The Joy of SOX: What employee activity is "protected"?

Now that the Supreme Court has decided that the retaliation provisions of the Sarbanes-Oxley Act apply, not only to employees of publicly-held companies, but also to employees of contractors who do work for publicly-held companies, I thought it might be helpful to review exactly what type of activity is protected under the SOX. To keep you awake, I'll address this in "FAQ" format, interspersed with some excruciating "SOX" puns.   

SOX it to me, baby!

Generally, what types of complaints are protected under the SOX?

The anti-retaliation provision of the Sarbanes-Oxley Act of 2002 prohibits employers from taking action against employees for lawful attempts to provide information or assist in an investigation based on the employee's reasonable belief that there was (1) mail fraud, (2) wire, radio, or television fraud, (3) bank fraud, or (4) securities or commodities fraud, as all of these frauds are defined in the U.S. Code.

The same protections apply if the employee acts based on a reasonable belief that there was (5) any violation of the Securities Exchange Act or the regulations of the Securities and Exchange Commission, or (6) any violation of any federal law relating to fraud against shareholders.

Finally, employees are protected from retaliation if they file, testify in, or otherwise participate in a proceeding alleging (7) a violation of the SEC rules, or (8) "any provision of Federal law relating to fraud against shareholders."


Is any complaint about these topics protected?

No. To be protected, the information or assistance has to be provided to, or the investigation has to be conducted by, (1) a federal regulatory or law enforcement agency, (2) Congress or a member of Congress, or (3) a person with supervisory authority over the employee (or his or her agent).

Presumably, most employers know better than to retaliate against an employee for cooperating with the government or Congress (!), filing formal complaints, or testifying truthfully, so we will focus on No. 3 -- complaints made, or other actions taken, internally.


What types of complaints or reports have the courts found to be "protected" under the SOX?

*A concern expressed to the employer's audit committee that the employer was "cooking the books" and would not accurately report financial information.

*A concern expressed to the employer's Vice President of Human Resources that a Vice President of Communications was converting the employer's money to her own use. (Alleged fraud.)

*A concern expressed by a Ph.D. chemist to officers of the employer, a pharmaceutical company, that statements in a press release about a new drug were inconsistent with results of the clinical trial. (Alleged fraud against shareholders.)

*A complaint about an allegedly improper method of bidding on a public contract that was discussed but never actually adopted.

*An accountant's refusal to approve some of the employer's corporate expenditures as business expenses.

*An Associate Media Director's report that an ad agency's client had been overcharged millions of dollars by one of the agency's vendors.

*Complaints by a banker that her commissioned co-workers generated account "activity" by opening and closing accounts without the customers' permission and opened accounts without getting the identification required by bank policy.

These are just a few examples, and as you can see, they do not always involve finance and accounting people disclosing alleged shareholder fraud.

Employers should be very careful before taking action against an employee who has reported any type of wrongdoing, or who has refused to participate in alleged wrongdoing. Employers should have been doing this anyway because even without SOX an employee in this situation might have been able to make a claim for wrongful discharge in violation of public policy. (But wrongful discharge claims usually require a "discharge," while the SOX retaliation provisions prohibit not only discharge but also demotion, suspension, harassment, threats, or discrimination "in any other manner.")


What types of complaints or reports have the courts found to be not protected by the SOX?

*An internal report of suspected insider trading, where the complaining employees had few specifics and did not investigate further before making their report. (If the information is too vague or speculative, it may not be protected.)

*Internal complaints that employees discussed the company's stock prices openly, that the company was wasteful, that management accepted fees for speaking engagements, and that the company's IT department made use of an outside consultant. (None of this is illegal or fraudulent.)

*Complaints by a banker that her co-workers were too aggressive in trying to sell the bank's products to customers. (Ditto.)

*Complaints by a fast food employee that his supervisors left food out past its expiration date. (Not cool, but not fraudulent within the meaning of the statute.)

*Concerns expressed in two emails: the first was about threats made to the employee, his alleged relationship with a female co-worker, and his belief that the FBI was conducting a frivolous investigation into fraud at a car dealership. The second email addressed the same issues and asked the employer to investigate "the possibility that illegal acts may have been committed." (Not fraudulent within the meaning of the statute.)

*Complaints about alleged violations of nuclear safety regulations and falsification of safety documents. (Not cool, but not fraudulent within the meaning of the statute. Of course, this could violate other laws.)


So, what can we learn about SOX protected activity from this tiny sampling of cases?

First, that the SOX applies broadly, not just to shareholder fraud or information that could materially affect the value of a company's shares, but also to fraudulent conduct, whether or not that fraudulent conduct has an impact on shareholders.

Second, not every act of workplace dishonesty, fudging, or cheating is "SOX fraud." Falsifying safety records and deliberately selling food after its expiration date are not necessarily the type of "fraud" addressed by the SOX. (On the other hand, I could see a court's finding that these acts were fraudulent within the meaning of the law under certain circumstances.)

Third, not every complaint or expression of concern about a company's practices is protected by the anti-retaliation provisions of the SOX.

Now that we know the law applies to private as well as public companies, employers will really have to be on their toes.


Where can I find out more about the SOX?

A great place to start is to go to the U.S. Department of Labor Sarbanes-Oxley Whistleblower web page. This website is full of information about SOX procedure, administrative and court decisions interpreting the SOX, and just about anything else you could want.

Here are a couple of recent Constangy bulletins that may be of interest to you:

From Jill Stricklin, "Think Sarbanes-Oxley Whisteblower Protection Doesn't Apply to Your Company? Think Again." (how apropos!)

From Tony McGrath, "Obama to Seek Drastic Changes to White-Collar Regulations Dealing With Overtime Exemption Under FLSA."  Which, by the way, the President has now done.

Robin Shea has 30 years' experience in employment litigation, including Title VII and the Age Discrimination in Employment Act, the Americans with Disabilities Act (including the Amendments Act). 
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