Whistleblower Provisions of New Sarbanes-Oxley Act Provide for Civil and Criminal Employer Liability
 
October 7, 2002
 

The Sarbanes-Oxley Act of 2002 (the Act), the wide-ranging corporate reform legislation enacted in the wake of accounting scandals at Enron, WorldCom and Adelphia Communications, includes two significant expansions of whistleblower protection laws that could subject corporate and individual violators to substantial criminal and civil liability.
 

The Act includes broad new civil protections for employees of publicly traded companies who report violations of certain federal security laws. Covered whistleblowers may pursue a private right of action in addition to Department of Labor enforcement, and may be ordered reinstated even before judicial proceedings have been completed. More significantly, a provision added to the bill in conference explicitly imposes criminal sanctions against companies or individuals who are found to have retaliated against certain whistleblowers. Under this provision, unique among federal anti-retaliation statutes, retaliation against a whistleblower of “any Federal offense” could result in 10 years’ imprisonment and fines of up to $500,000 for corporations and up to $250,000 for individuals.

Civil Provisions Protecting Whistleblowers of Security Law Violations
 

Section 806 of the Act prohibits retaliation by a publicly traded company against whistleblowers in securities fraud cases and creates a private right of action for aggrieved employees. The prohibitions also apply to the officers, employees, contractors, subcontractors and agents of any such companies. The law prohibits any of these persons from discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against an employee in the terms and conditions of employment because the employee engaged in protected activity.

The Act protects employees who take “lawful” acts to disclose information or otherwise assist criminal investigators, federal regulators, Congress, their supervisors (or such other persons working for the employer who have the authority to investigate, discover or terminate misconduct), or parties in a judicial proceeding in detecting and stopping actions that they reasonably believe to be in violation of specific sections of the Securities Exchange Act of 1934, any SEC rule or regulation, or any provision of federal law relating to fraud against shareholders. Protection is afforded under the new law as long as the employee “reasonably believes” the employer’s conduct is a violation of federal securities law, even if the questioned conduct is later determined to be lawful. However, since the only acts protected are “lawful” ones, the provision would not protect illegal actions, such as the improper public disclosure of trade secret information.
 

Aggrieved employees may seek relief by filing a complaint with the Secretary of Labor within 90 days of the alleged violation. If the Secretary of Labor has not issued a final decision within 180 days, and there is no showing that the delay is due to the bad faith of the claimant, the employee may bring an action for review in federal district court.
 

The administrative enforcement mechanisms of the Act are, by reference, those included within the whistleblower provisions of the Aviation Investment and Reform Act. This procedure calls for the filing of a complaint and a written response; an investigation into the allegations; a determination of reasonable cause by the Secretary of Labor; issuance of a preliminary order; a hearing on the record, if requested by either party; and issuance of a final order. The Secretary’s final order may be appealed by either party to the appropriate U.S. Court of Appeals within 60 days of issuance.
 

A particularly problematic aspect of the enforcement procedure is that upon a preliminary finding by the Secretary that reasonable cause exists to believe a violation of the Act has occurred, the statute requires the Secretary to issue a preliminary order granting relief, including reinstatement of the employee with back pay, compensatory damages, costs, attorney’s fees and expert witness fees. Consequently, an employer could be forced to pay damages to and rehire an employee who is later ruled to have been lawfully discharged.
 

The following make-whole relief is provided to prevailing claimants under the Act:
• reinstatement with the same seniority status that the employee would have had, but for the discrimination
• back pay and interest
• compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees and reasonable attorneys’ fees
 

On the positive side for employers, Congress rejected expansion beyond make-whole remedies to include compensatory and punitive damages, which likely would have resulted in a proliferation of whistleblower litigation under the Act. In another minor victory for employers, the Act provides that if a complaint is frivolous or has been brought in bad faith, the Secretary may award the prevailing employer up to $1,000 in reasonable attorney’s fees.
 

Criminal Penalties for Retaliation Against Whistleblowers
 

In a little-noticed provision added while the bill was in conference, Section 1107 of the Sarbanes-Oxley Act creates a felony for retaliation against certain whistleblowers. The new provision amends the chapter of the criminal code dealing with obstruction of justice and specifically amends a section addressing witness tampering. The new section provides:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.

The scope of this provision potentially is tremendously broad. It is important to recognize that, unlike the civil whistleblower provisions, the criminal provision is not restricted to protecting employees of publicly traded companies. Rather, the statute protects “any person” without limitation.
 

In addition, unlike the civil provisions, which prohibit retaliatory action against employees who report violations of securities laws, the criminal provision makes it unlawful to take retaliatory action against persons regarding the commission of “any Federal offense.” Neither the Act, nor the federal criminal code, define the term “Federal offense.” While the term likely is meant to encompass only violations of criminal laws, it is conceivable the term could be construed to include violation of civil laws as well.
 

How “Federal offense” is defined will have a tremendous influence on the scope of the new criminal penalties. If the courts interpret the phrase to include noncriminal violations, companies and individuals could be subject to criminal liability for retaliating against employees who provide information about, for example, a minor FLSA recordkeeping violation. The conduct prohibited by the criminal provision is also broad and vague. The courts will be called upon to determine what constitutes “harmful” action or “interference” with employment within the meaning of the statute. Finally, it should also be recognized that the whistleblower protection could apply even if it is ultimately determined that no federal offense occurred, since protection applies to any person providing truthful information “relating to the commission or possible commission of any Federal offense ….”

The law prohibits retaliation against employees who provide the requisite information to a “law enforcement officer.” The federal criminal code defines “law enforcement officer” broadly to include not only federal police officers or FBI agents, but also any office or employee of the federal government, in addition to any person or consultant, authorized to act on behalf of the government who is “authorized under law to engage in or supervise the prevention, detection, investigation, or prosecution of an offense.”

By its terms, the criminal provision only prohibits retaliation against employees who provide “truthful information” to the appropriate authorities.
 

Penalties for violation of the criminal provision are harsh. Violators of the new law may be sentenced to up to 10 years in prison. In addition, companies convicted of violating the law may be fined up to $500,000, and individuals convicted under the law may be fined up to $250,000.
 

The Securities and Exchange Commission is authorized to promulgate rules and regulations in furtherance of the Sarbanes-Oxley Act. It remains to be seen, however, whether the SEC will issue regulations with respect to the whistleblower provisions of the Act.
 

Conclusion
With the creation of a new felony and new civil protections and procedures, the Sarbanes-Oxley Act adds an entirely new dimension to employee whistleblower protections. Given the prospect of criminal liability and substantial fines for both companies and individuals under the new law, it is important for employers to be aware of these new provisions and to educate their management and supervisory personnel of the whistleblower protections contained in the Act.
 

For more information, contact Todd D. Steenson, toll free at 888-688-8500, or via e-mail at todd.steenson@hklaw.com, respectively.