is not a protected activity.

The fact that the concerns involved accounting and finances in some

way does not automatically mean or imply that fraud or any other illegal

attorney practicing before the SEC) was not objectively reasonable.” Id.

40. A tangential issue that is currently developing is whether reports of innocent violations of

SEC laws constitute protected activity. The Bishop court explained that “[a]ll the statutes and

regulations referenced in § 1514(a)(1) are ones setting forth fraud” and “[t]he phrase ‘relating to

fraud against shareholders’ in this provision must be read as modifying each item in the series,

including ‘rule or regulation’ of the [SEC].” Bishop, 2006 WL 1460032, at *9 (quoting 18 U.S.C. §

1514A(a)(1) (Supp. 2006)). The majority of decisions are in accord with the proposition that “fraud

is an integral element of a whistleblower cause of action” under SOX. Livingston v. Wyeth Inc.,

No. 1:03CV00919, 2006 WL 2129794, at *9 (M.D.N.C. July 28, 2006); see also Smith v. Hewlett

Packard, No. 2005-SOX-00088, 2006 WL 468045 (Dep’t of Labor Jan. 19, 2006) (“The legislative

history of the Act explains that fraud is an essential element of a claim brought under the

whistleblower provision.”). However, in the recent case of Klopfenstein v. PCC Flow Technologies

Holdings, Inc., ARB Case No. 04-149, 2006 DOLSOX LEXIS 59 (Dep’t of Labor May 31, 2006),

the ARB suggested that an innocent violation of an SEC rule may give rise to jurisdiction under

SOX if an employee were retaliated against for reporting it. Id. at *35. While it was merely dicta,

the ARB stated that “we do not believe that activity is protected only when . . . the complainant

believes he is reporting fraud.” Id. The court further noted that “[i]t certainly is possible that [the

complainant] engaged in protected activity” when he reported certain accounting discrepancies even

if he did not believe that the discrepancies amounted to fraud. Id. at *36. This issue is beyond the

scope of this article because it will only be raised in a small number of situations, but it is a

development worth noting and watching in the future. On a related note, and assuming, contrary to

the suggestion in Klopfenstein, that fraud is an essential element of a whistleblower claim under

SOX, the recent district court case of Fraser v. Fiduciary Trust Co., 417 F. Supp. 2d 310, 323

(S.D.N.Y. 2006), held that a report about an employer’s conduct can qualify as a protected activity

even if the statement does not expressly indicate that the employer was acting fraudulently as long

as it describes conduct that constitutes fraud. Id.

41. Marshall v. Northrop Grumman Synoptics, No. 2005-SOX-0008, 2005 DOLSOX LEXIS

63 (Dep’t of Labor June 22, 2005).

42. Id. at *12.

102 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

conduct took place.”

Likewise, in Richards v. Lexmark International, Inc.,

the ALJ

held that a complaint that the “Days of Inventory” calculation used by

the employer had potential to misrepresent and understate the number of

days that items remained in inventory, which could potentially result in

misrepresentations in management’s reports, did not constitute a

protected activity.

The ALJ explained that it was not reasonable for

the complainant, who had a Masters of Business Administration and

over thirty years of supply chain management experience, to think this

constituted fraud on shareholders.

This was because there was no

evidence that the methods used were not in accordance with generally

accepted accounting principles (“GAAP”) or contrary to any other SEC

requirements, certified public accountants were involved, and write-offs

were footnoted in the financial statements.

Thus, the court concluded

that “[n]o facts [had] been adduced that would cause a reasonable person

with Complainant’s training and experience to determine that there was

any potential securities fraud or violation of any laws or SEC rules and

regulations.”

Again, like Bishop, the complainant’s expertise in Lexmark played

at least some role in the decision.

Furthermore, the ALJs in both

Lexmark and Marshall doubted the respective complainant’s subjective

belief,

which provides another way in which complainants could

distinguish these cases in the future. Nonetheless, it seems that Bishop,

Marshall, and Lexmark, taken together, support the conclusion that

complaints about purely internal reporting matters or internal controls

that do not directly violate a law enumerated in section 806 will not be

deemed protected activity under SOX.

This is in line with the notion

that “[p]rotected activity must implicate the substantive law protected in

Sarbanes-Oxley definitively and specifically.”

However, it is critical

to note that while complaints about purely internal accounting and

43. Id.

44. No. 2004-SOX-00049, 2006 DOLSOX LEXIS 71 (Dep’t of Labor June 20, 2006).

45. Id. at *91.

46. See id. at *90, *92.

47. See id. at *42,*91-92.

48. Id. at *92.

49. See id. at *90; Bishop v. PCS Admin., No. 05 C. 5683, 2006 WL 1460032, at *5 (N.D. Ill.

May 23, 2006).

50. See Lexmark, 2006 DOLSOX LEXIS 71, at *92; Marshall v. Northrop Grumman

Synoptics, No. 2005-SOX-0008, 2005 DOLSOX LEXIS 63, at *11 (Dep’t of Labor June 22, 2005).

51. See Bishop, 2006 WL 1460032, at *6; Marshall, 2005 DOLSOX LEXIS 63, at *10-11;

Lexmark, 2006 DOLSOX LEXIS 71, at *92.

52. Fraser v. Fiduciary Trust Co., 417 F. Supp. 2d 310, 322 (S.D.N.Y. 2006).

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 103

ethical matters might fall safely outside the scope of protected activity,

such is not the case when the complaint involves noncompliance with

internal accounting controls promulgated in compliance with Sarbanes-

Oxley mandates or SEC rules and regulations. In that case, the

noncompliance itself would indeed be a violation of one of the laws

enumerated in section 806.

2. Complaints that Wrongdoing Would Result in Fraudulent

Misstatement

The following cases differ from Bishop, Lexmark, and Marshall in

that the conduct complained of is more than simply noncompliance with

internal policy. In these cases, complainants allege that some

wrongdoing by the employer could constitute or eventually lead to

fraudulent misstatements in the financial statements. These decisions

infuse the notion of materiality into the mix of factors to consider when

trying to determine whether conduct is of the type that one could

“reasonably believe”

constitutes a violation of the statutes and

regulations enumerated in section 806. In doing so, these cases serve to

limit the potential range of what constitutes a protected activity.

In the case of Harvey v. Home Depot, Inc.,

the complainant

brought a claim under section 806 alleging that he was retaliated against

for reporting racial discrimination and additional behavior that reflected

an overall bias, prejudice, and abuse of power by the company

executives.

The ALJ explained that the complainant engaged in a

protected activity only if the conduct he complained of could

“reasonably be considered to fall within the six SOX specified categories

of protected activities.”

Because none of the complainant’s allegations

related to mail fraud, wire fraud, bank fraud, securities fraud, or any

violation of SEC rules, the case turned on whether the complainant

reported something that could reasonably be believed to constitute a

violation of federal law relating to fraud against shareholders.

The ALJ noted that “an implicit argument may be made that a

company which permits discriminatory practices despite its public policy

53. See, e.g., Morefield v. Exelon Servs., Inc., No. 2004-SOX-00002, 2004 WL 3567255, at

*3, *4 (Dep’t of Labor Jan. 28, 2004); Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365,

1377 (N.D. Ga. 2004).

54. 18 U.S.C.A. § 1514A(a)(1) (Supp. 2006).

55. No. 2004-SOX-20, 2004 DOLSOX LEXIS 56 (Dep’t of Labor May 28, 2004).

56. Id. at *5-7, *15.

57. Id. at *35.

58. See id. at *35-36.

104 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

of equal opportunity is acting contrary to the best interests of its share

holders,” but explained that this argument fails because a protected

activity under SOX “must involve an alleged violation of a federal law

directly related to fraud against share holders.”

“[T]he federal law

actually prohibiting individual employment discriminatory practices,

Title VII, is based on individual rights and establishes procedures to

address illegal employment discrimination; it was not enacted to

preclude fraud against shareholders.”

The ALJ went on to consider the

argument that because “SOX mandates the accuracy of corporate

disclosures, a reported incident of racial discrimination within a publicly

traded company that represents itself to be non-discriminatory may

amount to a violation of a SOX disclosure requirement and thus involve

a federal law related to fraud against shareholders.”

The ALJ

concluded that despite the logical appeal of this argument, the link

between the discrimination at issue and SOX was too tenuous.

The

provisions of SOX requiring accuracy of corporate disclosures reflect

Congress’ intent to protect shareholders by requiring accurate reporting

of a corporation’s financial condition.

Whether an employer’s acts of

individual discrimination comply with the company’s stated equal

opportunity standards has a very marginal connection to accurate

accounting and financial condition.

Accordingly, the ALJ found that

the complainant’s report did not constitute a protected activity.

The

ALJ left a door open, however, when he noted that the reporting of an

employer’s “failure to disclose a class action lawsuit based on systemic

racial discrimination with the potential to sufficiently affect the financial

condition of a corporation might [constitute] SOX protected activity if

an individual complained about the failure to disclose that situation.”

The case of Harvey v. Safeway, Inc.,

involving the same

complainant and ALJ as the Home Depot case, reiterates the principles

established in Home Depot

and applies them in a slightly different

context. In Safeway, the complainant alleged that his complaints of

wage violations under the Fair Labor Standards Act (“FLSA”)

59. Id. at *37-38.

60. Id. at *38.

61. Id. at *38-39.

62. Id. at *39.

63. See id.

64. See id.

65. Id. at *43.

66. Id. at *39-40.

67. No. 2004-SOX-21, 2005 DOLSOX LEXIS 4 (Dep’t of Labor Feb. 11, 2005).

68. See supra text accompanying notes 53-63.

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 105

constituted a protected activity under section 806.

The ALJ explained

that complaints of systemic violations of FLSA could potentially “reach

the necessary magnitude to effectively perpetrate a fraud on

shareholders,” but ultimately held that the complainant’s reports of

discrepancies in his weekly paychecks did not fall within this category

and thus did not constitute a protected activity.

In reaching this

conclusion, the ALJ noted that FLSA is focused on employee

compensation and not the prevention of fraud against shareholders.

The ALJ reasoned that while it could be argued that the employer’s

“under-compensation of its employees could impermissibly alter the

accuracy of its financial disclosures mandated by SOX,” the connection

between an individual FLSA violation and SOX is too tenuous.

The

ALJ explained that even if uncorrected, the underpayment of the

complainant’s wages would have only a “microscopic” effect on any

financial report prepared by the employer for the benefit of the

shareholders.

The ALJ concluded that the complainant’s reports

simply failed to reach “the requisite level of materiality.”

To tie his

ultimate decision in with the objective reasonableness standard, the ALJ

simply stated that the complainant’s report “did not include an

objectively reasonable complaint that [the employer] was also engaged

in a significant, material and company-wide underpayment of its

employees to the extent a fraud was being perpetrated on its

shareholders.”

Thus, from Home Depot and Safeway, we see that materiality is the

key to a successful whistleblower complaint when the claimed protected

activity is a report of some wrongdoing that is not closely linked with

shareholder communications.

Stated another way, “a complainant

could only reasonably believe that perceived conduct was a fraudulent

misstatement of corporate financial condition if that conduct was

material toward the representation of that condition.”

The case of

Minkina v. Affiliated Physician’s Group is consistent with this

69. See Safeway, 2005 DOLSOX LEXIS 4, at *1-2, *4.

70. Id. at *78.

71. Id. at *79.

72. Id. at *80.

73. Id. at *80-81.

74. Id. at *80.

75. Id. at *83.

76. Id. at *80; Harvey v. Home Depot, Inc., No. 2004-SOX-20, 2004 DOLSOX LEXIS 56, at

*42 (Dep’t of Labor May 28, 2004).

77. Tice v. Bristol-Myers Squibb Co., No. 2006-SOX-20, 2006 WL 2616393, at *18 (Dep’t of

Labor Apr. 26, 2006).

106 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

proposition.

In Minkina, the complainant alleged that she was

retaliated against for reports she made to OSHA as well as her employer

concerning what she believed to be dangerous air quality conditions at

the workplace.

The ALJ held that the complainant’s reports did not

constitute protected activity.

The ALJ explained that:

Quite simply, while the Complainant may have had a valid claim of

poor air quality, Sarbanes-Oxley . . . was enacted to address the

specific problem of fraud in the realm of publicly traded companies

and not the resolution of air quality issues, even if there is a possibility

that poor air quality might ultimately result in financial loss.

Admittedly, the ALJ in Minkina ends his analysis without

discussion of materiality.

However, the conclusion is consistent with

the rule that can be gleaned from Home Depot and Safeway—reports of

violations of laws or regulations unrelated to shareholder fraud will not

be deemed protected activity unless the effect of such would be material

to a shareholder.

Minkina may very well have had a different result if

the evidence showed that the conduct complained of did indeed

constitute an environmental violation, the government was stepping in to

impose fines, and those fines would have a material effect on the

financial statements.

The principles developed by Home Depot and Safeway were

recently endorsed—and arguably expanded in a way that is favorable to

employers—by a federal court in Livingston v. Wyeth Inc.

Livingston, the employer company was a developer and manufacturer of

pharmaceutical, consumer health, and animal health products, and was

regulated pursuant to the Federal Food, Drug, and Cosmetic Act and

regulations thereunder.

These regulations require current good

manufacturing practices (“GMPs”) by all manufacturers of

78. Minkina v. Affiliated Physician’s Group, No. 2005-SOX-00019, 2005 DOLSOX LEXIS

41, at *16-17 (Dep’t of Labor Feb. 22, 2005).

79. Id. at *1.

80. Id. at *15. This was just one alternative holding in the case; the ALJ also concluded that

the complainant’s former employer did not qualify as a covered employer under SOX. Id. at *14.

81. Id. at *17.

82. See id. (ending the discussion by reiterating that the former employer, a privately held

company, is not covered by Sarbanes-Oxley).

83. See Harvey v. Home Depot, Inc., No. 2004-SOX-20, 2004 DOLSOX LEXIS 56, at *31,

*33, *37-38 (Dep’t of Labor May 28, 2004); Harvey v. Safeway, Inc., No. 2004-SOX-21, 2005

DOLSOX LEXIS 4, at *76-77, *80 (Dep’t of Labor Feb. 11, 2005).

84. Livingston v. Wyeth Inc., No. 1:03CV00919, 2006 WL 2129794, at *10 (M.D.N.C. July

28, 2006).

85. Id. at *1.

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 107

pharmaceutical vaccine products, including a GMP for training all

employees engaged in the drug manufacturing process.

The Food and

Drug Administration (“FDA”) had detected various GMP violations in

two of the employer’s facilities, and as a result the employer entered into

a consent decree with the FDA which required it to address compliance

issues in all of its facilities.

The facility in which the complainant

worked told the FDA that it would revise its quality system guidance

documents and set a target date of “September 30, 2002 implementing

the revisions and verifying compliance.”

Even if the required training

curricula was not fully developed and implemented by this date,

however, the facility would be deemed compliant provided that a

satisfactory “legacy plan” was adopted.

The plaintiff, who was the team leader of the group set up to ensure

site-wide compliance with the GMP training system, alleges that he was

retaliated against for making repeated internal complaints about training

deficiencies and a perceived cover-up of those deficiencies.

The

plaintiff argued that he had a reasonably objective basis for believing

that if his office went forward with compliance verification as

scheduled, it would be providing false and misleading information to the

FDA, thereby subjecting it to fines and penalties.

The court disagreed,

and held that the plaintiff had not engaged in a protected activity.

First, the court found that there was not an actual violation of any of the

laws enumerated in section 806.

There was nothing in the record to

indicate that the employer “made false or misleading statements, or

omitted relevant information, in any documents provided to its

shareholders.”

Next, the court explained why there was also no objectively

reasonable basis for the plaintiff to equate the perceived training

deficiencies with a violation.

The court stated that it was “entirely

speculative to say that because Defendants disagreed with Livingston’s

belief that the facility could not meet the September 30, 2002 deadline,

86. Id.

87. Id. at *2.

88. Id.

89. Id. at *3 (explaining that a legacy plan is simply a way to close compliance gaps after the

compliance date passes).

90. Id. at *2, *5-6, *9.

91. Id. at *9.

92. Id. at *10.

93. Id.

94. Id.

95. Id.

108 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

this meant that management planned to conceal critical information.”

The complainant admitted that “even if compliance concerns persisted

on that date, a legacy plan could be created for purposes of avoiding

penalties,” and the court found that this “concession [was] fatal” to his

SOX claim because no reasonable employee knowing that fact could

believe the employer was intending to conceal training deficiencies.

While the complainant contended that the potential financial impact

of non-compliance would be significant and thus the concerns about the

state of the training program should be reported, the court disagreed.

The court explained that:

Information must be sufficiently material to a company’s financial

picture before it will form the basis for securities fraud. Under

Supreme Court authority, for information to be material, there must be

“a substantial likelihood that a reasonable shareholder would consider

[the matter] important to his decision to invest.” Given the importance

of “materiality” under the securities laws, Administrative Law Judges

have rejected whistleblower retaliation claims where the information

disclosed would not be sufficiently material to shareholders.

The court found that even if it were reasonable for the complainant

to believe that the FDA might take some type of enforcement action

because of compliance issues in the future, it would not necessarily

follow that the employer would be obligated to report the alleged

violations before the FDA actually took any action.

100

This is

presumably because at such a premature and speculative time, such

information would not be material to a reasonable investor.

Interestingly, the Livingston court does not discuss the

complainant’s allegations that the potential fines and penalties would be

quite substantial. This article proposes that this is because the

materiality requirement of the reasonable-belief standard has two

elements: (1) the likelihood that the negative event affecting the

financial reporting will actually materialize within a reasonable

timeframe, and (2) the potential financial impact that would result if and

when that event occurred. If we view these two elements as a sliding

scale—the stronger the likelihood that the event will occur, the less

financial impact will be required, and vice versa—then we will have a

96. Id. at *10-11.

97. Id. at *10.

98. Id.

99. Id. (citations omitted).

100. Id.

2006] DISCERNING THE SCOPE OF “PROTECTED ACTIVITY” 109

useful test for predicting whether or not an employee’s communications

regarding a perceived violation would be deemed a protected activity.

This strategy proves helpful in explaining the outcomes that have

been reached to date. In Smith v. Hewlett Packard,

101

the complainant

argued that he was retaliated against for reporting to the EEOC that his

employer failed to make appreciable efforts to remedy alleged race

discrimination.

102

In analyzing whether this report constituted a

protected activity, the ALJ looked to the Home Depot case for guidance

and ultimately concluded that it did not.

103

The ALJ reiterated the

proposition announced in Home Depot that reporting an employer’s

failure to disclose a class-action lawsuit based on systemic racial

discrimination with the potential to sufficiently affect the financial

condition of a corporation would likely constitute a protected activity,

but such was not the case before him.

104

The ALJ held that although

there was a vague rumor of a class-action lawsuit, there was no such

litigation and thus there was nothing material for the employer to

disclose to its shareholders.

105

Viewing this outcome on the sliding

scale, we see that although the financial effect of a class action based on

systematic race discrimination would undoubtedly have a significant

negative financial effect, the likelihood in Smith that such event would

actually occur anytime in the near future was too low for the situation to

be deemed material. Similarly, in Reed v. MCI, Inc.,

106

the complainant

alleged that he was terminated because he reported the misuse of

unlicensed computer software.

107

The complainant argued that this was

a protected activity because there could be substantial fines and loss of

goodwill associated with such use, thus negatively impacting the

financial health of the company.

108

The complainant noted that the

penalty per incident could be as high as $150,000 and that thousands of

incidents could have occurred.

109

Nonetheless, the ALJ held that the

complainant could not reasonably believe that the company had

committed a violation of any of the enumerated security laws or that it

101. Smith v. Hewlett Packard, No. 2005-SOX-00088, 2006 WL 468045 (Dep’t of Labor Jan.

19, 2006).

102. Id. at *2.

103. Id. at *7, *9.

104. Id. at *7-8 (citing Harvey v. Home Depot, Inc., 2004-SOX-20, 2004 DOLSOX LEXIS 56,

at *14-15 (Dep’t of Labor May 28, 2004)).

105. Id.

106. No. 2006-SOX-00071, 2006 DOLSOX LEXIS 74 (Dep’t of Labor June 20, 2006).

107. Id. at *6.

108. Id. at *7.

109. Id.

110 HOFSTRA LABOR & EMPLOYMENT LAW JOURNAL [Vol. 24:95

had committed a fraud on its shareholders.

110

Arguably, the ALJ came

to this result because even though the financial impact to the company

would be very significant, there was no evidence that any fines were

actually on the horizon.

IV. CONCLUSION

While the boundaries of what constitutes a protected activity under

SOX are still being drawn, the recent decisions outlined above give

practitioners guidance for future situations. The materiality requirement

for claims involving alleged shareholder fraud, as opposed to those

involving an alleged violation of one of the specifically enumerated

statutes or regulations, places an effective limitation on a law that could

otherwise be construed to protect virtually all conduct that might

eventually have some effect on shareholder reports, no matter how

remote the chances. Understanding what will be deemed material, and

thus what can form the basis for a reasonable belief that a fraud on

shareholders has occurred or is being attempted, is necessary in order to

discern the scope of protected activity. Fortunately, Livingston and other

recent cases are starting to give us direction in that regard, and future

cases will certainly continue to elaborate on the standard.

110. Id. at *7-8.