SOX Corporate Whistleblower Rights Go International

An August 28, 2017 ruling by the Department of Labor’s Administrative Review Board (ARB) is a little-noticed landmark decision that internationally expands corporate whistleblower rights under the Sarbanes Oxley Act (SOX) of 2002. In Blanchard v. Exelis Systems Corporation, ARB No. 15-031 (Aug. 29, 2017), the Board held that Section 806 SOX whistleblower protections apply extraterritorially where misconduct “affect[s] in some significant way the United States.”

By finding coverage for a Department of Defense (DOD) contractor working in Afghanistan who blew the whistle on unreported security breaches and timecard fraud, the Board rejected a generic presumption against extraterritoriality that previously had blocked whistleblower rights under the Sarbanes-Oxley Act of 2002 from shielding against retaliation committed abroad. The new ruling creates the free speech structure for a corporate accountability breakthrough in overseas operations of publicly-traded firms.

Prior Exclusion of International Protection

After the Enron and WorldCom scandals, Congress enacted SOX “[t]o protect investors” by strengthening the responsibility, accountability and transparency requirements for corporate leaders and accounting firms. To further this goal, SOX included an employee protection provision, Section 806, which prohibits retaliation for an employee’s protected disclosure of fraud.

Section 806 of SOX applies to any foreign or domestic company  that elects to trade on a U.S. securities exchange. It also protects an employee’s disclosure when it involves “conduct which the employee reasonably believes” evidences fraud (whether wire, bank, securities or commodities fraud), any violation of a Securities and Exchange Commission rule or regulation, or a Federal law relating to fraud against shareholders. However, since a 2011 ARB ruling against the enforcement of Section 806 in a case where the fraud was inextricably foreign, the presumption against foreign application of the law had been the legal standard for SOX whistleblower cases.

DOD Contractor Fraud in Afghanistan

In 2013, Mr. Gary Blanchard, a U.S. citizen, was working for Excelis Systems Corporation, a subsidiary of Excelis, Incorporated,[1] a publicly traded company, at Bagram Air Force Base in Afghanistan as a security supervisor. He alleged that he observed his supervisor instructing another employee to hide a security breach from their military colleagues, and that when he disclosed this to higher management, his second-level supervisor told him not to report the incident to U.S. government investigators. Blanchard believed this constituted fraud.

Days later, Mr. Blanchard discovered that his second-level supervisor had engaged in timecard fraud, which he reported to Excelis’ senior human resources manager at Bagram. Rather than investigate Mr. Blanchard’s disclosures, Excelis began a retaliatory investigation into his conduct. A month later, he reported this retaliation to Excelis’ deputy director of human resources in Colorado. Within hours of this complaint, Blanchard was “interrogated, threatened, and demoted.” Less than three months later, an Excelis vice president in Colorado initiated his termination.

Mr. Blanchard made his initial complaint with the Occupational Safety and Health Administration (OSHA), but based on the foreign location of the action, OSHA and an Administrative Law Judge (ALJ) both denied Blanchard’s claim “because of the presumption against extraterritorial application of the law,” and more broadly, the ALJ found that Section 806 simply does not apply extraterritorially. Blanchard appealed to the ARB, which overruled the ALJ’s interpretation and sent the case back for a hearing.

Whistleblower Rights Without Borders

The ARB overcame the presumption against extraterritorial application by applying the SOX statute’s purpose, structure and legislative history to the principles in a 2016 Supreme Court ruling. In RJR Nabisco, Inc. v. European Community, the Court extended the application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to encompass foreign criminal activities, and held that an “express statement of extraterritoriality” was not required to support foreign enforcement. Rather, a “clear indication” of extraterritoriality was sufficient. To probe for that underlying intent, the Court instructed to look for statutory “predicates” which explicitly require extraterritorial enforcement.

In the Blanchard ruling, the ARB found this “clear indication” in two fundamental aspects of Section 806. First, the Board noted that the class of companies within the reach of Section 806 specifically included any foreign company that elects to trade on a U.S. securities exchange, and this was an “intrinsic inclusion…within the plain language” of the statute, evincing Congressional intent.

Second, the Board found that Section 806 “directly incorporates extraterritorial statutes into its protected activity provisions.” SOX § 806 protects an employee’s disclosure when it implicates a violation of any one of six legal authorities; the board noted that “three of these six…authorities extend to some foreign conduct.” The wire fraud statute, 18 U.S.C. § 1343, expressly encompasses “foreign commerce,” and the securities fraud statute, Section 1348, incorporates traded securities of foreign companies. The last category of protected speech relates to disclosure of violations of “any provision of Federal law relating to fraud against shareholders,” thus including Section 929P(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which “codified the extraterritorial reach of securities law.”

While SOX has specific provisions requiring extraterritoriality, the ruling and concurring opinion included detailed analysis against piecemeal protection. It emphasized legislative history and the broad SOX purpose of corporate accountability for misconduct that affects U.S. shareholders. It also analyzed how, independent of explicit predicates, the SEC regularly must enforce SOX against foreign operations of any company subject to the Commission’s regulation.

Caveats

After ruling that Section 806 “applies extraterritorially to…all publicly traded domestic and foreign companies and their employees regardless of the location,” the Board cautioned that the whistleblower provision only covers foreign misconduct that “‘affect[s] in some significant way’ the United States.” The Board also hastened to add that, depending on the factual circumstances, presumptions against international comity and the avoidance of conflict of laws could still block the application of Section 806 outside the U.S. Nonetheless, the ARB’s ruling potentially extends free speech rights to employees of any company publicly traded in the U.S., regardless of where the fraud or the disclosure occurred.