Our Blog Archive for February 19, 2008

When Sarbanes-Oxley passed in 2002, all of us understood that it represented a complete overhaul of financial controls and reporting in this country. What some of us didn’t understand, however, was that SOX created a whole new theory of employment discrimination – not discrimination related to membership in a protected category defined by Title VII of the Civil Rights Act (like race, gender or religion), but discrimination related to whistleblowing activities – like raising a concern about the books being cooked.

The key provisions of the whistleblower protection under Article 8 of SOX are as follows:

• Employees who provide information about acts they reasonably believe to be a violation of securities laws, rules of the SEC, or laws relating to fraud against shareholders, are protected from retaliation by their employer.
• Protected employees cannot be discharged, demoted, suspended, harassed, or otherwise discriminated against.

SOX retaliation claims have been steadily on the rise since 2002. What’s even more interesting is that the average recovery in a SOX whistleblower discrimination claim ($270,000) significantly exceeds the average recovery in a classic Title VII retaliation claim ($187,583). (Employment Practice Liability: Jury Awards Trends & Statistics, 2005, Jury Verdict Research, Horsham, PA.)

So we know these types of claims are prevalent – which is why a robust ethics and compliance training program will include appropriate coverage of whistleblower protections and the rule against retaliation. What some of us may not realize, however, is that SOX whistleblower protections could apply outside the U.S. At least that’s what a recent case out of the Southern District of New York is suggesting.

In O’Mahony v. Accenture Ltd., 07 Civ. 7916, 02/05/08 (S.D.N.Y.), U.S. District Judge Victor Marrero held that the whistleblower protections of SOX applied to the U.S. subsidiary of a foreign Bermuda-based corporation based on conduct that took place on foreign soil, under foreign law and affecting an employee based in and performing services in the foreign jurisdiction. The case involved the non-payment of Social Security taxes in France for an employee of Accenture’s U.S. subsidiary who had worked in France – not the typical kind of issue we focus on as ethics, legal and HR professionals. The Plaintiff claimed she was demoted and fired for refusing to conceal from French authorities that she had worked in the country long enough to invalidate the original certificate of exemption of coverage from France’s Social Security taxes. In other words, she was asked by her employer (Accenture’s U.S. subsidiary) to keep silent about payments that were owed.

While it may seem a bit overly technical and obscure, the decision is worth watching because it is the first case to hold that the whistleblower provisions of SOX apply to an employee working overseas. The Court focused on three key aspects of the case to justify the application of SOX protections extra-territorially:

0. The Plaintiff had worked at the U.S. subsidiary before being posted to France, and she was an employee of and paid by the U.S. subsidiary, even when she was working in France. The employment relationship was therefore between a U.S. employer and its employee;
0. The alleged wrongful conduct “involved employees of Defendants located in the United States and occurred in the United States” [namely, the decision that Social Security taxes were not due and owing in France]; and
0. The Plaintiff was bringing suit against a “foreign parent and its U.S. subsidiary for alleged misconduct of the United States subsidiary in the United States.”

Aside from the overseas application of SOX whistleblower protections, the case also carries importance because Judge Marrero rejected the previously assumed limitation of SOX to securities matters involving “fraud against shareholders.” He held that “general principles of statutory construction weigh against reading [the statute] as providing whistleblower protection only to employees who provide information concerning fraud against shareholders.”

So O’Mahony is a big deal, not just for its jurisdictional reach, but also for its extension of SOX to cases not involving fraud on shareholders.

As to its specific relevance for those of us interested in compliance training, I think the take-aways are also three-fold:

0. It’s critical for your ethics and Code of Conduct training to cover the principles of whistleblower protection, to encourage reporting, and to make crystal clear the rule against retaliation – both by employees and by managers.
0. When you address the issues in #1, be sure to cast a broad net, and underscore that these rules are not limited to circumstances which involve reporting suspected fraud against shareholders. They can apply to a much more extensive range of ethical violations and suspected misconduct.
0. If you are a multinational organization, don’t limit your ethics and code of conduct training to U.S. employees. Train everyone (with appropriately localized programs). Not only does your Code have global application, but in cases like O’Mahony, you may find U.S. laws being applied extra-territorially.

It will be interesting to see if O’Mahony can withstand appeal. Even if it does not, the practical recommendations that it inspires make for good business practice in any event. So many of the training programs I review are dangerously thin on proper treatment of anti-retaliation principles, yet lawsuits claiming retaliation are on a steep and steady increase. Time to review your materials and blow the whistle internally (pun intended) if your organization’s training programs are coming up short.