Although the Sarbanes-Oxley Act of 2002 was crafted by Congress to protect shareholders of publicly traded companies and as a response to corporate scandals involving publicly traded companies, lower level courts have held at least one portion of the act applicable to private companies.  The Corporate and Criminal Fraud Accountability Act of 2002 of Title VIII of the Sarbanes-Oxley 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 or participated or assisted with an investigation into securities fraud. 

Because the Sarbanes-Oxley 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 Sarbanes-Oxley 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.  Although such expansive interpretation has not been accepted in any higher court decisions, there is some uncertainty as to how the private company coverage issue will ultimately be resolved by the appellate courts, given the fact that employees of private companies arguing for a broad interpretation have had some success before U.S. Department of Labor (DOL)/ Occupational Safety and Health Administration (OSHA) Administrative Law Judges (ALJs).  See John B. Gamble, Jr., Whistleblower Claims, National Law Journal, Vol. 27, No. 81 (April 3, 2006). 

In reviewing the decisions of the DOL/OSHA ALJs, it is 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.  See Powers v. Pinnacle Airlines, No. 2003-AIR-12 (March 5, 2003); Grant v. Dominion East Ohio Gas,  No. 2004-SOX-63 (March 10, 2005), and Dawkins v. Shell Chemical L.P., No. 2004-SOX-41 (May 16, 2005).   

In addition to naming the publicly held company, 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), the district court stated that coverage under the whistleblower provisions did not extend to any privately-held employer which 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.   This requirement is a part of the analysis in the decisions.  See Bothwell v. American Income Life, No. 2005-SOX-57 (Sept. 19, 2005) (complainant was hired and fired by the subsidiary insurance company but put forth no evidence of any direct contact with the public company, so the claim was dismissed). 

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 administrative law judge 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.

The purpose of the Sarbanes-Oxley Act seems to be the driving force behind the DOL/OSHA ALJ decisions that provide whistleblower protection to employees of private companies where those companies are closely related to a public company.  Ultimately, higher courts will resolve this issue.  Until that time, private 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. 

If you have any questions regarding this alert, please contact Julie Hampton at 919.783.2819 or jhampton@poynerspruill.com.