An employer need not actually violate the Sarbanes-Oxley Act (SOX) for its employees to receive SOX whistleblower protections, the 3rd Circuit Court of Appeals has ruled. Wiest v. Lynch, +2013 U.S. App. LEXIS 5345 (3d Cir. March 19, 2013). This ruling broadens the scope of protected activity, making it easier for employees in the areas covered by the 3rd Circuit (Pennsylvania, New Jersey and Delaware) to succeed on a SOX retaliation claim.
The employee whistleblower in this case was fired by the Swiss-based security company Tyco shortly after refusing to approve certain payments for conferences and events that he considered to be accounting irregularities and possible violations of securities laws. The employee had communicated his concerns regarding these expenses to his supervisor and upper management.
The employee filed a lawsuit in federal court alleging that he had engaged in a protected activity by refusing to approve expenses that he believed to have been incurred in violation of SOX and communicated his concerns internally. However, Tyco successfully argued in the lower court that the employee had not engaged in protected activity because his internal complaints did not "definitely and specifically" relate to existing shareholder fraud.
The appeals court overturned the lower court's ruling, holding that an employee need only have a "reasonable belief" of a legal violation of shareholder fraud statutes to be protected for his or her internal complaints.
By failing to require that an employee's communications reference an existing violation of shareholder fraud laws, the 3rd Circuit has taken a different position from the 1st, 4th, 5th and 9th Circuit Courts of Appeals. Those appeals courts require that an employee blow the whistle on an existing violation of SOX (i.e., the "definitely and specifically" standard). Some have argued that under the 3rd Circuit's reasoning, an employee may receive protection under SOX's whistleblower provision for virtually any question or concern regarding a perceived accounting irregularity.
The Supreme Court may or may not review this case or choose to resolve the differences among the appeals courts. Public companies should continue to monitor any developments in this legal area and to implement SOX-compliant workplace ethics programs.
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