Department of Labor Administrative Review Board Decision Limits Sarbanes-Oxley Retaliation Protections for Foreign Whistleblowers

On December 22, 2011, the Department of Labor’s Administrative Review Board (ARB) issued a 3-2 en banc decision that limits the application of the Sarbanes-Oxley Act (SOX) outside of the United States.

The case, Villanueva v. Core Laboratories, ARB No. 09-108, ALJ No. 2009-SOX-006 (ARB December 22, 2011), centered around a whistleblower complaint filed by Colombian citizen William Villanueva. Mr. Villanueva was the CEO of Saybolt Colombia, a subsidiary of Core Laboratories NV, a Dutch company which maintains an office in Houston, Texas and whose securities are publically traded on the New York Stock Exchange.

In 2008 Villanueva alleged that he was the victim of adverse employment actions, including termination from his job, after he warned executives in Houston that other executives were engaging in illegal tax schemes. After Villanueva refused to sign a fraudulent tax return, Core Laboratories purportedly terminated him.

Villanueva then filed a complaint with the Occupational Safety and Health Administration (OSHA) alleging that the Saybolt had violated SOX by retaliating against him and that SOX should protected him as a whistleblower since Core Laboratories is based in the U.S. OSHA dismissed Villanueva’s complaint, after which Villanueva requested a hearing with an Administrative Law Judge (ALJ).

The ALJ dismissed Villanueva’s complaint for a lack of subject matter jurisdiction, reasoning that while the case had domestic components, the principal part of the case was extraterritorial and that SOX did not apply extraterritorially.

On August 6, 2009, Villanueva appealed the ALJ dismissal to the ARB arguing that because executives working at the Core Laboratories headquartered in the U.S. had engaged in fraudulent practices and retaliation, the case did not require extraterritorial application of SOX.

The ARB affirmed the ALJ’s dismissal of the lawsuit, ruling that SOX applies only to disclosures relating to U.S. laws and that the fraud Villanueva alleged involved only Colombian laws with no stated violation or impact on U.S. securities or laws. Additionally, the ARB wrote that the fact that Villanueva reported the alleged misconduct to Core Laboratories executives in Houston does not change the foreign nature of the alleged fraud.

The primary result of the Villanueva decision – and one that has surprised many commentators – is that the ARB rejected the “cause” or “decision-maker” test which had previously been used in favor of an “effects” test. The effects test looks to the effect of the conduct at issue and whether it implicates U.S. law, rather than the origin of the conduct, as the relevant factor for determining whether SOX applies internationally.

Because the ARB’s focus in Villanueva was that the whistleblower had only complained of violations of foreign laws, the ARB required the whistleblower to prove an actual violation of law in order to have a viable whistleblower retaliation claim under SOX.  This conflicts with the ARB’s recent decision in Sylvester v. Parexel Int’l, ARB No. 07-123, ALJ No. 2007-SOX-039 (ARB May 25, 2011), in which the ARB held that a complainant need not prove or identify the law believed to have been violated in order in order to constitute protected activity under SOX.

Judge E. Cooper Brown, Deputy Chief Administrative Appeals Judge, dissented from the majority’s decision in Villanueva, writing that the primary focus of SOX is not the underlying fraud, or even the location of the protected conduct, but rather the retaliation against an employee for blowing the whistle on potential fraud. The majority’s view, according to Judge Brown, was inconsistent with Congress’ intent in passing the Dodd-Frank Act’s strengthening amendments to SOX. According to Judge Brown:

“To construe the legal presumption against extraterritoriality as a bar to claims such as that presented by Villanueva constitutes, in my estimation, a legally indefensible restriction on the protection that Congress intended Section 806 to afford to covered employees.”

Additionally, Judge Brown wrote that the majority’s decision in Villanueva ignores the public policies underlying the original intent behind SOX, the recent amendments broadening SOX, the new causes of action under Dodd-Frank, and the ARB’s own recent decision in Sylvester.

Villanueva’s attorneys intend to file a petition for review of the ARB’s decision with the U.S. Court of Appeals for the Fifth Circuit by the filing deadline on February 17, 2012.

As a result of the ARB’s decision, compliance professionals would now need to investigate and take seriously any complaints that relate to or implicate U.S. laws or have an effect within the U.S. Additionally, foreign offices or subsidiaries can still violate U.S. securities law and regulations, as long as an alleged violation refers to U.S. law.

The Employment Law Group® law firm is a leader in the field of whistleblower law and, together with the National Whistleblower Center and the National Employment Lawyers Association, filed an amicus brief in the Villanueva case.

Tagged: Administrative Review Board (ARB), Dodd-Frank Act, Enforcement Bodies, P.C., Sarbanes-Oxley Act (SOX), The Employment Law Group, P.C., Whistleblower Laws (Federal)