U.S. Whistleblower Protections: Global or Not?

Whistle on Penalty Cards

Whistle on Penalty Cards

The critical question as to whether or not Sarbanes–Oxley (SOX) and Dodd-Frank’s whistleblower protection extend to employees of non-U.S. subsidiaries of U.S.-listed companies is currently subject to disagreement and debate.

Over the past two weeks, one decision concluded that there is no extraterritoriality to SOX and Dodd-Frank whistleblower protections, that it does not apply to non-US companies even if they are subsidiaries of U.S. public companies; the other says that the protections apply. Both were district court (entry-level) decisions, which means that they are subject to appeal. But the resulting uncertainty is concerning.

Corporate and securities lawyers alike are following these cases.

Why Whistleblower Protections Didn’t Apply in One Decision

In the first, a judge held that the anti-retaliation whistleblower protections in Dodd-Frank didn’t apply because the whistleblowing activity occurred outside the U.S. and related to a non-U.S. company, hence, extraterritorial (even though the non-U.S. company that was the subsidiary of a U.S. firm).

A Quick Refresher on SOX’s Anti-Retaliation Provision for Whistleblowers

Section 806 of Sarbanes-Oxley reads as follows:

(a) Whistleblower protection for employees of publicly traded companies.
No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee—

  1. to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 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, when the information or assistance is provided to or the investigation is conducted by—
    (A) a Federal regulatory or law enforcement agency;
    (B) any Member of Congress or any committee of Congress; or
    (C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or
  2. to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 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.

In 2010, Section 806 was amended by Dodd-Frank to provide that no public company, “including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company,” may retaliate against a whistleblowing employee. Dodd-Frank § 929A.

The judge also held that the employee was not protected because he did not report the alleged FCPA violation to the SEC, but rather reported it to his supervisor and to company’s ombudsperson. While most will not disagree with the court’s second conclusion—which by itself was sufficient to negate the ex-employee’s claims of unlawful retaliation—the alleged territorial reach of whistleblower provisions are, apparently, subject to dispute.

The judge relied in part on the U.S. Supreme Court’s decision in Morrison v. National Australia Bank (the gift that keeps on giving), holding that there is a presumption in the U.S. law against finding that a statute applies extraterritoriality: “When a statute gives no clear indication of an extraterritorial application, it has none.” Even looking beyond the letter of the law to the context of the statute, this court found that the provision did not extend to or protect the employee’s extraterritorial whistleblowing activity. (For a nice discussion of this case, see: ComplianceWeek, July 06, 2012.)

Why Whistleblower Protections Did Apply in the Other

Shortly thereafter, however, another federal court took a look at the same issue in a different case and found that Dodd-Frank’s amendment to Section 806 of SOX expressly protects employees of subsidiaries of public companies (not just “employees of publicly traded companies,” as stated in SOX), retroactively.

The second court considered the “novel question” of whether it had jurisdiction over retaliation claims by a employee who had worked for a subsidiary of a public company based on alleged conduct that arose prior to the 2010 Dodd-Frank amendment. This court considered three factors to determine whether the amendment was retroactive “by virtue of being a clarification”:

  1. legislative intent
  2. whether there was conflict or ambiguity regarding the meaning of the statute prior to the amendment
  3. whether the amendment was consistent with a reasonable interpretation of the prior enactment and its legislative history.

Based on its review of these factors, the court concluded that the amendment was a “clarification” of Congress’s intent with respect to the SOX’s whistleblower provision, and that it therefore applied retroactively to the plaintiff’s claims.

Some of the persuasive factors in the eyes of the court:

  • There was no dispute that at all times relevant to this case the U.S.-listed company included the financial information of its subsidiaries in its consolidated financial statements.
  • The subsidiaries all adhered to certain corporate branding guidelines for the family of companies.
  • Plaintiff’s employment agreement was written on the U.S. parent company’s letterhead … The agreement referred to “the U.S. listed company’s benefits and vacation entitlements, as well as the US listed company’s employee application forms.
  • The parent company was involved, to an extent, in the day-to-day management of its subsidiaries. One way this was accomplished was by appointing general managers of the subsidiaries in order to integrate them into the U.S. Listed-Company’s brand.

Foreign Tips on U.S. Companies Not Uncommon

This question is of more than academic interest to global companies and the U.S. Securities and Exchange Commission (SEC). The Commission, after all, has a global website where whistleblowers can report securities violations to them and potentially receive what are commonly referred to as whistleblower bounties: the 10-30% of the sanctions above $1 million collected as a result of this “assistance” from the whistleblower and successful prosecution by the SEC.

According to the early data, 10% of all tips were made from foreign countries, with the largest number coming from China (31% of overseas tips) and the U.K. (28% of international tips). While not all tipsters are employees (they can be clients, customers, business partners and others), it is reasonable to think that a material percentage of them are likely to come from in-house.

Until the global reach of the U.S. whistleblower protections are clarified, most of these tips are likely to be made anonymously (they can still collect a bounty) and litigation will continue. Never a good thing.

For more on the early returns on the SEC’s whistleblower bounty program, see our December 2011 Alert: New SEC Whistleblower Rules: Early Results.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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