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From Securities Regulation Daily, March 5, 2013

Whistleblower Retaliation Claim Properly Dismissed

By Matthew Garza, J.D.

A Second Circuit Court of Appeals panel denied a petition for review submitted by an employee of a technology company who appealed the dismissal of his Sarbanes-Oxley Act whistleblower retaliation claim by the Administrative Review Board of the U.S. Department of Labor (ARB). The decision affirmed the position of the ARB that the employee failed to prove by a preponderance of the evidence that his protected activity was a contributing factor in his firing. The court said its opinion was intended to clarify the burden-shifting framework applicable to Sarbanes-Oxley Act whistleblower claims (J. Scott Bechtel v. Administrative Review Board, United States Department of Labor, March 5, 2013, Cabranes, J.).

Protected activity. J. Scott Bechtel (employee) worked as a vice president for Competitive Technologies Incorporated (CTI), a publicly held company that acts as an agent for patent holders looking to bring technologies to market. The employee's job was to identify clients, acquire the rights to their technologies, and license those technologies in order to generate licensing fees for the company. The employee had disagreements with the company's president and CEO, who the employee thought failed to comply with certain legal requirements in his bid to generate immediate revenue to keep the company out of bankruptcy. The court said it was unclear whether these suspicions had any foundation.

The employee refused to sign disclosures made by the company under Sarbanes-Oxley because he believed certain aspects of the company's finances should be disclosed, while others in the company disagreed. The financial condition of the company did not improve, and the employee was fired. The employee then filed a Sarbanes-Oxley Act whistleblower complaint with the Occupational Safety and Health Administration alleging the he was fired because he refused to sign the Sarbanes-Oxley disclosure forms.

OSHA holding. OSHA initially held that there was reasonable cause to believe that CTI had violated the Sarbanes-Oxley Act and ordered CTI to reinstate the employee and pay back wages and compensatory damages. CTI appealed and an administrative law judge (ALJ) denied the relief and dismissed the employee's complaint. This decision was appealed to the ARB, and after a remand, the ALJ again dismissed the complaint, a decision that was then affirmed by the ARB. The employee then appealed to the Second Circuit Court of Appeals. The court noted that its standard of review of the matter under the Administrative Procedure Act was deferential, saying, "[w]e will uphold a decision by the ARB if it is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."

SOX whistleblower provision. Sarbanes-Oxley Act §806 (18 U.S.C. §1514A) makes it unlawful for publicly traded companies to "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…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" certain laws, rules, and regulations addressing various types of fraud.

Standard of proof. The court noted that it had not previously described the elements and burdens of proof necessary for a Sarbanes-Oxley whistleblower retaliation claim, but that it agreed with the Fifth and Seventh Circuit standard, which provides that in order to prevail on a whistleblower retaliation claim under Section 806, an employee must prove by a preponderance of the evidence that: (1) he or she engaged in a protected activity; (2) the employer knew that he or she engaged in the protected activity; (3) he or she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action. Even if the employee proves these four elements, the employer may rebut this prima facie case with clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of the protected behavior.

Judge Cabranes of the Second Circuit wrote that the court would overturn the ARB's decision only if it relied on factors which Congress had not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or was so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

ALJ error. The court found that the ALJ did set forth an erroneous standard, but that it was harmless error. The ALJ asserted that until the employee meets the burden of proof, the employer "need only articulate a legitimate business reason for its action." According to the ALJ, if the employer presents evidence of a legitimate reason for the adverse action, the employee may prevail by proving "by a preponderance of the evidence that the employer's articulated legitimate reason is pretext for discrimination." This represented an alternative to proving the four elements of the complainant's prima facie case, according to the Second Circuit.

"If the employee proves pretext, the ALJ asserted, the employer may avoid liability by presenting clear and convincing evidence that it had a nondiscriminatory justification for the adverse employment action. In other words, the ALJ seems to have thought that, in addition to the framework specified by the statute and regulations, there existed a second burden-shifting system that applied when the complainant failed to prove a prima facie case by a preponderance of the evidence. The ALJ's alternative burden-shifting scheme has no basis in any relevant law or regulation, and is simply incorrect," Judge Cabranes wrote.

The ARB relied on the evidentiary findings of the ALJ and concluded that the employee had failed to prove by a preponderance of the evidence that his protected activity was a contributing factor in the adverse employment action. Because the employee's failure to prove this element was a sufficient reason to rule against his claim, the ALJ's legal error was immaterial, and the ARB did not act arbitrarily or capriciously or abuse its discretion when it affirmed dismissal of the complaint.

The case is Docket No. 11-4918-ag.

Attorneys: Kirstin Marie Jahn (Jahn & Associates, LLC), Boulder, CO; David Bruce Shine (Law Office of D. Bruce Shine), Kingsport, TN, for Petitioner. Dean A. Romhilt, Trial Attorney; M. Patricia Smith, Solicitor of Labor; Jennifer S. Brand, Associate Solicitor; Megan E. Guenther, Counsel for Whistleblower Programs, (U.S. Department of Labor), Washington, D.C., for Respondent Administrative Review Board, Department of Labor. Garrick A. Sevilla, Mary E. Pivec, (Williams Mullen), Raleigh, NC, and Washington, D.C., for Respondent Competitive Technologies, Inc.

Companies: Competitive Technologies Incorporated

CorporateGovernance SarbanesOxleyAct

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