Changing the Rules of the Game After the Whistle Has Blown

Bechtel v. Administrative Review Board

On March 5, 2013, the Second Circuit joined five others in adopting an explicit burden-shifting framework for SOX whistleblower claims. Applying this framework, the court in Bechtel v. Administrative Review Board, No. 11-4918-ag (2d Cir. Mar. 5, 2013), affirmed the dismissal of Bechtel's retaliation claim against his former employer, Competitive Technologies, Inc. (CTI).

From 2001 to 2003, Bechtel worked as a vice president of CTI, where he served on a committee that reviewed CTI's financial transactions and made recommendations regarding CTI's compliance with SOX disclosure requirements. During two committee meetings, Bechtel argued that certain aspects of CTI's finances should be disclosed. The other members of the committee disagreed, but Bechtel refused to sign financial disclosure forms because he worried about personal liability under SOX. A few months later, CTI's financial condition deteriorated, and CTI fired Bechtel.

Bechtel filed a SOX whistleblower complaint with OSHA, which initially found in his favor. An administrative law judge, however, dismissed the complaint, and the ARB affirmed that dismissal. Bechtel appealed to the Second Circuit Court of Appeals, which agreed with him that the ALJ had applied the wrong standard. The court held that to prevail in a SOX whistleblower claim:

[A]n employee must prove by a preponderance of the evidence that (1) she engaged in protected activity; (2) the employer knew that she engaged in the protected activity; (3) she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action. If the employee establishes these four elements, the employer may avoid liability if it can prove by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of that protected behavior.

The court clarified that this burden-shifting framework is the only framework to be applied in SOX whistleblower cases. Applying the framework, the court ultimately rejected Bechtel's appeal, ruling that Bechtel failed to prove that his protected conduct was a contributing factor in CTI's decision to fire him.

Wiest v. Lynch

Bechtel may have clarified the framework, but in Wiest v. Lynch, 710 F. 3d 121 (3d Cir. 2013), the Third Circuit Court of Appeals created uncertainty when it diverged from other circuits on the issue of what constitutes “protected activity,” the first element of a prima facie case of SOX whistleblower retaliation.

SOX prohibits publicly traded companies from retaliating against employees who blow the whistle on federal mail fraud, wire fraud, bank fraud, securities and commodities fraud or conduct which violates any rule or regulation of the Securities and Exchange Commission (SEC) or any federal law relating to fraud against shareholders. The complaining employee must have both subjective and objectively reasonable beliefs that the conduct complained of violates one of those enumerated laws. Congress, unfortunately, did not define what constitutes an objectively reasonable belief ' and the courts are split.

Initially, the courts adopted the ARB's position announced in Platone v. FLYi, Inc., ARB 04-154 (Dep't of Labor Sept. 29, 2006), that a complaint had to “definitively and specifically relate” to one of the laws enumerated in Section 806 to be objectively reasonable. The Ninth Circuit, for example, adopted this standard in the often-cited Van Asdale v. Int'l Game Tech., 577 F.3d 989, 996 (9th Cir. 2009). In 2011, the ARB switched gears, overruling Platone and rejecting the “definitive and specific” standard. In Sylvester v. Parexel Int'l LLC, ARB 07-123 (Dep't of Labor May 25, 2011), the ARB adopted a more lenient standard under which the objective element is “evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience,” as the aggrieved employee.

Following Parexel, the Third Circuit revived the SOX whistleblower claims of Jefferey Wiest, a former accountant employed by Tyco Electronics. The court held that a SOX whistleblower need only possess a “reasonable belief” that his or her employer violated the law. Wiest, a 31-year employee of Tyco, alleged that he had been fired from his accounting job after he refused to process requests for extravagant spending, such as a conference at the Atlantis Resort in the Bahamas that featured $3,000 “mermaid greeters” and costumed “pirates/wenches.” After Wiest alerted his supervisor that the costs were inappropriately charged as advertising expenses, Tyco management decided it needed to treat the event as income for attending employees to avoid improper accounting and tax deductions.

Tyco subsequently opened an investigation into Wiest's potential violation of company policy for unrelated activities dating as far back as 10 years earlier. The company eventually fired Wiest, and he sued under Section 806.

Relying on Platone, the district court dismissed Wiest's SOX claims, finding that his allegations did not “definitively and specifically relate” to one of the enumerated laws under Section 806. The Third Circuit overturned the district court's decision and adopted the “reasonable belief” standard articulated in Parexel, ruling that the ARB's decision to reject the “definitively and specifically relate” standard was entitled to administrative deference (aka Chevron deference). The majority noted that while a SOX whistleblower must have a reasonable belief that the employer violated a statute or rule enumerated in Section 806, “the whistleblower's communication need not ring the bell on each element of one of the stated provisions of federal law ' ” The court also agreed with Parexel that this standard is appropriate as a policy matter because the complaining employee may not have access to the evidence needed to prove each element of the fraud.

In a strong dissent, Judge Jordan urged that without specificity in the complaint, the employer might not recognize that the employee is engaging in protected conduct. And, since the conduct complained of need not actually constitute fraud, virtually any complaint could be bootstrapped into protected conduct. Judge Jordan noted: “Whistleblower statutes like SOX ' 806 seek to protect people who have the courage to stand against institutional pressures and say plainly, 'what you are doing here is wrong' ' not wrong in some abstract or philosophical way, but wrong in the particular way identified in the statute at issue.”

University of Texas Southwestern Medical Center v. Nassar

SOX holds no monopoly on retaliation claims, and the Supreme Court recently weighed in on the burden of proof required to establish a retaliation claim under Title VII of the Civil Rights Act of 1964 (as amended), 42 U.S.C. ' 2000e et seq., reversing itself after more than 20 years. In University of Texas Southwestern Medical Center v. Nassar, 133 S. Ct. 2517 (2013), the Court held that a Title VII retaliation plaintiff must prove that “his or her protected activity was a but-for cause of the alleged adverse action by the employer.”

Dr. Naiel Nassar served as a faculty member at the University of Texas Southwestern Medical Center (UTSW). Nassar claimed his supervisor, Beth Levine, discriminated against and harassed him because of his Middle Eastern descent. Nassar ultimately accepted a position as a staff physician at Parkland Hospital, an affiliate of UTSW, and then sent a letter to UTSW complaining of the harassment by Levine. One UTSW doctor who received the letter declared that Nassar “publicly humiliated” Levine and later objected to Parkland's offer to Nassar because it allegedly violated the affiliate agreement between Parkland and UTSW. Parkland later withdrew Nassar's offer and he sued.

A jury found that UTSW constructively discharged Nassar and retaliated against him in violation of Title VII by preventing him from obtaining employment at Parkland. The Fifth Circuit held that there was insufficient evidence of constructive discharge but affirmed the finding of retaliation because retaliation was “a motivating factor” in UTSW's adverse employment action.

The Supreme Court reversed, holding that a plaintiff must prove that his engagement in a protected activity was the “but for cause” of the adverse employment decision. The Court based its decision on Gross v. FBL Financial Services, Inc., 557 U.S. 167 (2009), where it adopted a “but for” standard for retaliation claims under the Age Discrimination in Employment Act (ADEA), 29 U.S.C. ' 621 et seq. In reaching this decision, the Court observed that “[Title VII], like the statute at issue in Gross, makes it unlawful for an employer to take adverse employment action against an employee 'because' of certain criteria.” Since the anti-retaliation provisions of Title VII and the ADEA “lack of any meaningful textual difference,” the Court held that, “the proper conclusion here, as in Gross, is that Title VII retaliation claims require proof that the desire to retaliate was the but-for cause of the challenged employment action.” By adopting this heightened “but for” causation standard, the Court rejected the “mixed-motive” standard established nearly a quarter century ago in Price Waterhouse v. Hopkins, 490 U. S. 228 (1989).

The impact of Nassar on SOX whistleblower claims remains unclear in light of the explicit “contributing factor” language contained within the SOX regulations. On the other hand, to the extent Nassar may generally reflect the mood of the Supreme Court, it may portend a more stringent burden for SOX whistleblowers if and when the Court takes up the issue.

Now What? Recommendations for Employers

Against this evolving and unpredictable legal backdrop, employers may wonder how best to protect themselves from SOX and other types of whistleblower retaliation claims. As in many situations, the best defense is a good offense. Given the ease with which some courts may be willing to find a prima facie case and the uneven burdens of proof, the ideal method of avoiding liability for whistleblower retaliation is to avoid litigation altogether. Employers should consider the following steps to minimize the likelihood of a claim:

1. Create a climate that discourages fraud and improper conduct. Establish an explicit code of conduct, communicate (repeatedly) a commitment to the policies, and train employees. If no one is doing anything wrong, there will be no whistle to blow.

2. Walk the walk. Policies that are not enforced do little good. Companies must act swiftly to remedy and punish improper conduct, even when the perpetrator is a rainmaker, strategic genius, or a really nice guy/gal with three kids, a puppy and a mortgage. As painful as it may be, a serious response will not only stop the misconduct at hand, but will deter others from engaging in wrongdoing.

3. Make sure employees understand their jobs and the big picture of what is going on around them. If employees are kept in the dark, they may infer something nefarious from the secrecy, or mistakenly believe conduct they observe is improper. Under cases like Wiest, this scenario could lead to a finding of an objectively reasonable belief the company is violating the law. Employees who “get” what they and their colleagues are doing are less likely to believe, reasonably or otherwise, that something is amiss.

4. Create effective means for employees to complain. Whether through an ombudsman, open door policy or hotline, employers must ensure they have established an easy way for employees to complain and a system to ensure complaints are handled promptly. Under SOX, publicly traded companies must also implement mechanisms for employees to complain anonymously. When complaints are not anonymous, to the extent possible without violating confidentiality or compromising an investigation, keep the complaining employee informed about the progress and result of the investigation so he knows the company took the complaint seriously and does not feel shunned for complaining.

5. Enforce a robust anti-retaliation policy. Create a culture where everyone ' complainants, the accused and the investigators ' knows that the company does not tolerate retaliation against employees who complain in good faith. Invite complaining employees to notify a designated person promptly if the employee believes she is the victim of retaliation.

6. Provide regular, accurate oral and written feedback to employees about their performance. Without good documentation as to the reasons for an adverse personnel decision ' preferably predating any whistleblowing ' it is extremely difficult to establish by clear and convincing evidence that the employer would have taken the same action absent an employee's complaining. Employees (and their lawyers) know this and will assess the available documentation when deciding whether to sue.

7. Stay tuned. The only development that can be predicted with accuracy is that the law is sure to keep changing. Employers should buckle their seatbelts and prepare themselves for what could be a bumpy ride.

Janie F. Schulman is the Co-Chair of the Employment and Labor Group at Morrison & Foerster LLP, resident in the firm's Los Angeles office. She can be reached at 213-892-5393 or [email protected]. Ms. Schulman gratefully acknowledges the assistance of Jeremy Merkelson, Jessica Childress and Jonder Ho in preparing this article.'

What do Edward Snowden, J. Scott Bechtel, Jeffrey Wiest and Dr. Naiel Nassar have in common? At first glance, not much. Mr. Snowden is an accused traitor who (now) lives in Moscow; Messrs. Bechtel, Wiest and Nassar appear to be law-abiding citizens resident in the U.S. Despite their differences, though, all four men have recently been the subject of the same important question: Are they whistleblowers deserving of protection from retaliation?

Although Mr. Snowden's story may make for a better page-turner, the stories of the others ' all plaintiffs in retaliation lawsuits ' are more likely to impact the daily operations of American employers. In 2002 Congress enacted the Sarbanes-Oxley Act (SOX) “[t]o protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” Since then, courts have struggled to agree upon who qualifies for whistleblower protection under Section 806 of the Act, 18 U.S.C. ' 1514A, and what the parties' respective burdens of proof are in litigation. Adding to the uncertainty, in 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the Great Recession. Among many other provisions, Dodd-Frank beefed up the whistleblower protection provisions of SOX.

In light of Dodd-Frank and the collective anger of a nation reeling from economic turmoil, there has been a burst of whistleblower retaliation lawsuits. Recent notable cases ' including those of Messrs. Bechtel, Wiest and Nassar ' are in some instances defining what it takes to be a successful retaliation plaintiff; in other ways, these cases are merely shaping the battleground for cases yet to come.

Bechtel v. Administrative Review Board

On March 5, 2013, the Second Circuit joined five others in adopting an explicit burden-shifting framework for SOX whistleblower claims. Applying this framework, the court in Bechtel v. Administrative Review Board, No. 11-4918-ag (2d Cir. Mar. 5, 2013), affirmed the dismissal of Bechtel's retaliation claim against his former employer, Competitive Technologies, Inc. (CTI).

From 2001 to 2003, Bechtel worked as a vice president of CTI, where he served on a committee that reviewed CTI's financial transactions and made recommendations regarding CTI's compliance with SOX disclosure requirements. During two committee meetings, Bechtel argued that certain aspects of CTI's finances should be disclosed. The other members of the committee disagreed, but Bechtel refused to sign financial disclosure forms because he worried about personal liability under SOX. A few months later, CTI's financial condition deteriorated, and CTI fired Bechtel.

Bechtel filed a SOX whistleblower complaint with OSHA, which initially found in his favor. An administrative law judge, however, dismissed the complaint, and the ARB affirmed that dismissal. Bechtel appealed to the Second Circuit Court of Appeals, which agreed with him that the ALJ had applied the wrong standard. The court held that to prevail in a SOX whistleblower claim:

[A]n employee must prove by a preponderance of the evidence that (1) she engaged in protected activity; (2) the employer knew that she engaged in the protected activity; (3) she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action. If the employee establishes these four elements, the employer may avoid liability if it can prove by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of that protected behavior.

The court clarified that this burden-shifting framework is the only framework to be applied in SOX whistleblower cases. Applying the framework, the court ultimately rejected Bechtel's appeal, ruling that Bechtel failed to prove that his protected conduct was a contributing factor in CTI's decision to fire him.

Wiest v. Lynch

Bechtel may have clarified the framework, but in Wiest v. Lynch , 710 F. 3d 121 (3d Cir. 2013), the Third Circuit Court of Appeals created uncertainty when it diverged from other circuits on the issue of what constitutes “protected activity,” the first element of a prima facie case of SOX whistleblower retaliation.

SOX prohibits publicly traded companies from retaliating against employees who blow the whistle on federal mail fraud, wire fraud, bank fraud, securities and commodities fraud or conduct which violates any rule or regulation of the Securities and Exchange Commission (SEC) or any federal law relating to fraud against shareholders. The complaining employee must have both subjective and objectively reasonable beliefs that the conduct complained of violates one of those enumerated laws. Congress, unfortunately, did not define what constitutes an objectively reasonable belief ' and the courts are split.

Initially, the courts adopted the ARB's position announced in Platone v. FLYi, Inc., ARB 04-154 (Dep't of Labor Sept. 29, 2006), that a complaint had to “definitively and specifically relate” to one of the laws enumerated in Section 806 to be objectively reasonable. The Ninth Circuit, for example, adopted this standard in the often-cited Van Asdale v. Int'l Game Tech. , 577 F.3d 989, 996 (9th Cir. 2009). In 2011, the ARB switched gears, overruling Platone and rejecting the “definitive and specific” standard. In Sylvester v. Parexel Int'l LLC, ARB 07-123 (Dep't of Labor May 25, 2011), the ARB adopted a more lenient standard under which the objective element is “evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience,” as the aggrieved employee.

Following Parexel, the Third Circuit revived the SOX whistleblower claims of Jefferey Wiest, a former accountant employed by Tyco Electronics. The court held that a SOX whistleblower need only possess a “reasonable belief” that his or her employer violated the law. Wiest, a 31-year employee of Tyco, alleged that he had been fired from his accounting job after he refused to process requests for extravagant spending, such as a conference at the Atlantis Resort in the Bahamas that featured $3,000 “mermaid greeters” and costumed “pirates/wenches.” After Wiest alerted his supervisor that the costs were inappropriately charged as advertising expenses, Tyco management decided it needed to treat the event as income for attending employees to avoid improper accounting and tax deductions.

Tyco subsequently opened an investigation into Wiest's potential violation of company policy for unrelated activities dating as far back as 10 years earlier. The company eventually fired Wiest, and he sued under Section 806.

Relying on Platone, the district court dismissed Wiest's SOX claims, finding that his allegations did not “definitively and specifically relate” to one of the enumerated laws under Section 806. The Third Circuit overturned the district court's decision and adopted the “reasonable belief” standard articulated in Parexel, ruling that the ARB's decision to reject the “definitively and specifically relate” standard was entitled to administrative deference (aka Chevron deference). The majority noted that while a SOX whistleblower must have a reasonable belief that the employer violated a statute or rule enumerated in Section 806, “the whistleblower's communication need not ring the bell on each element of one of the stated provisions of federal law ' ” The court also agreed with Parexel that this standard is appropriate as a policy matter because the complaining employee may not have access to the evidence needed to prove each element of the fraud.

In a strong dissent, Judge Jordan urged that without specificity in the complaint, the employer might not recognize that the employee is engaging in protected conduct. And, since the conduct complained of need not actually constitute fraud, virtually any complaint could be bootstrapped into protected conduct. Judge Jordan noted: “Whistleblower statutes like SOX ' 806 seek to protect people who have the courage to stand against institutional pressures and say plainly, 'what you are doing here is wrong' ' not wrong in some abstract or philosophical way, but wrong in the particular way identified in the statute at issue.”

University of Texas Southwestern Medical Center v. Nassar

SOX holds no monopoly on retaliation claims, and the Supreme Court recently weighed in on the burden of proof required to establish a retaliation claim under Title VII of the Civil Rights Act of 1964 (as amended), 42 U.S.C. ' 2000e et seq., reversing itself after more than 20 years. In University of Texas Southwestern Medical Center v. Nassar , 133 S. Ct. 2517 (2013), the Court held that a Title VII retaliation plaintiff must prove that “his or her protected activity was a but-for cause of the alleged adverse action by the employer.”

Dr. Naiel Nassar served as a faculty member at the University of Texas Southwestern Medical Center (UTSW). Nassar claimed his supervisor, Beth Levine, discriminated against and harassed him because of his Middle Eastern descent. Nassar ultimately accepted a position as a staff physician at Parkland Hospital, an affiliate of UTSW, and then sent a letter to UTSW complaining of the harassment by Levine. One UTSW doctor who received the letter declared that Nassar “publicly humiliated” Levine and later objected to Parkland's offer to Nassar because it allegedly violated the affiliate agreement between Parkland and UTSW. Parkland later withdrew Nassar's offer and he sued.

A jury found that UTSW constructively discharged Nassar and retaliated against him in violation of Title VII by preventing him from obtaining employment at Parkland. The Fifth Circuit held that there was insufficient evidence of constructive discharge but affirmed the finding of retaliation because retaliation was “a motivating factor” in UTSW's adverse employment action.

The Supreme Court reversed, holding that a plaintiff must prove that his engagement in a protected activity was the “but for cause” of the adverse employment decision. The Court based its decision on Gross v. FBL Financial Services, Inc. , 557 U.S. 167 (2009), where it adopted a “but for” standard for retaliation claims under the Age Discrimination in Employment Act (ADEA), 29 U.S.C. ' 621 et seq . In reaching this decision, the Court observed that “[Title VII], like the statute at issue in Gross , makes it unlawful for an employer to take adverse employment action against an employee 'because' of certain criteria.” Since the anti-retaliation provisions of Title VII and the ADEA “lack of any meaningful textual difference,” the Court held that, “the proper conclusion here, as in Gross , is that Title VII retaliation claims require proof that the desire to retaliate was the but-for cause of the challenged employment action.” By adopting this heightened “but for” causation standard, the Court rejected the “mixed-motive” standard established nearly a quarter century ago in Price Waterhouse v. Hopkins , 490 U. S. 228 (1989).

The impact of Nassar on SOX whistleblower claims remains unclear in light of the explicit “contributing factor” language contained within the SOX regulations. On the other hand, to the extent Nassar may generally reflect the mood of the Supreme Court, it may portend a more stringent burden for SOX whistleblowers if and when the Court takes up the issue.

Now What? Recommendations for Employers

Against this evolving and unpredictable legal backdrop, employers may wonder how best to protect themselves from SOX and other types of whistleblower retaliation claims. As in many situations, the best defense is a good offense. Given the ease with which some courts may be willing to find a prima facie case and the uneven burdens of proof, the ideal method of avoiding liability for whistleblower retaliation is to avoid litigation altogether. Employers should consider the following steps to minimize the likelihood of a claim:

1. Create a climate that discourages fraud and improper conduct. Establish an explicit code of conduct, communicate (repeatedly) a commitment to the policies, and train employees. If no one is doing anything wrong, there will be no whistle to blow.

2. Walk the walk. Policies that are not enforced do little good. Companies must act swiftly to remedy and punish improper conduct, even when the perpetrator is a rainmaker, strategic genius, or a really nice guy/gal with three kids, a puppy and a mortgage. As painful as it may be, a serious response will not only stop the misconduct at hand, but will deter others from engaging in wrongdoing.

3. Make sure employees understand their jobs and the big picture of what is going on around them. If employees are kept in the dark, they may infer something nefarious from the secrecy, or mistakenly believe conduct they observe is improper. Under cases like Wiest, this scenario could lead to a finding of an objectively reasonable belief the company is violating the law. Employees who “get” what they and their colleagues are doing are less likely to believe, reasonably or otherwise, that something is amiss.

4. Create effective means for employees to complain. Whether through an ombudsman, open door policy or hotline, employers must ensure they have established an easy way for employees to complain and a system to ensure complaints are handled promptly. Under SOX, publicly traded companies must also implement mechanisms for employees to complain anonymously. When complaints are not anonymous, to the extent possible without violating confidentiality or compromising an investigation, keep the complaining employee informed about the progress and result of the investigation so he knows the company took the complaint seriously and does not feel shunned for complaining.

5. Enforce a robust anti-retaliation policy. Create a culture where everyone ' complainants, the accused and the investigators ' knows that the company does not tolerate retaliation against employees who complain in good faith. Invite complaining employees to notify a designated person promptly if the employee believes she is the victim of retaliation.

6. Provide regular, accurate oral and written feedback to employees about their performance. Without good documentation as to the reasons for an adverse personnel decision ' preferably predating any whistleblowing ' it is extremely difficult to establish by clear and convincing evidence that the employer would have taken the same action absent an employee's complaining. Employees (and their lawyers) know this and will assess the available documentation when deciding whether to sue.

7. Stay tuned. The only development that can be predicted with accuracy is that the law is sure to keep changing. Employers should buckle their seatbelts and prepare themselves for what could be a bumpy ride.

Janie F. Schulman is the Co-Chair of the Employment and Labor Group at Morrison & Foerster LLP, resident in the firm's Los Angeles office. She can be reached at 213-892-5393 or [email protected]. Ms. Schulman gratefully acknowledges the assistance of Jeremy Merkelson, Jessica Childress and Jonder Ho in preparing this article.'