ARB Says SOX Applies Extraterritorially in Government Contractor Whistleblower Claim

September 12, 2017
Matthew LaGarde

On Aug. 29, 2017, the Administrative Review Board (ARB or “the Board”) of the U.S. Department of Labor (DOL) issued an important decision regarding the extraterritorial application of the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (SOX). In Blanchard v. Exelis Sys. Corp., ARB No. 15-031, ALJ No. 2014-SOX-20 (ARB Aug. 29, 2017), the ARB held in two parts that:

  1. the SOX whistleblower provision does apply extraterritorially, and
  2. even if it did not, the allegations in the complaint were sufficiently connected to the U.S. such that extraterritorial application of the statute was not necessary.

The complaint was filed by Gary Blanchard, a U.S. national hired by Exelis Systems Corp. to work as a security supervisor under a contract it held with the United States Department of Defense (DOD) at the Bagram Air Force Base in Afghanistan (Bagram AFB). Blanchard’s job duties included assessing local nationals and others who sought access into Bagram AFB. Blanchard reported to Brandon Spann, Exelis’ senior security supervisor, who in turn reported to Kevin Daniel, Exelis’ personnel services regional manager.

Factual Background of Whistleblower Retaliation Case

In May 2013, Blanchard witnessed Spann directing an investigator to refrain from reporting a security breach to the U.S. military due to his concerns that it would reflect badly on him. Blanchard reported Spann’s conduct to Daniel, who instructed Blanchard not to report the breach to U.S. government investigators. Days later, Blanchard learned that Daniel was also working fewer hours than he was reporting on his timesheet – timesheets that Exelis subsequently transmitted to the U.S. government. Blanchard reported these violations to Exelis’ senior human resources manager at Bagram AFB. Rather than investigating Spann’s and Daniel’s misconduct, Exelis began investigating Blanchard.

Approximately one month later, Blanchard reported to Sheila Hickman, Exelis’ deputy director of human resources, based in Colorado Springs, Colo., that Exelis’ treatment of him constituted whistleblower retaliation. Mere hours after his report to Hickman, Daniel and another Exelis supervisor interrogated and threatened Blanchard, held him against his will, and demoted him. Roughly three months later, after getting input from six U.S.-based Exelis employees, Exelis terminated Blanchard.

Blanchard filed a complaint with the Occupational Safety and Health Administration (OSHA), alleging that Exelis had violated the SOX whistleblower protection provision. OSHA concluded that SOX did not protect Blanchard’s actions because the statute’s protections do not extend territorially. A DOL administrative law judge (ALJ) reached a similar conclusion and dismissed Blanchard’s complaint.

SOX’s Whistleblower Provision Applies Extraterritorially

The ARB reversed the ALJ and held that the SOX whistleblower provision applies extraterritorially. The Board began its analysis with a review of the relevant precedent, including Villanueva v. Core Labs., NV, ARB No. 09-108, ALJ No. 2009-SOX-006 (ARB Dec. 22, 2011) (en banc), in which the Board examined the question of extraterritoriality and SOX at some length. In Villaneuva, the ARB held that the SOX whistleblower provision did not extend to the whistleblower’s extraterritorial actions, relying in large part on the Supreme Court’s decision in Morrison v. National Australian Bank, Ltd., 561 U.S. 247 (2010). The Morrison Court held that “Congress ordinarily legislates with respect to domestic, not foreign affairs,” and, noting the longstanding “presumption against extraterritorial application,” held that in the absence of contrary intent, “we must presume it is primarily concerned with domestic conditions.” Id. at 255.

In the time since Villaneuva and Morrison, however, the Supreme Court issued an additional decision regarding the extraterritorial application of statutes in RGR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016). In RGR Nabisco, the Court examined the extraterritorial application of the Racketeer Influenced and Corrupt Organizations Act (RICO). The Court determined that RICO does apply extraterritorially, based in part on the fact that RICO incorporates a number of predicate statutes that plainly apply to foreign conduct. The Court explained that “a ‘clear indication’ of extraterritoriality will suffice to overcome the presumption [against extraterritorial application] and that an ‘express statement of extraterritoriality is not essential.’” Blanchard, slip op. at 7 (citing RGR Nabisco, 136 S. Ct. at 2102.).

The Board thus reviewed the SOX whistleblower provision for “clear indications of extraterritoriality sufficient to rebut the presumption.” Blanchard, slip op. at 7. The ARB first noted that the whistleblower provision extended to “foreign private issuers” that are subject to U.S. securities laws because they elected to trade in the United States, and that the “intrinsic inclusion of foreign parties within the plain language of § 806’s proscription evinces Congressional intent for the statute to apply extraterritorially.”

The Board further noted that, like RICO, the SOX anti-retaliation provision incorporates extraterritorial statutes into its protected activity provisions. SOX’s protections extend to reports of six different categories of conduct: violations of “§ 1341, § 1343, § 1344, or § 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” Of these, the Board held that at least three – § 1344 (wire fraud), § 1348 (securities fraud), and “any provision of Federal law relating to fraud against shareholders,” including Dodd-Frank, which contains provisions that apply extraterritorially – extend to some foreign conduct. Id. at 11. The Board noted that “[u]nder the RGR Nabisco precedent outlined above, this is arguably ‘a clear indication’ of the extraterritorial reach of § 806.” Id.

The Board warned, however, that its opinion should not be read to state that the SOX whistleblower provision extends to all foreign conduct of publicly traded foreign companies. According to the ARB, “[t]he misconduct of a foreign issuer/employer under the statute must still ‘affect in some significant way’ the United States.” Id. at 12. For reasons explained below, the Board determined that, in this case, there is no question that Blanchard alleged “significant domestic connections.”

Blanchard’s Conduct Falls Within the “Purely Domestic Reach” of SOX

The Board noted that the alleged violations Blanchard reported involved a publicly traded, U.S.-based corporation “engaged in submitting false claims to the U.S. government in connection with U.S. security and military operation on a U.S. air force base.” Id. at 16–17. The Board further noted that Blanchard’s protected activity comprised reports of violations of domestic law, not the law of Afghanistan or any other foreign country. Id. at 15. The ARB thus distinguished the case from Villanueva, which involved alleged violations of “Colombian laws with no stated violation or impact on U.S. securities or financial disclosure laws.” Id. The Board added that, although the conduct prompting Blanchard’s complaints occurred in Afghanistan, it occurred “on a U.S. air force base and directly implicated the security of the United States, U.S. military personnel, and U.S. contractors,” and “seven U.S. employees approved Blanchard’s termination.” Id. at 17. Although the Board had already determined that § 806 applies extraterritorially to the types of violations Blanchard reported, it also held that, because he alleged violations of domestic law, Blanchard’s complaint does not require extraterritorial application of § 806. Id.

Concurring Opinions

Chief Administrative Appeals Judge Paul Igasaki and Administrative Appeals Judge E. Cooper Brown wrote separate concurring opinions. Both judges noted in their concurrences that neither they nor the majority opinion reached any decision on the merits of the underlying protected activity – i.e., setting aside the question of extraterritoriality, whether Blanchard held an objectively and subjectively reasonable belief that Daniel’s actions constituted mail and/or wire fraud. Chief Judge Igasaki wrote separately to note that the majority opinion, authored by Administrative Appeals Judge Joanna Royce, had correctly held that the case “is a domestic one.” As a result, Chief Judge Igasaki stated his opinion that the case should not have presented “an opportunity to define the general extraterritoriality of § 806.” Judge Brown submitted a lengthy concurring opinion setting forth his analysis for the appropriate bases and scope of the extraterritorial application of the statute.

Takeaway for Employees of Publicly Traded Companies

The ARB’s decision in Blanchard is an important one, as many practitioners after Villanueva had resigned themselves to the fact that SOX’s protections did not extend extraterritorially. The Blanchard decision makes clear that, so long as the misconduct reported by the employee affects the United States in “some significant way,” SOX will apply extraterritorially. This is important news for employees of government contractors working abroad, particularly in light of some of the advantages SOX has over a retaliation claim under the False Claims Act, such as a lower causation standard, the absence of a materiality requirement, and a broader scope of adverse employment actions.

Moreover, while this decision was issued in a case brought by an employee of a publicly traded government contractor, the logic of the decision applies equally to any company subject to SOX, including many international companies with stock that is publicly traded on a U.S. exchange. Prospective international whistleblowers should heed the admonition of the ARB that they would need to prove that the alleged misconduct forming the basis for their protected activity affected the United States “in some significant way.” In the case of a government contractor, such connections are often self-evident; in the case of other publicly traded companies, the connection to the U.S. could be more remote. Regardless, we are buoyed by the prospect of an additional class of whistleblowers having access to SOX protections, and we look forward to seeing the ARB further define the bounds of SOX’s extraterritorial application over the coming years.

This post was subsequently published in Law360.

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