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Stone v. Instrumentation Laboratory Company

On December 31, 2009, in a case of first impression, the Fourth Circuit held in the opinion below that a Sarbanes-Oxley (SOX) complainant may seek de novo review in federal court after the complaint has been pending before DOL for over 180 days without a final decision by the Secretary of Labor. The Fourth Circuit unequivocally rejected the lower court’s decision, finding that:

  • The DOL Administrative Review Board’s dismissal of a SOX claim due to the complainant’s removal of the case to federal court does not result in a final decision being issued by the Secretary of Labor;
  • Comments from the Secretary of Labor do not inform the literal interpretation of a federal statute, nor do they override congressional intent;
  • Congress, in enacting SOX, “expressly provided for de novo non-deferential review in district court;”
  • Deferring to an administrative agency, “even if more efficient, is in direct conflict with the unambiguous language of [SOX];”
  • “Courts do not, of course, have free rein to impose rules of preclusion. . . . the question is not whether administrative estoppel is wise but whether it is intended by the legislature.”

The Fourth Circuit held that “the plain language of § 1514(b)(1)(B) unambiguously establishes a Sarbanes-Oxley whistleblower complainant’s right to de novo review in federal district court if the DOL has not issued a ‘final decision’ and the statutory 180-day period has expired.”

Stone v. Instrumentation Laboratory




Amici Supporting Appellant.
No. 08-1970


Amici Supporting Appellant.
No. 08-2196

Appeals from the United States District Court
for the District of Maryland, at Baltimore.
William D. Quarles, Jr., District Judge.

Argued: September 23, 2009

Decided: December 31, 2009

Before NIEMEYER and SHEDD, Circuit Judges,
and Mark S. DAVIS, United States District Judge for the
Eastern District of Virginia, sitting by designation.


Vacated and remanded by published opinion. Judge Davis
wrote the opinion, in which Judge Niemeyer and Judge Shedd


ARGUED: Adam Augustine Carter, EMPLOYMENT LAW
GROUP, PC, Washington, D.C., for Appellant. Robert
PC, Waltham, Massachusetts, for Appellees.

PC, Washington, D.C., for Appellant. Scott J. Connolly,
Massachusetts, for Appellees. Richard R. Renner,
EDUCATION FUND, Washington, D.C.; Thomas Devine,
Legal Director, Kasey Dunton-Dermont, GOVERNMENT
Amici Supporting Appellant.



DAVIS, District Judge:

In this appeal, we address the interpretation of a provision of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A, governing the filing of whistleblower lawsuits in federal district court. The parties acknowledge that the Sarbanes-Oxley Act expressly provides a United States District Court jurisdiction to entertain a whistleblower action. However, they disagree as to whether a whistleblower plaintiff, during the pendency of an administrative appeal of an Administrative Law Judge’s (“ALJ”) ruling, has the right to a de novo proceeding in district court. In the absence of guidance from this Court, or other circuit courts, the district court granted the defendants’ motion to dismiss the district court action in favor of remand to the appropriate administrative body for further proceedings. In light of the language of the statutory provisions at issue, we reverse the district court and remand for further proceedings consistent with this opinion.


David Stone (“Stone” or “Appellant”) was employed by Instrumentation Laboratory Company (“ILC”) from 1999 through 2006. ILC is in the business of developing, manufacturing, and distributing critical care and diagnostic instruments, as well as other related products and services, for use primarily in hospital laboratories. Stone began as an ILC Sales Representative in 1999, was promoted to Sales Manager in 2002, and was again promoted in 2005 to Director of National Accounts. During his employment at ILC, Stone received numerous accolades for his performance.1

As Director of National Accounts, one of Stone’s responsibilities was working with Group Purchasing Organizations (“GPOs”), which are strategic affiliations of hospitals that concentrate buying power in order to negotiate lower prices. ILC had contracts with various GPOs requiring that, among other things, ILC maintain a GPO membership database, offer contractually negotiated prices and terms to GPO members, and pay administrative fees to GPOs equal to three percent of sales revenue generated from member purchases. ILC has acknowledged in public disclosures to shareholders that GPOs are a critical part of its distribution strategy.

After assuming his role as Director of National Accounts, Stone learned that Brian Durkin (“Durkin”), one of Stone’s superiors at ILC, was not accurately tracking, reporting, and paying the required administrative fees to GPOs. Durkin’s omissions resulted in a multi-year cumulative liability of at least half a million dollars and threatened ILC’s ability to sell products to most of its customers. Stone’s Complaint asserts that Durkin’s failure to maintain adequate internal controls and track administrative fees resulted in ILC “misrepresenting its financial condition to shareholders.” (Compl. ¶ 70.) Stone’s discovery regarding administrative fees prompted him to perform additional investigation into ILC’s internal controls, and such investigation revealed numerous weaknesses.

From September of 2005 until March of 2006, Stone repeatedly voiced his concerns about deficient internal controls and unpaid GPO fees to Durkin and two other ILC managers.2 Stone’s efforts were repeatedly met with resistance and even unequivocal refusals to correct the problems. Stone contends that Appellees retaliated against him after he brought such deficiencies to light, and that such retaliation culminated in Stone’s termination in March of 2006.



On June 19, 2006, pursuant to the Sarbanes-Oxley Act, Stone filed a retaliation claim with the Occupational Safety and Health Administration (“OSHA”), which hears such claims on behalf of the Secretary of Labor (“the Secretary”). OSHA issued its preliminary findings on January 3, 2007, more than 180 days after Stone’s claim was filed. Pursuant to the governing regulations, Stone timely objected to OSHA’s findings and requested a hearing before an ALJ. On March 1, 2007, Appellees filed a motion for summary decision before the ALJ. In response, Stone moved to delay consideration of such motion to permit him to take discovery. Stone’s motion for discovery was denied,3 and the ALJ granted Appellees’ motion for summary decision on September 6, 2007. Stone thereafter successfully petitioned the Administrative Review Board (“ARB”) for review of the ALJ’s order. On October 1, 2007, the ARB established a briefing schedule, which was thereafter modified by the ARB on Stone’s motion.

On November 8, 2007, more than a month before Stone’s initial brief was due under the modified briefing schedule, Stone filed a on to district courts to apply preclusion principles because Congress expressly provided for de novo non-deferential review in district court. A literal interpretation of the statute’s plain language does not lead to an absurd result since Congress unquestionably has the right to create a complainant-friendly statutory scheme that affords no deference to non-final agency findings.

For the reasons stated herein, we reverse the district court’s order granting Appellees’ motion to dismiss, vacate the entry of final judgment, and remand to the district court for further proceedings consistent with this opinion.



1As the instant appeal challenges the district court’s dismissal under Federal Rule of Civil Procedure 12(b)(6), “we accept as true all wellpleaded allegations and view the complaint in the light most favorable to [Stone].” Venkatraman v. REI Systems, Inc., 417 F.3d 418, 420 (4th Cir. 2005).

2Stone’s Complaint names all three superiors as defendants: Brian Durkin, Ann DeFronzo, and Ramon Benet. ILC and the individually named ILC managers are referred to herein collectively as “Appellees.”

3Stone had previously agreed, during a telephone status conference, that discovery would be stayed pending the ALJ’s ruling on the motion for summary decision. Notwithstanding such inconsistent positions, there is no allegation that Stone acted in “bad faith” to delay the administrative process.

4The court below noted the lack of case law interpreting the relevant Sarbanes-Oxley Act provision and cited to two district court cases, one of which squarely addressed the question before the district court. (J.A. 166- 68.) See Allen v. Stewart Enters., No. 05-4033 (E.D. La. Apr. 6, 2006) (unpublished) (giving preclusive effect to the ALJ’s ruling on the plaintiff’s administrative whistleblower claim and granting a petition for mandamus that effectively remanded the case to the ARB for further proceedings); Hanna v. WCI Cmtys., Inc., 348 F. Supp. 2d 1322 (S.D. Fla. 2004) (finding that OSHA’s preliminary findings do not have preclusive effect, but suggesting that the result may be different after an ALJ conducts a hearing and issues a ruling).

5We defer to the DOL’s established procedure for processing and ruling on an administrative whistleblower claim, and such procedure necessarily defines what constitutes a “final decision” of the Secretary. Such deference to the DOL’s reasonable implementation of the Sarbanes-Oxley Act is appropriate regardless of whether the court views the DOL’s procedural scheme as merely “filling explicit gaps in the statute” or “clarifying” the phrase “final decision” as used in the statute. Yashenko, 446 F.3d at 549 n.1.

6We recognize that in reviewing de novo questions of law when there is final agency action we sometimes defer to the agency’s statutory interpretation. See, e.g., Welch, 536 F.3d at 276 (“Under the Administrative Procedure Act . . . [w]e review questions of law de novo, giving deference to the ARB’s interpretation of § 1514A.”). However, the procedural posture of this matter, involving the initiation of a new case in district court due to the absence of final agency action, is starkly different from Welch, and similar cases, where an agency’s final decision is reviewed by this Court in the first instance. Tellingly, here, not only is there no final agency action to which to defer, but a district court’s review under § 1514A(b)(1)(B) is not review of a question of law, it is consideration of the Sarbanes-Oxley complaint as if the complaint had been filed initially in district court. As we noted in Welch, deference is appropriate when it appears that Congress expects the agency to speak with the force of law, but nothing in § 1514A(b)(1)(B) suggests that Congress intended non-final agency actions, or the Secretary’s comments regarding how a district court will conduct de novo review, “to speak with the force of law.” Id. at 276 n.2 (quoting United States v. Mead Corp., 533 U.S. 218, 229 (2001)).

7Appellees argue that even though the ALJ’s ruling was not the DOL’s “final decision,” as per the controlling regulations, it was “final” for purposes of collateral estoppel. See E.I. Du Pont de Nemours & Co. v. Richmond Guano Co., 297 F. 580, 583 (4th Cir. 1924) (indicating that a federal district court’s ruling can have preclusive effect while an appeal is pending). We need not, however, reach the question of whether an ALJ’s ruling, while being appealed administratively, can have preclusive effect in federal court because even if preclusion principles are generally applicable  in such scenario, here, Congress’s creation of the statutory right to “de novo review” in district court would trump such general rule. See id. at 583 (indicating that the lower court’s finding only has preclusive effect when, on appeal, “it is not . . . tried de novo, but the record made below is simply re-examined and the judgment is either vacated or affirmed . . . .”); see also Restatement (Second) of Judgments § 83(4) (1982) (“An adjudicative determination of an issue by an administrative tribunal does not preclude relitigation of that issue in another tribunal if according preclusive effect to determination of the issue would be incompatible with a legislative policy that: (a) The determination of the tribunal adjudicating the issue is not to be accorded conclusive effect in subsequent proceedings; or (b) The tribunal in which the issue subsequently arises be free to make an independent determination of the issue in question.”) (emphasis added); id. cmt. a (“The application of this Section is subject to statutory provisions that may, expressly or by implication, govern the res judicata effect of the determinations of a particular tribunal.”) (emphasis added).

8The benefit of the aggressive timetable established by Congress does not inure solely to the benefit of complainants, as § 1514A presents  complainants an extremely limited window to file a claim, providing that a whistleblower action “shall be commenced not later than 90 days after the date on which the violation occurs.” 18 U.S.C. § 1514A(b)(2)(D). The fact that the statute requires both the DOL and the complainant to act swiftly further evidences the weight Congress placed on the timely resolution of whistleblower claims.

9The ARB noted in a footnote to its November 15, 2007 Order to Show cause that: “As is the usual case, by the time the Board received the petition for review, the 180-day period for deciding the case had already expired.” (J.A. 105.)

10Appellees, grafting onto an argument advanced by the Secretary, 69 F.R. at 52111, further argue that a literal interpretation of § 1514A(b)(1)(B) would lead to an absurd result, not in this case, but in cases where the ARB issues a final decision more than 180 days after the administrative complaint was filed. We decline to reach such fact pattern not currently before us.

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