Article Summary

The Second Circuit's recent error in Murray v. UBS Securities, LLC means that whistleblowers who complain of retaliation under the Sarbanes-Oxley Act now face a new obstacle in the federal courts of New York, Connecticut, and Vermont. Here's the best alternative: Avoid litigation in the Second Circuit for as long as possible by following the administrative law process to its conclusion at the U.S. Department of Labor, which isn't bound by the faulty ruling.

This expert analysis by TELG managing principal R. Scott Oswald and TELG associate Austin Szabo was published by Law360 on October 19, 2022.

Reprinted from:

When Alleging SOX Retaliation in the Second Circuit, Stick with the DOL

By R. Scott Oswald and Austin Szabo

In August, while overturning a $900,000 jury verdict, a panel of the U.S. Court of Appeals for the Second Circuit erroneously raised the burden on plaintiffs who claim retaliation under the Sarbanes-Oxley Act of 2022 (SOX).

Worse, a rehearing in Murray v. UBS Securities, LLC was denied last month, both by the panel and by the Second Circuit as a whole, leaving a bad decision to stand as federal law in New York, Connecticut, and Vermont.[1]

The court’s mistake may hurt not only SOX plaintiffs, but also employees who claim retaliation under parallel laws that protect whistleblowers across a host of U.S. industries, and that are mostly enforced via the U.S. Department of Labor (DOL). The issue could end up being decided by the U.S. Supreme Court, since the Second Circuit’s interpretation of these laws’ “contributing factor” test isn’t supported by any other court — and has been expressly rejected by sister circuits.[2]

In the meantime, attorneys who represent whistleblowers face a dilemma: How should SOX cases be navigated in an outlier jurisdiction where the law is unfairly tilted against their clients?

Fortunately, there’s a decent option: Pursue these retaliation cases to their conclusion within the safe confines of DOL, which isn’t bound by Second Circuit rulings. If your client has other claims under statutes that aren’t administered by DOL, pursue those claims separately — even if your normal procedure in another circuit would be to pull everything into a single action.

This strategy may not be ideal, and your claim could end up in the Second Circuit anyway after a DOL decision on the merits, but it’s still the best path for employees in most cases. In the meantime, we must hope that the Supreme Court takes its earliest opportunity to correct Murray and any collateral damage to parallel laws.

What the Second Circuit Got Wrong

Passed in the wake of the Enron scandal, SOX was intended to deter reprisals against corporate whistleblowers. To achieve this, it adopted the language of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR21) — another statute enforced by DOL — as to the standard and burden of proof for a retaliation claim.

Under AIR21 and similar laws, plaintiffs must show by preponderance of the evidence that:

  • They engaged in a protected activity;
  • Their employer knew that they did so;
  • Their employer then acted adversely against them; and
  • The protected activity was a “contributing factor” in the adverse action, which may be inferred solely from temporal proximity.[3]

The burden of proof then shifts to the employer, which can escape liability only if it shows by clear and convincing evidence that it would have taken the exact same action without the protected activity.[4]

Notice what’s not required here of a whistleblower: Any showing of the employer’s retaliatory intent. This is by design. Patrick Leahy, a principal author of SOX’s anti-retaliation provision, said the statute is meant to “sweep broadly” so that corporations must use kid gloves in their handling of whistleblowers — a contrast to the culture of intimidation that surrounded Enron.[5]

In particular, the “contributing factor” test in AIR21, SOX, and similar laws is deliberately easier than the “motivating factor” test that is used for retaliation cases under some other workplace statutes, including Title VII of the Civil Rights Act of 1964, which requires a showing of retaliatory intent.[6]

The “contributing factor” standard has been well understood for years via DOL regulations;[7] via federal court rulings;[8] and via rulings of DOL’s Administrative Review Board (ARB), the ultimate arbiter in the SOX administrative law process.[9]

But then came the Second Circuit in Murray, a bombshell that held that a trial court erred by failing to instruct a jury that “a SOX antiretaliation claim requires a showing of the employer’s retaliatory intent.”[10] This conclusion was driven by a convoluted reading of SOX, and flew in the face of an earlier Second Circuit decision, Bechtel v. Administrative Review Board — not to mention decisions from sister circuits.[11]

The resulting Frankenstein-like standard, with its bolted-on intent requirement, probably remains less onerous for whistleblowers than “motivating factor,” but it still should be avoided by a conscientious practitioner for as long as viable.

This is possible by working through the DOL’s administrative law process.

How DOL Enforces Whistleblower Laws

As with many whistleblower retaliation statutes, SOX delegates enforcement to DOL, which operates a three-tiered system:

  • First, retaliation claims must be filed with DOL’s Occupational Safety and Health Administration, which investigates each case;
  • Then disputes are adjudicated by DOL’s Office of Administrative Law Judges (OALJ); and
  • Finally, appeals are heard by the ARB, whose rulings are precedential for the lower DOL levels.

DOL’s wheels grind slowly, however, and many whistleblowers opt to “kick out” their claims to federal court after an administrative exhaustion period of 210 days. Article III courts offer some advantages over DOL, including a robust discovery process and the promise of a jury trial, both of which can bring a defendant to the bargaining table.

Also, if the whistleblower has other claims that aren’t before DOL, like an allegation of age discrimination, it can be make sense to consolidate the case into a single action.

As of August 2022, however, if the relevant federal court is in the Second Circuit, “kicking out” a claim will change the forum and the law that’s applied — for the worse.

What’s Good About Staying at DOL

Administrative actions can be tedious, but they do have some advantages.

First, the ARB interprets SOX and other whistleblower laws according to the intent of Congress and in accord with federal courts everywhere except the Second Circuit — so it’s a more favorable legal environment than whistleblowers will face if they “kick out” into New York, Connecticut, or Vermont.

Second, whistleblowers will likely rack up fewer legal fees at DOL than they would in federal court: The discovery process is less robust, which has disadvantages, but it’s also cheaper in most cases.

Third, the judges at the OALJ and ARB are uniquely well-versed in the whistleblower statutes administered by DOL; these laws generate a large portion of their caseload. Federal judges, by contrast, are generalists, and are relatively less likely to have built a deep understanding of SOX.

Fourth, whistleblowers won’t face nuisance counterclaims from a defendant, as they might in federal court: DOL doesn’t have jurisdiction over some of the common allegations tossed at whistleblowers, such as violations of employment agreements or the Computer Fraud and Abuse Act.

Fifth, any allegation of forum-shopping is easily addressed: Whistleblowers may pursue the DOL process to the end by right and have no obligation to consolidate their claims into a parallel Title VII case, for example, even if the matters arise from a common set of facts. Meanwhile, DOL has no jurisdiction to consolidate such claims in the other direction.

And finally, pursuing the DOL process through an ARB decision, if needed, doesn’t limit a whistleblower’s rights in federal court. Although it might not be advisable to keep going, a federal court must judge even a fully considered DOL case de novo, meaning the whistleblower gets a fresh bite of the apple.

Of course, we’d prefer if the Second Circuit simply had followed the established law of SOX. What’s more, each case is different: There might still be reasons to venture into federal court, depending on the facts.

Until Murray is corrected, however, fully litigating SOX retaliation claims within DOL is a solid alternative.

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[1] Murray v. UBS Securities LLC, 43 F.4th 254 (2d Cir. 2022), reh’g denied, No. 20-4202 (2d Cir. Sept. 15, 2022).

[2] See, e.g., Halliburton, Inc. v. Admin. Rev. Bd., 771 F.3d 254, 263 (5th Cir. 2014) (holding that retaliatory intent is not an element of a section 1514A claim); Coppinger-Martin v. Solis, 627 F.3d 745, 750 (9th Cir. 2010) (same).

[3] See 49 U.S.C. § 42121(b). See also Bechtel v. Admin. Rev. Bd., U.S. Dept. of Labor, 710 F.3d 443, 447 (2d Cir. 2013).

[4] Bechtel, 710 F.3d at 447.

[5] See 149 Cong. Rec. S1725-01, S1725 (daily ed. Jan. 29, 2003) (statement of Sen. Leahy).

[6] Virtually every circuit court has noted and accepted the difference between these two standards, often stating outright that the contributing factor standard is easier for plaintiffs than the motivating factor standard. See, e.g., Lee v. Norfolk S. Ry. Co., 802 F.3d 626, 631 (4th Cir. 2015); Lockheed Martin Corp. v. Admin. Rev. Bd., U.S. Dept. of Labor, 717 F.3d 1121, 1137 (10th Cir. 2013); Kosmicki v. Burlington N. & Santa Fe R. Co., 545 F.3d 649, 651 (8th Cir. 2008); Woodman v. WWOR-TV, Inc., 411 F.3d 69, 76 (2d Cir. 2005); Bridgeport Music, Inc. v. Still N The Water Pub., 327 F.3d 472, 480 (6th Cir. 2003); Barrett v. Lombardi, 239 F.3d 23, 27 (1st Cir. 2001).

[7] See 69 Fed. Reg. 52104 (Aug. 24, 2004).

[8] DOL regularly publishes federal decisions on SOX and parallel statutes. See, e.g., Department of Labor, Office of Administrative Law Judges, 2022 Federal Court Whistleblower Decisions, Department of Labor/Office of Administrative Law Judges Reporter, https://www.dol.gov/agencies/oalj/PUBLIC/WHISTLEBLOWER/REFERENCES/CASELISTS/FEDERAL_2022#SOX

[9] The Department of Labor also publishes new ARB decisions monthly. See, e.g., Department of Labor, Office of Administrative Law Judges, Administrative Review Board Decisions – August 2022, Department of Labor/Office of Administrative Law Judges Reporter, https://www.dol.gov/agencies/oalj/PUBLIC/ARB/REFERENCES/CASELISTS/08_2022

[10] Murray, 43 F.4th at 261.

[11] See Brief of Government Accountability Project as Amicus Curiae in Support of Appellee-Cross-Appellant at 21, Murray v. UBS Securities LLC, 43 F.4th 254 (2d Cir. 2022).

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R. Scott Oswald is managing principal of The Employment Law Group, P.C.; Austin Szabo is an associate at the firm.

(Note: This article has been edited slightly from the version published by Law360, and carries a different headline.)