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Congress crafted the Sarbanes-Oxley Act of
2002 (the Act) to protect shareholders of publicly traded companies in
response to corporate scandals involving publicly traded companies.
However, lower courts and administrative agencies have found at least
one portion of the Act applicable to privately held companies. The
Corporate and Criminal Fraud Accountability Act of 2002 of Title VIII of
the Act specifically prohibits a publicly traded company, including
officers, employees, contractors, subcontractors or agents of the
company, from discharging, demoting, suspending, threatening, harassing,
discriminating, or retaliating against an employee with regard to his or
her conditions of employment because the employee has filed a complaint,
participated, or assisted with an investigation into securities fraud.
Because the Act creates liberal
protections for “whistleblowers,” including an immediate reinstatement
provision, more and more employees are seeking those protections.
Employees of private companies have claimed that the whistleblower
protection provision of the Act, 18 U.S.C. § 1514A, applies to their
private company employer because the company has been a “contractor,”
“subcontractor,” or “agent” of a publicly traded company. While such an
expansive interpretation has not yet been accepted in any appellate
court rulings, employees of private companies arguing for a broad
interpretation have had some success before U.S. Department of Labor (DOL)/OSHA
Administrative Law Judges (ALJs). See John B. Gamble, Jr.,
Whistleblower Claims, National Law Journal, Vol. 27, No. 81 (April 3,
2006).
The DOL/OSHA ALJ decisions make it clear
that a successful claim by a private company’s former employee must name
the public company as a defendant in the lawsuit, so the public company
will have an opportunity to participate in the investigation of the
claim against it.
In addition, the claimant must either show
that he or she had a relationship with the public company or that the
public company is very closely related to his or her employer. In
Brady v. Calyon Securities, 406 F. Supp. 2d 307, 318 (S.D.N.Y.
2005), for instance, the district court stated that coverage under the
whistleblower provisions did not extend to any privately-held employer
that acted as an agent of a public company unless there was a
relationship between the complainant-employee of the private company and
the publicly traded company.
Some DOL/OSHA ALJ cases emphasize the
relationship between the private company and public company, holding
that “commonality of management and purpose” and “unity of operations”
are major factors in determining whether a private company subsidiary of
a public company can be held liable under the statute. While these
decisions seem to use a “piercing the corporate veil” analysis, at least
one DOL/OSHA ALJ decision expressly rejected that analysis. In
Morefield v. Exelon Services, No. 2004-SOX-2 (Jan. 28, 2004), the
ALJ allowed the employee of the private subsidiary to proceed with his
claim reasoning that “too pinched a view of this remedial statute” would
not serve the Act’s purpose.
While awaiting appellate court decisions
providing more guidance about the Act’s applicability to private
companies, privately-held companies that are either owned by a public
company, or have strong ties as a contractor or agent of a public
company, should be aware of potential liability under the whistleblower
claim protections of the Sarbanes-Oxley Act. They should treat employees
who complain about, participate in or assist with a securities fraud
investigations with the same caution and respect they would treat an
employee complaining about or participating in the investigation of any
other alleged unlawful activity involving the company, its agents or
related entities.
For questions regarding this alert or
other employment law matters, please contact
Anuja Purohit
at apurohit@poynerspruill.com
or 919.783.2823, or
Susie Gibbons at
sgibbons@poynerspruill.com or 919.783.2813.
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