DOL Ruling Expands SOX Whistleblower Protections and Widens Court Conflict

June 27, 2012

On May 31, 2012, the Department of Labor’s Arbitration Review Board (ARB) ruled in Spinner v. David Landau & Associates that the whistleblower protections of the Sarbanes-Oxley Act apply to employees of non-public companies that contract with public companies. The holding significantly expands the class of individuals to whom SOX protections ostensibly apply and will almost certainly result in an increase in (1) SOX whistleblower filings, and (2) further disputes with federal courts regarding whether the DOL’s coverage interpretation is appropriate.

Prior Circuit Court Decision

In Lawson v. FMR LLC, two employees of companies that provided contract services to a public company filed complaints, alleging that they were fired from their jobs in retaliation for activity protected by SOX’s whistleblower provisions. A DOL administrative law judge (ALJ) dismissed one case, holding that the employee was not covered under SOX. Both employees then removed their cases to federal court, where they were consolidated. The District Court held that the employees were covered by SOX, but certified the issue for interlocutory appeal.

The U.S. Court of Appeals for the First Circuit, in a detailed opinion, disagreed with the District Court, holding that the whistleblower protections of SOX applied only to employees of publicly traded companies. The Court undertook a detailed textual analysis of the statute, examined the legislative history and reviewed other factors to reach its conclusion. Further, only one judge on the panel dissented, writing that the Court should have given deference to the agency’s interpretation and applied a broad definition of the term “employee.”

Spinner Decision

Fewer than four months later, in Spinner v. David Landau & Associates, the ARB examined the identical issue addressed by Lawson. The ARB held that because Spinner did not arise in the First Circuit, the Board was not bound by the decision in Lawson. The ARB then rejected the analysis of the Court of Appeals in Lawson, conducting its own textual and legislative history analysis to reach the opposite conclusion and hold that Congress intended SOX whistleblower provisions to cover employees of public company contractors, regardless of whether the contractors themselves are public companies.

This is not the only case in which the ARB has issued decisions directly contrary to prior Court of Appeals rulings. In Sylvester v. Parexel, the ARB held that the pleading standard established by courts that SOX whistleblower complaints must “definitively and specifically relate” to one of the six areas protected by statute was improper. Instead, the ARB held that any “reasonable belief” that the activity complained about could fit within SOX is sufficient.

Spinner Impact

  • Because of the significant expansion of coverage brought about by the ARB’s Spinner decision, non-public companies that provide contract services to public companies should become familiar with the SOX whistleblower provisions and prepare to handle whistleblower claims.
  • While employees may remove their SOX cases from the DOL to federal court if the cases are not resolved within 180 days, the fact that the ARB is issuing holdings more favorable to employees likely means that employees will stay in the DOL process for as long as possible, which could significantly increase the cost of defense to employers.
  • Companies facing SOX whistleblower claims should be prepared to litigate those claims before the DOL and should take steps to preserve their defenses — even those court-established defenses squarely rejected by the ARB — until the defenses can be presented to the federal courts following ALJ adjudication and an ARB determination.

For assistance preparing for SOX whistleblower claims or litigating such claims before the DOL or in federal court, please contact the author or any other members of the McGuireWoods Labor and Employment Group.