It is costly for employers to defend against whistleblower retaliation cases. The laws that apply are tipped in the plaintiff's favor, making these actions hard to defeat in court, even when the facts appear to be in the employer's favor.

The federal Sarbanes-Oxley Act of 2002 (SOX) established sweeping auditing and financial regulations for public companies and companies required to file reports under the Securities Exchange Act of 1934, including protection for whistleblowers. To prove a claim for whistleblower retaliation in violation of SOX, courts require the plaintiff to exhaust administrative remedies and prove four elements: (1) protected activity; (2) the employer knew that the plaintiff engaged in the protected activity; (3) the plaintiff suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action.

In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which prohibits an employer from retaliating against an employee for providing certain information to the Securities and Exchange Commission (SEC). Plaintiffs often bring SOX and Dodd-Frank claims together, and the claims tend to overlap.

To better optimize discovery, motion practice, and trial strategy in SOX and Dodd-Frank lawsuits, here are practical tips to help companies defend against retaliation cases, and position themselves for the best chance of success.

Tip 1: A SOX plaintiff must first submit an OSHA Complaint.

Before a plaintiff can assert a SOX claim in federal court, the employee must submit a complaint with the Occupational Safety and Health Administration (OSHA) and afford OSHA an opportunity to investigate and administratively resolve the allegations. The substantive scope of the OSHA complaint determines the scope of the SOX claim that the employee may pursue in court. The defendant should argue that each separate violation must be pled before the agency. Hence, when additional allegations are included in a federal SOX complaint, the proper test is whether an OSHA investigation into the additional allegations could reasonably be expected to ensue from the administrative complaint.

Tip 2: Organize the defense by alleged predicate violations.

If the plaintiff alleges more than one practice or incident in support of the SOX claim, strategically organize the plaintiff's claims by violation or subject matter, and attack each individually by arguing that each violation must separately qualify as a SOX violation. The plaintiff may argue that if you view the various conduct in the aggregate, it is protected activity even if individually it is not. But this is circular reasoning as conduct that is not protected activity cannot become protected activity simply by combining it with other conduct.

Tip 3: Who is the reasonable person?

The protected activity standard is whether a reasonable person in the plaintiff's position in the same factual circumstances would believe that the conduct constituted a SOX violation. This requires the defendant to consider the plaintiff's position, experience, and access to internal information. If a plaintiff in the same circumstances would have first accessed and consulted certain information or asked questions before forming a belief of illegality, it is not a reasonable belief. Next, ascertain if the plaintiff has a specialized role or duties, such as an internal auditor, CPA, CFO or lawyer, to determine if the company can argue that additional investigative duties or a higher knowledge standard should apply.

Tip 4: Protected activity is limited to six enumerated violations.

The plaintiff cannot simply allege a general violation of law. Instead, the plaintiff must have held a reasonable belief that the reported information constituted one of the following SOX enumerated violations: (1) mail fraud, (2) wire fraud, (3) bank fraud, (4) securities fraud, (5) violation of a rule or regulation of the SEC, or (6) violation of a federal law relating to fraud against shareholders. Congress specifically limited SOX to these six narrow categories, which are consistent with the statute's purpose: to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. Nothing suggests that SOX was intended to encompass all situations where a company's stock price decreases or an employee believes there was some general fraud.

Tip 5: The conduct must be connected to one of the enumerated violations.

The plaintiff must be specific as to the violation, and the conduct must be a hallmark of one of the six violations. As examples, the hallmark of mail or wire fraud is a scheme to defraud another out of money, so the plaintiff must observe conduct concerning the defrauding of another out of money. Similarly, the hallmark of bank fraud is that the scheme is directed at the financial institution itself or otherwise places the bank's property interests at risk. Plaintiffs often lump conduct into securities fraud or fraud against shareholders, but the hallmark of these violations is a public company making material misrepresentations or omissions about its financial picture in order to deceive its shareholders. Fraudulent actions that might lead to misstatements should be deemed insufficient, as courts reject efforts to transform SOX into a general anti-retaliation statute.

Tip 6: The plaintiff must show the employer's knowledge of the plaintiff's protected activity.

The SOX knowledge requirement looks to whether the employer knew or suspected that the employee engaged in protected activity. Knowledge is a distinct element, but it is not one that litigants often raise. There is therefore limited case law, particularly in the Ninth Circuit. If a whistleblower provides information to a federal agency, argue that the external communication does not alone provide the employer with notice. Likewise, when the employee seeks to establish a SOX claim by showing he or she provided information to a supervisor, and this internal disclosure falls within the employee's regular assigned responsibility to gather and report information to the supervisor, argue that the communication cannot itself provide the requisite knowledge.

Tip 7: The unfavorable personnel action must have been taken because of the protected activity.

The protected activity must be a contributing factor for the unfavorable personnel action. Argue it is not adequate to show that the circumstances were sufficient to raise the inference that the protected activity was a contributing factor. As a defense, the employer should provide legitimate non-retaliatory reasons for any unfavorable personnel action, including termination. If provided, the burden of proving pretext then shifts to the plaintiff. Due to the factual nature of this inquiry, it is likely that this can only be successfully attacked at trial.

Tip 8: SOX and Dodd-Frank claims generally rise and fall together.

Plaintiffs often bring claims for retaliation under SOX and Dodd-Frank together. The broadest category of reporting under Dodd-Frank in large part subsumes reporting that qualifies as SOX protected activity. In this respect, SOX and Dodd-Frank claims tend to overlap, and thus the claims generally rise and fall together. Accordingly, argue that challenges to the purported regulatory violations underlying the SOX claim equally apply to the Dodd-Frank claim.

Tip 9: A Dodd-Frank plaintiff must report to the SEC.

After the Supreme Court's 2018 ruling in Digital Realty Trust Inc. v. Somers, a Dodd-Frank plaintiff must also make SOX "required or protected" disclosures to the SEC. If there are no allegations or no evidence of reporting to the SEC, the claim should be dismissed.

Tip 10: Hire a Knowledgeable Firm

To ensure the best possible chance of success, hire a law firm that understands the nuances of the SOX and Dodd-Frank laws.

Polly Towill is a partner in Sheppard Mullin's Business Trial Practice Group in the firm's Los Angeles office, where she is also the Office Managing Partner. She is the leader of the Whistleblower Retaliation Defense team and the Toxic Tort and Product Liability team..

Heather Plocky is an associate in Sheppard Mullin's Business Trial Practice Group in the firm's Los Angeles office and is a member of the Whistleblower Retaliation Defense team and the Toxic Tort and Product Liability team.