United States: Some Sarbanes-Oxley Protections For Whistleblowers Found Not To Cover Foreign Employees

In January, the First Circuit Court of Appeals became the first appellate court to address the issue of whether or not the protections afforded to whistleblowers under Section 806 of the Sarbanes-Oxley Act of 2002 apply to overseas employees of U.S. listed companies.  In a decision that creates a significant loophole in the application of that provision, the court found that Section 806 does not apply outside of the United States.

Section 806 of the Sarbanes-Oxley Act provides protection against retaliation by publicly listed companies against employees who report wrongdoing to their superiors.  The statute provides that publicly listed companies may not retaliate against employees who provide information about fraudulent activity to their supervisors or to others who have the authority to investigate misconduct within the company.  Employees are also protected from retaliation for providing information to U.S. federal regulatory or law enforcement agencies or to members of Congress.  The Secretary of Labor is charged with hearing complaints from employees who believe that they have been discriminated against for whistleblowing.  If the Secretary of Labor has not issued a final decision within 180 days of the filing of the complaint, the employee may file a complaint in federal district court.  Section 806 is one of three sections of the Sarbanes-Oxley Act that are designed to protect whistleblowers.

The case of Ruben Carnero v. Boston Scientific Corporation was brought by Mr. Carnero, an employee of an Argentinean subsidiary of Boston Scientific.  Carnero claimed that he was fired by the Argentinean subsidiary, as well as by a Brazilian subsidiary of Boston Scientific for which he acted as Company Manager, because he reported to Boston Scientific that the Argentinean and Brazilian companies were creating false invoices and reporting inflated sales figures.  He filed a complaint against Boston Scientific with the Department of Labor, which issued a preliminary decision dismissing Carnero’s claim.  Carnero subsequently filed a complaint in the Federal District Court for the District of Massachusetts, which dismissed his claim, finding that Congress had not intended Section 806 to be applicable outside of the United States.

The First Circuit Court of Appeals agreed with the District Court that Section 806 did not apply to employees outside of the United States.  The court went through an extensive review of the legislative history of Section 806, and did not find any express intent to invoke extraterritorial jurisdiction for the section.

The court also contrasted Section 806 with the other provisions of the Sarbanes-Oxley Act that address whistleblowers.  Section 301 of the Act requires audit committees of public companies to put in place procedures to encourage anonymous whistleblowers to report questionable accounting or auditing matters.  The court stated, in summary fashion, that because Section 301 does not purport to confer enforceable rights on employees, it does not implicate foreign sovereignty in the way that Section 806 does.  Given the ongoing controversy concerning the conflict between Section 301 and privacy laws in France, this conclusion may be in doubt.  In any event, public companies have generally interpreted Section 301 to require that procedures such as anonymous whistleblower hot lines be instituted throughout a company’s organization, including in its overseas operations.

Another section of the Sarbanes-Oxley Act that the court examined is Section 1107.  Section 1107 provides for criminal liability for retaliation against employees who provide truthful information to law enforcement officers relating to the commission of any federal offense.  Section 1107 was enacted as an amendment to a section of the U.S. code that explicitly provides for extraterritorial jurisdiction.  The court reasoned that because Congress affirmatively placed the whistleblower protection provisions of Section 1107 in a statute that authorizes extraterritorial jurisdiction, its failure to do the same for Section 806 indicated that Congress did not have the intention of extending the protections of Section 806 to overseas employees.

In the end, though, it appears that the major concern of the court was a practical one.  The procedure specified in Section 806 specifies that an employee must bring his or her complaint to the U.S. Secretary of Labor.  Requiring foreign workers to seek redress from a U.S. administrative agency, and authorizing that agency to provide remedies overseas, is impractical on many levels.  In particular, the remedy of reinstatement, which is arguably the most important remedy under the statute, would be impossible for the Secretary of Labor to administer as the Secretary has no means to enforce equitable relief outside of the borders of the United States.  Also, the Secretary would need to become involved in the interpretation of local laws throughout the world in order to determine whether or not a particular action against an employee was taken in retaliation for whistleblowing or for some other acceptable reason under local law.

As a result of this decision, potential whistleblowers in foreign subsidiaries of U.S. listed companies or in foreign companies listed in the U.S. will need to consider their relative lack of protection compared to employees of the same company who happen to be employed in the United States.  While Section 301 and Section 1107 of the Sarbanes-Oxley Act continue to apply to the non-U.S. operations of listed companies, Section 301 is largely concerned with a company’s internal procedures, while Section 1107 applies only to communications with law enforcement officials.  Only Section 806 provides protection for employees who try to raise alarms inside a company.  While the Carnero decision tends to undercut Sarbanes-Oxley’s policy of protecting and encouraging whistleblowing as a means of bringing corporate wrongdoing to light, it is difficult to see how the court could have reached a different conclusion, given the practical difficulties cited by the court.

Jonathan H. Lemberg is a partner with Farella Braun + Martel LLP in San Francisco, CA. His practice emphasizes private equity, international securities offerings, mergers and acquisitions, and other corporate finance transactions.

Farella Braun + Martel was founded in 1962 and maintains offices in San Francisco and St. Helena, California. The firm represents clients throughout the United States and abroad in sophisticated business transactions and high-stakes commercial, civil and criminal litigation.

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