The U.S. Department of Labor, Administrative Review Board (ARB) issued a precedent setting decision last week holding that the Sarbanes-Oxley Act (SOX) does protect the employees of contractors to publicly traded companies. The decision is particularly noteworthy as the ARB rejected the First Circuit decision in Lawson v. FMR, LLC, Case No. 10-2240 (1st Cir. 2012). The ARB decision is Spinner v. David Landau and Associates, LLC, ARB Nos. 10-111 and -115, ALJ No. 2010-SOX-29 (ARB May 31, 2012).
Thomas Spinner started working as an internal auditor for David Landau & Associates (DLA) in March 2008. Spinner is a Certified Public Accountant, a Certified Internal Auditor and a Certified Fraud Examiner. DLA is not a publicly traded company, but it provides internal audit, management consulting and SOX compliance services to publicly traded companies, including SL Green Realty Corp.. SL Green is a large real estate company that owns many office buildings in New York City. On September 2, 2008, DLA assigned Spinner to work full time in providing audit services to SL Green. Spinner quickly discovered internal control and reconciliation problems at SL Green, and he reported those problems. On October 1, 2008, DLA fired Spinner.
Spinner filed a timely SOX retaliation claim which OSHA dismissed. Spinner requested a hearing, but the Administrative Law Judge (ALJ) dismissed his case. The ALJ concluded that Spinner was not protected by SOX because he worked for a contractor that is not publicly traded. The ARB concluded that Spinner was covered by SOX. The ARB reversed the dismissal and returned the case to the ALJ for a hearing on the merits.
The ARB decision relies on the plain language of SOX which specifically prohibits retaliation by "any officer, employee, contractor, subcontractor, or agent of such [publicly traded] company ... ." 18 U.S.C. § 1514A(a). The ARB also relied on the Department's regulation at 29 C.F.R. § 1980.101 which includes employees of contractors as "employees." On pages 5 and 19, the ARB cites prior ARB decisions, of both the current and prior administrations, supporting coverage for employees of contractors. From pages 6 through 16, the ARB then explains why the First Circuit majority was wrong in Lawson. My own critique of the Lawson holding is in this prior blog post. The ARB and I are in agreement about how the plain text of SOX, the legislative history and the remedial purpose, all support protection for employees of contractors. On page 14, the ARB goes farther: "An interpretation limiting protection of whistleblowers to those only directly employed by a publicly traded company would sabotage the overriding purpose of protecting investors." Well said.
In a lengthy concurring opinion, Judge E. Cooper Brown expands on the reasons for holding that contractor's employees are protected by SOX. On page 25, he notes how the Enron scandal that inspired SOX featured the misconduct of their outside accountants at Arthur Anderson. The Senate Report on SOX (S. Rep. 107-146) noted how Arthur Anderson had removed a partner who raised concerns about Enron's accounting. The Senate Committee wanted to end the "corporate code of silence" and Judge Brown recognizes that this can't happen unless SOX protects those who raise concerns about SOX violations, whether they work for the publicly traded company itself, a contractor, or any other affiliated entity. He states:
If the overriding purposes of Sarbanes-Oxley are to be met, employees of contractors, subcontractors, and agents of publicly traded companies must be afforded the same protection against retaliation by their employer that is afforded employees of publicly traded companies.
By page 32, Judge Brown has considered the ARB practice of broad interpretation of whistleblower protections to accomplish their remedial purposes and concludes that SOX is equally deserving of the same broad scope.
The ARB's decision to flatly disagree with a federal court of appeals is reminiscent of the Secretary of Labor's rejection of the Fifth Circuit decision in Brown & Root v. Donovan, 747 F.2d 1029 (5th Cir. 1984). There, the Court held that nuclear whistleblowers were not protected when they raised safety concerns to their superiors. The Fifth Circuit would only protect disclosures to the NRC. No other circuit followed this holding. In 1992, Congress amended the Energy Reorganization Act (ERA) to protect internal whistleblowing explicitly. In 2005, the Fifth Circuit finally conceded that its 1984 holding "was incorrect." Willy v. Administrative Review Bd., 423 F.3d 483, 489, n. 11 (5th Cir. 2005). Let us hope that the Lawson holding will not stay on the books for anything close to 21 years. The ARB's firm rejection of Lawson is a good sign.
Congratulations to Spinner's attorney, Daniel Corey of Drexel Hill, Pennsylvania, on obtaining this fine result. Corporate whistleblowers will benefit from this decision for years to come.