United States: DOL Flip-Flop: SOXs Anti-Retaliation Provisions Apply To Overseas Conduct After All

Last Updated: September 25 2017
Article by Philip M. Berkowitz

In a late-August decision with potentially far-reaching implications for foreign and multinational employers, the United States Department of Labor Administrative Review Board (ARB) held that the Sarbanes-Oxley Act's (SOX) whistleblower provisions have extraterritorial application—in apparent contradiction of appellate court and indeed prior ARB case law.

In Blanchard v. Exelis Systems Corp.,1 the complainant security supervisor had a contract with the U.S. Department of Defense (DOD) at Bagram Air Force Base ("Bagram") in Afghanistan. His duties included assessment of Afghanis and "other country nationals" (OCNs) who sought access into Bagram. The complainant claimed that his supervisors violated DOD security policy by attempting to cover up the fact that another employee had allowed an OCN to enter Bagram without proper credentials, because they were concerned that the security breach would reflect badly upon the contractors. He also claimed that a supervisor had falsified the number of hours he worked, amounting to alleged mail and wire fraud.

The complainant reported these alleged violations to one of his supervisors and to Human Resources. He also filed a whistleblower complaint with the DOL's Occupational Safety and Health Administration (OSHA), claiming that he suffered unlawful retaliation—he was interrogated, threatened, demoted and held against his will.

OSHA investigated the complaint but concluded that SOX § 806 did not cover adverse actions occurring outside the United States because of the presumption against extraterritorial application of the law. An Administrative Law Judge affirmed this ruling—but on appeal, the ARB reversed and remanded the matter to the ALJ for further proceedings.

The ARB held:

it is unlikely that Congress intended to limit enforcement of § 806 to U.S. companies and exempt the misconduct of foreign issuers of securities in the U.S. financial market. Such a result would not only give unfair advantage to foreign issuers, it would significantly 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 Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Report and Consumer Protection Act of 2010 provide private causes of action for whistleblowers who suffer retaliation. Both statutes require a plaintiff asserting a whistleblower claim to show that he engaged in protected activity, that he suffered an adverse employment action, and that the adverse action was causally connected to the protected activity.

To have a claim, a whistleblower plaintiff must show that he reasonably believed that the defendant's conduct constitutes mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders.

Dodd-Frank's amendments to the Securities Exchange Act provide a "bounty" to some whistleblowers—if an individual voluntarily provides original information to the SEC, which leads to an SEC enforcement action and recovery of more than $1 million, the whistleblower can collect a monetary award ranging between 10 and 30 percent of the monetary sanctions collected.

In September 2014, the SEC awarded $30 million to a foreign national who submitted to the SEC from overseas evidence of his employer's alleged unlawful conduct, which occurred entirely overseas. The SEC stated its view that there exists "a sufficient U.S. territorial nexus [to justify a bounty award under Dodd-Frank] whenever a claimant's information leads to the successful enforcement of a covered action brought in the United States, concerning violations of the U.S. securities laws, by the [SEC]."

Villanueva

The ARB held in 2011 that § 806 did not have extraterritorial effect. In Villanueva v. Core Labs. NV, Saybolt de Colombia Limitada,2 the ARB affirmed a decision dismissing a whistleblower complaint, even though the alleged retaliatory decision occurred in the United States, because the complaint involved a foreign citizen who alleged violations of foreign law by his foreign employer. In dismissing the complaint, the ALJ relied in part on the Supreme Court's then-recent decision in Morrison v. National Australian Bank, Ltd.,3 where the U.S. Supreme Court engaged in a two-step process to resolve any extraterritoriality issue.

In one step, the adjudicative body determines the extraterritorial reach of the relevant statute. The other step is deciding whether the essential events occurred extraterritorially and, thus, outside of the statute's domestic reach.

Applying Morrison's first step in Villanueva, the ARB held that SOX's whistleblower provision, § 806(a)(1), has no extraterritorial application. The ARB reasoned that Congress's silence as to § 806's extraterritorial application conclusively establishes Congress's intent to withhold its application outside the borders of the United States.

As for Morrison's second step, the ARB considered whether the essential parts of the alleged fraud occurred domestically or whether they triggered extraterritorial application. Here, the ARB focused on the locus of the fraudulent activity being reported and stressed that the inquiry should consider the "location of the protected activity, the location of the job and the company the complainant is fired from, the location of the retaliatory act, and the nationality of the laws allegedly violated that the complainant has been fired for reporting ...."

The ARB further noted that even if the complainant's allegation that a publicly traded American company controlled all aspects of the overseas company were true, it would "not change the fact that the disclosures involved violation of extraterritorial laws and not U.S. laws or financial documents filed with the SEC." Thus, despite the allegation that the retaliatory decision was made in the United States, the ARB held that, pursuant to Morrison, "some domestic contact will not convert an extraterritorial application to a domestic one."

Blanchard

In finding that SOX has extraterritorial effect, the ARB in Blanchard relies almost entirely on its view of Congress's intent in addressing whistleblower conduct when it passed SOX, and on the Supreme Court's more recent decision on extraterritoriality, RGR Nabisco, Inc. v. European Community.4 There, the Supreme Court applied the two-step process developed in Morrison to hold that the Racketeer Influenced and Corrupt Organizations Act (RICO) applies extraterritorially.

The Court in RGR Nabisco found that RICO incorporates a number of criminal offenses (or predicate acts) that apply to foreign conduct. The Court held that such an indication will suffice to overcome the presumption against extraterritoriality, and that an "express statement of extraterritoriality is not essential."5

Similarly, in Blanchard, the ARB noted that § 806's substantive prohibitions contain clear indications of extraterritorial intent on the part of Congress. The ARB noted the application of § 806 to all companies with a class of securities registered under § 12 of the Securities Exchange Act of 1934, which by definition includes "foreign private issuers" that are subject to U.S. security laws because they elect to trade in the United States.

Perhaps more significantly, the ARB noted that § 806's "context, structure, and legislative history" indicate that it should be applied extraterritorially. The ARB noted that while Congress did not state expressly that the law applies in foreign countries, its target, "publicly traded companies that engage in specified misconduct",... unequivocally includes both domestic and foreign companies (as well as their employees, contractors and agents)."

The ARB noted, "it is unlikely that Congress intended to limit enforcement of § 806 to US companies and exempt the misconduct of foreign issuers of securities in the US financial market."

The ARB emphasized that Congress's focus, in adopting SOX, was "a backdrop of corporate misconduct conducted on a global arena."

The ARB concluded that its prior ruling in Villanueva was "suspect in light of the Supreme Court's holding in RGR Nabisco." Nevertheless, the ARB stopped short of finding Villanueva to be in error. This is because the ARB concluded that they did not need to determine that § 806 applies extraterritorially to find that the conduct at issue violated SOX.

Here, then, is the one saving grace of the decision. The ARB held that § 806 does not cover all foreign conduct of publicly traded foreign companies. Instead, "the misconduct of a foreign issuer/employer under the statute must still 'affect in some significant way' the United States." The ARB held that the complaint in Blanchard did allege significant domestic connections.

The ARB noted that in Villanueva, it found that the alleged fraud and or law violations involved Colombian laws, with no stated violation or impact on U.S. securities or financial disclosure laws. In Blanchard, the complainant based his claims "solely on violations of US law," despite that the majority of the conduct at issue occurred overseas.

Indeed, the ARB rejected the Villanueva tribunal's conclusion that key to whether the conduct should be protected are the locus of the alleged illegal conduct, the discovery of the alleged illegal conduct, the protected activity, the efforts to address the alleged illegal conduct, and of the retaliation. While "these factors may be a relevant to an extraterritorial assessment under § 806, they are neither individually nor cumulatively dispositive."6

Conclusion

Most U.S. multinationals with a concern about potential application of whistleblower law, whether of the United States or another country, are not necessarily parsing their preventive activities by determining whether the conduct at issue involves U.S. laws or the laws of any other jurisdiction.

Some foreign companies, though, may have taken a less leery view of such conduct, expecting that U.S. whistleblower laws will not touch them. Blanchard undoubtedly will change this. It greatly expands the risk of U.S. whistleblower claims to all multinationals, to the extent that the conduct at issue could be considered to violate U.S. law. If there are additional connections to the United States, the risk is heightened.

Multinationals, then, must consider this potential liability in formulating policies and directing internal enforcement.

Footnotes

1 ARB Case No. 15-031, ALJ Case No. 2014-SOX-020 (Aug. 29, 2017), reported at https://www.oalj.dol.gov/PUBLIC/ARB/DECISIONS/ARB_DECISIONS/SOX/15_031.SOXP_slip_op.pdf#search=exelis.

2 ARB Case No. 09-108 (ARB Dec. 22, 2011).

3 130 S. Ct. 2869 (2010).

4 136 S. Ct. 2090 (2016).

5 Id. at 2012.

6 However, even if the statute does apply extraterritorially, the ARB noted that "the authority to reach certain foreign conduct might nevertheless be constrained by principles of international comity or avoidance of conflict of laws."

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