Whistle with a purpose: extending coverage under SOX to employees discharging their duties.

Author:Lee, Jonathan
Position::Sarbanes-Oxley Act of 2002


There are three underlying rationales for protecting whistleblowers. (1) First, by protecting employees who report employer wrongdoing, whistleblower protection promotes employers' compliance with the law. (2) Second, by providing whistleblower protection, the government and the taxpaying public can expend fewer resources on fixing the problems that unreported wrongdoings of government and corporate fraud cause. (3) Third, whistleblower protection is necessary not only to deter employers from committing wrongful acts, but also to encourage employees to report these wrongful acts. (4) By providing whistleblower protection, employees can freely report their employer's misdeeds without fear of retaliation. (5)

The policy rationales noted above also apply to the whistleblower provision of the Sarbanes Oxley Act of 2002 ("SOX"). (6) Section 806 of SOX provides whistleblower protection to an employee of a publicly traded company who reports information regarding violations relating to mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission ("SEC"), or any provision of federal law relating to fraud against shareholders. (7) Congress implemented the whistleblower provisions of SOX "to help rectify a culture, supported by law that discourage[s] employees from reporting fraudulent behavior." (8)

Although some scholars "praise the whistleblower protections of the Sarbanes-Oxley Act of 2002 as one of the most protective anti-retaliation provisions in the world," many whistleblowers have failed to seek protection under SOX. (9) One reason for this is that, unlike other general whistleblower statutes, SOX is tailored to protect only six particular types of violations. (10) Furthermore, the tersely worded and unclear statutory language of SOX has led to differing interpretations regarding the scope of protection provided to employees. (11) This has led scholars to question whether whistleblower protection extends to employees of private contractors (12) and to employees discharging their duties. (13)

This Note addresses whether SOX covers employees discharging their duties. (14) Employees are discharging their duties when they act in accordance with their job responsibilities and obligations. For example, an accountant is discharging his duties when he spots an accounting irregularity and reports the irregularity to his supervisor. These types of employees are crucial to spotting corporate fraud because of their roles and positions within the company. (15) Without whistleblowing by these employees, the public and the government are susceptible to another Enron-like debacle. (16) SOX fails to define the term "employee," which has led to debates about how restrictively the term "employee" should be applied. (17) Clearly delineating the type of employee covered under SOX is paramount because employees discharging their duties will not rely on SOX if they are not assuaged of their fears of employer retaliation. (18)

To fully grasp the importance of extending protection under SOX to employees discharging their duties, this Note details the chronological history of whistleblower protection (i) prior to SOX, (19) (ii) under SOX, and (iii) under the Dodd-Frank Act ("Dodd-Frank") and Lawson v. FMR LLC. Specifically, Part I briefly addresses how Garcetti v. Ceballos (20) and the Whistleblower Protection Act ("WPA") (21) have declined protection to employees discharging their duties. (22) Part II then introduces the events leading up to SOX, analyzes the congressional intent behind the enactment of SOX, and discusses why the statute has been ineffective thus far. Part III then summarizes how Dodd-Frank amended SOX and discusses Lawson v. FMR LLC, (23) a recent Supreme Court case, as an example of how courts have struggled with interpreting the coverage SOX provides to different kinds of employees. (24) Part IV addresses the emerging split at the district court level regarding whether employees discharging their duties are protected under SOX. Part V analyzes the WPA and considers how SOX should be read in light of how the WPA has dealt with employees discharging their duties. Finally, Part VI proposes that the recent SDNY decision in Yang v. Navigators Group, Inc., (25) which extended coverage to employees discharging their duties, is the best interpretation of SOX that furthers the purpose Congress had in mind when it enacted SOX in 2002.


    1. Protected Speech Under the First Amendment and Common Law

      Before statutory protections existed for whistleblowers, employees had to rely on either the First Amendment or the common law for protection. (26) Under the First Amendment, public employees could allege that their speech was protected because they were speaking as citizens on matters of public concern. (27) Under the common law, at-will employees alleged that they were wrongfully discharged in violation of a known and accepted public policy. (28)

      However, both the First Amendment and the common law are limited in providing whistleblower protection. In fact, constitutional protection under the First Amendment only applies to public government employees, and it is limited to speech that (1) does not arise out of one's job duties, (29) (2) is truly a matter of public concern, (30) and (3) outweighs the government employer's interest "in promoting the efficiency of the public services it performs through its employees." (31) Similarly, the public policy exception does not apply in every state, and even where the exception does exist, it must be tied to a public policy that society is willing to recognize. (32) Although some whistleblower protection existed under the First Amendment and the common law, Congress enacted more concrete statutory protection for whistleblowers under the WPA and SOX. (33)

    2. Whistleblower Protection Act of 1989

      The WPA34 was enacted in 1989 to protect "employees who disclose Government illegality, waste, and corruption." (35) The statute applies to

      any disclosure of information by an employee ... which the employee ... reasonably believes evidences--(A) a violation of any law, rule, or regulation; or (B) gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety. (36) Despite seemingly clear statutory language (37) and legislative history,38 the Federal Circuit interpreted the WPA to exclude employees discharging their duties in Willis v. Department of Agriculture (39) and Huffman v. Office of Personnel Management. (40)

    3. Willis v. Department of Agriculture (1998)

      In 1998, a plaintiff-employee sought protection under the WPA after reporting that some of the conservation farms he worked for were out of compliance with the Department of Agriculture's approved conservation plans. (41) In denying coverage to the plaintiff-employee, the US Court of Appeals for the Federal Circuit ("Federal Circuit") stated that the goal of the WPA is to "protect government employees who risk their own personal job security for the advancement of the public good by disclosing abuses by government personnel." (42) Plaintiff-employee's job responsibility was to report when farms were out of compliance. This responsibility did not put him at "personal risk for the benefit of the public good." (43) Due to these reasons, plaintiff-employee's claim was dismissed for failing to allege any protected disclosure that satisfied the WPA's jurisdictional prerequisites. (44)

    4. Huffman v. Office of Personnel Management (2001)

      In line with Willis, the Federal Circuit in Huffman v. Office of Personnel Management (45) found that a plaintiff-employee's complaints to a supervisor about the supervisor's conduct did not constitute a disclosure under the WPA. (46) The court came to this conclusion because the WPA defines disclosure as "reveal[ing] something ... hidden and not known." (47) Therefore, a plaintiff-employee must go "above and beyond the call of duty and report infractions of law that are hidden." (48) This means that a plaintiff-employee with investigatory responsibilities must report wrongdoing outside of normal channels to constitute a disclosure that reveals something unknown to the general public. (49) In the end, the Federal Circuit affirmed the lower court's finding that plaintiff-employee's complaint to his supervisors did not constitute a protected disclosure. (50)

    5. Garcetti v. Ceballos (2006)

      Although this idea of excluding employees based on their job duties stems from common law interpretations of the WPA, it has spread, with the help of Garcetti, to other statutes as well. (51)

      In 2006, the Supreme Court held that "when public employees make statements pursuant to their official duties, the employees are not speaking as citizens for First Amendment purposes, and the Constitution does not insulate their communications from employer discipline." (52) In this case, Richard Ceballos, a district attorney, claimed that he was "subjected to a series of retaliatory employment actions" after he notified his supervisors of the misrepresented facts in a search warrant affidavit. (53) In finding for the government employer, Justice Kennedy stated, "Ceballos did not act as a citizen when he went about conducting his daily professional activities" and "did not speak as a citizen by writing a memo that addressed the proper disposition of a pending criminal case." (54) Instead, by discharging his duties, he "acted as a government employee" and therefore his speech was not protected under the First Amendment. (55)

      Despite the fact that "Garcetti involved a constitutional, [rather than] a statutory, claim, the decision has given new life to the doctrine" of excluding employees discharging their duties. (56) The impact Garcetti has is evident in the common law interpreting the WPA, and this can be a useful starting point in analyzing the protection...

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