United States: Disclosing The Identity Of A Complainant Can Constitute Retaliation Under The Sarbanes-Oxley Act

Last Updated: November 26 2014
Article by Michael Stevens and Karen S. Vladeck

The United States Court of Appeals for the Fifth Circuit recently affirmed a decision of the Administrative Review Board of the Department of Labor, which had determined that a company's disclosure of the identity of an SEC whistleblower who had caused an official investigation, resulting in the employee's workplace ostracism, constituted illegal retaliation under § 806 of the Sarbanes–Oxley Act (SOX). Halliburton, Inc. v. Admin. Review Bd., No. 13-60323, 2014 WL 5861790 (5th Cir. Nov. 12, 2014).

Background

In 2005, Halliburton, Inc. (Halliburton) hired Anthony Menendez (Menendez) as Director of Technical Accounting Research and Training in the Finance and Accounting Department of the Company's Houston office. In that role, Menendez monitored accounting issues and gave advice and training to field accountants. He reported directly to Halliburton's Chief Accounting Officer (CAO).

In July 2005, Menendez raised concerns that some of Halliburton's accounting practices involving revenue recognition did not conform with generally accepted accounting principles. Menendez circulated a memorandum on the revenue recognition issue to colleagues within his department, including the CAO. The CAO met with Menendez and suggested that, although the memorandum was good, Menendez was not a "team player" and needed to work more closely with colleagues to resolve any concerns over accounting practices. Halliburton ordered a new study of the revenue recognition issue and, in October 2005, the study concluded that the Company's practices were proper. That same month, Menendez sought another meeting with the CAO regarding the revenue recognition practices, but he declined to meet with Menendez again.

Menendez then made a series of complaints regarding the accounting practices. First, he complained anonymously to the Securities and Exchange Commission (SEC); then to Halliburton's Vice President of Financial Controls, who said his complaint lacked merit. Menendez then took his complaint to Halliburton's Board of Directors, who forwarded the complaint to the General Counsel.

Around this time, the SEC informed the General Counsel that it was investigating Menendez's complaint, but did not identify the complainant. But, the General Counsel, having seen Menendez's internal complaint, surmised that Menendez must have been the source of the SEC complaint as well. The General Counsel sent an email to Menendez's boss and others, instructing them to preserve documents relevant to the SEC's investigation, as directed, because "the SEC has opened an inquiry into the allegations of Mr. Menendez." That same day, his boss forwarded the email identifying Menendez as the whistleblower to 15 members of Menendez's work group, including Menendez himself, thus alerting them to the SEC's investigation and to the fact that Menendez had complained to the SEC about the propriety of their accounting practices.

Menendez claimed that he was horrified when he saw the email disclosing his identity as the SEC complainant, and he described that day as one of the worst in his life. He claimed that colleagues began to treat him differently, generally avoiding him. Menendez missed work frequently after the revelation, showing up at the office only sporadically and later requested paid administrative leave "given the current environment and circumstances involving the SEC investigation." The Company granted the request.

On September 19, 2006, the SEC recommended no enforcement action against Halliburton. On October 17, 2006, Menendez resigned from Halliburton, stating in his resignation letter that he could not "professionally and ethically" return to the Company while it persisted in accounting practices that, he continued to maintain, were improper.

The Department of Labor Proceedings

On May 8, 2006, Menendez filed a complaint with the Occupational Safety and Health Administration (OSHA) of the Department of Labor pursuant to § 806 of SOX, the antiretaliation provision, alleging that Halliburton retaliated against him because of his complaints about the Company's accounting procedures by disclosing his identity as the whistleblower to his colleagues. OSHA dismissed the complaint, and Menendez requested a hearing before an Administrative Law Judge. Following a hearing that included several days of testimony, the Judge issued a decision and order dismissing the complaint. The Judge concluded, among other things, that, although Menendez's reports to the SEC and the Company were protected conduct, the disclosure of his identity was not an "adverse action" (a required element of an antiretaliation claim under SOX) because none of the workplace harm Menendez suffered as a result of being identified as the whistleblower rose to the level of being "materially adverse." Menendez appealed.

On appeal, the Review Board reversed, holding that Halliburton had retaliated against Menendez by releasing his name. The Board remanded to the Administrative Law Judge for findings on whether Menendez's protected activity was a "contributing factor" in Halliburton's disclosure of his identity and whether Halliburton had satisfied its burden of establishing, as an affirmative defense to the retaliation claim, that "legitimate business reasons" mandated the disclosure of Menendez's identity.

On remand, the Judge held that Halliburton had shown a legitimate business reason for disclosing Menendez's identity as the whistleblower. Menendez again appealed. The Review Board reversed the Administrative Law Judge on the affirmative defense, thus holding Halliburton liable for retaliation. Halliburton then petitioned the Fifth Circuit Court of Appeals for review.

The Fifth Circuit Decision

Section 806 of SOX, codified at 18 U.S.C. § 1514A, creates a private cause of action for employees of publicly-traded companies who are retaliated against for engaging in certain protected activity. The statute states, in relevant part:

"No [public 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 [certain protected whistleblowing activity]." 18 U.S.C. § 1514A(a).

To prevail on a retaliation claim under that provision, the employee must prove, by a preponderance of the evidence, that (1) he engaged in protected whistleblowing activity; (2) the employer knew that he engaged in the protected activity; (3) he suffered an adverse action; and (4) the protected activity was a contributing factor in the adverse action.

Halliburton first contested that releasing Menendez's name constituted adverse action. The Court of Appeals disagreed. The Court explained that the key analysis is whether the action would dissuade an employee from making a complaint. The Court reasoned that in a workplace environment such as Menendez's where collaboration is an important part of the job, "the employer's targeted disclosure to the whistleblower's colleagues that the whistleblower had reported them to the authorities for alleged wrongdoing and has caused them to become the subject of an official investigation, thus creating an environment of ostracism, well might dissuade a reasonable employee from whistleblowing."

Halliburton also contested whether the protected conduct was a "contributing factor" in the employer's adverse action. The Review Board found that Menendez's whistleblowing was indeed a "contributing factor" in Halliburton's disclosure of his identity as the whistleblower. Halliburton contended that, as a matter of law, it is not enough that the protected conduct be a "contributing factor" in the employer's adverse action. Rather, according to Halliburton, an employee must prove a "wrongfully-motivated causal connection."

The Court again disagreed with Halliburton, chastising the Company by stating "Given the facts of this case, it is difficult to see how a different outcome [than the Review Board's conclusion] could have been possible." The Court explained that a whistleblower need not demonstrate the existence of a retaliatory motive on the part of the employer in order to establish that his protected conduct was a contributing factor to the personnel action. The Court also affirmed the non-economic, compensatory damages that the Review Board had awarded Menendez for emotional distress.

Conclusion

The Halliburton case is a clear reminder to employers that "adverse action" can take many forms; what may have seemed like an innocuous litigation hold letter can result in a retaliation claim if not properly handled. If you have any questions about this case, please contact the authors of this post, or the Arent Fox professional who usually handles your matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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