Appellate Victory in Sarbanes-Oxley Act Whistleblower Case More Important Now, After SCOTUS Decision in Digital Realty
On February 21, 2018, the Supreme Court issued its opinion in Digital Realty Trust v. Somers, Case No. 16-1276, — US – (2018), holding that in order to be protected from retaliation for internal reporting under the Dodd-Frank Act’s Section 21F as a “whistleblower,” which is defined in the statute, the individual must have first made a disclosure to the SEC under the Act’s bounty system. While the decision was not the death blow to Chevron deference that some expected, given Justice Gorsuch’s apparent hatred of the doctrine, it was a significant limitation on the protections for whistleblowers.
The next day, on February 22, 2018, the Tenth Circuit Court of Appeals issued its decision in Genberg v. Porter, 882 F.3d 1249 (10th Cir. 2018), which represents a significant victory for whistleblowers generally and a particularly sweet victory for Ogborn Mihm’s client, Carl Genberg. The opinion strengthens the Sarbanes-Oxley Act’s anti-retaliation protections for whistleblowers in the Tenth Circuit and provides a ray of light for corporate whistleblowers after the Supreme Court’s opinion in Digital Realty v. Somers narrowed the Dodd-Frank Act’s anti-retaliation protections.
The Genberg Case
Carl Genberg was an executive at a publicly traded medical technology and device company. In late 2009 and early 2010 he began raising concerns with the CEO and CFO regarding the Board of Directors’ continued exercise of a proxy granted to it pursuant to a prior plan for the company to become public, in violation of SEC Rule 14. When his concerns went unaddressed, Mr. Genberg wrote a letter on behalf of an interested shareholder, demanding in part that the Board give up its proxy and noting that the company had failed to hold annual shareholders meetings for several years.
In response to this letter, on the next day the Board and the Company’s CEO, Steven Porter, issued a cease and desist letter to Mr. Genberg. The following day, Mr. Genberg also reported his concerns that the CEO was engaging in insider trading and stock price manipulation. Three days later the Board began an investigation of Mr. Genberg. Three weeks later, as a result of the investigation, Mr. Genberg was terminated under a “for cause” provision in his employment agreement, which effectively denied him the severance he was otherwise entitled to. Mr. Genberg subsequently brought claims under, inter alia, the Sarbanes-Oxley Act’s anti-retaliation provision, and represented himself pro se for the majority of the litigation of the case. Clayton Wire and Jim Fogg of Ogborn Mihm LLP were proud to step in just prior to the scheduled trial to represent Mr. Genberg.
The Sarbanes-Oxley Act (SOX)
SOX prohibits a publicly traded company, or any contractor or agent of such company, from retaliation against an employee who blows-the-whistle on what he reasonably believes to be a violation of statutes prohibiting mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission (SEC), or any provision of Federal law relating to fraud against shareholders. Successful whistleblowers are entitled to recover economic damages, non-economic damages, attorneys’ fees and costs. The SOX statute incorporates the burdens and evidentiary procedures of the AIR-21 anti-retaliation statute. Under this paradigm, a whistleblower must first prove that:
- he engaged in protected activity,
- the defendant was aware of the protected activity,
- he suffered some adverse action, and
- that his protected activity was a contributing factor in the adverse action.
This “contributing factor” causation standard is viewed as a whistleblower-friendly one. Then, once the whistleblower establishes these basic elements, the burden then shifts to the defendant to prove the “same action” affirmative defense, which allows the defendant to escape liability if it can establish by clear and convincing evidence that the same adverse action would have been taken against the whistleblower in the absence of the protected activity.
The Genberg Opinion
In its February 22, 2018, opinion, the Tenth Circuit reversed the District Court’s grant of summary judgment in favor of the Defendant. In doing so, the court made several key legal rulings that both benefit Mr. Genberg’s case and all whistleblowers.
First, the court found that the District Court had applied the incorrect test to determine whether Mr. Genberg had engaged in protected activity under SOX. The Tenth Circuit noted that by requiring Mr. Genberg to refer to a specific statute or rule enumerated in SOX, the District Court had applied the “definitive and specific” protected activity standard that the Administrative Review Board (ARB) had rejected in the Sylvester case. The court went on to note that under Lockheed, the Sylvester decision was entitled to Chevron deference, i.e. the court would follow the decision absent proof that it was directly contrary to the statutory language, thus joining four other circuits in adopting the Sylvester standard.
Under the Sylvester standard, a whistleblower is not required to make a “definitive and specific” reference to an enumerated statute or rule under SOX, but is instead only required to have a reasonable belief that such enumerated statutes or rules were or would be violated. “The Sylvester standard contains subjective and objective components. Under the subjective component, the employee ‘must actually believe’ that the conduct raised in the communication is unlawful. Lockheed, 717 F.3d at 1132. Under the objective component, the belief must be reasonable. Id.” Genberg v. Porter, Slip Op. at 11.
Importantly, the Tenth Circuit noted that whistleblowers such as Mr. Genberg have “no obligation to explain the omission of a citation to federal securities law in” their protected activity because Sylvester does not require whistleblowers to “include a citation to the underlying rule.” Genberg, Slip Op. at 12-13 n.3. Importantly, this is even the case when the whistleblower is, like Mr. Genberg, an attorney.
Second, the court reiterated the Tenth Circuit’s previous description of the “contributing factor” causation standard in Lockheed, holding that “[t]his element is broad and forgiving, requiring the plaintiff to point to any factor that tends to affect in any way the outcome of the decision. The contributing factor need not be significant, motivating, substantial, or predominant.” Genberg, Slip Op. at 15 (internal quotations and citations omitted, emphasis in original). The court noted that a close temporal proximity of events could establish causation in SOX retaliation claims.
The court also addressed and rejected the Defendant’s “legitimate intervening event” theory, which was premised on the Fourth Circuit’s opinion in Feldman v. Law Enforcement Assocs. The court held that “[t]o rely on a legitimate intervening event, the adverse action cannot be inextricably intertwined with the protected activity; therefore, [the defendant] need[s] to explain [the adverse action] ‘without reference to [the whistleblower’s] protected activity.’” Genberg, Slip Op. at 17-18. In making this holding and limiting the Feldman court’s opinion, the Tenth Circuit relied on the ARB’s decision in Palmer v. Canadian Nat’l Ry.
The court ruled that when an investigation leads to an adverse action against a whistleblower, and in the absence of the whistleblower’s protected activity that investigation would never have occurred, then the protected activity is “inextricably intertwined” with the investigation and adverse action. When protected activity is inextricably intertwined with the investigation that led to the adverse action, the investigation cannot be “independent” of the protected activity, and thus the investigation cannot serve as a “legitimate intervening event” that cuts off causation. Genberg, Slip Op. at 18. In coming to this result, the court cited to Palmer’s holding that if the protected activity led the employer to investigate a possible rule violation and then fire the employee for violating that rule, “the protected activity…would be ‘inextricably intertwined’ with the adverse action.” Id. (quoting Palmer).
Finally, the court found that, for purposes of summary judgment, the Defendant had “forfeited” the “same action defense” by failing to raise the defense in either his Answer or his motion for summary judgment, noting that the Answer actually expressly disavowed the relevance of the defense. Genberg, Slip Op. at 19. The court went on to reject the Defendant’s argument that he had properly preserved the defense by arguing that the protected activity had not contributed to the adverse action. Id.
The Digital Realty Case
In Digital Realty the Court was faced with relatively straight forward questions regarding statutory interpretation and deference to agency regulations. Under the language of Section 21F of the Dodd-Frank Act, a “whistleblower” is defined by the Act’s bounty provision, i.e. a “whistleblower” is “any individual who provides … information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].” This definition is tied to the Dodd-Frank Act’s whistleblower bounty system, whereby an individual may report violations of securities laws to the SEC and potentially be eligible for a reward or bounty if the SEC is successful in pursuing claims based on the whistleblower’s report.
In the same section, the Dodd-Frank Act also provides that “whistleblowers” are protected from retaliation for engaging in activities that fall into three categories, one of which is engaging in activity protected by SOX. However, the SEC promulgated regulations stating that an individual did not need to qualify as a “whistleblower” under the Act’s bounty provision, i.e. report to the SEC, in order to be protected from retaliation, and that the anti-retaliation provision barred retaliation for internal reporting by an individual who had not reported to the SEC. Prior to the Supreme Court’s decision, the majority of courts to have addressed the issue, and indeed the District Court in the Genberg case was one of these, held that the SEC’s regulations were entitled to deference and that the Act’s anti-retaliation protections extended to individuals who reported internally, but did not report to the SEC.
In that case, Mr. Somers had apparently reported potential securities law violations internal, but had not made any report or disclosure to the SEC, and was terminated allegedly in retaliation for such internal reporting. Mr. Somers did not pursue a SOX retaliation claim, possibly because the statute of limitations for such claims is 180 days, as compared to 3 years under the Dodd-Frank Act. The case thus presented the issue of whether Mr. Somers fell within the protections of Section 21F of the Dodd-Frank Act, despite having not reported to the SEC.
The Court took a strict interpretation of Section 21F of the Dodd-Frank Act, finding that the SEC’s regulations were not consistent with the clear language of the statute. Consequently, the Court held that in order to qualify as a “whistleblower” under Section 21F, and thus be entitled to protection from retaliation, the plaintiff must have made a report to the SEC pursuant to the Dodd-Frank Act’s bounty provision. While the Court did not specifically address the issue, it is apparent that this likely means that in order to be covered under Section 21F’s anti-retaliation provision, the plaintiff must have filed with the SEC before suffering retaliatory adverse actions for her otherwise protected activity. This significantly limited the scope of potential claimants under Section 21F.
The Ramifications for Whistleblowers
The Genberg decision has significant beneficial ramifications for whistleblowers in the states covered by the Tenth Circuit, and throughout the nation. In particular, the Tenth Circuit’s adoption of the whistleblower friendly Sylvester standard is a clear statement that whistleblowers need only reasonably believe that a violation is or will occur in order to be protected by SOX. Further, the court’s limitation of the “legitimate intervening event” theory and its recognition that contributing factor causation is satisfied when protected activity leads to an investigation that ultimately results in an adverse action is great for whistleblowers who face systematic attempts to investigate, discredit and terminate them. Finally, the court’s recognition that the “same action defense” may be forfeited if not plead, and that merely challenging causation does not preserve such defense, will allow whistleblowers to succeed by only proving the basic prima facie elements of retaliation.
This expansion of protections for whistleblowers under SOX is more important than ever, given the Supreme Court’s recent opinion in Digital Realty v. Somers narrowing the anti-retaliation protections of the Dodd-Frank Act by requiring reporting to the SEC. In light of the Digital Realty opinion, the SOX anti-retaliation provision is more important now than ever, as it presents a broad and forgiving protection for those that have the courage to report illegal conduct by publicly held companies. Further, SOX is now back to being the primary protection for internal whistleblowers.
Ogborn Mihm is proud to represent Mr. Genberg and whisteblowers of all types. Learn more about our whistleblower practice.
(303) 592-5910