Menendez v. Halliburton Affirms Broad Protection for Sarbanes-Oxley Whistleblowers

On September 13, 2011, the Department of Labor Administrative Review Board (ARB) issued an opinion in Menendez v. Halliburton, Inc., another opinion in a long line of opinions this year and last year that affirm broad protections for Sarbanes-Oxley Act (SOX) whistleblowers.   The ARB reversed the decision of the Administrative Law Judge, finding that the reporting of questionable accounting practices in this case was a protected activity even when the whistleblower was mistaken.  The ARB also ruled that the disclosure of the whistleblower’s identity – even though coworkers would eventually find out anyway – was an adverse employment action.  In addition, the whistleblower need only show that the protected activity was a contributing factor in the employer’s decision to take the adverse action – a very low hurdle.

Importantly, the ARB further expanded protections for whistleblowers by removing from consideration Title VII case law that may have produced narrow exceptions to whistleblower protection.  The ARB formally adopted the Williams standard, which states that any nontrivial unfavorable employment action is an adverse action, but curiously the ARB also retained the Title VII Burlington Northern standard as a persuasive interpretive tool. 

Background

Halliburton, Inc. hired Anthony Menendez in March 2005 as Director of Technical Accounting Research & Training to support Halliburton’s Finance & Accounting (F&A) organization.  He initially reported directly to Halliburton’s Chief Accounting Officer (CAO) Mark McCollum.

Within a few months, Menendez approached McCollum with his belief that Halliburton was engaging in questionable accounting practices – namely, that Halliburton could not recognize revenue on certain products prior to their delivery into the physical possession of the customer.  Halliburton and its external auditor, KPMG, disagreed with Menendez’s recognition concern.

Following the disagreement, Menendez made confidential disclosures to the SEC that Halliburton, with the knowledge of its external auditor, was engaging in defective accounting practices with respect to revenue recognition.  He also reported the practices to Halliburton’s Audit Committee, making substantially the same claim and expecting his complaint to remain confidential as required under the Sarbanes-Oxley Act (SOX) and Halliburton’s stated policy.

In violation of SOX and Halliburton’s stated policy, Menendez’s complaint to Halliburton’s Audit Committee was forwarded to KPMG, the CFO, and McCollum.  Even more damning – an email was sent to Menendez and fifteen of his direct coworkers publically outing Menendez as the SEC whistleblower.

When Menendez returned to work the following week after used accumulated leave, he received no phone calls, few emails, and his coworkers generally avoided him.  KPMG’s auditors, with whom Menendez normally worked closely, also refused to interact with him.

The SEC formally notified Halliburton on September 19, 2006, that no enforcement action was being recommended.  Halliburton’s Audit Committee concluded the same.

Menendez was then instructed to report to the director of external reporting for the F&A group instead of reporting directly to McCollum.  On October 17, 2006, Menendez resigned, stating that he believed Halliburton had demoted him by requiring him to report to a lower ranking officer. 

Sarbanes-Oxley Act (SOX)

On May 8, 2006, Menendez filed a complaint with the Department of Labor under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of SOX, accusing the company of using improper accounting practices to distort its financial statements and mislead investors.  Menendez further claims Halliburton retaliated against him in violation of the SOX whistleblower provisions after he reported his concerns to the SEC and Halliburton’s Audit Committee.

Section 806 of SOX, 18 U.S.C. Sec. 1514(A), provides that:

No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d), or any officer, employee, contractor, subcontractor, or agent of such company, may 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 –

(1) 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 section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by –

(A) a Federal regulatory or law enforcement agency;

* * * *

(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).

The plain language of the statute prohibits employers from discriminating against whistleblowers who report to the SEC or other regulatory or law enforcement agency what the whistleblower “reasonably believes” constitutes a violation of a securities law or of “any rule or regulation” of the SEC.

To prevail on a SOX whistleblower retaliation claim, whistleblowers must prove by a preponderance of evidence that:

1. he or she engaged in a protected activity;
2. he or she suffered an adverse action; and
3. the protected activity was a contributing factor in the resulting adverse action.

The Department of Labor (DOL) Administrative Law Judge (ALJ) dismissed Menendez’s claim; however, the Administrative Review Board (ARB) reviewed the ALJ’s decision, reversing in part, affirming in part, and remanding back to the ALJ to make further findings.

Protected Activity – Reasonableness Standard

The ARB affirmed the ALJ’s finding that the Menendez engaged in protected activity when he alleged violations of SEC rules concerning potentially questionable accounting practices to his supervisors, the SEC, and Halliburton’s Audit Committee.  To be engaged in a protected activity, the whistleblower must reasonably believe that their employer is committing fraud that violates a securities law or any rule or regulation of the SEC.   The necessary reasonableness is based on the knowledge available to a reasonable person in the same circumstances as the whistleblower and with the same training and experience.

Material violation not a requirement

The ARB held that there is no requirement that the whistleblower allege material violations of the law, noting that the whistleblower is seeking protection under SOX and not actually suing the employer for committing fraud.

…Section 806’s plain language contains no materiality requirement for whistleblower complaints.  As we explained recently in Sylvester v. Parexel, a complainant need not allege the substantive elements of fraud, including materiality, to warrant Section 806 protection; the complainant need only have a reasonable belief that the activity alleged constitutes fraud.

Menendez v. Halliburton, Inc. ARB No. 09-002, 09-003, ALJ No. 2007-SOX-005, slip op. at 13 (ARB Sep. 13, 2011) (citing Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42 (ARB May 25, 2011)).

Vindication not a Requirement

The ARB held that the reasonableness of Menendez’s position on the questionable accounting practices is not undermined by the SEC ultimately approving the accounting practices.  An employee’s reasonable but mistaken belief in employer wrongdoing constitutes protected activity under SOX.

Congress purposely selected a broad reasonableness standard unfettered by the limitations of the materiality or vindication requirements in order to encourage whistleblowers to report potential fraud and to report that fraud in its infancy.  Placing the burden on the whistleblower to prove with legal certainty that an employer is indeed committing a vast fraud would deter those whistleblowers who sense wrongdoing but do possess a smoking gun from ever coming forward with the valuable knowledge they do possess.

Adverse Action

Menendez alleged the following adverse actions: (1) breach of whistleblower confidentiality; (2) isolation; (3) removal of job duties; (4) demotion; and (5) constructive discharge.  The ALJ held that none of the above enumerated instances constituted an adverse action.  The ARB disagreed, holding that the breach of whistleblower confidentiality was an adverse action levied against Menendez and stating:

Indeed, the facts of this case exemplify the very reason why Congress mandated that publically-traded firms set up confidential avenues to report wrongdoing.

Menendez, slip op. at 26.

Breach of whistleblower confidentiality

Section 301 of SOX, 15 U.S.C. Sec. 78j-1(m)(4), requires that publicly-traded companies such as Halliburton establish procedures for:

(A) the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and

(B) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.

Strict confidentiality of whistleblower complaints is essential to protecting whistleblowers from almost certain retaliation by the supervisor that whistleblower likely implicates in a fraud committed against shareholders.

The reason for requiring audit committees to create confidential and/or anonymous disclosure procedures is evident. Employee whistleblowers are one of the most effective sources of information concerning questionable accounting and auditing matters as well as fraud and corporate crime. Since employees are more willing to identify misconduct if they can do so anonymously, it stands to reason that anonymous and/or confidential reporting mechanisms encourage internal reporting of corporate misconduct. Furthermore, the confidentiality that Section 301 provides allows employees to report problems directly to the independent audit committee and thus effectively to their employer, while at the same time permitting the whistleblowing employee to avoid possible retaliation from supervisors or high-ranking company managers who may be defensive about wrongdoing in which they might be implicated.  Congress well recognized the importance of encouraging the reporting of accounting irregularities and potential fraud by means of confidential disclosures.

Menendez, slip op. at 23.

Williams and Burlington Northern tests for adverse actions

While the ARB had previously adopted the Burlington Northern test for adverse actions, the ARB now formally adopts the Williams test:

Citing this Board’s adoption of the Supreme Court’s Burlington standard in AIR 21 cases, the ALJ held Title VII’s definition of adverse action, likewise applies to SOX whistleblower claims. However, in Williams v. American Airlines, this Board recently clarified that Burlington’s adverse action standard, while persuasive, is not controlling in AIR 21 cases.  As we discuss below, we similarly hold that Burlington is a particularly helpful interpretive tool, but the plain language of Section 806’s adverse action provision controls.

Menendez, slip op. at 15; Williams v. American Airlines, Inc. ARB No. 09-018, ALJ No. 2007-AIR-004, slip op. (ARB Dec. 29, 2010); Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006).

The Burlington Northern test, borrowed from Title VII anti-discrimination Supreme Court case law, defines an adverse action as any action that would dissuade a reasonable employee from engaging in the protected activity.  The Williams test alternatively defines adverse actions as unfavorable employment actions that are more than trivial, either as a single event or in combination with other deliberate employer actions.

The ARB has decided to officially depart from Title VII case law by adopting Williams as the controlling standard and relegating Burlington Northern to persuasive authority or an “interpretive tool.”   This departure is intended to resolve inconsistencies caused by substantial differences in statutory language between the Title VII provisions and the SOX anti-retaliation provisions.  The move is in all likelihood a victory for whistleblowers and whistleblower advocates, because it forecloses arguments by the opposition manipulating Title VII case law in an attempt to unfairly narrow the broad protections Congress originally intended to provide SOX whistleblowers.

Unlike either Title VII provision, Section 806 states that no company “may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee.” As explained above this language explicitly proscribes non-tangible activity, which evinces a congressional intent to prohibit a very broad spectrum of adverse action against SOX whistleblowers. This difference in statutory construction convinces us that adverse action under SOX Section 806 must be more expansively construed than that under Title VII.

Considering these differences in statutory language, in Williams, we held that the intended protection of AIR 21 extends beyond any limitations in Title VII and can extend beyond tangibility and ultimate employment actions.  Because of its similarity to the adverse action language construed in Williams and for reasons explained below, we adopt the Williams standard of actionable adverse action as likewise applicable to Section 806 cases. Under this standard, “the term ‘adverse actions’ refers to unfavorable employment actions that are more than trivial, either as a single event or in combination with other deliberate employer actions alleged.”  Nevertheless, the Supreme Court’s reasoning in Burlington addressing the contours of adverse action under Title VII’s anti-retaliation provision is compelling and serves as a helpful guide for the analysis of adverse acts under SOX.

Menendez, slip op. at 17.

In some ways, the Williams standard provides broader protections than the Burlington Northern one.  In Williams, the ARB wrote that certain actions, such as termination, demotion, and suspension are per se adverse actions.  The ARB also lists examples of trivial actions: petty slights, minor annoyances, personality conflicts, snubbing by supervisors and coworkers, but further remarks that these actions could be nontrivial in the aggregate.

This is likely not the end of the application of Burlington Northern by the ARB to whistleblower cases.  The ARB in Menendez applied the Burlington Northern test, finding that the employer’s breach of whistleblower confidentiality would dissuade a reasonable employee from engaging in protected activity.  Even the Williams court applied both its standard and Burlington Northern test to the facts of that case.

Anything that would dissuade a reasonable employee from engaging in protected activity seems like it would always constitute an unfavorable employment action that is more than trivial.  The Williams test seems to engulf the Burlington Northern test, while broadening whistleblower protections by exalting certain unfavorable employment actions to a per se status, and foreclosing the application of any narrowing language from Title VII case law.  For this reason, Burlington Northern will likely remain extremely persuasive authority, particularly for close cases.

No tangible consequences requirement

The ARB reversed the ALJ’s conclusion that the emails breaching Menendez’s confidentiality were not adverse actions under SOX because they merely identified Menendez to a group of people who would have known it was him in any case.  The ARB held that the tangible consequences of an adverse action merely affects the amount of damages ultimately awarded the whistleblower, not the adverse action determination.  Because Section 301 of SOX requires publically-traded companies to establish procedures for the confidential, anonymous submission of concerns regarding questionable accounting matters, Menendez’s right to confidentiality was a “term and condition” of employment that Halliburton unquestionably denied him.

Causation 

The ARB held that a whistleblower need only show by a preponderance of evidence that the protected activity was a contributing factor in the employer’s decision to take the resulting adverse action.  The protected activity does not have to be the only factor or even a determining factor- it need only be a contributing factor.

Proving a motive is not a necessary element in determining causation.  Requiring the whistleblower to prove that the employer harbored a retaliatory or discriminatory motive would impose a higher evidentiary standard than what Congress has put forth in the statute.

Conclusion

Menendez should be a clarion call to publicly traded corporations that the ARB has aligned whistleblower protections with the original language and broad interpretation Congress originally intended to protect SOX whistleblowers.

Tagged: Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)