On Sarbanes Oxley and communications through un-official channels

”Should Section 806 be interpreted to independently impose a materiality requirement on communications . . .?”

Based on Congress’ expressions of intent, the controlling standard is set forth in the Munsey- Guttman-Passaic Valley line of cases. The scope of protected activity is somewhat different depending upon whether an employee uses an established channel for raising a concern, or simply expresses a concern to someone outside of any reporting structures.

I. PROTECTED ACTIVITY RAISED THORUGH UN-OFFICIAL CHANNELS UNDER SOX IS DEFINED BY THE PASSAIC VALLEY CASE AND THE AUTHORITY UPON WHICH PASSAIC VALLEY WAS BASED.

The controlling precedent for interpreting the scope of protected activity raised by an employee using unofficial channels (i.e. such as complaining to a co-worker or a supervisor) under SOX was clearly established by Congress. This precedent reaches back into well-settled case law under the 1969 Mine Safety Act, and an unbroken line of judicial and administrative precedent that was in-place at the time Congress enacted SOX. Congress, both by the statutory structure of the SOX, and its explicit reference to this body of case law, made its intentions perfectly clear. This Board must apply this precedent to the current case, and clarify the scope of protected activity under the law.

The Guttman case reflected the standard followed by this Board for years before the passage of SOX. It is based on the unquestioned line of cases developed under the laws upon which SOX was ultimately modeled, including the Mine Health and Safety Act and the National Labor Relations Act. Congress was fully cognizant of the case law when it enacted SOX, and by modeling SOX upon these prior laws, Congress expressed its intention that the Department of Labor follow this unbroken line of precedent. Not one word in SOX demonstrates an intent to overturn this long line of cases for which Congress, as far back as 1978, had explicitly affirmed. See Kansas Gas and Electric Co. v. Brock, cited above.

If there was any doubt whatsoever about the standard the DOL was required to apply in SOX cases under 18 U.S.C. § 1514A(a)(1), Congress explicitly re-affirmed the prior precedent of the DOL when it cited, with approval, to the case of Passaic Valley Sewerage Comm. v. U.S. Department of Labor, 992 F.2d 474, 478-79 (3rd Cir. 1993) in the legislative history of SOX.

The Passaic Valley case affirmed the Secretary of Labor’s definition of protected activity as set forth in the underlying case of Guttman, cited above. In Guttman the Secretary described the reach of protection for raising concerns through unofficial channels as follows: ...there was never any contention that they were frivolous or brought in abuse of the statute. Rather, the record shows that they were pressed by the Complainant in good faith as his very strongly and seriously held beliefs. I find that Complainant’s communication of these alleged violations... was fully protected under the whistleblower provision of the FWPCA. 33 U.S.C.
1367. 85-WPC-2, D&O of SOL (emphasis added).

Thus, as long as an internal complaint made outside the formal reporting channels was made in good faith, and was not frivolous, it was protected. In Passaic Valley, cited above, 992 F.2d at 478-79, the Third Circuit affirmed saying: protection would be largely hollow if it were restricted to the point of filing a formal complaint with the appropriate external law enforcement agency. Employees should not be discouraged from the normal route of pursuing internal remedies before going public with their good faith allegations.

The Third Circuit concluded that Mr. Guttman’s internal complaints constituted a “proceeding” and affirmed the finding that his activity was protected. 992 F.2d at 480.

Critically, the Senate Conference Report approving the language of § 806 explicitly cited to Passaic Valley as the controlling standard for SOX.

...Thus, under unquestionable prior precedent, the standard for judging whether an employee’s subjective or objective beliefs that his or her disclosures implicate the misconduct or frauds identified under SOX is not the “definitively and specifically relates to a violation” standard, but rather the “frivolous or brought in abuse of the statute” standard. As intended by Congress, Guttman and Passaic Valley control the legal interpretation of the scope of protected activity.

The standards set forth in Guttman and Passaic Valley stretch back for many years, and the cases upon which these two precedents rely provide answers for the other questions raised by the Board. ...There was never any precedent under the Guttman-Passaic Valley line of cases that conditioned employee protections on a sophisticated understanding of the law.

...The law was also designed to protect “channels of information.” The law did not want to endorse any policy or precedent that would chill employee speech. Thus, every time the standard for protected activity was analyzed by the Secretary of Labor in the cases upon which the Guttman-Passaic Valley precedent is based, the cases were analyzed in the context of protecting channels of information, not in ensuring that valid complaints were filed. The standard set forth in Guttman had nothing whatsoever to do with whether or not his complaints were “definitive” or “specific.” They were designed to protect the channels of information.

...While employers are encouraged to establish channels for raising compliance concerns, they cannot impose a chain of command to limit how employees raise protected concerns.

...The Third Circuit addressed these issues in Passaic Valley at 992 F.2d at 478-49, saying, "The whistle-blower provision was enacted for the broad remedial purpose of shielding employees from retaliatory actions taken against them by management to discourage or to punish employee efforts to bring the corporation into compliance... [A]n employee’s non-frivolous complaint should not have to be guaranteed to withstand the scrutiny of in-house or external review in order to merit protection under § 507(a) for the obvious reason that such a standard would chill employee initiatives in bringing to light perceived discrepancies in the workings of their agency.":

...Consequently, permitting an employer to scrutinize the validity of an employee’s protected disclosures in the light of fraud standards or “materiality” standards would be an abuse of discretion.

The standard is straightforward: Were the complaints frivolous or not?

Where the complaints raised in order to “abuse the statute?”

Any other standard would defeat the primary purpose of § 806 and the laws upon which it is modeled. These laws were designed to protect “channels of communication,” not to ensure that employees raise sophisticated or well documented allegations.

http://www.dol.gov/arb/briefs/07-123/NWC.pdf