Bay State Co. Immune From 'Foreign' SOX Suit

The whistleblower provision of Sarbanes-Oxley is off limits to a worker fired by a foreign subsidiary of a U.S. company because the broad reach of the law doesn’t extend to alleged financial fraud outside the U.S., the 1st Circuit recently ruled.

The employee claimed he was terminated in retaliation for disclosing fraudulent work that took place in Latin America. He argued that even though foreign subsidiaries in Argentina and Brazil committed the alleged fraud, the extensive control exerted over him by the Massachusetts-based company – including continuous contact and regular visits to the state – triggered potential liability under Sarbanes-Oxley.

But the 1st Circuit in Carnero v. Boston Scientific Corporation (Docket No. 04-1801) said Congress did not intend the whistleblower provisions of the law to apply outside the U.S.

Judge Levin H. Campbell in the panel’s opinion said the legislative history of Sarbanes-Oxley suggested Congress was concerned about providing whistleblower protections for corporate employees working within the U.S.

“Nowhere in the legislative history is there any indication that [the statute] was drafted with the purpose of extending to foreign employees working in nations outside of the United States the right to seek administrative and judicial civil relief under the Act,” he said.

Cambell added: “[W]hatever help to investors its overseas application might in theory provide is offset not only by the absence of any indication that Congress contemplated extraterritoriality but by a variety of indications that Congress thought the statute was limited to territorial jurisdiction of the United States.”

Domestic Concerns

Boston attorney James W. Nagle, who along with Leslie S. Blickenstaff represented the parent company, said the opinion is the first time any court in the U.S. has ruled on this issue.

“The court is indicating that the statute is primarily designed to effect domestic eployment claims,” he said. “International claims, particularly for multinationals involving whistleblowing assertions, are going to face an uphill battle given the presumption that exists against extraterritoriality.”

Nagle said that such a presumption would apply unless Congress expressly carved out an exception, as it did with the criminal portion of the law.

The parent company’s lawyer said he anticipates the decision will affect any businesses that have significant overseas operations and will provide useful guidance for attorneys involved in similar litigation.

“Rather than having to argue the particular facts of a case, lawyers are now going to be able to contend in a motion to dismiss that the statute doesn’t apply extraterritorially,” he said. “Having this type of legal defense available will greatly simplify the way lawyers can deal with these claims.”

One attorney familiar with Sarbanes-Oxley said the decision seemed to recognize the inherent problems that would be raised if a federal court sought to regulate the practices of a foreign company doing its business outside the U.S.

Boston attorney Robert R. Berluti said “what the court is saying is that the governance of a foreign entity is going to be controlled under the law in which the entity was formed.”

Edward Griffith of Bolatti & Griffith of New York City, who represented the employee, said the court ignored the plain meaning of the statute.

“[C]ongress’ basic purpose in enacting the whistleblower section was to protect investors in U.S. financial markets by encouraging employees of companies listed on U.S. exchanges to disclose accounting irregularities and other violations of U.S. law,” Griffith said. “Whether an employee works within the territorial limits of the United States is irrelevant to that purpose.”

The 1st Circuit has previously recognized that the Sarbanes-Oxley whistleblower section extends to all employees of companies listed on U.S. securities exchanges, without any limitation to domestic employees, Griffith added.

Foreign Operations

After examining the history of the statute, Campbell in the opinion indicated lawmakers made repeated references to various locations throughout the U.S., particularly Texas, but that no parallel reference was made to foreign countries.

Campbell said: “Congress’s complete silence as to overseas application of the instant whistleblower protection provision (combined with Congress’s repeated reference to the need for that provision to supplement state enforcement), provides significant indication that Congress did not intend [the statute] to apply extraterritorially.”

The plaintiff, Ruben Carnero, a citizen of Argentina, accepted employment with Boston Scientific Argentina, an Argentinean subsidiary of the defendant parent company, Boston Scientific Corp.

The parent company was a Delaware corporation with headquarters in Natick, Mass., which manufactures medical equipment with operations in several countries.

The plaintiff’s employment agreement was finalized in Argentina and specified that it would be governed by the laws of Argentina. The plaintiff worked primarily in Buenos Aires and was directly employed and paid by the subsidiary rather than by the parent company.

The plaintiff claimed he was eventually terminated in retaliation for reporting to supervisors at the parent company that its Argentinean and Brazilian subsidiaries, as well as other foreign companies, improperly inflated sales figures.

The Department of Labor dismissed the plaintiff’s claim, ruling the whistleblower provision did not apply to employees of companies working outside the U.S.

The plaintiff sought review of the decision in U.S. District Court in Massachusetts, which upheld the dismissal.

In response to the plaintiff’s contention that limiting the applicability of the statute to purely domestic conduct would improperly insulate the actions of U.S. companies in their foreign operations, Campbell again turned to Congressional intent.

“While [the plaintiff’s] argument has some force, it faces a high and we think insurmountable hurdle in the well-established presumption against the extraterritorial application of Congressional statutes,” he said.

Campbell noted that the presumption reflected the notion that when Congress legislates, it is primarily concerned with domestic conditions.

“If the whistleblower protection provision is given extraterritorial reach in a case like the present one, it would empower U.S. courts and a U.S. agency … to delve into the employment relationship between foreign employers and their foreign employees,” he said. “The door would thus be opened for U.S. courts to examine and adjudicate relationships abroad that would normally be handled by a foreign country’s own courts and government agencies pursuant to its own laws.”

He said that the court believed that if Congress had intended to have the provision applied in such a way, it would have said so.

“[Congress] certainly would have considered, before enacting the law, the problems and limits of extraterritorial enforcement,” he said. “In sharp contrast to this silence, Congress has provided expressly elsewhere in the Sarbanes-Oxley Act for extraterritorial enforcement of a different, criminal, whistleblower statute.”