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United States of America > New York > Litigation Dispute resolution > Advisory > Article > Whistle While You Work: Defining the Scope of Whistleblower Protection Under Sarbanes Oxley and Dodd Frank

Article: Whistle While You Work: Defining the Scope of Whistleblower Protection Under Sarbanes-Oxley and Dodd-Frank

The Second Circuit recently issued two decisions that define the scope of whistleblower protection under Sarbanes-Oxley and Dodd-Frank. In Nielsen v. AECOM Technology Corp., No. 13-235-cv (2d Cir. Aug. 8, 2014), the court adopted a new standard for whether an alleged whistleblower employee is engaged in protected activity under Sarbanes-Oxley. In Meng-Lin v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014), the court held that the whistleblower anti-retaliation provision of Dodd-Frank does not apply extraterritorially. With these decisions, the Second Circuit broadened the scope of whistleblower protection under Sarbanes-Oxley, but narrowed the scope of protection under Dodd-Frank.

Protected Activity Under Sarbanes-Oxley

Section 1514A of Sarbanes-Oxley protects the employees of publicly traded companies who provide information or otherwise assist in an investigation concerning conduct that they “reasonably believe[] constitutes a violation” of certain enumerated federal statutes, any rule or regulation of the Securities & Exchange Commission (SEC), or “any provision of Federal law relating to fraud against shareholders.” 18 U.S.C. § 1514A(a)(1).

To prevail on a retaliation claim under Section 1514A, a plaintiff must show that: (1) he or she engaged in a protected activity; (2) the employer knew that he or she engaged in the protected activity; (3) he or she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action.

Relying on a 2006 Department of Labor Administrative Review Board (ARB) decision, the Second Circuit previously ruled that an employee’s communications “must definitively and specifically relate to one of the listed categories of fraud or securities violations in 18 U.S.C. § 1514A(a)(1)” in order to qualify as protected activity. However, the ARB has since abrogated that standard, and determined that the statute requires only that the plaintiff have a subjective belief that the challenged conduct violates a provision listed in § 1514A(a)(1), and that the belief is objectively reasonable. The Second Circuit found the ARB’s new standard persuasive and adopted it.

Unfortunately for the plaintiff, the court still affirmed the lower court’s dismissal of his retaliation suit even under its new, more employee-friendly standard. The plaintiff’s allegations centered on a single AECOM employee’s failure to properly review engineering designs for compliance with fire safety standards. The court held those allegations could not form the basis of an objectively reasonable belief that AECOM had engaged in mail fraud, wire fraud, or shareholder fraud.

No Extraterritorial Whistleblower Protection Under Dodd-Frank

In contrast to the Second Circuit’s adoption of a more employee-friendly standard under Sarbanes-Oxley in Nielsen, employers came out ahead with the court’s Meng-Lin decision concerning Dodd-Frank one week later.

Dodd-Frank provides that "[n]o employer may discharge . . . or in any other manner discriminate against, a whistleblower in the terms of conditions of employment because of any lawful act done by the whistleblower . . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . ., this chapter, . . . and any other law, rule, or regulation subject to the jurisdiction of the [Securities and Exchange] Commission."

Plaintiff Liu Ming-Lin, a citizen and resident of Taiwan working for the healthcare division of Siemens China Ltd., a Chinese Corporation that is a wholly owned subsidiary of the Germany corporation Siemens AG, alleged that he discovered Siemens employees indirectly making improper payments to officials in North Korea and China in connection with the sale of medical equipment there. Ming-Lin alerted his superiors through internal company procedures, and alleged that he was demoted and then fired for doing so. After he was fired, Ming-Lin reported the alleged conduct to the SEC.

The district court dismissed Ming-Lin’s complaint for a failure to state a claim on two grounds. First, the court held that the Dodd-Frank anti-retaliation provision does not apply extraterritorially. Second, the court held that the anti-retaliation provision does not apply to employees who are fired after only reporting alleged misconduct internally, and not reporting the conduct to the SEC.

The Second Circuit affirmed on the extraterritoriality issue. Relying on the Supreme Court’s decision in Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010), the court found that there was no explicit statutory evidence that Congress intended the anti-retaliation provision to apply extraterritorially.

The court declined to resolve the uncertainty over whether Dodd-Frank’s anti-retaliation provision applies to purely internal reporting of alleged misconduct. The SEC has published rules in 2011 that say it does, but the Fifth Circuit, the only appellate court to decide the issue, ruled it does not.

Article by Charles E. "Trip" Dorkey III and John W. Lomas, Jr

Last Update: 2015-Mar-01 Charles E. “Trip” Dorkey III - Dentons
The contents of this page do not constitute legal advice or create an attorney- client relationship with the contributor. Do not apply anything you read here without contacting a professional.
Author: Charles E. “Trip” Dorkey III
Law Firm: Dentons
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