Second Circuit Clarifies Burden-shifting Framework in SOX Whistleblower Cases | Practical Law

Second Circuit Clarifies Burden-shifting Framework in SOX Whistleblower Cases | Practical Law

In Bechtel v. Administrative Review Board, the US Court of Appeals for the Second Circuit clarified the burden-shifting framework applicable to whistleblower retaliation claims under the Sarbanes-Oxley Act of 2002 (SOX). The Second Circuit denied the petitioner employee's petition for review, holding that the Administrative Review Board (ARB) did not act arbitrarily or capriciously, or abuse its discretion, when it affirmed the decision of the Administrative Law Judge (ALJ) dismissing the petitioner's complaint.

Second Circuit Clarifies Burden-shifting Framework in SOX Whistleblower Cases

Practical Law Legal Update 2-524-9725 (Approx. 4 pages)

Second Circuit Clarifies Burden-shifting Framework in SOX Whistleblower Cases

by PLC Labor & Employment
Published on 07 Mar 2013 • USA (National/Federal)
In Bechtel v. Administrative Review Board, the US Court of Appeals for the Second Circuit clarified the burden-shifting framework applicable to whistleblower retaliation claims under the Sarbanes-Oxley Act of 2002 (SOX). The Second Circuit denied the petitioner employee's petition for review, holding that the Administrative Review Board (ARB) did not act arbitrarily or capriciously, or abuse its discretion, when it affirmed the decision of the Administrative Law Judge (ALJ) dismissing the petitioner's complaint.

Key Litigated Issues

In Bechtel v. Administrative Review Board, the key litigated issue was whether the Administrative Review Board (ARB) acted arbitrarily or capriciously, or abused its discretion, when it affirmed the dismissal of the petitioner's complaint by the Administrative Law Judge (ALJ). The Second Circuit, among other things, clarified the burden-shifting framework applicable to Sarbanes-Oxley Act of 2002 (SOX) whistleblower retaliation claims.

Background

Competitive Technologies, Inc. (CTI) is a public company that acts as an agent for patent-holders seeking to license or sell technologies to entities that will bring the technologies to market. CTI hired the petitioner, J. Scott Bechtel, in February 2001 to serve as vice president of technology commercialization. At that time, CTI was not profitable and had reported a net operating loss for at least three fiscal years.
In June 2002, CTI hired John Nano to serve as president and CEO. To prevent bankruptcy, Nano aimed to generate immediate revenue for CTI. Soon after Nano joined CTI, he and Bechtel began to disagree.
In December 2002 and March 2003, CTI asked Bechtel to join a committee to:
  • Review CTI’s financial transactions.
  • Make recommendations regarding SOX disclosure requirements.
During both meetings, Bechtel argued that under SOX, certain aspects of CTI’s finances should be disclosed. The other members of the committee disagreed with Bechtel. Bechtel refused to sign the relevant disclosure forms, concerned about his own SOX liability.
CTI’s financial condition did not improve, and CTI's board of directors approved cost cutting measures, including the discharge of Bechtel and other employees. Bechtel's employment was terminated in June 2003.
In September 2003, Bechtel filed a SOX whistleblower complaint with OSHA, alleging that CTI illegally retaliated against him because he refused to sign the SOX disclosure forms. After an investigation by the OSHA Regional Administrator, a formal hearing before an ALJ, an appeal to the ARB resulting in a remand to the ALJ, and another determination by the ALJ, the ARB affirmed the ALJ's second order dismissing Bechtel's complaint. Bechtel then filed a petition for review with the Second Circuit.

Outcome

On March 5, 2013, the Second Circuit issued an opinion in Bechtel v. Administrative Review Board, denying Bechtel's petition for review and holding that:
  • In affirming the ALJ’s dismissal of Bechtel's complaint, the ARB did not abuse its discretion or act arbitrarily or capriciously.
  • Bechtel's remaining claims lack merit.
Among other things, the Second Circuit clarified the burden-shifting framework applicable to SOX whistleblower retaliation claims. Specifically, the Second Circuit held that to prevail on a SOX whistleblower retaliation claim under Section 1514A, an employee must prove by a preponderance of the evidence that:
  • He engaged in a protected activity.
  • The employer knew that the employee engaged in a protected activity.
  • The employee suffered an unfavorable personnel action.
  • The protected activity was a contributing factor in the unfavorable action.
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.

Practical Implications

The Second Circuit's decision allows employers and practitioners in the Second Circuit (New York, Connecticut and Vermont) to gain an understanding of the burden-shifting framework applicable to SOX whistleblower retaliation claims brought in this circuit.

Court Documents