Lawyers for Matt Neumann and Nick Tides are currently finishing their last brief to the U.S. Court of Appeals for the Ninth Circuit in an appeal that will decide if corporate fraud whistleblowers can ever be protected from retaliation when they make disclosures to the media. For the National Whistleblowers Center, David Colapinto and I filed a brief in September that urged the Court to use the same balancing test used in Title VII and other discrimination cases. This test balances “the purpose of the Act to protect persons engaging reasonably in activities opposing . . . discrimination, against Congress’ equally manifest desire not to tie the hands of employers in the objective selection and control of personnel.” Wrighten v. Metropolitan Hosp., Inc., 726 F.2d 1346, 1355 (9th Cir. 1984) (holding a press conference is protected). I explained Tides' and Neumann's case in an earlier blog post.
Now the Boeing Company has filed their brief arguing that media disclosures can never be protected under the Sarbanes-Oxley Act. Boeing's opening paragraph (page 1 of the brief and page 6 of the linked PDF file) essentially concedes that the company fired Neumann and Tides because of their disclosures to a newspaper reporter. Next, Boeing argues that while the law protects giving the disclosures to company officials would be protected, giving the disclosures to the media is not protected. Boeing makes this argument even though there is no dispute that Boeing officials did get the information -- and they acted on it promptly by firing the whistleblowers.
Boeing's brief, at pages 1, belittles whistleblowing as "General, work-related grousing." Work related “grousing” is still protected when that grousing points to a violation of law.
On page 17, Boeing cites 148 Cong.Rec. S1788 (although their quote spans pages S1787 and S1788) for the proposition that SOX was being enacted to protect disclosures to federal authorities. On that same page, the report also states as follows:
In addition, corporate employees who report fraud are subject to the patchwork and vagaries of current State laws, even though most publicly traded companies do business nationwide. Thus, a whistleblowing employee in one State may be far more vulnerable to retaliation than a fellow employee in another State who takes the same actions. Unfortunately, one thing that often transcends State lines, as we all know from the State tobacco litigation, are certain companies with a corporate culture that punishes whistleblowers for being ‘‘disloyal’’ and ‘‘litigation risks.’’
This is exactly why Boeing fired Tides and Neumann! See p. 8 of Boeing's brief (“creating an unacceptable liability”).
While Boeing tries to contrast SOX from the WPA (pp. 15-16 of their brief), the Senate understood that it was giving corporate employees the same protections that government employees have:
Although current law protects many government employees who act in the public interest by reporting wrongdoing, there is no similar protection for employees of publicly traded companies who blow the whistle on fraud and protect investors.
At page S7420, the Congressional Record has the following after the sentence quoted in Boeing's brief:
Although current law protects many government employees who act in the public interest by reporting wrongdoing, there is no similar protection for employees of publicly traded companies who blow the whistle on fraud and protect investors. With an unprecedented portion of the American public investing in these companies and depending upon their honesty, this distinction does not serve the public good.
This page does not support the distinction Boeing tries to make.
On page 5, Boeing is confessing that it uses a chain-of-command rule to control employee communications with the media. As a matter of law, it is “not permissible to find fault with an employee for failing to observe established channels when making safety complaints.” Dutkiewicz v. Clean Harbors Environmental Services, 95-STA-34, D&O of ARB, at 7 (August 8, 1997), aff’d, Clean Harbors Environmental Services v. Herman, 146 F.3d 12 (1st Cir. 1998); Brockell v. Norton, 732 F.2d 664, 668 (8th Cir. 1984). “Chain of command” rules are restrictions on protected activity. Protected activity is not really protected if employers can restrict the channels through which disclosures can be made.
On pages 17 and 18, Boeing makes the argument that since SOX intends to protect disclosures to federal authorities, then disclosures to other entities is not protected. The quotes Boeing cites never say that these are the “only” means of making disclosures, or that protection is “limited” to direct disclosures to the listed entities. The quotes above show that Congress meant to give corporate employees the same broad protection available under other laws.
Boeing takes a snippet of NWC's letter to Chairman Leahy. The Senate knew that groups like the NWC wanted a broad protection for employees whenever they stick their necks out to do the right thing. The Senate report continues:
employees who do the ‘‘right thing’’ are vulnerable to retaliation. After this high level employee at Enron reported improper accounting practices, Enron is not thinking about firing Arthur Andersen, they are considering discharging the whistle blower. No wonder that so many employees are scared to come forward. Our laws need to encourage and protect those who report fraudulent activity that damages investors in publicly traded companies. That is why this bill is supported by groups such as the National Whistleblower Center, the Government Accountability Project, and Taxpayers Against Fraud, who have written a letter calling this bill ‘‘the single most effective measure possible to prevent recurrences of the Enron debacle and similar threats to the nation’s financial markets.’’
The Senate understood that, “Since the only acts protected are ‘‘lawful’’ ones, the bill would not protect illegal actions, such as the improper public disclosure of trade secret information.” Here is the full text of the letter which shows that NWC asked for broad protection, without loopholes:
DEAR CHAIRMAN LEAHY: Since 1988 the National Whistleblower Center has aided or defended hundreds of employees who have disclosed fraud and criminal activities within the public and private sectors. During this time we have become painfully aware of the major loopholes which often leave courageous employees without any legal protection. One of the most notorious loopholes exists under the securities laws, in which employees who report fraud upon stockholders have no protection under federal law. It is truly tragic that employees who are wrongfully discharged merely for reporting violations of law, which may threaten the integrity of pension funds or education-based savings accounts, have no federal protection. This point was made perfectly clear by the recently released internal memorandum from attorneys for Enron. According to Enron’s own counsel, employees who raised concerns over that company’s accounting practices had no protection under federal law and could be fired.
With this background in mind, the NationalWhistleblower Center strongly commends you for introducing the Corporate and Criminal Fraud Accountability Act of 2002. This law would protect employees who disclose Enron-related fraud to the appropriate authorities. It is modeled on the airline safety whistleblower law, which overwhelmingly passed Congress with strong bi-partisan support. The next time a company like Enron seeks advice from counsel as to whether they can fire an employee, like Sharon Watkins, who merely discloses potential fraud on shareholders, the answer must be a resounding ‘‘no.’’ That can only happen if the Corporate and Criminal Fraud Accountability Act is enacted into law.
Boeing completely ignores the leading cases from the Ninth Circuit on protection for media disclosures: O’Day v. McDonnell Douglas Helicopter Co., 79 F.3d 756 (9th Cir. 1996); Wrighten v. Metropolitan Hosp., Inc., 726 F.2d 1346 (9th Cir. 1984). See p. 32 of the amicus brief.
On page 18, Boeing's brief cites to Terry Morehead Dworkin, SOX and Whistleblowing, 105 Mich. L. Rev. 1757, 1760, to argue that it is good public policy to protect employees who make internal reports of violations. On that same page of Dworkin's article, he states, “In specifying to whom the whistleblowing report should be made, SOX is like most of the U.S. state and federal whistleblowing statutes.” This sentence is followed by a footnote citing, “See Elletta Sangrey Callahan & Terry Morehead Dworkin, Who Blows the Whistle to the Media and Why: Organizational Characteristics of Media Whistleblowers, 32 Am. Bus. L.J. 151, 153–58 (1994) [hereinafter Callahan & Dworkin, Media Whistleblowers].” The point here is that while it is good to protect internal whistleblowers, it is not good public policy to restrict disclosures to other entities. Public policy will best be served when the protections for disclosing wrongdoing are broadest. When whistleblowers have a choice of reporting internally or externally, then managers will have an incentive to demonstrate to their employees that internal disclosures will be effective and protected. When companies compete with outside entities for the confidence of their own employees to be compliant, proactive, and non-retaliatory, then the public interest really wins.
Boeing claims that “no public policy is served by encouraging employees to reveal confidential, competitive, or trade secret information to reporters.” Boeing apparently believes that if a company wants to engage in illegal pollution, and says that this information should be kept confidential and secret, then it should stay secret. Obviously, the right to keep information confidential depends on the legality of what that information reveals. Companies have no right to keep illegal conduct secret. SOX's employee protection also makes clear that employees are protected when they disclosure information of violations to outside entities. Our brief conceded that when employees disclose the employer's confidential business information, a balancing test should apply pursuant to O'Day and Wrighten. Boeing persists in claiming that such disclosures can never be protected, and whistleblowers should be limited to internal whistleblowing only. Ironically, when companies first began to resist the federal protections for nuclear and environmental workers, they claimed that only external whistleblowing should be protected. Compare, Brown & Root, Inc. v. Donovan, 747 F.2d 1029, 1036 (5th Cir. 1984), and EBASCO Constructors, Inc. v. Martin, unpublished case No. 92-4576 (5th Cir. Feb. 19, 1993), with Lambert v. Ackerly, 180 F.3d 997, 1002-1008 (9th Cir. 1999) (en banc).
Among the wide variety of working people, many will believe that the effective way to raise a concern about a violation of law is to go to the media. The media is the means through which many workers see wrongdoers are called to account for their actions.
If the disclosed information evidences illegality, then law enforcement agencies can, and in some circumstances, must place that information into the public record to prove the violation of law. Managers cannot use confidentiality to shield themselves from accountability in all circumstances. A balancing test is necessary to determine if the disclosure in each case is reasonable.
The big picture of SOX is that it is better for investors to know early and often when managers of publicly traded companies are violating the law. The media's ability to disseminate this information rapidly and effectively can serve this purpose – and also call to the attention of other employees the media's ability to have this impact.
Boeing notes that the dissemination of confidential information “can” cause harm to a company's investors. Typically, this harm flows from the underlying misconduct of corporate managers. However, the wide variety of possible circumstances is precisely why the Ninth Circuit's balancing test is so wise.
Boeing is wrong in saying that government agencies have a duty to investigate all complaints that come to them. Law enforcement agencies have prosecutorial discretion. While the media have no legal duty to publicize information that comes to them, they are accountable through the marketplace of buyers. This is the wisdom of the First Amendment. In some cases, corporate managers and the government both decline to act on a concern, and the media can be a last resort to prompt the needed action. Whistleblowers should have the freedom to chose the recipients of their disclosures based on the information available to them about who is most likely to respond, and under what circumstances that response will be most effective. Within the bounds of reasonableness, they should be protected along whatever channel they follow toward the goal of accomplishing the public purpose.
The media might not be a perfect channel for handling a disclosure of illegality, but it is a means to prompt enforcement action. Those who disagree with the media's handling of a matter are free to use other media channels to express their ideas. The best antidote to bad speech is more good speech. See Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes, J., dissenting) (advocating "free trade in ideas - that the best test of truth is the power of the thought to get itself accepted in the competition of the market").
“To courageous, self-reliant men, with confidence in the power of free and fearless reasoning applied through the processes of popular government, no danger flowing from speech can be deemed clear and present unless the incidence of the evil apprehended is so imminent that it may befall before there is opportunity for full discussion. If there be time to expose through discussion the falsehood and fallacies, to avert the evil by the processes of education, the remedy to be applied is more speech, not enforced silence. Only an emergency can justify repression.” Whitney v. California, 274 U.S. 357, 377 (1927) (Brandeis, J., concurring).
On page 22, Boeing is right that our argument opens the door to protecting all means of disclosure. On page 24, Boeing is wrong to say that a report to the media cannot be “an initial step” in effectuating a report of a violation. Recent events show that Congress has every right and even a responsibility to recognize the great harm caused by corporate fraud, and the urgency of detecting such fraud early and often.
As the district court clearly used the wrong legal standard in dismissing the SOX claim, NWC still urges the Ninth Circuit to remand the case of Matt Neumann and Nick Tides so that the district court can consider the evidence under the correct standard, the balancing test of O'Day and Wrighten.