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March 5, 2014

Sarbanes-Oxley Whistleblower Provision and Private Employers


On March 4, 2014, the United States Supreme Court issued a landmark ruling in Lawson v. FMR LLC, No. 12-13 (U.S. Mar. 4, 2014), which broadened the scope of whistleblower protections under the Sarbanes-Oxley Act to employees of private companies. The Sarbanes-Oxley whistleblower protection provision, 18 U.S.C. §1514A, has long provided shelter from employer retaliation to employees of public companies who report suspected corporate fraud. The Court’s decision in Lawson extends that protection to employees of privately-held companies such as investment advisors, attorneys, accountants, and consultants who provide services to public companies. This broad interpretation of §1514A reflected the Court majority’s belief that the Act’s whistleblower protections should reaffirm Congress’s clearly-articulated goals in passing Sarbanes-Oxley in the wake of the Enron scandal, namely, “prevent[ing] and punish[ing] corporate and criminal fraud,” and eradicating the “corporate code of silence” that plagued Enron and allowed it to perpetuate its fraud. That “code of silence,” the Court observed in Lawson, extended beyond Enron’s own officers to the employees of the privately-held contractors Enron used to facilitate its day-to-day operations. Those private contractor employees bore significant responsibility for reporting fraud but “the fear of retaliation was the primary deterrent to such reporting.” The Court majority reasoned that extending whistleblower protection to those employees was necessary to satisfy Congress’s goal of preventing future Enron scandals from ever occurring.

The practical result of the Court’s Lawson decision will likely be a substantial uptick in employee whistleblower claims. That is because the Court’s ruling not only greatly increases the pool of employees protected by §1514A, but it does so by expanding the statute’s reach to include privately-held employers who were not previously susceptible to such claims and, therefore, unlikely to have experience preventing and defending whistleblower suits.

Through my experience successfully defending healthcare institutions against similar civil whistleblower claims brought under other statutes, I have observed the following factors to be the most critical to a company’s successful defense against whistleblower allegations brought by terminated employees. By keeping these factors in mind before terminating an employee, an employer can better arm itself with the evidence it will need to withstand a potential whistleblower lawsuit.

Documentation: Without question, an employer’s best evidence to refute a whistleblower claim is documentation of the true, non-retaliatory reason for the termination that precedes the employee’s whistleblowing. In the context of §1514A, this means documenting all deficiencies and other issues with a particular employee before he/she reports suspected fraud or abuse. Because an employee can make such a report at any time, a company’s best practice is to contemporaneously document any complaint, criticism, and other issue with every employee so there is a complete and accurate record of those failings prior to any report of suspected fraud.

Internal Policies: Whistleblower plaintiffs often point to perceived irregularities in the termination process to establish disparate treatment and/or improper motive. Accordingly, employers should put in place, and strictly follow, written internal policies describing the various grounds for termination and the procedure to be followed when an employee is terminated. Showing that an employer held an alleged whistleblower to the same standard and treated him/her the same way it did all other employees can be persuasive evidence to refute the whistleblower’s retaliation claim.

Warnings and Coaching: Whether a termination was “unfair” is not technically an element of a whistleblower suit, but successfully defending such a claim can nonetheless turn on whether the fact-finder perceives the termination to be “fair.” Juries and, to a lesser extent, judges are usually more willing to reject whistleblower claims if the employer shows that it treated the employee fairly by making good faith attempts to work with the employee and help him/her improve performance before resorting to termination. The best evidence of such a good faith effort is documentation reflecting written warnings specifically describing the deficient conduct, followed up by documented coaching sessions with a supervisor who offers suggestions on how the employee can remedy those deficiencies.

Timing: Frequently, the most compelling evidence a whistleblower can offer – and the most difficult evidence for an employer to refute – is that a termination followed very shortly after whistleblowing. In fact, there is substantial legal precedent recognizing an inference of impropriety when there is close temporal proximity between the whistleblowing and the termination. Therefore, it is advisable for an employer to analyze and consider whether an employee has recently engaged in any whistleblowing prior to terminating him/her. If, for example, the employee recently reported suspected fraud to his/her superior, the employer may want to consider delaying the termination, if possible, and consulting with counsel while continuing to document deficiencies and warnings, and offer coaching.

The extra time and attention that an employer devotes to implementing and following these procedures will be time well-spent to help insulate itself as much as possible from employee whistleblower and retaliation claims. Evidence of carefully followed procedures and thorough documentation can ultimately save an employer hundreds of thousands of dollars in civil damages and attorneys’ fees. With so much at stake, employers would be wise to take these proactive steps to anticipate and preempt whistleblower suits before they can cause civil liability or reputational damage.

About the Author

Callan Stein

Callan Stein is an associate in Donoghue Barrett & Singal’s Boston office. He regularly represents small and large businesses in litigation and general corporate matters. You can follow him on Twitter at @CallanSteinEsq


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