Yesterday the Fifth Circuit issued a seminal decision in Halliburton v. Admin. Review Bd on the scope of Sarbanes-Oxley whistleblower protection, holding that 1) “outing” a whistleblower is a prohibited adverse action; 2) the “contributing factor” causation standard does not require a showing of a retaliatory motive; and 3) SOX affords noneconomic compensatory damages, including emotional distress and reputational harm.
While working as Director of Technical Accounting Research and Training in the Finance and Accounting department at Halliburton, Anthony Menendez raised concerns internally about questionable accounting practices. In particular, Menendez disclosed to his supervisor his belief that Halliburton’s practices involving revenue recognition did not conform with generally accepted accounting principles. Menendez’s supervisor initially responded by telling Menendez that he was not a “team player” and should try harder to work with colleagues to resolve accounting issues.
After Halliburton failed to address his concerns, Menendez filed a confidential disclosure with the SEC about Halliburton’s accounting practices. In addition, Menendez sent a memo to Halliburton’s Board of Directors raising the same issues he disclosed to the SEC, and that memo was forwarded to Halliburton’s General Counsel (GC). When Halliburton received a notice of investigation from the SEC requiring Halliburton to retain documents, Halliburton’s GC inferred from Menendez’s internal disclosures that he was the source of the SEC inquiry. The GC sent an email to Menendez’s colleagues instructing them to retain certain documents because “the SEC has opened an inquiry into the allegations of Mr. Menendez.”
Subsequent to the GC outing Menendez as a whistleblower, Menendez’s colleagues began treating him differently, refusing to work and associate with him. Menendez described the day that he saw the GC’s email outing him as a whistleblower as one of the worst in his life. Halliburton granted his request for paid administrative leave, and within a year, Menendez resigned.
Scope of Prohibited Adverse Actions Under SOX
The main issue on appeal was whether Menendez suffered an “adverse action” when Halliburton disclosed his identity as a whistleblower. Affirming the ABR’s decision, the Fifth Circuit applied the Supreme Court’s Burlington Northern material-adversity standard to SOX, i.e., the inquiry is whether a company’s actions well might have dissuaded a reasonable worker from engaging in protected conduct. Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006).
In this case, Halliburton’s outing of a whistleblower to his colleagues and informing them that the whistleblower caused them to be the subject of an SEC investigation “created an environment of ostracism” for the whistleblower, which well might dissuade a reasonable employee from whistleblowing. The court eloquently describes the impact of outing a whistleblower:
It is inevitable that such a disclosure would result in ostracism, and, unsurprisingly, that is exactly what happened to Menendez following the disclosure. Furthermore, when it is the boss that identifies one of his employees as the whistleblower who has brought an official investigation upon the department, as happened here, the boss could be read as sending a warning, granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high . . . In an environment where insufficient collaboration constitutes deficient performance, the employer’s disclosure of the whistleblower’s identity and thus targeted creation of an environment in which the whistleblower is ostracized is not merely a matter of social concern, but is, in effect, a potential deprivation of opportunities for future advancement.
SOX Whistleblowers Need Not Prove Retaliatory Motive
On appeal, Halliburton asserted that a SOX whistleblower must prove a “wrongfully-motivated causal connection.” The Fifth Circuit emphatically rejected this argument, citing its prior decision in Allen v. Admin. Review Bd., 514 F.3d 468 (2008) clarifying that a “contributing factor” is “any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision.” In addition, the court relied on a Federal Circuit decision holding “a whistleblower need not demonstrate the existence of a retaliatory motive on the part of the [employer] in order to establish that his [protected conduct] was a contributing factor to the personnel action.” Marano v. Dep’t of Justice, 2 F.3d 1137, 1141 (Fed. Cir. 1993).
SOX Authorizes Damages for Emotional Distress and Reputational Harm
The Fifth Circuit also rejected Halliburton’s contention that SOX does not authorize noneconomic compensatory damages, i.e., emotional distress and reputational harm. Relying on the statutory text (identifying “special damages” as a remedy for a prevailing SOX whistleblower), the Tenth Circuit’s recent decision in Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121, 1138 (10th Cir. 2013), and cases construing “special damages” under the False Claims Act’s anti-retaliation provision, the court concluded that SOX affords noneconomic compensatory damages.
By clarifying the broad scope of actionable adverse actions and the low burden to establish causation, Halliburton establishes very helpful precedent for whistleblowers. In addition, the case also offers an important glimpse into the challenges that corporate whistleblowers face when disclosing accounting fraud. Despite having robust compliance and reporting procedures in place, Halliburton responded to a whistleblower by accusing him of not being a team player and then outing him and essentially destroying his career at the company. The facts of the case highlight why it is so important for whistleblowers to have the option to make confidential disclosures to the SEC, and confirms that the SEC was correct to reject Dodd-Frank rulemaking proposals from the business community to require whistleblowers to report internally before becoming eligible for a whistleblower award. Indeed, the SEC recently issued an award to a whistleblower who “engaged in diligent efforts to correct and to bring to light the underlying misconduct” prior to making a disclosure to a self-regulatory agency and the SEC.