United States: DOL Allows SOX Claim Where Foreign Whistleblower Alleged Violation of US Law

The Department of Labor's Administrative Review Board (ARB) recently held that a former employee of Exelis Systems Corporation who was employed in Afghanistan could bring a SOX claim even though he worked exclusively outside of the United States. Blanchard v. Exelis Systems Corp./Vectrus Systems Corp., ARB Case No. 15-031 (August 29, 2017). In so ruling, the ARB opened the door to the potential extraterritorial application of SOX, reversing course from its prior decision addressing this same issue.

Background

Complainant was formerly employed by Exelis as a Security Supervisor. He was stationed in Afghanistan, where his duties included assessment of local or foreign nationals who sought access to a U.S. air force base. Complainant alleged that his employment was terminated (while in Afghanistan) in retaliation for reporting to Exelis' human resources staff that his supervisors had engaged in wire and mail fraud. Specifically, Complainant reported that his supervisor had attempted to cover up the fact that another employee had allowed an unauthorized person to enter the air force base without the proper credentials, and directed an investigator to refrain from reporting the security breach to the U.S. military. He believed that his supervisors withheld or falsified information relating to the breach, and that this false information, which was sent to U.S. military personnel, constituted a violation of U.S. law – specifically, mail and wire fraud. He also reported that an indirect supervisor was working fewer hours than he was reporting on his timesheet, which he also believed constituted mail and wire fraud. Complainant subsequently filed a complaint against the Company with the DOL, alleging that the company violated § 806 of SOX by retaliating against him because of his protected activities.

Holding

Relying upon Obama-era ARB precedent, an Administrative Law Judge dismissed the complaint on the grounds that the Complainant's concerns arose from conduct that occurred in Afghanistan and SOX § 806 does not apply extraterritorially. The ARB reversed, explaining that the issue of extraterritorial application was unnecessary in this case because the Complainant asserted allegations that fell within the domestic reach of the statute (i.e. violations of U.S. mail and wire fraud). Accordingly, the ARB held that because the complainant's alleged complaints involved "a U.S.-based corporation engaged in submitting false claims to the U.S. government in connection with U.S. security and military operation on a U.S. air force base," his complaints "fall squarely within the type of malfeasance that both SOX and § 806 aimed to deter."

ARB In Dicta Addresses The Potential Extraterritorial Application of SOX

As described in our prior post, the applicable standard in assessing the extraterritorial application of a statute arises from the Supreme Court's decision in Morrison v. National Australian Bank, Ltd., 130 S. Ct. 2869 (2010). There, the court applied a "two-step test" to determine (1) whether Section 10(b) of the Securities Exchange Act of 1934 ("SEA") reached extraterritorial claims and, if not, (2) whether the facts alleged in the complaint require an impermissible extraterritorial application. The Supreme Court held that, because the SEA did not give a "clear indication of an extraterritorial application, it has none."

Relying upon Morrison, the ARB in Villanueva v. Core Labs. NV, Arb. Case No. 09-108 (ARB Dec. 22, 2011) held that SOX does not apply extraterritorially. In Villanueva, the plaintiff (who was employed outside of the United States) alleged that he had been terminated for complaining about his employer's alleged underreporting of taxes due to the Columbia government. The ARB held that the complainant's allegations of unlawful conduct were not protected activity under SOX because his complaints concerned solely violations of foreign laws.

In the Blanchard decision, the ARB (in dicta) described its prior holding in Villanueva as "suspect" in light of the Supreme Court's recent ruling in RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016). In RJR Nabisco, the Supreme Court applied the Morrison two-step process and held that the Racketeer Influenced and Corrupt Organizations Act (RICO) applies extraterritorially because it incorporates a number of predicates that apply to foreign conduct, which signaled that Congress intended for RICO to apply extraterritorially.

Citing RJR Nabisco, the ARB stated that because SOX's anti-retaliation provision applies to all companies that register securities and those that are required to file reports under the SEA, its coverage includes "foreign private issuers" that are subject to U.S. securities laws because they elected to trade in the U.S. Therefore, the ARB stated that it was "unlikely that Congress intended to limit enforcement of Section 806 to U.S. companies and exempt the misconduct of foreign issuers of securities in the U.S. financial market" because such a result would "give unfair advantage to foreign issuers" and "undermine the twin goals of SOX to protect both shareholders of publically-traded companies as well as the integrity of our increasingly global and interconnected U.S. financial system." The ARB further noted that the legislative history of SOX "contains repeated references to the interconnectedness and internationalization of national markets" and therefore concluded that limiting Section 806 to domestic activity "would severely undercut Congress' remedial purpose." Finally, the ARB stated that at least three of the six enumerated forms of protected activity under SOX (wire fraud, securities fraud and fraud against shareholders) "extend to some foreign conduct."

Significantly, the ARB recognized that SOX does not cover all foreign conduct of publicly-traded foreign companies and that "the misconduct of a foreign issuer/employer under the statute must still 'affect in some significant way' the United States."

Implications

The ARB's dicta in Blanchard regarding the potential extraterritorial application of SOX is directly contrary to its prior decision in Villanueva (which was affirmed by the 5th Circuit Court of Appeals) and other court decisions. Notably, the ARB did not overturn its prior holding in Villanueva and made clear that a SOX whistleblower's allegations of misconduct must have a "significant" impact in the United States. It therefore remains to be seen whether courts will accord any deference to Blanchard in considering the extraterritorial application of SOX. In addition, although not the focus of this blog post, employers should take note that the ARB in Blanchard continued to expand the notion of "protected activity" under SOX beyond any possible purpose associated with the statute's enactment.

DOL Allows SOX Claim Where Foreign Whistleblower Alleged Violation Of US Law

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