Whistleblower Protection Laws

Sarbanes-Oxley

Section 806 of the Sarbanes-Oxley Act protects whistleblowers at covered employers who report to their supervisor or the government conduct that they reasonably believe constitutes wire fraud, mail fraud, bank fraud, securities fraud, or a violation of any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders.

Some SOX whistleblowers have obtained substantial recoveries, including jury verdicts of $11M and $5M in SOX whistleblower retaliation cases. Leading SOX whistleblower lawyer Jason Zuckerman has established favorable precedent construing SOX and has obtained more than ten settlements in SOX matters in excess of $1 million, two of which were above $4 million.

To succeed in a Sarbanes-Oxley retaliation claim, the whistleblower must show by a preponderance of the evidence that

1. she had engaged in protected whistleblowing activity;
2. the company was aware of her protected activity;
3. she suffered an unfavorable personnel action; and
4. her protected activity was a “contributing factor” in the unfavorable action.

“Contributing factor” causation is a light burden that can be met by showing that protected activities tended to affect in any way the decision to take the adverse action.

Once the whistleblower makes that showing, the company can avoid liability only by proving by clear and convincing evidence that it would have taken the same adverse action even in the absence of the protected activity.

A helpful guide to SOX titled Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers elaborates on protections afforded whistleblowers under the law.

Protected Whistleblowing Under the Sarbanes-Oxley Act

The Sarbanes-Oxley whistleblower law protects corporate whistleblowers for providing information about securities fraud, shareholder fraud, bank fraud, a violation of any SEC rule or regulation, mail fraud, or wire fraud. The Department of Labor has construed SOX whistleblowing broadly, holding that:

• [ Disclosing a potential violation] is protected, i.e., an employee who reasonably believes that a securities violation is imminent will be protected by SOX if he or she reports the violation before it actually occurs.
• An employee’s mistaken belief in a violation of law can be objectively reasonable. The reasonable person standard recognizes that many employees are unlikely to be trained to recognize legally actionable conduct by their employers. To satisfy the objective component of the “reasonable belief” standard, the employee must prove that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws.
• To be protected under SOX, the employee’s report need not “definitively and specifically” relate to one of the listed categories of fraud or securities violations in Section 806 of SOX. The focus is “on the plaintiff’s state of mind rather than on the defendant’s conduct.” Guyden v. Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008).

Prohibited Whistleblower Retaliation Under Sarbanes-Oxley

The whistleblower protection provision of the Sarbanes-Oxley Act prohibits a broad range of retaliatory adverse employment actions, including discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower. Recently a federal court of appeals held that merely outing or disclosing the identity of a whistleblower is actionable retaliation under SOX.

Proving Sarbanes-Oxley Whistleblower Retaliation

To prevail under SOX’s whistleblower provision, an employee must prove by a preponderance of the evidence that

• they engaged in protected activity;
• the employer knew that they engaged in the protected activity;
• they suffered an unfavorable personnel action; and
• the protected activity was a contributing factor in the unfavorable action.

A contributing factor is any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision. Causation can be inferred from timing alone where an adverse employment action follows on the heels of protected activity. The decision-maker’s knowledge of the protected activity and close temporal proximity will suffice to prove causation in some cases.

Once the employee proves the elements of a Sarbanes-Oxley whistleblower retaliation claim by a preponderance of the evidence, the employer can avoid liability only if it proves by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of the complainant’s protected behavior or conduct.

Recent SOX Whistleblower Recoveries

There is no cap on special damages under SOX, and some state whistleblower protection laws enable whistleblowers to recover punitive damages. Recently [ccountants-whistleblowers/ corporate whistleblowers have obtained substantial recoveries] in SOX whistleblower cases:

• Jury Awards Former Bio-Rad Counsel $11Min Sarbanes-Oxley Whistleblower Case
• Jury Awards Six Million Dollars to Whistleblower in Sarbanes-Oxley Case
• Sarbanes-Oxley Whistleblower Recovers Nearly $5 Million
• JP Morgan SOX Whistleblower Wins $1.13M at Trial
• UBS Whistleblower Prevails at Trial in SOX Whistleblower Case

Remedies in Whistleblower Retaliation Cases

Whistleblower retaliation can exact a serious toll, including lost pay and benefits, reputational harm, and emotional distress. Indeed, whistleblower retaliation can derail a career and deprive the whistleblower of millions of dollars in lost future earnings.

Whistleblowers should be rewarded for doing the right thing, but all too often they suffer retaliation and find themselves marginalized and ostracized. Federal and state whistleblower laws provide several remedies to compensate whistleblowers that have suffered retaliation, including:

• back pay (lost wages and benefits);
• emotional distress damages;
• damages for reputational harm;
• reinstatement or front pay in lieu thereof;
• lost future earnings; and
• punitive damages.

Click here for examples of substantial verdicts and settlements in whistleblower retaliation cases. Recently, the Pennsylvania Supreme Court affirmed an award of approximately $3.2 million in a whistleblower protection case.

Back Pay in Whistleblower Retaliation Cases

Back pay is compensation for lost wages and benefits that the whistleblower would have earned absent the adverse employment action, offset by interim earnings. A back pay award may include all promotions and salary increases the complainant would have received in the absence of retaliation. See, e.g., Welch v. Cardinal Bankshares Corp., 2003-SOX-15, at 17 (ALJ Feb. 15, 2005) (holding that a prevailing complainant “is entitled to all promotions and salary increases that he would have obtained but for the illegal discharge”) rev’d on other grounds, 536 F.3d 269 (4th Cir. 2008). The value of stock options is recoverable in SOX whistleblower cases. Hagman v. Washington Mutual Bank, Inc., 2005-SOX-73, 2006 WL 6105301, *32 (Dec. 19, 2006).

In addition to back pay, a prevailing whistleblower is entitled to prejudgment interest under certain whistleblower protection laws. Prejudgment interest accrues from the time of the whistleblower’s termination to the time that the court entered judgment.

Under the False Claims Act whistleblower protection law and Dodd-Frank anti-retaliation provision, a prevailing whistleblower is entitled to recover double back pay. In Mooney v. Americare, the court held that back pay is doubled before the court offsets the value of interim earnings (also known as mitigation).

Back pay can also include contracted severance pay to which he would be entitled in the event of discharge without cause when reinstatement was not appropriate. See Loftus v. Horizon Lines, Inc., ARB No. 16-082, ALJ No. 2014-SPA-004 (ARB May 24, 2018).

Front Pay in Lieu of Reinstatement in Whistleblower Retaliation Cases

Reinstatement is the “presumptive and preferred remedy,” but where pronounced animosity between the parties leads both of them to advocate against reinstatement, front pay may be an appropriate substitute. Front pay is designed to compensate the plaintiff for the time it would take to secure comparable employment. See, e.g., Hagman v. Washington Mutual Bank, Inc., ALJ Case No. 2005-SOX-00073, at 26–30 (ARB Dec. 19, 2006), appeal dismissed, ARB Case No. 07-039 (ARB May 23, 2007) (awarding $640,000 in front pay to a banker whose supervisor became verbally and physically threatening when the banker disclosed concerns about the short funding of construction loans).

Where a whistleblower demonstrates that he planned to continue working for the employer until he or she reached normal retirement age and demonstrates sufficient efforts to mitigate damages (find comparable employment), the whistleblower can been entitled to expected earnings to the date of retirement. For example in the Perez v. Progenics Pharmaceuticals SOX whistleblower case, the court awarded approximately $2.7 in front pay. That case is discussed in an article in Corporate Counsel titled How to Help a Whistleblower.

Front pay is an appropriate remedy in lieu of reinstatement in SOX whistleblower cases. See Jones v. SouthPeak Interactive Corp., 986 F. Supp. 2d 680 (E.D. Va. 2013), aff’d, 777 F.3d 658 (4th Cir. 2015). Andrea Jones worked at SouthPeak Interactive Corp. (“SouthPeak”) as its chief financial officer, and SouthPeak terminated her employment two days after she disclosed accounting irregularities to the SEC. Following a four-day trial, a jury found for Jones and awarded nearly $700,000 in damages. Jones then filed a motion seeking front pay in lieu of reinstatement and in addition to compensatory damages. Judge Payne awarded front pay, and noted the following:

Front pay also has been more precisely defined as “a lump sum … representing the discounted present value of the difference between the earnings [an employee] would have received in his old employment and the earnings he can be expected to receive in his present and future, and by hypothesis, inferior, employment.” McKnight v. Gen. Motors Corp., 908 F.2d 104, 116 (7th Cir.1990), cert. denied, 499 U.S. 919, 111 S.Ct. 1306, 113 L.Ed.2d 241 (1991), partially superseded by Civil Rights Act of 1991, Pub.L. 102-166, 105 Stat. 1071 (codified at 42 U.S.C. 1981 et seq.). If a plaintiff has been diverted onto a less profitable career path through the unlawful actions of his former employer, an award of front pay to compensate the plaintiff until such time as he can regain his former career track is not a windfall.

SouthPeak appealed Judge Payne’s decision. The DOL filed an amicus curiae brief arguing that front pay is an appropriate remedy under SOX, and the Fourth Circuit affirmed. See 777 F.3d at 663.

In calculating front pay, courts should apply the following guiding principles:

• “It is well settled that `the risk of lack of certainty with respect to projections of lost income must be borne by the wrongdoer, not the victim.” Bartek v. Urban Redevelop ent Authority, 882 F.2d 739, 746 (3d Cir. 1989).
• The Court should “assume, absent evidence to the contrary, that the illegally discharged employee would have continued working for the employer until he or she reached normal retirement age.” See Perez v. Progenics Pharmaceuticals, Inc., 204 F. Supp. 3d 528 (S.D.N.Y. 2016).

Compensatory Damages in Whistleblower Retaliation Cases

The SOX whistleblower protection law and similar corporate whistleblower protection laws authorize the award of not only economic damages, but also “special damages” which includes damages for emotional distress, mental anguish, humiliation and injury to reputation. See, e.g., Lockheed Martin Corp. v. Admin. Rev. Bd., 717 F.3d 1121, 1138 (10th Cir. 2013) (upholding an award of “noneconomic compensatory damages” for “emotional pain and suffering, mental anguish, and humiliation”). As a federal judge held in Hanna v. WCI Communities, Inc., 348 F.Supp.2d 1332 (S.D.Fla.2004), a SOX whistleblower case, “[w]hen reputational injury caused by an employer’s unlawful discrimination diminishes a plaintiff’s future earnings capacity, [he] cannot be made whole without compensation for the lost future earnings [he] would have received absent the employer’s unlawful activity.”

“[A] plaintiff’s testimony, standing alone, can support an award of compensatory damages, [but] the evidence of the emotional distress must be demonstrable, genuine, and adequately explained.” Price v. City of Charlotte, N.C., 93 F.3d 1241, 1251-52 (4th Cir. 1996). The whistleblower’s testimony “must indicate with specificity how the plaintiff’s alleged distress manifested itself.” Bryant v. Aiken Reg’l Med. Ctrs., 333 F.3d 536, 547 (4th Cir. 2003) (internal quotation marks and alterations omitted).

Attorney Fees and Litigation Costs in Whistleblower Retaliation Cases

Legal fees and costs in whistleblower retaliation cases can also be significant. In the Wadler v. Bio Rad SOX whistleblower retaliation case, Bio-Rad stipulated to $3M in attorney fees for the whistleblower’s counsel. In March 2020, Magistrate Judge Michael E. Hegarty awarded $2,719,225.50 in lodestar fees on the whistleblower’s recovery of $620,105.00 in an NDAA whistleblower retaliation case. See Cejka v. Vectrus Systems Corp., 2019 WL 8198090 (D. Colo. Feb. 21, 2019).

Litigating Sarbanes-Oxley Whistleblower Cases

A Sarbanes-Oxley whistleblower retaliation complaint must be filed initially with OSHA. The complainant has the option to remove a SOX whistleblower claim to federal court once the complaint has been pending at the Department of Labor for 180 days.

180-Day Sarbanes-Oxley Statute of Limitations

The deadline for a SOX whistleblower to file a complaint is 180 days after the whistleblower first experiences or becomes aware of the unlawful retaliation.i The clock starts ticking once “the discriminatory decision has been both made and communicated to the complainant.”ii

The 180-day clock starts to run on the date of each discrete retaliatory act, e.g., the date on which the whistleblower is informed of a demotion, suspension, termination, change in job duties, etc. However, in an action alleging a hostile work environment, retaliatory acts outside the statute of limitations period are actionable where there is an ongoing hostile work environment and at least one of the acts occurred within the 180-day statute of limitations.

A SOX retaliation complaint is considered filed once the Department of Labor receives it. A complaint sent by mail, however, is considered filed on the date of its postmark.

The 180 day period is not jurisdictional and may be equitably tolled when (1) the respondent actively misled the complainant respecting the cause of action, (2) extraordinary circumstances prevented the complainant from asserting his rights, (3) complainant raised the precise statutory claim in issue but mistakenly did so in the wrong forum, or (4) the respondent did not actively mislead the complainant, but instead through its acts or omissions lulled the complainant into foregoing prompt action to vindicate his rights.

“[A]lthough recovery for any action outside the 180-day period is barred, an employee may still use ‘the prior acts as background evidence in support of a timely claim.’” Roop v. Kan. City S. Ry., No. CIV-16-413-SPS, 2017 U.S. Dist. LEXIS 177646 (E.D. Okla. Oct. 26, 2017) citing Dunn v. BNSF Ry. Co., 2017 U.S. Dist. LEXIS 137109, 2017 WL 3670559, at *8 (W.D. Wash. Aug. 25, 2017), quoting Nat’l R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 105, 110, 113 (2002).

Individual Liability Under SOX Whistleblower Protection Law

A whistleblower can bring a SOX retaliation claim against individuals who have the functional ability to retaliate against the whistleblower, and are aware of the whistleblower’s protected conduct (or influenced by a person with knowledge of the protected conduct).

The Fourth Circuit and a California district court have held that directors may be held individually liable under SOX as agents of a publicly-traded company. See Jones v. Southpeak Interactive Corp. of Delaware, 777 F.3d 658, 675 (4th Cir.2015); Wadler v. Bio-Rad Labs, Inc., No. 15-cv-02356-JCS, 2015 WL 6438670 (N.D. Cal. Oct. 23, 2015). But in Zornoa v. Terraform Global, Inc. of the United States Court for the Southern District of New York held that corporate directors are not liable under SOX because they are not understood to function as agents and the statute omits directors from its list of potentially liable persons.

OSHA Enforcement of Sarbanes-Oxley Whistleblower Law

The U.S. Department of Labor Occupational Safety and Health Administration (“OSHA”) administers the anti-retaliation provision of SOX. A SOX whistleblower claim must be filed initially with OSHA. OSHA will then investigate the complaint and may order preliminary reinstatement of the whistleblowers if it finds “reasonable cause” to believe that retaliation occurred.

OSHA finds “reasonable cause” when it determines that a reasonable judge could rule for the whistleblower. And a reasonable judge could rule so only where there is evidence supporting each element of a SOX retaliation claim. Generally, though, less evidence is required to establish “reasonable cause” at this stage than to prevail at trial. “OSHA’s responsibility to determine whether there is reasonable cause to believe a violation occurred is greater than the complainant’s initial burden to demonstrate a prima facie allegation that is enough to trigger the investigation.”[i] But OSHA need not “resolve all possible conflicts in the evidence or make conclusive credibility determinations to find reasonable cause to believe that a violation occurred.” In practice, however, OSHA rules for SOX complainants only in the strongest cases, which is due in part to the burden that OSHA must bear to order preliminary reinstatement of a whistleblower.

[i] Clarification of the Investigative Standard for OSHA Whistleblower Investigations (Apr. 20, 2015)

Dodd-Frank Act

The whistleblower protection provision of the Dodd-Frank Act prohibits retaliation against a whistleblower for lawful actions taken by a whistleblower:

1. in providing information to the Commission in accordance with this section;
2. in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
3. in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. [§§] 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

15 U.S.C. § 78u-6(h)(1)(A). A prevailing whistleblower can secure reinstatement and recover double back pay and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.

In February 2018, the Supreme Court held in Somers that the anti-retaliation provision of the Dodd-Frank Act projects a whistleblower only where the whistleblower has disclosed a potential securities law violation to the SEC. Somers also clarified that once an employee has provided information to the SEC, subsequent internal disclosures are protected absent proof that the employer had knowledge of the disclosure to the SEC.

Post Somers, the SEC has indicated that it will continue to prioritize whistleblower protection as a key tool to encourage whistleblowers to come forward. In a June 28, 2018 public statement at the open meeting announcing the Proposed Rulemaking, Chair Clayton stated: “Many have asked whether the SEC will continue to enforce the anti-retaliation provisions of Dodd-Frank. Let me be clear: retaliation protections are a key component of the whistleblower program, and we will bring charges against companies or individuals who violate the anti-retaliation protections when appropriate.” Statement at Open Meeting on Amendments to the Commission’s Whistleblower Program Rules.

SEC Enforcement of Dodd-Frank SEC Whistleblower Retaliation Provision

The SEC has taken enforcement action for retaliation against a whistleblower.

• On September 29, 2016, the SEC ordered International Game Technology (“IGT”) to pay a $500,000 penalty for terminating the employment of a whistleblower because he reported to senior management and to the SEC that the company’s financial statements might be distorted. See Exchange Act Release No. 78991 (Sept. 29, 2016). During an internal investigation into the whistleblower’s allegations, IGT removed him from opportunities that were integral to his ability to perform his job successfully. IGT then fired the whistleblower the same day as the internal investigation concluded that IGT’s cost-accounting model was appropriate and did not cause its financial statements to be distorted. The whistleblower was protected under the SEC whistleblower program, despite being mistaken, because he reasonably believed that IGT’s cost-accounting model constituted a violation of federal securities laws.

The action against IGT was the SEC’s first standalone retaliation case. However, it is consistent with a 2014 enforcement action that indicated, for the first time, that retaliating against a whistleblower can result not only in a private suit brought by the whistleblower but also in a unilateral SEC enforcement action.

• On June 16, 2014, the SEC announced that it was taking enforcement action against Paradigm Capital Management, Inc. (“Paradigm”), a hedge fund advisory firm, for engaging in prohibited principal transactions and for retaliating against the whistleblower who disclosed the unlawful trading activity to the SEC. See Exchange Act Release No. 72393 (June 16, 2014). This was the first case in which the SEC exercised its authority under Dodd-Frank to bring enforcement actions based on retaliation against whistleblowers.
• According to the order, Paradigm retaliated against its head trader for disclosing, internally and to the SEC, prohibited principal transactions with an affiliated broker-dealer while trading on behalf of a hedge fund client. The transactions were a tax-avoidance strategy under which realized losses were used to offset the hedge fund’s realized gains.
• When Paradigm learned that the head trader had disclosed the unlawful principal transactions to the SEC, it retaliated against him by removing him from his position as head trader, changing his job duties, placing him on administrative leave, and permitting him to return from administrative leave only in a compliance capacity, not as head trader. The whistleblower ultimately resigned his position.
• Paradigm settled the SEC charges by consenting to the entry of an order finding that it violated the anti-retaliation provision of Dodd-Frank and committed other securities law violations; agreeing to pay more than $1 million to shareholders and to hire a compliance consultant to overhaul their internal procedures; and entering into a cease-and-desist order.

The SEC’s press release accompanying the order includes the following statement by Enforcement Director Andrew Ceresney: “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.” The Paradigm enforcement action suggests that whistleblower retaliation can result in liability far beyond the damages that a whistleblower can obtain in a retaliation action and that retaliation can invite or heighten SEC scrutiny.

Differences between SOX and Dodd-Frank Acts

This table identifies some of the major differences between the anti-retaliation provisions of SOX and Dodd-Frank. To maximize the potential recovery, a whistleblower could initially bring a SOX claim at OSHA and subsequently remove it to federal court and also bring a Dodd-Frank claim. Doing so could enable the whistleblower to recover double back pay and uncapped special damages.

Topic Area	SOX	Dodd-Frank
Scope of Coverage	Any company with a class of securities registered under section 12 of the Securities Exchange Act of 1934, or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934, including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company, or nationally recognized statistical rating organization, or any officer, employee, contractor, subcontractor, or agent of such company.	Any employer
Protection for internal whistleblowing	Yes	Internal whistleblowing protected only if individual has also reported a possible securities violation to the SEC
Protection for whistleblowing to SEC	Yes	Yes
Statute of Limitations	180 days	6 years
Administrative Exhaustion	Must file initially with OSHA	None
Arbitration	Exempt from mandatory arbitration	Not exempt
Back pay	Ordinary back pay	Double back pay
Special damages for emotional distress and reputational harm	Available	Not available