SOX Whistleblower Case Strengthens Protections for Workers

August 16, 2016
Harini Srinivasan

In March 2016, the Department of Labor Administrative Review Board (ARB) established an important precedent on the broad scope of protected whistleblowing under the Sarbanes-Oxley Act (SOX) and also clarified its standards to better serve SOX whistleblowers who faced retaliation.

As has been discussed in the legal press, the ARB’s decision in Dietz v. Cypress Semiconductor Corp., ARB No. 15­017, ALJ No. 2014­SOX­2 (ARB March 30, 2016), strengthened protections for Sarbanes-Oxley whistleblowers at publicly traded companies in three ways:

  1. Finding complaints of fraud at covered employers are likely to constitute protected activity under SOX due to the broad construal of what constitutes mail and wire fraud;
  2. Holding that whistleblowers can claim constructive discharge for resigning when an employer acts in a way that would put a reasonable employee on notice that he or she will be terminated; and
  3. Alluding that, although the heightened evidentiary requirements mandated by the ARB’s 2014 holding in Fordham v. Fannie Mae are not dead, they have been mortally wounded.

Background on the Case

Timothy Dietz brought suit under SOX, alleging that his employer – Cypress Semiconductor Corporation – constructively discharged him in retaliation for disclosing to a senior vice president that the company’s bonus plan violated state laws. Dietz also raised concerns that Cypress failed to inform certain employees that its bonus plan took deductions of 10 percent of their salaries each month.

After Dietz raised these concerns, Cypress began retaliating against Dietz by taking away resources from the project Dietz was supervising, in violation of the company’s own policies. Company management also sent a memorandum to Dietz about his performance issues and warned him that the memo would be “placed in his personnel file to serve as the basis for ‘further’ discipline.” Dietz replied that he believed he did not deserve any discipline and that management was retaliating against him for his whistleblowing.

Cypress management then ordered Dietz to attend an agenda-less meeting with his supervisor, a business unit manager with whom Dietz had previously had hostile interactions, and a human resources representative. Dietz expected that his employment would be terminated at this meeting. To avoid being terminated, Dietz tendered his resignation, effective immediately.

The SOX Whistleblower Claim

Dietz filed a whistleblower retaliation claim under SOX, stating that Cypress had violated federal mail and wire fraud laws in its administration of the bonus plan, in violation of certain state laws. The ARB clarified that complaining of a failure to comply with state wage payment laws may be protected activity under SOX where the complaint is based on a reasonable belief that the employer is committing fraud by making a knowing misrepresentation or misstatement of material facts. The ARB did note that a company violating state law, on its own, is not sufficient to trigger SOX, but in this case, Dietz had a reasonable belief that the wage law violations reflected misrepresentations, which constituted protected activity. The ARB also noted that constructive discharge was not only established where the employer created intolerable working conditions, but also when the employer “acts in a manner so as to have communicated to a reasonable employee that [he] will be terminated.”

The ARB affirmed an award for Dietz of more than $250,000 in back pay and benefits. Recently, on May 12, the ARB further held that because it had affirmed that Dietz had prevailed on his whistleblower claim, he was entitled to his litigation costs and reasonable attorneys’ fees, as authorized under SOX.

A Noteworthy Victory

The ARB’s decision in Dietz’s case affirms and extends important protections for whistleblowers by stating that a broad range of disclosures constitute fraud under the statute and by establishing alternative grounds to prove a constructive discharge claim. Dietz is both a noteworthy victory for SOX whistleblowers and an important lesson to employers that whistleblowers and their counsel have critical tools for proving retaliation at their disposal.

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