FRANCHISEE NOT AN COVERED EMPLOYER WHERE A PUBLICLY TRADED COMPANY WAS NOT NAMED AS A DEFENDANT, AND THERE WAS NO ALLEGATION THE DEFENDANT WAS AN AGENT OF A PUBLICLY TRADED COMPANY
In Heaney v. Prudential Real Estate Affiliates, Inc., No. 05-820 (E.D.La. July 3, 2008) (case below ARB No. 05-039, ALJ No. 2004-SOX-72), the court granted summary summary against the Plaintiff on his SOX whisteblower claim where the Defendant presented affidavits to show that the Employer/Defendant was a state limited liability corporation and a franchise of Prudential Real Estate Affiliates, Inc., and the Plaintiff's only response was to submit the SEC Form 10-K for Prudential Financial, Inc., which was not a named defendant, and where the Plaintiff had not alleged that the Employer/Defendant was an agent of any company required to file under either of the applicable SEC laws.
THE SARBANES-OXLEY ACT WHISTLEBLOWER PROVISION ONLY APPLIES TO PUBLICLY TRADED COMPANIES
In Tumban v. Biomerieux, Inc., No. 1:06CV00442 (M.D.N.C. Mar. 13, 2007),
the Plaintiff brought a complaint in federal district court for wrongful discharge under state law based on the ground that she was engaged in the protected activity of being a "whistleblower" when she pointed out to her
supervisors failures in compliance with regulatory guidelines and standards that govern the manufacture and testing of medical devices. The Plaintiff sought to show that she fit the "public policy" exception for
an at will employee under the state law by showing that she had engaged in whistleblowing activity, citing by analogy the Sarbanes-Oxley Act. The court, however, observed that the Sarbanes-Oxley Act only
applies to publicly traded companies, and therefore found that it did not apply to the Plaintiff's case.
ADMINISTRATIVE REVIEW BOARD DECISIONS
COVERED EMPLOYER; PUBLICLY TRADED PARENT COMPANY NEED NOT BE NAMED AS A RESPONDENT AS LONG AS AT LEAST ONE NAMED RESPONDENT IS AN OFFICER, EMPLOYEE, CONTRACTOR, SUBCONTRACTOR, OR AGENT OF SUCH A COMPANY
In Andrews v. ING North America Insurance Corp., ARB No. 06-071, ALJ Nos. 2005-SOX-50 and 51 (ARB Aug. 29, 2008), the Complainants alleged that the company that employed them and from which they had been terminated, along with several individuals, retaliated against them in violation of the SOX. That company was a subsidiary four levels remote from the publicly traded parent company. OSHA treated the company as the sole Respondent, and dismissed on the ground that the Respondent was not a covered employer under SOX. Before the ALJ, the Complainants moved to add the parent company as a Respondent only the day before the hearing. The ALJ ruled that the Complainants had "abandoned that motion." Following a full hearing and briefing on the coverage issue, the ALJ found that the Complainants had failed to establish that the Respondent was a covered employer or that it had acted as an agent of the parent.
The ARB stated that the ALJ had relied upon its decision in Flake v. New World Pasta Co., ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), in concluding
that the SOX does not provide a cause of action against a non-public subsidiary. The ARB stated that it had rejected
such a reading of Flake and also the proposition that a subsidiary cannot by definition be an agent, in Klopfenstein v. PCC Flow Techs. Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-011 (ARB May 31, 2006). The ARB noted
that its decision in Klopfenstein, had been issued after the ALJ ruled in this case. The ARB remanded, stating that "on remand the Complainants must be given an opportunity to prove by a preponderance of evidence that [the parent company] is a covered company and that [the named Respondent] acted as its agent." The ARB also wrote:
Furthermore, SOX does not require a complainant to name a corporate respondent that is itself "'registered under section 12, or that is required to file reports under section 15(d)' so long as the complainant names at least one respondent who is covered under the Act as an "officer, employee, contractor, subcontractor, or agent' of such a company." Thus, since they do not have to name ING Groep, N.V. as a respondent, the issue whether or not the Complainants abandoned their motion to amend the complaint to name ING Groep, N.V. is moot.
USDOL/OALJ Reporter at 5 (footnote omitted).
NON-PROFIT, NON-PUBLICLY TRADED COMPANY IS NOT COVERED BY THE SOX WHISTLEBLOWER PROVISION
In Paz v. Mary's Center for Maternal & Child Care, ARB No. 06-031, ALJ No. 2006-SOX-7 (ARB Nov. 30, 2007), the ARB affirmed the ALJ’s finding that the SOX whistleblower provision did not cover the Respondent because it was a non-profit, non-publicly traded company.
ADMINSTRATIVE LAW JUDGE DECISIONS
COVERED EMPLOYER; THE AMERICAN MEDICAL ASSOCIATION
In Fleszar v. American Medical Association, 2007-SOX-30 (ALJ June 13, 2007), the ALJ dismissed the Complainant's SOX complaint because the Respondent was not subject to the provisions of § 806 of the SOX, and thus not a properly named Respondent. Specifically, the ALJ found that the "AMA is a private organization that has not registered securities under § 12 of the SEA. Similarly, § 15(d) relates solely to reports of registered issuers of securities, and the AMA is not such an issuer. Consequently, I find the AMA does not fall under either specific category of publicly traded company subject to the § 806 whistleblower provisions." Slip op. at 3 (footnotes omitted). The Complainant alleged that the Respondent had filed reports to the SEC under § 15(d). The ALJ, however, found that the pleadings showed that those reports related to defined benefits plans that did not involve the issuance of securities, and would not have been filed under § 15(d). The ALJ also rejected the Complainant's contention that the Respondent was covered under § 806 because it had contractual relationships with publicly traded companies and governmental entities, or due to real estate transactions or mutual fund activities.
COVERED EMPLOYER; MERE FACT THAT RESPONDENT SUBJECT TO REPORTING REQUIREMENTS OF OTHER FEDERAL LAWS DOES NOT ESTABLISH SOX COVERAGE; MERE FACT THAT RESPONDENT'S DONORS ARE SIMILAR TO SHAREHOLDERS DOES NOT ESTABLISH COVERAGE
In Stevenson v. Neighborhood House Charter School, 2005-SOX-87 (ALJ Sept. 7, 2005), the Respondent was not shown to be a company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 nor to be a company that is required to file reports under Section 15(d) of that Act. The Complainant asserted that coverage should be found under the whistleblower provision of SOX because the Respondent had a retirement plan with benefits subject to reporting and disclosure requirements under ERISA. The ALJ found this fact to be irrelevant, writing that nothing in the SOX or its legislative history "suggests that being subject to reporting requirements under one federal law, such as ERISA, automatically extends coverage of any other federal legislation, such as Sarbanes-Oxley, to a company."
The Complainant also argued SOX whistleblower coverage based on allegations that the Respondent had violated other parts of SOX, and that the Respondent was subject to reporting under SEC Rules 10b5 and 15c2-12. The ALJ again found these allegations to be irrelevant.
Finally, the Complainant argued coverage based on the fact that the Respondent receives funds from both private donors and public corporations. The Complainant argued that such donors are much like the shareholders of a publicly traded corporation. The ALJ found that there was "no indication that Congress intended for a private company to fall within the purview of Sarbanes-Oxley simply because it receives funds from private donors or public companies."
RESPONDENT; NO LIABILITY IF NOT A COMPANY WITH A CLASS OF SECURITIES REGISTERED UNDER SECTION 12 OR IF NOT REQUIRED TO FILE REPORTS UNDER SECTION 15(d)
In Flake v. New World Pasta Co., 2003-SOX-18 (ALJ July 7, 2003), the ALJ granted summary judgment to Respondent where it established that it was not a company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. section 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. section 78o(d), thereby subjecting it to jurisdiction under Section 806 of the Sarbanes Oxley Act, 18 U.S.C. section 1514A(a).
In 1999, Respondent had filed a registration statement with the SEC as a result of a public offering of indentures; however, the ALJ found that thereafter Respondent's registration obligation was automatically suspended by virtue of the plain language of 15 U.S.C. section 15(d). In making this determination, the ALJ found that the absence of a regulation on this point was not of relevance in view of the plain language of the statute itself. Moreover, automatic suspension was supported by both a publication issued by the Chief Counsel for the SEC Division of Corporate Finance "Manual of Publicly Available Telephone Interpretations" and that Division's "Frequently Asked Questions" publication.
Subsequently, respondent had filed some of the reports required by section 15(d) pursuant to its indenture agreement with its lenders; however, the ALJ found that such a contractual arrangement did not make Respondent an issuer required to file reports under section 15(d) – rather in order for SOX whistleblower liability to attach the company must be required by the SEA to make such filings.
COVERED EMPLOYER; "COMPANY REPRESENTATIVE" STATUS IS NOT CONFERRED MERELY BECAUSE FINANCIAL SERVICES ARE PROVIDED TO A PUBLICLY TRADED COMPANY
In Roulett v. American Capital Access, 2004-SOX-78 (ALJ Dec. 22, 2004), the Respondent provided insurance for registered companies in connection with debt securities of publicly traded companies, and associated services. The Complainant argued that the SOX whistleblower provision extended to the Respondent because it is a "company representative" for publicly traded companies. The ALJ found that the only merit to this argument was its creativity. The ALJ declined "to expand [coverage under the whistleblower provision of the SOX] to a non-publicly traded company solely because it engages in financial business with publicly traded companies."
COVERED EMPLOYER; NON-PROFIT
In Paz v. Mary's Center for Maternal & Child Care, 2006-SOX-7 (ALJ Dec. 12, 2005), the Complainant's response to the ALJ's order to show cause why the complaint should not be dismissed on the ground that the Respondent, a non-profit, was not covered under the SOX was that he had filed his complaint under both a SOX and False Claims Act, and that OSHA mishandled his complaint by processing it only under the SOX. The ALJ found that the Respondent was not a publicly traded company and dismissed the complaint. She noted that she did not have jurisdiction over False Claims Act claims.
COVERED EMPLOYER; CONTRACTOR OF PUBLICLY TRADED COMPANY; MERELY ENTERING INTO A SETTLEMENT AGREEMENT IS NOT THE TYPE OF CONTRACTUAL RELATIONSHIP CONTEMPLATED UNDER SECTION 1514A; CONTRACTOR MUST HAVE BEEN ACTING ON BEHALF OF PUBLICLY TRADED IN DISCRIMINATING AGAINST THE COMPLAINANT FOR LIABILITY TO ATTACH
In Reno v. Westfield Corp., Inc., 2006-SOX-30 (ALJ Feb. 23, 2006), the named Respondent was not a publicly traded company, and it moved for summary decision based on lack of coverage under SOX. The Complainant contended that it was a contractor of a publicly traded company, and therefore was covered under SOX. The ALJ granted summary decision because the Complainant failed to present any evidence to show that the Respondent actually was a contractor of the publicly traded company. Although the Complainant showed that the two companies had entered into a settlement agreement, the ALJ found such evidence failed to show a contractual relationship. Moreover, even if there existed a material fact as to whether the Respondent was a contractor within the meaning of Section 1514A, the claim would still fail because merely being a contractor does not impose liability under the SOX; rather than the contractor or agent must have been acting on behalf of the publicly traded company when discriminating against the employee for liability to be imposed. Since the Complainant presented no such evidence, the claim was denied.
COVERED EMPLOYER; NON-PUBLICLY TRADED CONTRACTOR THAT PROVIDES SERVICES TO PUBLICLY TRADED COMPANIES
In Goodman v. Decisive Analytics Corp., 2006-SOX-11 (ALJ Jan. 10, 2006), the Complainant was an employee of a company that provided engineering consulting services under contract with publicly traded companies. There was no allegation that the company employing the Complainant was publicly traded. The ALJ observed that different ALJs have reached different conclusions as to the jurisdictional breath of SOX, but that no definitive appellate interpretation had yet been established. The ALJ concluded that "employees of private contractors and subcontractors of publicly traded companies are not afforded SOX whistleblower protection. Any broader interpretation means every non-publicly traded company becomes subject to SOX if it engages in any contractual relationship with a publicly traded company." Slip op. at 9-10. The ALJ found that the caption and language of the SOX employee protection provision does not extend jurisdiction that far. The ALJ concluded that the Complainant was not an employee of a publicly traded company or a company required to file with the SEC, and therefore was not an employee entitled to SOX whistleblower protection under 18 U.S.C. § 1514A(a). The ALJ, therefore, granted summary decision in favor of the Respondent.
COVERED EMPLOYER; COMPANY THAT PROVIDES SERVICES TO PUBLICLY TRADED COMPANIES
In Smith v. Hewlett Packard, 2005-SOX-88 to 92 (ALJ Jan. 19, 2006), the Complainant asserted that the Respondent was covered under the whistleblower provision of the SOX because it performed direct mail services as a first tier contractor to publicly traded companies. Because there was no allegation that any of the companies with which the Respondent did business directed or controlled its employment decisions, including the decision to terminate the Complainant's employment, nor that the Respondent acted on behalf of a publicly traded company when it elected to terminate the Complainant's employment, the ALJ found that the Respondent was not a covered employer under the SOX.
COVERED EMPLOYER; FACT THAT RESPONDENT HAD GOVERNMENT CONTRACTS AND ARGUMENT THAT PUBLIC POLICY FAVORS PROTECTING WHISTLELBLOWERS ARE INSUFFICIENT TO PERMIT A SOX CASE TO PROCEED WHERE THE RESPONDENT IS NOT A PUBLICLY TRADED COMPANY
In Judith v. Magnolia Plumbing Co., Inc., 2005-SOX-99 and 100 (ALJ Sept. 20, 2005), the Complainants did not contest that the Respondent was neither a publicly traded company or that it did not have a class of securities registered under section 12 of the Securities Exchange Act of 1934. Rather, the Complainants argued that the SOX should apply because the Respondent had numerous contracts with municipal and federal governments. The Complainant also argued that public policy to protect whistleblowers who seek to bring acts of malfeasance before the public should permit their SOX case to proceed. The ALJ rejected both arguments: "[i]f a company is not publicly traded, the Act simply does not apply."
EMPLOYER; CONTRACTOR OR SUBCONTRACTOR CANNOT DISCRIMINATE ON BEHALF OF COVERED EMPLOYER, BUT COMPLAINANT MUST NEVERTHELESS BE AN EMPLOYEE OF THE COVERED EMPLOYER TO HAVE SOX COVERAGE
The named Employer was neither a publicly traded company nor a subsidiary of a publicly traded company. The Complainant argued it was a contractor or subcontractor of various publicly traded companies, and therefore she should be considered a covered employee based upon the inclusion in Section 806 of the language referring to "any officer, employee, contractor, subcontractor, or agent of such company." 18 U.S.C. 1514A(a). The ALJ held, however, that "this language simply lists the various potential actors who are prohibited from engaging in discrimination on behalf of a covered employer. It does not bridge the gap in this case which is created by the fact that the Complainant is not an employee of a publicly traded company. That is, while it is at least theoretically possible that a privately held entity such as APG could engage in discrimination prohibited by Section 806 when acting in the capacity as an agent of a publicly traded company in regard to an employee of that company, there is nothing in the language of Sarbanes-Oxley or its legislative history that suggests that Congress intended to bring the employees of non-public contractors, subcontractors and agents under the protective aegis of Section 806." Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005).
[Editor's note: Compare Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (ALJ July 18, 2005), casenoted infra, in which the ALJ found that a "turnaround specialist" firm could be held liable under SOX where that company's president had been installed as the CEO and president of the company it was helping through bankruptcy and which actually employed the Complainant.]
NON-PUBLICLY TRADED FIRM SPECIALIZING IN RESTRUCTURING SERVICES FOR COMPANIES IN DISTRESS FOUND TO BE A LIABLE CONTRACTOR OR AGENT
AMENDMENT OF COMPLAINT TO ADD RESPONDENT; TOO LATE AFTER EVIDENTIARY HEARING COMPLETED
In Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (ALJ July 18, 2005), one Respondent was a firm that provides crisis management and restructuring services to companies in financial distress ("AP Services"). The other Respondent ("DVI Financial" or "DVI") was a financial services company that had contracted with AP Services to provide leased employees to manage DVI through bankruptcy and dissolution. DVI was a publicly traded company, but AP Services was not. The Complainant was a DVI employee. The President of AP Services, Mr. Toney, was appointed by the DVI Board of Directors as temporary President and CEO of DVI upon filing for Chapter 11 protection. The chief protagonist as described in the complaint was Mr. Toney. There was no dispute that DVI was a covered employer, but the question was presented whether AP Services could be held liable
The ALJ reviewed the facts and relevant law, and concluded that AP Services was a properly named Respondent because (1) it was a subcontractor or contractor, (2) it had assumed respondeat superior liability to the Complainant, (3) it was an agent under the statute, and (4) the Complainant could also be viewed as a third party beneficiary to the agreement between the Respondents. The ALJ rejected AP Services argument that it had to actually employ the Complainant to be covered under the SOX, writing:
DVI contracted to AP the power to determine how best to manage the corporation and its assets in light of the pending bankruptcy. ... Included in those powers was the power to evaluate DVI's employees' value to the company and to terminate those who were no longer needed. ... Mr. Toney, as CEO, had the authority to terminate anyone at DVI, and Ms. Clay [an AP Services employee brought to DVI to work on Human Resources issues] testified that she performed the duties of Chief Administrative Officer as part of her duties at DVI. Thus AP, through Mr. Toney and Ms. Clay, had the power to affect Ms. Kalkunte's employment.
Slip op. at 9 (citations to the record omitted). Following the evidentiary hearing before the ALJ, the Complainant moved to amend the complaint to name Mr. Toney as a Respondent. The ALJ recounted the procedural history of the case, and -- finding that although he had left the record open following the hearing the scope of that ruling did not include naming an additional party -- denied the motion.
[Editor's note: Compare Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005), supra, in which the ALJ held that employees of non-publicly traded contractors, subcontractors and agents are not under the protective aegis of Section 806]
Non-Publicly Traded Subsidiary of Publicly Traded Parent
COVERED EMPLOYEE; EMPLOYEE OF NON-PUBLICLY TRADED SUBSIDIARY
In Rao v. Daimler Chrysler Corp., No. 2:06-CV-13723 (E.D.Mich. May 14, 2007) (case below 2006-SOX-78), the district court granted summary judgment against
the Plaintiff in a SOX whistleblower suit where the Defendant was not itself a public company, but only the subsidiary of its publicly traded parent, and the publicly traded parent
had not been named in the complaint. The court reviewed ALJ decisions on this issue, and while recognizing some merit to the position that
the background to enactment of SOX might support the view that subsidiaries should be covered, observed that the clear statutory text of
section 1514A only lists employees of public companies as protected individuals. The court stated it was not its job to rewrite the statute, especially
in light of the corporate law principle that parent companies are not ipso facto liable for the actions of their subsidiaries, and that Congress had
specifically overrode this principle in other portions of SOX.
The court then looked to common law agency principles to determine whether the Defendant was acting as an agent for its parent company in
its actions towards the Plaintiff. The court granted summary judgment in favor of the Defendant on this issue because the Plaintiff's amended
complaint only mentioned employees of the Defendant as those who were aware of the situation and his complaints, and did not assert that
anyone at the parent company had such knowledge.
ADMINISTRATIVE LAW JUDGE DECISIONS
COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY WHICH WAS NOT THE PUBLICY TRADED PARENT COMPANY'S AGENT IN REGARD TO THE COMPLAINANT'S EMPLOYMENT
In Savastano v. WPP Group, PLC, 2007-SOX-34 (ALJ July 18, 2007), the Complainant relied on the ALJ decision in Morefield v. Exelon Services, Inc., 2004-SOX-2 (ALJ Jan. 28, 2004), to argue that she qualified for coverage under the whistleblower provision of SOX as a covered employee of a subsidiary of publicly traded parent company. The ALJ, however, found that Morefield's approach to non-public subsidiaries was inconsistent with the ARB's holding in Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), and had not been followed in later federal district court and ALJ decisions. In Klopfenstein, the ARB held that a non-public subsidiary of a publicly held parent company could be subject to the Act's whistleblower provisions if the evidence establishes that it acted as an "agent" of its publicly held parent as determined under principles of general common law agency. The ALJ wrote that "for an employee of a nonpublic subsidiary to be covered under Section 806, the non-public subsidiary must act as an agent of its publicly held parent, and the agency must relate to employment matters. Rao, 2007 U.S. Dist. LEXIS 34922, at *15; Brady v. Calyon Secs. (USA), 406 F. Supp. 2d 307, 318 n.6 (S.D.N.Y. 2005)." Slip op. at 7.
In the instant case, the ALJ found that the Complainant had alleged no facts that would tend to support a finding that either her non-publicly traded employer or its non-publicly traded holding company were acting as agents of the publicly traded parent in connection with the termination of her employment with her employer. The Complainant had not contradicted the Respondents' claims that: (1) the subsidiary acted and was run independently from the parent; (2) there was no overlap in the officers; (3) the companies had separate offices, operations and officers and were rarely, if ever, involved in one another's daily activities; (4) no officer or employee of the parent exerted any control over the terms and conditions of the Complainant's employment; and (5) no officer or employee of the parent had anything to do with the decision to hire or terminate the Complainant. The ALJ found that, while the Complainant had identified statements from the parent's annual report indicating that its non-public subsidiaries may act as its agents for purposes of collecting and reporting financial data, there was no factual predicate for finding an agency relationship pertaining to employment matters. Accordingly, the ALJ granted summary decision in favor of the Respondents.
COVERED EMPLOYER; NON-PUBLICLY TRADED SUSIDIARY OF PUBLICLY TRADED PARENT
In Bothwell v. American Income Life, 2005-SOX-57 (ALJ Sept. 19, 2005), the Complainant alleged that the company that employed him was a covered employer under SOX, even though it was not a publicly traded company, because it is a subsidiary of a publicly traded company. The ALJ reviewed the statutory language and legislative history of SOX and concluded that the Complainant's argument was not meritorious: "If Congress had wanted to include non-publicly traded subsidiaries of publicly-traded parent companies as covered employers, it could have done so in drafting the statute."
COVERED EMPLOYER; PUBLICLY TRADED PARENT COMPANY NEED NOT BE NAMED AS A RESPONDENT AS LONG AS AT LEAST ONE NAMED RESPONDENT IS AN OFFICER, EMPLOYEE, CONTRACTOR, SUBCONTRACTOR, OR AGENT OF SUCH A COMPANY
In Andrews v. ING North America Insurance Corp., ARB No. 06-071, ALJ Nos. 2005-SOX-50 and 51 (ARB Aug. 29, 2008), the Complainants alleged that the company that employed them and from which they had been terminated, along with several individuals, retaliated against them in violation of the SOX. That company was a subsidiary four levels remote from the publicly traded parent company. OSHA treated the company as the sole Respondent, and dismissed on the ground that the Respondent was not a covered employer under SOX. Before the ALJ, the Complainants moved to add the parent company as a Respondent only the day before the hearing. The ALJ ruled that the Complainants had "abandoned that motion." Following a full hearing and briefing on the coverage issue, the ALJ found that the Complainants had failed to establish that the Respondent was a covered employer or that it had acted as an agent of the parent.
The ARB stated that the ALJ had relied upon its decision in Flake v. New World Pasta Co., ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), in concluding
that the SOX does not provide a cause of action against a non-public subsidiary. The ARB stated that it had rejected
such a reading of Flake and also the proposition that a subsidiary cannot by definition be an agent, in Klopfenstein v. PCC Flow Techs. Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-011 (ARB May 31, 2006). The ARB noted
that its decision in Klopfenstein, had been issued after the ALJ ruled in this case. The ARB remanded, stating that "on remand the Complainants must be given an opportunity to prove by a preponderance of evidence that [the parent company] is a covered company and that [the named Respondent] acted as its agent." The ARB also wrote:
Furthermore, SOX does not require a complainant to name a corporate respondent that is itself "'registered under section 12, or that is required to file reports under section 15(d)' so long as the complainant names at least one respondent who is covered under the Act as an "officer, employee, contractor, subcontractor, or agent' of such a company." Thus, since they do not have to name ING Groep, N.V. as a respondent, the issue whether or not the Complainants abandoned their motion to amend the complaint to name ING Groep, N.V. is moot.
USDOL/OALJ Reporter at 5 (footnote omitted).
INTERLOCUTORY APPEAL OF AMENDMENT OF COMPLAINT TO NAME PUBLICLY-HELD PARENT COMPANY AS A RESPONDENT
In Gonzalez v. Colonial Bank, ARB No. 05-060, ALJ No. 2004-SOX-39 (ARB May 31, 2005), the ALJ had granted the Complainant's motion to amend his complaint to add the publicly-held parent company as a Respondent. The ALJ denied the Respondent's motion for reconsideration and for certification of an interlocutory appeal. The Board found that the ALJ did not abuse his discretion in denying certification of the interlocutory appeal because the issue of whether the complaint could be amended to relate back is not a purely legal question, but a mixed question of law and fact. The ALJ was required to determine whether the party to be added received notice of the filing of the action such that it would not be prejudiced in maintaining a defense, and whether the party knew, or should have known that, but for a mistake concerning the identity of the proper party, the complainant would have brought an action against the proper party. The Board also found that the ALJ correctly determined that even if the amendment did not relate back, the issue of first impression of whether a subsidiary of a publicly-held company falls within SOX's coverage, would remain. The Board also rejected the argument that the relation-back issue is a threshold jurisdictional issue -- timeliness is not a jurisdictional bar because SOX's limitations period for filing a complaint is subject to equitable tolling. Finally, the Board held that even if the ALJ had certified the question it would have not exercised its discretion to hear the appeal because of the Board's strong policy against piecemeal appeals.
AMENDMENT TO COMPLAINT; WHEN PERMITTED
In Gonzalez v. Colonial Bank, ARB No. 05-060, ALJ No. 2004-SOX-39 (ARB May 31, 2005), the Respondent had filed an interlocutory appeal of the ALJ's order granting the Complainant's motion to amend his complaint to add the publicly-held parent company as a Respondent. Although the Board denied interlocutory review, and therefore did not rule on whether the ALJ properly granted the motion, the Board stated the following about an ALJ's authority to permit an amendment of the complaint:
An administrative law judge may permit a complainant to amend a complaint when the amendment is reasonably within the scope of the original complaint, the amendment will facilitate a determination of a controversy on the merits of the complaint and there is no prejudice to the public interest and the rights of the parties. An amended complaint will relate back to the original complaint for purposes of determining the timeliness of the complaint when the amendment adds a party against whom a claim is asserted if the claim in the amended pleading arose out of the conduct, transaction, or occurrence described in the original pleading. Furthermore, an amended complaint relates back if, within the limitations period, the party to be added received notice of the filing of the action such that the party will not be prejudiced in maintaining a defense on the merits, and the party knew or should have known that, but for a mistake concerning the identity of the proper party, the complainant would have brought an action against the proper party.
Id., slip op. at 3 (footnotes omitted).
Related orders: Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 17, 2004) (Order Granting Motion to Amend Complaint); Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Dec. 20, 2004) (Order Denying Motion to Reconsider Order on Motion for Leave to Amend Complaint); Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Feb. 7, 2005) (Order Denying Request for Certification of Interlocutory Appeal).
ADMINISTRATIVE LAW JUDGE DECISIONS
COVERED EMPLOYER; MOTION TO ADD PUBLICLY TRADED PARENT COMPANY BEFORE THE ALJ; LIMITED REFERENCES TO PARENT IN PLEADINGS INADEQUATE TO ESTABLISH EARLIER NAMING AS RESPONDENT; TIMELINESS OF ATTEMPT TO AMEND COMPANY; RELATION BACK
In Bothwell v. American Income Life, 2005-SOX-57 (ALJ Sept. 19, 2005), the Complainant sought to add as a Respondent the publicly traded parent company of the company that had employed him - and which had been named as the Respondent - after the Respondent subsidiary had filed a motion to dismiss based on it not being a publicly traded company subject to SOX.
The Complainant argued that he had requested inclusion of the publicly traded parent company consistently throughout the case. The ALJ, however, found the pleadings' limited references to the parent company did not exhibit any allegation of "facts that could conceivably make [the parent company] liable under the Act." In addition, the ALJ found that the Complainant's attempt to add the parent company was untimely, as it occurred more than 90 days after the date of his termination. See 29 C.F.R. § 1980.103. The ALJ found that the "relation back" standard of FRCP 15(c) was not met because it was undisputed that the parent company did not have notice of the action prior to the expiration of the statute of limitations.
AMENDMENT OF COMPLAINT TO ADD PUBLICLY TRADED PARENT COMPANY
In McIntyre v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2003-SOX-23 (ALJ Sept. 4, 2003), the ALJ permitted the Complainant to amend the complaint to add the publicly traded parent company as a named Respondent, finding that there was "a genuine issue of material fact concerning the subsidiary's actions as an agent with arguable express, implied and apparent authority to act on behalf of its parent...." The ALJ distinguished the ALJ's decision Powers v. Pinnacle Airlines, Inc., 2003-AIR-12 (ALJ Mar. 5, 2003) (Powers involved an indirect subsidiary, whereas the instant case involved a direct subsidiary).
COVERED EMPLOYER; NAMED RESPONDENT NOT A PUBLICLY TRADED COMPANY; FAILURE TO NAME PUBLICLY TRADED PARENT CORPORATION; FAILURE TO AMEND COMPLAINT TO ADD A COVERED EMPLOYER
Where the Complainant brought his complaint against his employer alone, that employer was not a publicly traded company, and the Complaint did not name any parent company that may be publicly traded, and did not move to amend his complaint, the ALJ granted summary decision to the Respondent employer on the ground that it was not a covered employer. The ALJ also noted that no parent companies had participated before OSHA and that there was no indication that the parent companies were sufficiently involved in the management and employment relations of the Respondent to justify a piercing of the corporate veil. Dawkins v. Shell Chemical, LP, 2005-SOX-41 (ALJ May 16, 2005).
COVERED EMPLOYER; FAILURE TO NAME PUBLICLY TRADED COMPANY AND TO PROVE THAT THE COMPANY FITS WITHIN THE SOX DEFINITION OF A COVERED EMPLOYER
In Grant v. Dominion East Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005), the ALJ sua sponte raised the issue of whether the Complainant had established whether the named Respondent was a publicly traded company subject to the whistleblower provision of SOX. The ALJ stated that a complainant cannot maintain a SOX whistleblower action "unless he names a publicly traded company as Respondent, and establishes that the named Respondent is actually covered by the Act." Slip op. at 33 (citation omitted; emphasis as in original). The ALJ found that the Complainant had failed to name a publicly traded company as Respondent and made no attempt to prove that Respondent or its parent company were in fact publicly traded or otherwise covered by the Act, despite sufficient opportunity to do so. The ALJ also observed that even if the Complainant had named the parent company as a Respondent, and that parent company was shown to be a publicly traded company, the mere fact of a parent-subsidiary relationship would not establish liability; rather evidence must be presented to justify piercing the corporate veil. Finally, the ALJ indicated that the mere fact that there exists a doctrine of piercing the corporate veil does not "operate to pull a parent company into litigation if the parent company is not named in the first place." The ALJ noted that the Complainant had been represented by counsel, but had filed his complaint solely against the subsidiary, that the parent had never been a party to the claim, and that the Complainant had never taken any steps to cure this deficiency. The ALJ, therefore, found that the failure to establish a covered respondent under the Act was grounds for dismissal of the complaint.
COVERED EMPLOYER; NON-PUBLIC SUBSIDIARY OF PUBLICLY TRADED COMPANY; BOTH COMPANIES NAMED AS RESPONDENTS
In Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 20, 2004), the Complainant's employer, a non-publicly traded company, moved for summary decision on the ground that it was not a covered employer under the SOX whistleblower provision. The Complainant, however, had recently amended his complaint to name his employer's parent company as a Respondent, alleging that the parent had shared management and function with the subsidiary and that the parent's actions affected the Complainant's employment. The parent was a publicly traded company. The ALJ found that since the parent company had been named as a respondent, and Congress intended to provide whistleblower protection to employees of subsidiaries of publicly traded companies, the Complainant had set forth a cause of action sufficient to withstand a motion for summary decision.
COVERED EMPLOYER; FAILURE TO NAME PUBLICLY TRADED PARENT COMPANY AS A RESPONDENT
In Klopfenstein v. PPC Flow Technologies Holdings, Inc., 2004-SOX-11 (ALJ July 6, 2004), the ALJ considered the issue of whether the Complainant's failure to name a publicly traded company in his complaint should result in the dismissal of the complaint.
The Complainant was employed by a limited partnership, which was owned by a holding company. Neither the limited partnership nor the holding company was a publicly traded company. The holding company in turn was owned by a parent company, which was a publicly traded company. The complaint, for unexplained reasons, named only the holding company and the Vice President for Finance for the limited partnership. The Vice President had conducted an investigation of some of the Complainant's business practices at the request of the holding company, but made no recommendations as to what should be done about his findings. The complaint did not name either the limited partnership or the publicly traded parent company.
The Respondent holding company moved to dismiss based on Flake v. New World Pasta Co., ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), in which the ARB held that SOX only covers companies with securities registered under § 12 or companies required to file reports under § 15(d) of the Exchange Act. The ALJ agreed with the Complainant that employees of non-public subsidiaries of publicly traded companies can be covered by the SOX whistleblower provisions, citing the ALJ's decision in Morefield v. Exelon Services, Inc., 2004-SOX-2 (ALJ Jan. 28, 2004). The ALJ also found that, had the Complainant sued the parent company in this case, the commonality of management and purpose would likely have been sufficient to bestow whistleblower protection. But since the only company sued by the Complainant was a subsidiary of the parent company, which was neither the Complainant's employer nor a publicly traded company, the ALJ found that the complaint could not be maintained. The ALJ wrote: "Despite the apparent legislative intent to attach liability to publicly traded companies who surround themselves by other entities under their control, it does not seem the Act provides a cause of action directly against such subsidiary alone." Klopfenstein, Slip op. at 12. The ALJ also rejected the Complainant's contention that the holding company was an agent of the parent company.
The ALJ also found that the named Vice President of Finance was not a proper party to the action because he was not an officer, employee, contractor, subcontractor, or agent of the publicly traded parent company.
RESPONDENT MUST BE PUBLICLY TRADED COMPANY UNDER SOX WHISTLEBLOWER PROVISION; UNTIMELY ATTEMPT TO ADD PARENT COMPANY REJECTED BY ALJ
In Powers v. Pinnacle Airlines, Inc., 2003-AIR-12 (ALJ Mar. 5, 2003), Complainant alleged that she was harassed and intimidated by the Respondent in retaliation for voicing concerns about flight and duty time under Federal Aviation Regulations. In addition to an AIR21 whistleblower complaint, Complainant also alleged that the Respondent violated the whistleblower provision of the Sarbanes-Oxley Act because she raised concerns about the accuracy of the Respondent's on-time flight records and the fraudulent impact they had on stockholders. The ALJ granted Respondent motion for dismissal of the SOX complaint on the ground that Respondent is not a publicly traded company. See 18 U.S.C. § 1514A(a)(1).
Complainant attempted to cure this deficiency by adding Northwest Airlines, Inc. to the caption of the case. The ALJ, however, held that Complainant could not "get around the fact that her Employer, Pinnacle, is not a publicly traded company by unilaterally adding another corporate entity that is publicly traded, i.e., Northwest Airlines, Inc. as a respondent, after the investigation and determination by OSHA." The ALJ also found that Northwest had been attempted to be added as a respondent in the hope that it could be found liable for the actions of its indirect subsidiary, Pinnacle. The ALJ wrote that: "However, this ignores the general principle of corporate law that a parent corporation is not liable for the acts of its subsidiaries. In other words, the mere fact of a parent-subsidiary relationship between two corporations does not make one company liable for the torts of its affiliate. United States v. Bestfoods, et al., 524 U.S. 51, 61 (1998). Nor has the Complainant even alleged any facts that would justify piercing the corporate veil and ignoring the separate corporate entities." The ALJ also found that any complaint against Northwest Airlines, Inc. would be untimely, as it was made more than ninety days after the date of the alleged violation.
NON-PUBLICLY TRADED FIRM SPECIALIZING IN RESTRUCTURING SERVICES FOR COMPANIES IN DISTRESS FOUND TO BE A LIABLE CONTRACTOR OR AGENT
AMENDMENT OF COMPLAINT TO ADD RESPONDENT; TOO LATE AFTER EVIDENTIARY HEARING COMPLETED
In Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (ALJ July 18, 2005), one Respondent was a firm that provides crisis management and restructuring services to companies in financial distress ("AP Services"). The other Respondent ("DVI Financial" or "DVI") was a financial services company that had contracted with AP Services to provide leased employees to manage DVI through bankruptcy and dissolution. DVI was a publicly traded company, but AP Services was not. The Complainant was a DVI employee. The President of AP Services, Mr. Toney, was appointed by the DVI Board of Directors as temporary President and CEO of DVI upon filing for Chapter 11 protection. The chief protagonist as described in the complaint was Mr. Toney. There was no dispute that DVI was a covered employer, but the question was presented whether AP Services could be held liable
The ALJ reviewed the facts and relevant law, and concluded that AP Services was a properly named Respondent because (1) it was a subcontractor or contractor, (2) it had assumed respondeat superior liability to the Complainant, (3) it was an agent under the statute, and (4) the Complainant could also be viewed as a third party beneficiary to the agreement between the Respondents. The ALJ rejected AP Services argument that it had to actually employ the Complainant to be covered under the SOX, writing:
DVI contracted to AP the power to determine how best to manage the corporation and its assets in light of the pending bankruptcy. ... Included in those powers was the power to evaluate DVI's employees' value to the company and to terminate those who were no longer needed. ... Mr. Toney, as CEO, had the authority to terminate anyone at DVI, and Ms. Clay [an AP Services employee brought to DVI to work on Human Resources issues] testified that she performed the duties of Chief Administrative Officer as part of her duties at DVI. Thus AP, through Mr. Toney and Ms. Clay, had the power to affect Ms. Kalkunte's employment.
Slip op. at 9 (citations to the record omitted). Following the evidentiary hearing before the ALJ, the Complainant moved to amend the complaint to name Mr. Toney as a Respondent. The ALJ recounted the procedural history of the case, and -- finding that although he had left the record open following the hearing the scope of that ruling did not include naming an additional party -- denied the motion.
[Editor's note: Compare Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005), supra, in which the ALJ held that employees of non-publicly traded contractors, subcontractors and agents are not under the protective aegis of Section 806]
Agency; Piercing the Corporate Veil; Intertwined Operations
COVERED EMPLOYER; FINANCIAL ACTIVITIES WITH PUBLICLY TRADED BANK
The ARB in Kukucka v. Belfort Instrument Co., ARB Nos. 06-104 and 120, ALJ Nos. 2006-SOX-57 and 81 (ARB Apr. 30, 2008), stated that the Complainant's initial burden under section 1514A(a) was to establish that the Respondent had either registered its securities under section 12 or had to file reports under section 15(d). Because he had not alleged such in response to the ALJ's show cause orders, the ARB found that the ALJ had properly dismissed the Complainant's SOX complaints. On appeal the Complainant argued that the Respondent's financial activities made the company directly reliant on a publicly-traded bank, SunTrust, and that the Respondent had "public debt" because it accepted public money to develop products. The ARB recognized that contractors, subcontractors, and agents of companies that are subject to the SOX registration and filing requirements are covered by the SOX whistleblower provision, but found that the Complainant had offered no evidence that the Respondent's "public debt" or its "reliance" on SunTrust was equivalent to being a contractor, subcontractor or agent of Sun Trust. Moreover, the ARB found that the Complainant had failed to offer evidence to demonstrate that SunTrust was subject to section 1514A's registration and filing requirements.
The Complainant also argued that the Respondent should be considered a subsidiary of SunTrust because its favorable extension of credit and debt burden kept the Respondent in business and thus SunTrust, a publicly traded company, controlled the Respondent. The ARB, however, found that the Complainant had offered no evidence to support his allegation that SunTrust's extension of credit amounted to control of the Respondent or that such control, if it existed, made the Respondent the bank's contractor, subcontractor, or agent.
COVERED RESPONDENT; SUBSIDIARY AND CORPORATE OFFICER'S STATUS AS COVERED RESPONDENTS IS DETERMINED BASED ON COMMON LAW AGENCY PRINCIPLES; SOX WHISTLEBLOWER COMPLAINT DOES NOT REQUIRE NAMING OF PUBLICLY TRADED COMPANY SO LONG AS ONE RESPONDENT IS AN OFFICER, EMPLOYEE, CONTRACTOR, SUBCONTRACTOR, OR AGENT OF SUCH A COMPANY
In Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), the Complainant was the Vice President of Operations for a subsidiary (the "Employer") of two limited liability corporations, which in turn were subsidiaries of a holding company ("Holding"), which in turn was the subsidiary of a publicly traded parent company. At issue was the ALJ's finding that the holding company and a Vice President of Finance for the Complainant's Employer were not covered entities under the SOX. The ARB held that the ALJ misapplied the ARB's decision in Flake v. New World Pasta Co., ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), and misapplied the law of agency. The ALJ had concluded that under Flake, the SOX does not provide a cause of action against a non-public subsidiary; the ARB noted that in Flake, the named Respondent did not have a publicly traded parent, so the ARB did not have the occasion in that case to decide whether a non-public subsidiary of a public parent could be covered under the Act.
And the ARB did not specifically reach that issue in the present case either. Rather, the ARB wrote: "[w]e do not interpret the Act to require a complainant to name a corporate respondent that is itself ‘registered under § 12 or … required to file reports under § 15(d),' so long as the complainant names at least one respondent who is covered under the Act as an ‘officer, employee, contractor, subcontractor, or agent' of such a company." USDOL/OALJ Reporter at 13. In addition, the ARB held that Flake did not stand for the proposition that a subsidiary cannot by definition be an agent. Rather, "[w]hether a particular subsidiary or its employee is an agent of a public parent for purposes of the SOX employee protection provision should be determined according to principles of the general common law of agency." USDOL/OALJ Reporter at 14 (footnote omitted). The ARB stated that the function of the ALJ is to ascertain whether the factual elements set forth in the Restatement of Agency are present. The ARB remanded to the ALJ to make findings of fact necessary to apply agency principles in determining whether the holding company and the Employer's VP for Finance were the publicly traded parent company's agents with regard to the termination of the Complainant's employment.
ADMINISTRATIVE LAW JUDGE DECISIONS
COVERED EMPLOYER; WHOLLY OWNED SUBSIDIARY; FAILURE TO ESTABLISH GENUINE ISSUE OF MATERIAL FACT THAT SUBSIDIARY WAS AN AGENT
In Lowe v. Terminex International Co., LP, 2006-SOX-89 (ALJ Sept. 15, 2006), the Respondent offered a number of documents in support of its motion for summary decision to show that it was not a publicly traded company. In his answer, the Complainant argued that the Respondent's written submissions were misleading and that he was unable to respond fully because of the accelerated pace and limited scope of discovery. The ALJ, however, found that there was nothing in the record to create a genuine issue of material fact on whether an agency relationship existed between the named Respondent and its publicly traded parent company. Thus, the remaining issue was the purely legal issue of whether a privately held subsidiary of a publicly held company is subject to SOX. Noting that the applicable section title of the SOX refers to employees of publicly traded companies, and that a general principle of corporate law is that a parent corporation is not liable for the acts of its subsidiary in the absence of specific congressional intent to depart from that principle, and that subsidiaries are referenced in another part of the SOX but not the whistleblower provision, the ALJ found that subsidiaries were not included within the operative terms of the SOX whistleblower provision. The ALJ also found that the ARB decision in Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No., ALJ No. 2004-SOX-11 (ARB May 31, 2006), appeared to have implicitly addressed the issue. Although in that case the ARB remanded to evaluate whether the private subsidiary acted as the parent's agent, because the law did not permit a finding that a subsidiary is never a parent's agent, and expressly did not reach the converse issue of whether a subsidiary could always be considered an agent or one with its parent for purposes of the SOX whistleblower provision, the ALJ pointed out that the ARB could have resolved the case by finding that a subsidiary is a covered employer under the SOX. "That it did not so is consistent with the clear language of the Act." Slip op. at 8.
COVERED EMPLOYER; PARENT COMPANY; MERE NAMING OF PARENT NOT SUFFICIENT TO ESTABLISH LIABILITY; RATHER, GROUNDS MUST EXIST FOR PIERCING OF CORPORATE VEIL
In Bothwell v. American Income Life, 2005-SOX-57 (ALJ Sept. 19, 2005), the ALJ found that the Complainant had untimely attempted to add a publicly traded parent company as a named Respondent after the non-publicly traded subsidiary had moved for dismissal on the ground that it was not a covered employer under the SOX. The ALJ also ruled that, assuming that the parent had been timely named as a Respondent, it was not automatically to be assumed to fall under the purview of SOX. The ALJ noted that other ALJs had required sufficient commonality of management and purpose to justify piercing the corporate veil and holding the parent liable for its subsidiary's actions. Conceding that courts have found parent companies liable for their subsidiaries' actions when the two corporate identities are used interchangeably, the ALJ found that liability nonetheless extends only to areas where the parent has exerted its influence and control.
In the instant case, the Complainant pointed to certain indicia of interchangeability (e.g., litigation costs combined into single liability; references to subsidiaries as "distribution systems in the parent company"; commonality of directors and officers; etc.), but the ALJ found that such evidence was insufficient to justify piercing the corporate veil. The ALJ pointed out that the was no evidence that the subsidiary was acting as an agent of the parent with respect to employment practices toward the Complainant or any other employee; that the parent took any part in hiring or terminating the Complainant or had any role in the payment of his salary; or that the parent's employees had any interaction with the Complainant.
COVERED EMPLOYER; SUBSIDIARY AND PARENT NOT SO INTERTWINED AS TO BE ONE ENTITY; PARENT NOT NAMED AS A RESPONDENT
In Hughart v. Raymond James & Associates, Inc., 2004-SOX-9 (ALJ Dec. 17, 2004), the Complainant did not name, and was not seeking relief from, the parent company. The named Respondent was a wholly owned subsidiary, which was neither a publicly traded company with registered securities nor required to file reports under section 15(d) of the Securities Exchange Act. Consequently, the ALJ found that the Respondent was liable under the whistleblower provision of SOX "only if the parent company and its wholly owned subsidiary are so intertwined as to represent one entity." Slip op. at 44. The ALJ concluded that "in an employment discrimination case, the parent company will only be held liable where it controlled or influenced the work environment of, or termination decision about, an employee of its subsidiary company." Id.
In the instant case, there were indicia that the parent controlled some operational aspects of the subsidiary. The Complainant's employee benefits (including pharmacy benefits, health insurance, stock purchase plans and profit sharing plans) were provided by the parent company. He was subject to the parent company's ethics policy. The letterhead used by the subsidiary contained both its own logo and the parent company's logo, with address. Portions of the two companies were housed at the same location.
The ALJ found, however, that other evidence established that the parent and subsidiary were not so inseparable as to be considered one entity subject to the whistleblower provision of SOX. The Complainant's paychecks were issued by the subsidiary, and there was no evidence of the funds of the parent and subsidiary were commingled. Nearly all the workers with whom the Complainant had day-to-day contact were employees of the subsidiary, and he only very occasionally came into contact with employees of the parent. His supervisors were all employees of the subsidiary. There was no indication that the subsidiary was acting as an agent for the parent with respect to employment practices toward the Complainant. The subsidiary had its own human resources department that was solely responsible for interacting with its employees.
The ALJ noted that several ALJs had held that a parent company subject to SOX may be held liable for SOX violations of a wholly owned subsidiary, but that the parent company must be named in the complaint to extend such liability.
EXTRATERRITORIAL APPLICATION OF SOX NOT IMPLICATED WHERE, EVEN THOUGH THE PLAINTIFF WAS STATIONED OVERSEAS, SHE WAS AN EMPLOYEE OF A U.S SUBSIDIARY, THE ALLEGED FRAUD OCCURRED IN THE U.S., AND THE ALLEGED RETALIATORY CONDUCT OCCURRED IN THE U.S.
In O'Mahony v. Accenture Ltd., No. 1:07-CV-07916 (S.D.N.Y. Feb. 5, 2008), the Plaintiff – who had been assigned to establish and head a new office in France for a French subsidiary - alleged that she had been retaliated against because she had objected to a fraudulent scheme to evade the payment of social security contributions due in France for U.S. employees working in that country.
The Defendants, relying primarily on Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006), moved to dismiss on the ground that § 1514A does not apply extraterritorially. The court denied the motion. It distinguished Carnero on several grounds.
First, the plaintiff in Carnero was a foreign employee employed and compensated exclusively by Latin American subsidiaries of a U.S. corporation. In the instant case, the Plaintiff was employed within the U.S. from 1984 through 1992, and was compensated by the U.S. subsidiary of a Bermuda corporation from 1984 through 2004. Thus, the employment relationship through 2004 was between a U.S. employer and its employee.
Second, in Carnero, the alleged wrongful conduct occurred in Latin America. In the instant case the alleged fraud involved employees of the Defendants located in the U.S. and occurred in the U.S. Moreover, the alleged retaliation was undertaken by executives located in the U.S.
Third, in Carnero, the plaintiff brought an action against the U.S. parent for alleged misconduct abroad by its Latin American subsidiary. In the instant case the action was brought against the foreign parent and its U.S. subsidiary for alleged misconduct of the U.S. subsidiary in the U.S.
The court then analyzed whether § 1514A even raised an extraterritorial question in the instant case, applying a two factor test of (1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial adverse effect in the United States or upon United States citizens. In the present case, the Plaintiff's allegations only fit the conduct test. The court found that the test was met because, inter alia, the Plaintiff had alleged sufficient facts that, if proven, would constitute a violation of § 1514A, and because the "center of gravity" of the wrongdoing was in the U.S., even though the employee was located abroad. The court found that extending jurisdiction over the complaint would be reasonable and in accordance with Congressional policy where the Plaintiff was an employee of a U.S. subsidiary during the time that the alleged fraudulent misconduct occurred, and complained about misconduct occurring in the U.S. Thus, the court was not being "being asked to intervene to apply American law in a dispute between foreigners that occurred abroad concerning a foreign transaction." In sum, the court found that it had jurisdiction over the dispute and that exercise of that jurisdiction would not implicate extraterritorial application of the law.
EXTRATERRITORIAL COVERAGE OF SOX WHISTLEBLOWER PROVISION
In Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006) (case below 2004-SOX-18), the Complainant was an Argentinean citizen resident in Brazil working for two Brazilian subsidiaries of a U.S. parent company. The Complainant was employed and paid by the subsidiaries rather than the parent U.S. company. It was undisputed that the alleged fraudulent conduct reported by the Complainant was instituted in Latin America and that his employment duties were mainly performed outside the U.S.
OSHA and an ALJ dismissed the complaint based on the principle that legislation, unless a contrary intent appears, applies only within the territorial jurisdiction of the U.S. The Complainant then filed in federal district court seeking de novo relief. The district court dismissed on the same grounds as OSHA and the ALJ.
On appeal, the First Circuit first noted that the Complainant's claim would fit generally within the whistleblower protection provision of the SOX if not for the extraterritoriality issue. The court detailed case law regarding the "well-established presumption against the extraterritorial application of Congressional statutes," the provisions and structure of the SOX, the legislative history of the SOX whistleblower provision, and other factors, and held that the SOX whistleblower provision "does not reflect the necessary clear expression of congressional intent to extend its reach beyond our nation's borders." The court therefore held that "the district court properly dismissed Carnero's complaint under 18 U.S.C. §1514A."
The court carefully limited its ruling to the facts of the case, noting that many other fact patterns could be imagined that may or may not be covered by the reasoning in the instant decision.
PERSONAL JURISDICTION OVER FOREIGN CORPORATION; ADEQUATE TIME TO CONDUCT DISCOVERY
In Mifsud v. Tyco Valves and Controls, LP<, No. C06-585 (W.D.Wash. Dec. 13, 2006), the Plaintiffs amended their complaint to name the Defendants' indirect parent company, Tyco International, a Bermuda corporation, and to include a cause of action under the SOX whistleblower provision. Tyco International moved to dismiss based on lack of subject matter jurisdiction. The court denied the motion, granting the Plaintiffs ninety days to conduct discovery solely on the question of personal jurisdiction over Tyco International.
ADMINISTRATIVE REVIEW BOARD DECISIONS
EXTRATERRITORIAL APPLICATION OF SOX WHISTLEBLOWER PROVISION; ARB FOLLOWS CARNERO RULING
In Ede v. The Swatch Group Ltd., ARB No. 05-053, ALJ Nos. 2004-SOX-68 and 69 (ARB June 27, 2007), the ARB found that substantial evidence supported the ALJ's findings that the Complainants worked solely for foreign subsidiaries of the Respondent in Switzerland, Hong Kong and Singapore; that they never worked for the Respondent within the United States; and that their SOX complaint was grounded in adverse actions that occurred outside the United States. The ARB also found no reason to depart from the First Circuit decision in Carnero v. Boston Scientific Corp., 433 F.3d 1, 4, 6-7 (1st Cir. 2006), cert. denied, __ U.S. __, 126 S.Ct. 2973 (June 26, 2006), that SOX section 806 does not protect employees who work exclusively outside the United States. The ARB therefore denied the complaint.
ADMINISTRATIVE LAW JUDGE DECISIONS
EXTRATERRITORIAL APPLICATION; COMPLAINANT WORKED IN LONDON AND ADVERSE ACTION OCCURRED IN LONDON
Where the Complainant worked in the Respondent's London office and the alleged adverse employment actions occurred in London, the ALJ found that the whistleblower provisions of SOX did not apply, citing Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir. 2006). Pik v. Goldman Sachs Group, Inc., 2007-SOX-92 (ALJ Feb. 21, 2008).
JURISDICTION; EXTRATERRITORIAL APPLICATION OF SOX
In Neuer v. Bessellieu, 2006-SOX-132 (ALJ Dec. 5, 2006), the Respondent argued that the complaint should be dismissed under FRCP 12(b)(1) for lack of jurisdiction because the publicly traded parent was located in Israel, the purported protected activity took place in Israel, and the Complainant was not a U.S. citizen. Acknowledging that one court had ruled that the SOX whistleblower provisions generally do not have extraterritorial reach, the ALJ found distinctions that made granting a 12(b)(1) motion premature. Specifically, the ALJ noted that although the purported protected activity occurred during a company visit to Israel, the Complainant was employed full time in the U.S. by a wholly owned subsidiary, which was conducting business in the U.S; the alleged adverse personnel action occurred in North Carolina; and the record contained a visa application that raised the prospect that there was significant intermingling of the business activities of the parent and the subsidiary.
COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY OF FOREIGN CORPORATION; DIFFICULTY SERVICING FOREIGN COMPANY
In Teutsch v. ING Groep, N.V., 2005-SOX-101, 102 and 103 (ALJ Sept. 25, 2006), the ALJ issued an order allowing the Complainant to amend her complaint to name and serve additional parties. Thereafter, the parent company of the originally named non-publicly traded subsidiary moved to dismiss on the basis that it had not been properly served. The ALJ directed the Complainant to serve the parent company, which was based in The Netherlands, by a date certain. Shortly after the deadline set by the ALJ, the Complainant stated that she attempted service in good faith. The Respondent, however, refused to concede that service had been made. The Complainant was hampered in effecting timely service because service under the Hague Convention was out of her control. Several months later, the Respondent requested that the ALJ rule on its motion to dismiss. The ALJ, while acknowledging that the Complainant had proceeded in good faith to attempt service, found that it was uncertain whether service would be obtained. Accordingly, he proceeded to decide the motion to dismiss. The ALJ found that the parent company on which service had not been affected was the only publicly traded firm in the matter. The record showed that the parent company and its officers had not controlled the management of its subsidiaries, or the individual managers named in the complaint. The ALJ rejected the Complainant's contention that SOX included non-publicly traded subsidiaries of publicly traded companies merely because of that relationship. Accordingly, the ALJ dismissed the complaint.
COVERED EMPLOYER; PARENT LISTED ON EUROPEAN BUT NOT U.S. EXCHANGES
In Deutschmann v. Fortis Investments, 2006-SOX-80 (ALJ June 14, 2006), the named Respondent was not a publicly traded company, and the Complainant argued that it was subject to SOX because it was the subsidiary of a publicly traded company. The ALJ noted that the parent had not been named as a party, that the complaint had not been amended to name the parent company, and that the Complainant had presented no evidence to show that the two companies were so intertwined that one would consider them to be one entity. Moreover, the Respondent presented evidence that, even assuming that the subsidiary was an agent of the parent, the parent was not covered by the SOX because it was a foreign corporation listed on exchanges in Belgium and the Netherland and not on a U.S. exchange. The Complainant countered that the parent had a class of securities registered in the U.S. called American Depository Receipts; however, the Respondent attested that those securities were exempt from registration under SEC Rule 12g3-2(b), and therefore were not securities registered under section 12 or required to file reports under section 15(d) of the SEA. In light of the foregoing, the ALJ granted summary decision in favor of the Respondent.
COVERED EMPLOYER; NON-PUBLICLY TRADED SUBSIDIARY OF FOREIGN CORPORATION; DIFFICULTLY SERVING FOREIGN COMPANY
In Andrews v. ING North America Insurance Corp., 2005-SOX-50 and 51 (ALJ Feb. 17, 2006), although the Complainants had named the parent company, ING Groep, N.V., in their initial complaint, ING Groep was a foreign corporation allegedly incapable of being effectively served, and by the time of the hearing the only named Respondent was the non-publicly traded U.S. subsidiary for which the Complainants worked. The Respondent moved to dismiss on the ground that it was not an employer covered under the whistleblower provision of the SOX. The ALJ found that the Respondent did not fit the statutory definition, that the publicly traded parent was an indispensable party if the Complainants wanted to show a commonality of management in purpose or to attempt to pierce the corporate veil, and that merely being owned at a distance by publicly traded company does not make a subsidiary an agent of the parent company within the meaning of the Act. Accordingly, the ALJ granted the Respondent's motion to dismiss.
[Editor's note: The decision is not entirely clear on the point, but it appears that the Complainants only speculated that they could not sue the foreign parent company, and made no attempt to serve the parent.]
COVERED EMPLOYER; EXTRATERRITORIAL APPLICATION OF SOX
In O'Mahony v. Accenture Ltd., 2005-SOX-72 (ALJ Jan. 20, 2006), the ALJ found persuasive the holdings of other ALJs and the First Circuit Court of Appeals that the whistleblower provision of the SOX applies only to employees who work within the United States. Thus, the ALJ dismissed the complaint where the Complainant-- an Irish national residing in France -- was an employee and partner of the French operating subsidiary of a Bermuda-based company traded on the New York Stock Exchange.
EXTRATERRITORIAL COVERAGE; EMPLOYMENT OVERSEAS FOR A FOREIGN SUBSIDIARY, BUT SUBSTANTIAL NEXUS TO THE U.S.
In Penesso v. LLC International, Inc., 2005-SOX-16 (ALJ Mar. 4, 2005), the Complainant was employed in Italy by the Italian subsidiary of a corporation headquartered in McLean, Virginia. The Respondent filed a motion for summary decision based on, inter alia, the proposition that the whistleblower provision of SOX does not have extraterritorial application, citing in support Concone v. Capital One Financial Corp., 2005-SOX-6 (ALJ Dec. 3, 2005) and Carnero v. Boston Scientific Corp., 2004 WL 1922132 (D.Mass. Aug. 27, 2004). The ALJ distinguished Concone and Carnero, finding that the facts in the case before him were materially different, the Complainant being a U.S. citizen, much of the protected activity having occurred in the U.S., and at least one of the alleged retaliatory actions (a decision not to issue bonuses) was made in the U.S. The ALJ concluded that "unlike Concone and Carnero, this case has a substantial nexus to the United States, and it is appropriate for the complainant to bring this claim under §1514A of the Sarbanes-Oxley Act." Slip op. at 3 (footnote omitted).
COVERED EMPLOYER; JOINT VENTURE OF TWO CORPORATIONS
In Mann v. United Space Alliance, LLC, 2004-SOX-15 (ALJ Feb. 18, 2005), the ALJ granted summary judgment to the Respondents on the ground that none the named Respondents were employers for purposes of the employee protection provision of the SOX. The Complainant was employed by United Space Alliance (USA), which was a limited liability company equally owned by Boeing and Lockheed Martin. The ALJ found that there was no evidence that Boeing or Lockheed could have affected, or did affect, the Complainant's employment with USA, or that USA was acting as their agent with respect to the Complainant's employment. See 29 C.F.R. § 1980.101. While those companies participated in the hiring and dismissing of USA's president and CEO, it was the responsibility of USA's president and CEO to hire and dismiss management and other employees of USA, and to establish the terms of their employment.
The ALJ also considered whether the fact that Boeing and Lockheed owned USA brought them under the coverage of SOX. Although USA did not have a class of securities registered under section 12 of the SEA nor was it required to file reports under section 15(d) of the SEA, the Complainant argued that it was the agent of the two ownership companies.
The ALJ found no prior precedent addressing the applicability of SOX to a joint venture, but looked to cases involving subsidiaries, finding that in all those cases "shared management and control and unity of operations have been key factors in holding the parent company and its subsidiary to be covered by the Act." Slip op. at 9 (citations omitted). The ALJ found that such factors were not present in the instant case.
Not a Publicly Traded Company at the Time of the Adverse Action
COVERED EMPLOYER; RESPONDENT WHICH HAD FILED A REGISTRATION WITH THE SEC WHICH HAD NOT YET BECOME EFFECTIVE
In Stalcup v. Sonoma College, 2005-SOX-114 (ALJ Feb. 7, 2006), the Respondent had filed a registration statement with the SEC. The Complainant was subsequently terminated. At the time he was terminated, the registration neither had become effective nor had it been withdrawn. The ALJ found that under the plain language of section 806 of the SOX, the Respondent is not a covered employer. Because the Complainant argued that there was evidence of ambiguity or a drafting error, the ALJ nonetheless examined section 806 in the context of the rest of the Act, the legislative intent and the policy of the Act.
The Complainant argued that the Respondent fit the definition of "issuer" found in the definitions portion of the Act, and that this general definition applied to "all or most other sections of the Act, wherever the term 'issuer' is used." Slip op. at 3, quoting Complainant's brief. The ALJ, however, noted that the term "issuer" is not used in Section 806 and that Congress was quite explicit in Section 806 in referring to and defining publicly traded companies. The ALJ rejected the Complainant's argument that this was a drafting mistake, the ALJ noting that other sections of the Act applied to the categories of companies narrowly defined in Section 806 and that, given that Section 806 "is different in both purpose and effect from most other provisions of the Act, there are logical reasons why Congress may have decided not to apply section 806 to prospective public companies." Finally, the ALJ found that the Complainant's argument that the limited coverage of section 806 was contrary to the policies underlying the Act did not give the ALJ the authority to redraft the law.
COVERED EMPLOYER; EMPLOYER WHICH FILES A REGISTRATION BUT WITHDRAWS IT BEFORE APPROVAL
In Roulett v. American Capital Access, 2004-SOX-78 (ALJ Dec. 22, 2004), the Respondent had filed a registration with the SEC in preparation for an IPO, but subsequently obtained private financing and withdrew the registration before any approval by an exchange or the SEC was effected. The Securities Exchange Act provides that a registration does not become effective until it is approved by the relevant exchange authorities who must then certify to the SEC that the security has been approved. The ALJ held, therefore, that the Respondent never registered a class of securities under section 12 of the Securities Exchange Act of 1934.
COVERED EMPLOYER; EMPLOYER DID NOT SEEK REGISTRATION UNTIL AFTER THE COMPLAINANT HAD BEEN TERMINATED FROM EMPLOYMENT
In Roulett v. American Capital Access, 2004-SOX-78 (ALJ Dec. 22, 2004), the Respondent had filed a registration with the SEC in preparation for an IPO, but subsequently obtained private financing and withdrew the registration before any approval by an exchange or the SEC was effected, and the ALJ consequently found that it was not a covered employer under the whistleblower provision of the SOX. The ALJ also found that, even if the application had been approved by the SEC, the Respondent had not filed until after the Complainant had already been terminated from employment. The ALJ found that SOX may not be applied retroactively to confer coverage before a company meets the jurisdictional requisites.
COVERED EMPLOYER; COVERAGE UNDER SOX AT THE TIME OF THE ADVERSE ACTION
In Gallagher v. Granada Entertainment USA, 2004-SOX-74 (ALJ Apr. 1, 2005), the Respondent was not a publicly traded company subject to SOX at the time that it made the decision not to promote the Complainant following a contemplated merger. After the merger, however, the Respondent became a company subject to the requirements of sections 12 or 15(d) of the Securities and Exchange Act. The decision not to renew the Complainant's employment contract was made after the merger. Thus, the Respondent was not a covered employer at time of the refusal to promote but was a covered employer at the time of the non-renewal of the employment contract.
COVERED EMPLOYER; AUTOMATIC EXEMPTION FROM REPORTING UNDER SECTION 15(d) WHERE SECURITIES ARE HELD BY FEWER THAN 300 PERSONS
The whistleblower protection provisions of the Sarbanes-Oxley Act cover only companies with securities registered under § 12 or companies required to file reports under § 15(d) of the Exchange Act. In Flake v. New World Pasta Co., ARB No. 03-126, ALJ No. 2003-SOX-18 (ARB Feb. 25, 2004), the parties agreed that New World was not subject to § 12 of the Securities Exchange Act, and the dispute was whether it was required to file reports under § 15(d). The parties agreed "that in 1999 New World registered securities pursuant to the Securities Act of 1933 and that at the beginning of each fiscal year thereafter New World's securities were held of record by fewer than 300 persons." Under § 15(d), the applicable reporting requirements are automatically suspended when a company's securities are held at the beginning of the fiscal year by fewer than 300 persons.
The Complainant contended that SEC rule 12h-3 applies, and that because New World had not filed "Form 15" as that rule dictates, the suspension from reporting requirements is invalid. New World countered that the Form 15 filing applies only to a company that becomes illegible for the suspension during a fiscal year, citing several SEC informal, non-binding interpretative statements in support. The ARB observed that the SEC had expressed this view (that the suspension goes into effect by operation of law and the failure to file Form 15 has no effect on the automatic suspension) not only in informal guidance, but also in notice and comment rulemaking. The ARB rejected Complainant's argument that the SOX whistleblower provision should be interpreted to include any publicly traded company, and found that no genuine issue of material fact existed as to whether New World was a covered employer under that law. Thus, it affirmed the ALJ's dismissal.
COVERED INDIVIDUALS AND ENTITIES; HARMONIZATION AND CLARIFICATION OF REGULATIONS TO LIMIT LITIGATION TO PERSONS OR ENTITIES IN A POSITION TO EFFECT TERMS AND CONDITIONS OF EMPLOYMENT
In Gallagher v. Granada Entertainment USA, 2004-SOX-74 (ALJ Oct. 19, 2004), the Complainant sought to amend his complaint to name additional Respondents, including the executive who terminated his employment, and "any person or business entity ... whose acts in concert with or at the direction of the Employer ... lead to" his discharge. Slip op. at 3, quoting Complainant's motion.
The ALJ noted that the SOX whistleblower statute and regulations are broader in scope that previous types of whistleblower cases under DOL's jurisdiction in that they do not restrict the parties to a complainant and an employer, but require the Secretary to give notice that a complaint has been filed to both "the employer" and "the person named in the complaint." The ALJ reviewed the applicable laws and regulatory history and sought to harmonize the regulations and clarify who could be named as a party. The ALJ concluded that the regulations imply that only someone in a position to take unfavorable personnel actions would be a "named person." The ALJ also found that the regulations imply "that any 'named person' would have had direct authority over a complainant, and are consistent with the assumption [made in the regulatory history] that the employer and the named person(s) ordinarily are the same."
The ALJ thus concluded that the executives named as those who terminated the Complainant's employment could be added as "named parties." The ALJ denied addition of the "acting in concert" group (which the Respondent estimated would add more than 30 individuals or entities to the litigation). The ALJ concluded that the regulations did not contemplate expansion of Respondents to that extent, but limited individuals as parties to superiors who could discriminate against the Complainant in regard to the "'terms or conditions of his employment' as Congress used the phrase in 18 U.S.C. § 1514(A) and the Secretary applied it in 29 C.F.R. § 1980.102(a)."
The ALJ acknowledged that SOX permits compensation for special damages [in other words, SOX is not limited to equitable relief which can only be provided by the corporate Employer], but concluded that "[t]he availability of damages does not convert this statutory proceeding into a common law tort action, permitting joinder of persons or entities who were not the Complainant's superiors as if they were joint tortfeasors."
COVERED RESPONDENTS; INDIVIDUAL OFFICERS NOT NAMED IN OSHA FINDINGS, BUT CLEARLY IDENTIFIED IN THE COMPLAINT
In Jordan v. Sprint Nextel Corp., 2006-SOX-41 (ALJ Mar. 14, 2006), Sprint filed a motion to dismiss three individually named Respondents (the Complainant's supervisor, Sprint's General Counsel, and Sprint's CEO), arguing that they had not been properly served, that claims against the individuals had not been investigated and considered by OSHA, and that the Complainant would not be prejudiced by their dismissal because complete relief is available against the corporate Respondent. The ALJ denied the motion. The ALJ distinguished the decision of the ALJ in Powers v. Pinnacle Airlines, Inc., 2003-SOX-12 (ALJ Mar. 5, 2003), in which the ALJ denied the Complainant's attempt to add a publicly traded company as a Respondent in an attempt to cure the deficiency that the originally named Respondent was not a publicly traded entity, and the Complainant had not alleged any facts that would justify piercing the corporate veil and ignoring the separate corporate structure. The ALJ observed that the SOX expressly covers officers of the company named in the complaint, and that the Complainant in the instant case had expressly named the supervisor, general counsel, and CEO in the complaint filed with OSHA. The ALJ found that the fact that OSHA's findings only named Sprint as the Respondent in this mater was not dispositive. OSHA was required under 29 C.F.R. § 1980.104(a) to notify all persons named in the complaint of receipt of the complaint, and any failure by OSHA in this respect could not be attributed to the Complainant or used to justify dismissal of his complaint. Nor was the service requirement jurisdictional, its purpose being merely to give adequate notice of the complaint. The ALJ observed that it was clear from the pleadings that the three individuals were well aware of the pendency of the proceedings. Finally, the ALJ noted that proceedings before him were de novo.
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