Shareholder Fraud Not Required for Sarbanes-Oxley Whistleblower Retaliation: Tenth Circuit

Practical Law Legal Update 6-531-6237 (Approx. 7 pages)

Shareholder Fraud Not Required for Sarbanes-Oxley Whistleblower Retaliation: Tenth Circuit

by PLC Labor & Employment

Key Litigated Issues

In Lockheed Martin v. Admin. Rev. Bd., the key litigated issue was whether the employer violated the whistleblower protection provision contained in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX) by constructively discharging an employee after she engaged in protected activity.

Background

Andrea Brown became Director of Communications for Lockheed Martin Corporation (Lockheed) in 2003, reporting to Wendy Owen, Vice President of Communications, and Ken Asbury, President of Technical Operations. In May 2006, Brown began having difficulty getting Owen to communicate. Brown discussed this with Asbury and Tina Colditz, a coworker. Colditz, who also reported to Owen, ran a pen pals program for the company, through which Lockheed employees could correspond with deployed US soldiers. Colditz told Brown that Owen was engaging in fraudulent and illegal actions through the pen pal program. Brown was concerned that there could be media exposure leading to government audits and affecting the company's stability.

Brown told her concerns to Jan Moncallo, Vice President of Human Resources. Moncallo told Brown that:

She would submit an anonymous ethics complaint on Brown's behalf.
Brown would be protected from retaliation because her identity would remain concealed.

In May 2006, Moncallo sent an e-mail to Jean Pleasant, Ethics Director, for investigation. The e-mail detailed Brown's allegations of Owen, including:

Purchase of a laptop with company funds.
Use of company funds to pay for:
- limousines to transport soldiers;
- lodging with soldiers; and
- gifts for soldiers.
Communications with staff stating she was meeting with generals when, in fact, she was meeting with soldiers.
Not responding to calls from staff due to non-business related meetings with soldiers.
Having affairs with soldiers.
Sending pornographic material to soldiers.
Using her position to influence staff to cover for her.
Tarnishing Lockheed's image.

The e-mail identified Brown as having knowledge about the allegations.

Lockheed investigated Owen from May 2006 to August 2006. Following Brown's anonymous complaint, the following events occurred:

A few days after the complaint, the pen pal program was discontinued.
Owen later changed positions (although remained a vice president).
Believing Colditz to have reported her, Owen began to treat Colditz unfairly, and indicated in an e-mail that Colditz would soon be out of work.
In fall 2006, Brown revealed to Asbury and Colditz that she made the complaint.
In December 2006, Owen called Brown to try to find out who had reported her, and informed Brown that she had lost her annual bonus due to the complaint. Brown revealed to Owen that Brown had told Moncallo "a few things," but was not sure her comments had resulted in the complaint.
Brown reported the phone call with Owen to Asbury and Moncallo.
From late 2006, Brown received a lower than usual rating of "successful contributor" (having always received "high contributor" or "exceptional contributor" prior to that time).

In February 2007, Lockheed announced it was undergoing a reorganization, and in March 2007, announced that further reorganizations would be made. Following the reorganization announcement, the following changes were made:

Brown began reporting to Judy Gan, the Senior Vice President of Communications.
Owen became Gan's assistant (although retained her title as Vice President).

Brown found Gan's attitude toward her negative from the start, and Gan indicated that Brown was not the right person for the job. In June 2007, Owen informed Brown that Brown's job had been posted on the internet and that she should get her resume together. Brown, who was devastated:

E-mailed Asbury and Gan about the phone call.
Began discussing with Moncallo the possibility of resigning.
Instead applied for the new Director of Communications position.
In the course of applying, learned that the newly-posted position was a "Level 6" (Brown held a "Level 5" at that time).
Sent an e-mail to Gan, Asbury, Owen and another senior manager, informing them she was applying.

Gan then told Brown she:

Was not qualified for the position.
Had performed poorly since she had been with Lockheed.
Had hurt her future with Lockheed by applying.

Brown withdrew her application.

In September 2007, Lockheed hired David Jewell as the new Director of Communications. Owen, who had a good relationship with Jewell before he was hired, had told Jewell to apply. Owen was also a member of the selection committee which considered Jewell. Owen told Jewell that Brown had received less-than-perfect evaluations in the past. Shortly after Jewell started, Brown:

Was made to vacate her office and either work from home or use the visitor's office (which was used as a storage room).
Lost her title and her supervisory responsibilities over four employees.
Was prevented (by Gan) from attending an annual conference, even though she had always attended before, and was due to receive an award.

Brown requested information about the nature of her position and future but received no answer. Jewell then told her that she may be laid off, but would not clarify. In January 2008, Brown found someone else working in the visitor's office. Jewell told Brown that he was looking for a cubicle for her. Brown protested that, at her level, she was entitled to an office. Jewell responded that he was reducing her level. Brown suffered a breakdown and took medical leave.

During January and February 2008, Brown:

Brought a complaint to OSHA alleging SOX violations.
Provided Lockheed with a notice of forced termination.
Amended her OSHA complaint to allege constructive discharge.

OSHA denied Brown's complaint in May 2008. Brown then requested a hearing before an Administrative Law Judge (ALJ) who found that:

Brown had engaged in protected activity.
Brown suffered materially adverse employment actions, including constructive discharge.
Brown's engagement in protected activity was a contributing factor in the constructive discharge.

Lockheed appealed the ALJ's decision to the DOL's Administrative Review Board (ARB) which affirmed.

Both the ALJ and the ARB concluded that Brown had proven each element of her claim by a preponderance of the evidence. Specifically, the ALJ concluded, and the ARB affirmed, that Brown had established that:

She reasonably believed that Owen had committed mail or wire fraud.
She communicated that belief "definitely and specifically" to Lockheed.

However, the ALJ also concluded that Brown "failed to establish protected activity under a general shareholder fraud theory on the basis of loss of shareholder value." The ARB failed to address this finding that Brown's activity did not relate to shareholder fraud.

Lockheed sought review from the US Court of Appeals for the Tenth Circuit, arguing that:

Employee reports of mail and wire fraud that do not allege shareholder fraud are not protected under Section 806 of SOX.
The ARB was incorrect to conclude that Brown "definitely and specifically" communicated her belief that Owen engaged in mail or wire fraud.

Outcome

On June 4, 2013, the Tenth Circuit issued an opinion in Lockheed Martin v. Admin. Rev. Bd., affirming the ARB's opinion. The Tenth Circuit held that Lockheed's interpretation of Section 806 of SOX that an employee is protected from retaliation only if the violations they are reporting relate to shareholder fraud, is incorrect. In its explanation, the Tenth Circuit stated that:

The plain, unambiguous text of the regulation implementing Section 806 (18 U.S.C. § 1514A) establishes six categories of employer conduct against which an employee is protected from retaliation for reporting.
Because four of these violations relate to federal law provisions (18 U.S.C. §§ 1341, 1343, 1344, and 1348) Lockheed's reading of Section 806 (that the phrase "relating to fraud against shareholders" modifies all six of the protected activities) would render the enumeration of these activities in Regulation 1514A superfluous, and superfluity should be always be avoided in statutory construction.
Congress could have accomplished the more limited purpose that Lockheed believes Section 806 has by limiting its protection only to an employee who reports conduct he reasonably believes constitutes a violation relating to fraud against shareholders. However, Congress did not phrase the statute this way, but instead gave each provision of Regulation 1514A a clear and distinct meaning.
When interpreting an ambiguous statute which Congress has vested a government agency the power to interpret, "the question for the court is whether the agency's answer is based on a permissible construction of the statute" (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.). Interpreting this holding, the Tenth Circuit stated that, since the ARB's construction of Regulation 1514A is indisputably permissible, the Tenth Circuit is bound to defer to it.

The Tenth Circuit also affirmed the ALJ and ARB's finding that Brown:

Reasonably believed the conduct she reported violated one of the federal statutes or violations listed in Regulation 1514A.
"Definitively and specifically" communicated her belief that Owen had engaged in illegal acitivity to her supervisor.

In reaching this conclusion, the Tenth Circuit stated that there was substantial evidence that Brown met these requirements, including that:

Brown reported to her supervisors her concerns that costs incurred by Lockheed employees were billed back to the government.
Although Brown did not specifically use the words "fraudulent" or "illegal" when she complained to her supervisors, her supervisors recognized that the conduct could be considered fraudulent or illegal.
Brown's testimony was credible.

Further, the Tenth Circuit held that the fact that Owen did not attempt to conceal her involvement with the pen pal program did not negate the inference that she acted with the requisite intent to defraud.

The Tenth Circuit also held that:

The ALJ and the ARB applied the correct legal standard in concluding that Brown was constructively discharged from Lockheed, and further that there is sufficient evidence to conclude that Brown was constructively discharged. For example, before making her complaint, Brown had an office, held a leadership position and received high performance ratings. She lost all of this after making her complaint. The Tenth Circuit stated that a reasonable person would have found these changes intolerable, to the extent that resignation would be their only option.
Brown proved (as is required under Section 806) that her protected activity was a contributing factor in the unfavorable personnel action. Noting that the adverse employment actions Brown experienced began shortly after the conclusion of the investigation of Owen, the Tenth Circuit concluded that "a reasonable fact finder could easily conclude Brown's ethics report was a contributing factor in her ultimate termination."

Practical Implications

Even complaints that do not clearly correlate with shareholder fraud are susceptible to SOX Section 806 liability. Employers (especially those dealing with an employee whistleblower situation) are advised to become familiar with Section 806 of SOX and its implementing regulations. Employers should especially be aware that Section 806 and its related regulations establish six clear and distinct violations. An employee that complains about any one of these six violations will be protected from retaliation. According to the Tenth Circuit's interpretation and explanation of Section 806, it is not necessary for the violation or violations of which the whistleblower employee is complaining to relate to fraud against shareholders.

Shareholder Fraud Not Required for Sarbanes-Oxley Whistleblower Retaliation: Tenth Circuit | Practical Law