SOX whistleblower protection could extend to private companies

The Sarbanes-Oxley Act protects employees of publicly traded companies from retaliation for making both internal and external complaints about actions they reasonably believe violate federal laws involving fraud against shareholders.

SOX has many remedies to make an employee whole, including, reinstatement, back pay with interest, compensatory damages, and special damages sustained by an employee, including litigation costs, expert witness fees and reasonable attorney fees.

This broad array of damages has resulted in attempts by employees to file claims under the Act even though they are not employees of publicly traded companies.

In making these claims, the employees have argued that a literal reading of the language in the Act prohibiting retaliation by any “contractor, subcontractor, or agent” of a publicly traded company, extends coverage to employees of private companies who fall within these identified categories. As outlined below, a review of applicable Department of Labor regulations and related commentary, as well as the actual Whistleblower Investigations Manual of the Occupational Safety and Health Administration, fully supports this interpretation.

The regulations define “employee” to include an individual presently or formerly working for a “company” or “company representative.” 29 C.F.R. § 1980.101. In turn, a “company representative” is defined as any officer, employee, contractor, subcontractor, or agent of a company. Id.

The regulations then expressly describe persons who may file a complaint as “[a]n employee who believes that he or she has been discriminated against by a company or company representative in violation of the Act.” 29 C.F.R. § 1980.103.

In addition, the interpretive commentary to the DOL regulations setting forth the procedures for handling whistleblower complaints (issued Aug. 24, 2004) provides the following analysis under 29 C.F.R. § 1980.101 (Definitions): “Notwithstanding its caption, section 806(a) expressly provides that no publicly traded company, ‘or any officer, employee, contractor, subcontractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee….’ The statute thus protects the employees of publicly traded companies as well as the employees of contractors, subcontractors, and agents of those publicly traded companies.” [Emphasis added].

Finally, the application of SOX to private company employees is also anticipated in the OSHA Whistleblower Investigations Manual. Section III “Coverage” of Chapter 14 of the manual provides the following illustration of the Act’s application to an employee of a private company: “For example, an employee of an otherwise non-covered employer (e.g., a small accounting firm) that is a contractor of a covered company who provides information to the SEC regarding a violation of SEC regulations (e.g., accounting irregularities) would be protected from subsequent retaliation.”

Courts not persuaded

Despite the existence of this express language in SOX, related regulations, commentary, and the OSHA Manual to the contrary, courts interpreting the Act to date have rejected its application to employees of private companies.

Rather, private companies have only been held liable in circumstances where an employee of a publicly traded company is retaliated against by a private company acting on behalf of the employee’s public company employer.

For example, in Minkina v. Affiliated Physician’s Group, 2005-SOX-19 (ALJ Feb. 22, 2005), appeal dismissed (ARB July 29, 2005), the employer was not a publicly traded company. The employee argued that the company was a contractor or subcontractor of various publicly traded companies and that she should be covered under the Act because of the specific reference to “contractors” and “subcontractors.”

The DOL administrative law judge granted the employer’s motion for summary judgment and held that the reference to contractors and subcontractors in the Act was merely a listing of the potential actors who were prohibited from retaliating on behalf of a publicly company employer.

Similarly, in Brady v. Calyon Securities, 406 F. Supp. 2d 307 (S.D.N.Y. 2005), the employee did not allege that any of the defendants were publicly traded companies. The employee alleged instead that they were agents or underwriters for numerous public companies and should be covered based on the reference to “agent” in the Act

The court granted the defendants’ motion to dismiss, holding that merely acting as an agent for a public company does not bring the agency under the protection of the Act. The court emphasized that adopting the plaintiff’s theory would create a general whistleblower protection applicable to the employment relationships of any privately-held employer that has ever acted as an agent of a publicly traded company.

A similar decision resulted in Goodman v. Decisive Analytics Corp., 2006-SOX-11 (ALJ Jan. 10, 2006). The employee worked for a private company that provided consulting services to publicly traded companies. He argued that his employer was a “contractor” or “subcontractor” of a publicly traded company.

In approving the employer’s motion for summary decision, the DOL ALJ relied on the express language of the caption chosen by Congress for the Act, “Whistleblower Protection for Employees of Publicly Traded Companies” and, as in Minkina, held that the terms “contractor” and “subcontractor” merely reference two entities that may not retaliate against an employee of a publicly traded company.

Notably, the ALJ’s reliance on the express language of the caption directly contradicts the interpretive commentary under 29 C.F.R. § 1980.101 to the regulation’s language (“Notwithstanding its caption”) as cited above.

In Reno v. Westfield Corporation, 2006-SOX-30 (ALJ Feb. 23, 2006), the employee argued his employer was a contractor of a publicly traded company and was therefore covered under the Act. The ALJ granted the company’s motion for summary judgment, again holding that merely being a contractor or agent of a publicly traded company is not enough to impose liability under SOX. Rather, the contractor or agent must be acting on behalf of the publicly traded company when it retaliates against the public company employee.

Different result

Although the majority of decisions have not applied SOX to private companies, a different result was reached in Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (ALJ July 18, 2005). The ALJ held that a private company could be liable under the Act due to the level of control it had over a publicly traded company’s personnel.

The employee worked for DVI Financial Services, Inc., a publicly traded company, which hired AP Services, a private company, to manage its business operations during its bankruptcy, including the authority to evaluate and terminate DVI’s employees.

Based on Kalkunte, private companies should be aware of potential liability under the Act when their business relationships allow them to have control over employees of publicly traded companies.

Moreover, a recent decision by the Administrative Review Board (ARB) of the Department of Labor in Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149, ALJ No. 04-SOX-11 (ARB May 31, 2006), may initiate a shift in the decisions under the Act and allow claims by certain employees of private companies.

Specifically, the ARB revived the claims of an employee of a private subsidiary of a publicly held company that were previously dismissed by the ALJ.

The ARB did not interpret the Act to require a complainant to name a corporate respondent that is a publicly traded company, as long as the employee names at least one respondent who is covered under the Act as an officer, employee, contractor, subcontractor, or agent of such company.

The ARB further held that in determining whether a respondent is an “agent” of a publicly held company principles of general common law agency should be applied.

The decisions to date have not directly extended the Act’s whistleblower provisions to employees of private companies. Rather, private companies have been liable only when they have acted on behalf of an employer in connection with a whistleblower claim of an employee.

However, private companies should be cautioned that the express language of the Act, related regulations, commentary, and the OSHA Manual, all anticipate the Act’s application to employees of private companies that are “contractors,” “subcontractors,” and “agents” of public companies, and future appellate level decisions could drastically alter the Act’s scope and extend its protection to such employees.

Michael A. Bean is an associate in the Boston office of Wolf, Block, Schorr and Solis-Cohen LLP where he represents emerging growth companies with a focus on general corporate law, labor and employment issues, mergers and acquisitions, corporate governance matters, and financing transactions. He can be reached at (617) 226-4028 or [email protected]. Wolf, Block, Schorr and Solis-Cohen LLP (www.wolfblock.com) is based in Philadelphia with offices throughout the Northeast.