Unfulfilled expectations: an empirical analysis of why Sarbanes-Oxley whistleblowers rarely win.

Author:Moberly, Richard E.


Scholars praise the whistleblower protections of the Sarbanes-Oxley Act of 2002 as one of the most protective anti-retaliation provisions in the world. Yet, during its first three years, only 3.6% of Sarbanes-Oxley whistleblowers won relief through the initial administrative process that adjudicates such claims, and only 6.5% of whistleblowers won appeals through the process. This Article reports the results of an empirical study of all Department of Labor Sarbanes-Oxley determinations during this time, consisting of over 700 separate decisions from administrative investigations and hearings. The results of this detailed analysis demonstrate that administrative decision makers strictly construed, and in some cases misapplied, Sarbanes-Oxley's substantive protections to the significant disadvantage of employees. These data-based findings assist in identifying the provisions and procedures of the Act that do not work as Congress intended and suggest potential remedies for these statutory and administrative deficiencies.

INTRODUCTION I. SARBANES-OXLEY'S WHISTLEBLOWER PROVISIONS: A SHORT OVERVIEW A. The Anti-retaliation Protections of the Act B. The Procedure for Filing a Whistleblower Complaint II. STUDY METHODOLOGY A. Complete Census vs. Sampling B. Original Sources vs. Secondary Compilations C. The Specifics III. RESULTS AND DISCUSSION A. The Big Picture: Outcomes from the Administrative Process B. Explaining the Low Win Rate: The Importance of Procedural, Boundary, and Causation Hurdles 1. The Size of the Hurdle Depended on the Level of Review 2. Specific Legal Hurdles Loomed Large a. Statute of Limitations b. Covered Employers c. Protected Activity 3. A Surprisingly Unfavorable Burden of Proof 4. Conclusion: Narrow Boundaries and a High Burden IV. RECOMMENDATIONS A. Amending the Statute of Limitations Procedural Hurdle B. Clarifying the Act's Boundaries 1. Clarifying the Definition of a "Covered Employer" 2. Clarifying the Scope of "Protected Activity" 3. Clarifying the Decision-Making Process C. Enforcing the Burden of Proof D. Thinking About Broader Protections CONCLUSION INTRODUCTION

Whistleblowers played a significant role in revealing and disrupting corporate malfeasance at the beginning of the twenty-first century, as scandals at corporations such as Enron and WorldCom came to public light through the efforts of whistleblowing employees. (1) Subsequently, Congress recognized the importance of whistleblowing and included strong and unprecedented anti-retaliation protection for corporate employees as part of the Sarbanes-Oxley Act of 2002 ("the Act"), the mammoth congressional reaction to these corporate scandals. (2)

Yet, in the first three years after the statute's enactment, the Act failed to protect the vast majority of employees who filed Sarbanes-Oxley retaliation claims. During this time, 491 employees filed Sarbanes-Oxley complaints with the Occupational Safety and Health Administration (OSHA), the agency charged with initially investigating such complaints. (3) OSHA resolved 361 of these cases and found for employees only 13 times, a win rate of 3.6%. (4) On appeal from 93 OSHA decisions, administrative law judges (ALJs) in the Department of Labor found in favor of 6 employees, a win rate of 6.5%. (5)

This Article presents the findings of an empirical analysis of these Sarbanes-Oxley administrative decisions to explore why the Act's protections did not produce a robust number of employee victories. The results indicate that employees rarely won claims for two primary reasons. First, OSHA and the ALJs generally decided cases as a matter of law and rigidly construed Sarbanes-Oxley's legal requirements. (6) Second, for cases that survived this strict legal scrutiny during the initial OSHA investigation, OSHA tended to misapply Sarbanes-Oxley's burden of proof regarding causation, to the substantial detriment of employees. (7)

These findings challenge the hope of scholars and whistleblower advocates that Sarbanes-Oxley's legal boundaries and burden of proof would often result in favorable outcomes for whistleblowers. For example, soon after the Act's enactment, Professor Robert Vaughn asserted that the statute is "the most important whistleblower protection law in the world." (8) Tom Devine, legal director for the Government Accountability Project, a whistleblower advocacy group, described the Act as "the promised land.... [T]he law represents a revolution in corporate freedom of speech [that] far surpasses, indeed laps, the rights available for government workers." (9) Taxpayers Against Fraud called the statute "the single most effective measure possible to prevent recurrences of the Enron debacle and similar threats to the nation's financial markets." (10)

The language of Sarbanes-Oxley's anti-retaliation protections justified this initial reaction. Prior to Sarbanes-Oxley, millions of workers were protected from retaliation for revealing corporate wrongdoing only sporadically, if at all. (11) The Act now purports to protect these workers by providing significant remedies for retaliation against corporate whistleblowers, including noneconomic damages and reinstatement. (12) Moreover, the congressionally mandated burden of proof for causation favors employees more than many retaliation protections. (13) Indeed, a few early victories for employees sparked outrage from management attorneys, who argued that Sarbanes-Oxley's protections were too broad and overly burdensome for employers (14)--a sign that perhaps the Act provided real protections for whistleblowers.

Despite Sarbanes-Oxley's pro-whistleblower provisions and a few early employee victories, however, administrative decisions over the first three years of the Act's life failed to fulfill Congress's expectation that a strong anti-retaliation provision would protect whistleblowers. This Article explains why.

Part I of the Article provides a brief summary of Sarbanes-Oxley's substantive and procedural requirements. Part II summarizes the scope and methodology of my empirical study examining why employees rarely won Sarbanes-Oxley cases. This study examined all Department of Labor Sarbanes-Oxley cases filed and resolved during the first three years of Sarbanes-Oxley's existence, totaling over 700 separate decisions from two levels of administrative investigations and hearings. As explained in Part II, the scope of this study differs from previous empirical studies of employment cases in two fundamental ways. First, rather than rely only on published decisions to comprise a sample of examined cases, (15) this study collected all administrative decisions involving Sarbanes-Oxley's anti-retaliation provision. Data from this census of cases allow stronger inferences than data derived from a sample of published cases. (16) Second, some previous employment law studies relied upon data collected by the government; although such datasets contain a large number of cases, analyses usually produce only general outcome or procedural data about each case. (17) By contrast, this study involved in-depth coding of decisions to obtain detailed data that permitted nuanced analyses of the rationales provided by decision makers in their determinations.18 The breadth of data produced by a census of cases and the depth of data resulting from the coding process permitted a truly comprehensive analysis of Sarbanes-Oxley's administrative decisions.

Part III of the Article presents the study's results. The first section describes the low employee win rate at the two different levels of administrative review--the initial investigation conducted by OSHA and any subsequent hearing before an ALJ. The second section analyzes the rationales OSHA and the ALJs provided when finding for the employer and examines whether the employee lost because (1) the employee violated a "procedural" rule, such as the statute of limitations; (2) the employee's claim failed as a matter of law for not fitting within Sarbanes-Oxley's legal "boundaries"; or (3) the decision maker determined that the facts did not demonstrate "causation," meaning that the employee's whistleblowing did not actually cause any adverse employment action. (19)

The analysis in Part III provides two explanations for Sarbanes-Oxley's low employee win rate. First, employees frequently lost because OSHA and the ALJs determined that a large number of employees either violated a procedural rule or did not meet Sarbanes-Oxley's statutory requirements as a matter of law (that is, the employees did not demonstrate that their claim fit within the Act's legal "boundaries"). Thus, OSHA and the ALJs rejected a large percentage of cases (66.7% for OSHA, 95.2% for ALJs) for failing to fit within the legal parameters of a Sarbanes-Oxley claim, thereby avoiding any determination of the factual merits of an employee's allegations. (20) In so doing, these administrative decision makers often strictly interpreted Sarbanes-Oxley's legal requirements. For example, whistleblowers rarely were equitably excused for missing a procedural deadline, such as the statute of limitations. (21) Moreover, although Sarbanes-Oxley applies to a "contractor, subcontractor, or agent" (22) of any publicly-traded company, ALJs consistently determined that the Act did not protect employees of privately-held subsidiaries and contractors of publicly-traded companies. (23) Furthermore, ALJs and the Administrative Review Board (ARB) (the last level of administrative review) required extraordinary specificity from whistleblowers regarding their disclosure of illegal activity and refused to protect whistleblowers who disclosed general fraud as opposed to fraud related specifically to securities. (24)

This strict legal scrutiny might have many causes; I posit that it likely resulted from the push and pull of defining a new statute's legal boundaries. Employees, perhaps relying on expectations generated by scholars and whistleblower advocates...

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