Another Whistleblower Win For Plaintiffs Bar

Katz, Marshall & Banks partner Debra S. Katz and law clerk Matthew LaGarde published an article in Law360 on June 27, 2013, entitled “Another Whistleblower Win For Plaintiffs Bar.”  The article discusses how the Tenth Circuit’s decision to take an expansive view of whistleblower protections under the Sarbanes-Oxley Act ("SOX") in the case Brown v. Lockheed Martin Corporation may prove important in light of the Supreme Court's decision to hear the SOX whistleblower case of Lawson v. FMR, LLC.

See the full text of the article below or click here to view the article in PDF format.

Law360, New York (June 27, 2013, 1:26 PM ET) –

The U.S. Court of Appeals for the Tenth Circuit joined what has become a growing trend among federal courts by rejecting the management bar’s cramped and overly narrow interpretation of the whistleblower protection provision of the Sarbanes-Oxley Act of 2002. Like the U.S. Court of Appeals did in March 2013 in the case of Wiest v. Lynch, the Tenth Circuit embraced recent decisions of the Administrative Review Board (ARB) of the U.S. Department of Labor, which provide an expansive interpretation of the scope of the SOX whistleblower protections.

For attorneys in the plaintiffs bar, it is especially heartening to see another circuit court provide Chevron deference to the ARB’s broad construal of protected activity under SOX, particularly in the buildup to what will be an important decision by the U.S. Supreme Court in Lawson v. FMR LLC, et al.

The case before the Tenth Circuit was Brown v. Lockheed Martin Corporation. Andrea Brown worked as a communications director for Lockheed from June 2000 to February 2008. In May 2006, she began to suspect that her supervisor, Wendy Owen, vice president of communications, was engaging in activities that constituted mail and wire fraud. Specifically, Brown suspected that through a “pen pal” program set up by Lockheed to allow its employees to communicate with active duty soldiers, Owen was developing sexual relationships with several of the soldiers in the program.

In this pursuit, Owen purchased a laptop and other gifts for soldiers using company funds, used company funds to rent limos to transport soldiers to company-funded stays in expensive hotels and otherwise behaved in ways that could tarnish Lockheed’s image. Brown understood that most employee expenses incurred were passed on to Lockheed’s customers, in this case, the federal government.

Brown thus became concerned that Owen’s actions were fraudulent and illegal and that there could be media exposure, which could lead to government audits and affect the company’s future contracts and stock price. Brown reported her suspicions to Lockheed’s vice president of human resources, Jan Moncallo, who responded by requesting that the ethics office conduct an investigation.

After a three-month long investigation, Owen reportedly lost her annual bonus but was not terminated. In December 2006, not long after the investigation’s conclusion, Owen called Brown several times to try to find out who had reported her to Lockheed’s HR department. Brown finally relented and told Owen that she had informed Moncallo of “a few things.”

In March 2007, Lockheed conducted a reorganization of the communications department and assigned Brown to report to Judy Gan, the senior vice president of communications. According to Brown’s testimony, Gan had a very negative attitude toward her from the beginning of their professional relationship. Gan, for example, told Brown that she was not the right person for her current position and that there would be a reduction in force.

Several months later, Owen called Brown and informed her that her position had been posted on the Internet and advised her to get her resume together. Instead, Brown applied for the new director of communications position. After learning that she had applied for the position, Gan lambasted Brown and pressured her to withdraw her application.

In September 2007, Lockheed hired David Jewell as its new director of communications. Owen informed Jewell that Brown had received “less-than-perfect evaluations” in the past. In fact, prior to reporting Owen’s alleged fraud, Brown had received a “high contributor” or “exceptional contributor” rating in all of her performance evaluations. For all of her evaluations after Owen became aware that Brown had filed an ethics report about her conduct, Brown received a lower rating.

Brown bore a torrent of mistreatment over the months following her revelation to Owen that she had initiated the ethics report. Brown’s supervisor asked her to vacate her office and either work from home or use the “visitor’s office,” which doubled as a storage room for office supplies. Brown lost her title and her supervisory responsibilities and was told not to attend an annual communications conference she had always attended previously, even though she was to receive an award at the conference.

On Jan. 3, 2008, Brown came to the office at Jewell’s request and found that another employee had moved into the visitor’s office, and she no longer had a place to work. When she protested to Jewell that an employee with her status was entitled to an office, he responded by telling her that he was working on lowering her status. Brown suffered an emotional breakdown, became deeply depressed and went out on medical leave.

Twenty-two days later, Brown filed a complaint with the Occupational Safety and Health Administration, alleging that she had been retaliated against in violation of SOX. Ten days later, Brown provided Lockheed with notice of her forced termination and amended her OSHA complaint to allege that she had been constructively discharged.

Following a denial by OSHA, an administrative law judge heard Brown’s case. The ALJ determined that Brown had engaged in protected activity by reporting what she reasonably believed to be mail or wire fraud by Owen; that Brown had suffered materially adverse employment actions, including constructive discharge; and that Brown’s protected activity was a contributing factor in the constructive discharge. The ALJ rejected Brown’s alternate argument that she had engaged in protected activity under a “general shareholder fraud theory on the basis of loss of shareholder value.”

The ARB affirmed the ALJ’s finding that Brown engaged in protected activity by reporting mail and wire fraud but did not address the finding that Brown’s activity did not relate to shareholder fraud. Lockheed appealed to the Tenth Circuit, arguing that employee reports of mail and wire fraud that do not allege shareholder fraud are not protected under Section 806. Lockheed also argued that the ARB erred in concluding that Brown “definitively and specifically” communicated a belief that Owen engaged in mail or wire fraud.

The Tenth Circuit upheld the ARB’s decision. First, the court rejected Lockheed’s argument that employee reports of mail and wire fraud that do not also allege shareholder fraud are not protected under the SOX whistleblower provision. Section 806 forbids a publicly traded company from retaliating against an employee because that employee provided information to a person with supervisory authority over the employee “which the employee reasonably believes constitutes a violation of ... [18 U.S.C. §§ ] 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.”

Lockheed argued that the modifying phrase “relating to fraud against shareholders” did not apply to just the “any provision of Federal law” clause immediately preceding it but to all of the enumerated protected activities.

The Tenth Circuit rejected this interpretation of the statute. First, the court noted that interpreting the statute in this manner would render the enumeration of the previous statutes superfluous, a result courts avoid in statutory construction. Second, the court ruled that deference was to be afforded to the board’s interpretation of the act pursuant to the 1984 Supreme Court decision in Chevron USA Inc. v. Natural Resources Defense Council Inc.

Under Chevron, when faced with an ambiguous statute which Congress has vested an agency with the power to interpret, the court should adopt the agency interpretation if it is based on “a permissible construction of the statute.” In this case, the Tenth Circuit found, “Because the Board’s construction of § 1514A(a) is indisputably permissible, this court is bound to defer to it.”

Next, while the court elected not to decide the issue of whether it would adopt the ARB’s rejection of the strict evidentiary standard set forth in Platone v. FLYi Inc., which required that SOX plaintiffs have reported concerns that “definitively and specifically” related to one of the enumerated categories of SOX, it provided a nod to the ARB’s 2011 decision in Sylvester v. Parexel Int’l LLC, which relaxed those requirements.

The Tenth Circuit noted that “multiple Circuit Courts of Appeals are in accord” with Sylvester. However, because the court determined here that Brown’s complaint constituted what she reasonably believed to be a definitive and specific allegation of mail and wire fraud — that Owen was fraudulently and illegally diverting company funds for her personal use — it did not need to address the question of whether to adopt the evidentiary standard set forth inSylvester.

The court next considered and rejected Lockheed’s arguments that there was insufficient evidence in the record to support the conclusion that Brown was constructively discharged and that the ALJ and the ARB applied the wrong legal standard. The Tenth Circuit found that it was reasonable for Brown to have determined that her working conditions were so intolerable that quitting was her only option — the standard for constructive discharge set forth by the Tenth Circuit in Strickland v. United Parcel Service Inc.

Moreover, the court found that the ARB correctly applied that standard when it explicitly concluded that “a reasonable person in Brown’s shoes would have found continued employment intolerable and would have been compelled to resign.”

Finally, the court determined that Brown’s protected activity was a contributing factor in the mistreatment that eventually formed the basis of her constructive discharge. The court noted that even in the absence of any additional evidence, “[t]emporal proximity between the protected activity and adverse employment action may alone be sufficient to satisfy the contributing factor test.”

Moreover, despite Lockheed’s argument that more than 20 months had passed between Brown’s ethics complaint in May 2006 and her departure from the company in January 2008, “the relevant time frame is not when the constructive discharge occurred, but when the conduct leading up to the discharge began.” Here, the Tenth Circuit determined that after Brown told Owen that she may have been responsible for the investigation that was undertaken against her, “the cascade of difficulties which culminated in Brown’s constructive termination began.”

The court also noted that even if Gan and Jewell knew nothing of Brown’s ethics complaint, the “cat’s paw” theory of liability allows for the presumption that they were poisoned against Brown by Owen’s biased reports.

Accordingly, the Tenth Circuit upheld the determination by the ARB that Brown’s constructive discharge constituted a violation of the SOX whistleblower protection provision. The Tenth Circuit nevertheless remanded the case to the ARB for a determination about whether the initial award of reinstatement was still appropriate in light of the fact that five years later, an appropriate position for Brown at Lockheed may no longer exist.

Prior to the Tenth Circuit’s ruling, members of the management bar scoffed at the ARB’s determination on Brown’s behalf, questioning how a report that an employee was having sex on the clock could possibly constitute “protected activity” in the context of financial fraud. However, the simple facts of this case describe an employee who reported a co-worker for fraudulently diverting company funds for her personal use, which reports led to the company engaging in an ongoing campaign of retaliation against her until she had no feasible choice but to quit.

While corporate attorneys may disagree with this result, this is an appropriate application of SOX, which specifically enumerates six categories of employer conduct against which an employee is protected from retaliation for reporting: violations of 18 U.S.C. § 1341 (mail fraud); § 1343 (wire fraud), § 1344 (bank fraud), § 1348 (securities fraud), any rule or regulation of the SEC or any provision of federal law relating to fraud against shareholders.

As the Tenth Circuit noted in rejecting Lockheed’s efforts to limit the type of protected activity an employee may engage in, “Congress could have accomplished the more limited purpose attributed to it by Lockheed by limiting whistleblower protection under Sarbanes-Oxley only to an employee who reports conduct ‘the employee reasonably believes constitutes a violation of any provision of Federal law relating to fraud against shareholders.’”

SOX was enacted in 2002 in the wake of major corporate scandals at companies such as Enron, WorldCom and Tyco International. In passing a robust whistleblower protection provision, Congress correctly recognized that individuals with the most information about company fraud are often current employees, who will not report fraud unless they are confident that they will have legal protections when doing so.

The Tenth Circuit, like the Third Circuit in March 2013, has issued a decision that ensures that employees who face career-derailing retaliation after reporting fraud by publicly held companies can be made whole.

--Debra S. Katz and Matthew LaGarde, Katz Marshall & Banks LLP

Debra Katz is a partner at Katz Marshall & Banks who specializes in the representation of employees in Sarbanes-Oxley and other whistleblower matters. Matthew LaGarde is a law clerk at the firm.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.