On November 12, 2014, in Halliburton, Inc. v. Admin. Review Bd., 5th Cir. No. 13-cv-60323, the Fifth Circuit affirmed an ARB’s decision that disclosing the identity of a whistleblower may constitute an “adverse action” under Section 806 of SOX. This decision presents a number of risks for employers—even when they are acting conscientiously and in good faith—and is mandatory reading for in-house employment counsel and compliance professionals.
Anthony Menendez (Plaintiff), an employee of Halliburton (Company), used the Company’s internal procedures to submit a complaint to management about what he allegedly believed to be “questionable” accounting practices. He also lodged a complaint about the Company’s accounting practices with the SEC, which led the SEC to contact the Company and instruct it to retain certain documents during the pendency of the SEC’s investigation. Although the SEC did not specify who had reported the Company’s accounting practices, the Company allegedly inferred from Plaintiff’s internal reports that Plaintiff must have also reported his concerns to the SEC. The Company thereafter sent an e-mail to Plaintiff and his colleagues, instructing them to retain certain documents because “the SEC has opened an inquiry into the allegations of [Plaintiff].” Plaintiff claimed that after his identity as a whistleblower was disclosed, his colleagues began treating him unfavorably.
Plaintiff filed a complaint with OSHA, alleging that the Company retaliated against him in violation of Section 806 of SOX by disclosing his identity as the whistleblower to his colleagues. An ALJ dismissed his complaint, reasoning that the disclosure was not an adverse action. On appeal, the ARB ruled that the ALJ erred in determining that the disclosure was not an adverse action, and remanded to the ALJ for findings on whether the Plaintiff’s protected activity was a “contributing factor” in the Company’s disclosure of his identity and whether the Company met its burden of establishing an affirmative defense that the disclosure of the Plaintiff’s identity was mandated by “legitimate business reasons.” On remand, the ALJ ruled that the Company established its affirmative defense and demonstrated a legitimate business reason for disclosing the Plaintiff’s identity as a whistleblower.
The ARB reversed, ruling that the Company failed to prove “by clear and convincing evidence that [the Company’s] disclosure of [Plaintiff’s] identity was dictated by a legitimate, non-discriminatory business reason unrelated to his protected activity.” The Company appealed to the Fifth Circuit Court, arguing that the disclosure was not an adverse action, and it also requested that the Fifth Circuit set aside the ARB’s award of “noneconomic compensatory damages.”
Fifth Circuit’s Ruling
The Fifth Circuit upheld the ARB’s ruling, affirming that the disclosure of a whistleblower’s identity may constitute an adverse action for the purposes of a SOX whistleblower claim. According to the Court, “[i]t is inevitable that such a disclosure would result in ostracism,” and when the identity of a whistleblower is identified, “the boss could be read as sending a warning, granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high.” In so ruling, the Fifth Circuit embraced precedent from outside of the SOX whistleblower context standing for the proposition that a whistleblower need not show that the employer’s challenged action was driven by an improper motive.
The court also held that non-economic compensatory damages (emotional distress damages) are available under SOX even though such relief is not specifically enumerated in the statute. SOX provides that “an employee prevailing in [an anti-retaliation action] shall be entitled to all relief necessary to make the employee whole” and that relief “shall include” (i) reinstatement; (ii) back pay, with interest and (iii) “compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees and reasonable attorneys’ fees.” According to the court, the word “include” indicates that the three forms of relief listed are non-exhaustive and thus “the plain language of SOX’s text relating to remedies for retaliation affords noneconomic compensatory damages.”
This decision creates a quandary for employers because maintaining absolute confidentiality of a whistleblower’s identity may often conflict with an employer’s ability to create a rock solid litigation hold; it may create a catch-22 for employers seeking in good faith to preserve evidence to the greatest extent possible. Still, given the risk this decision creates, employers need to be closely familiar with this ruling when crafting litigation holds in this context. What’s more, the conclusion that a whistleblower need not show a retaliatory motive to establish a whistleblower retaliation claim is curious indeed. By definition, retaliation means a desire to exact retribution for particular conduct.
The full and original memo was published by Proskauer Rose LLP on November 17, 2014, and is available here.