Labor Board Rules Breach of Confidentiality Constitutes Adverse Action

May 14, 2013

Sarbanes-Oxley whistleblowers received another welcome decision from the Administrative Review Board (“ARB”) of the Department of Labor (“DOL”) in mid-March in the case of Menendez v. Halliburton, Inc.  In that case, the ARB affirmed a decision by an administrative law judge (“ALJ”) to award $30,000 to Anthony Menendez, formerly a Director of Technical Accounting Research & Training for Halliburton, to compensate him for retaliation he suffered after reporting Halliburton to the Securities and Exchange Commission (“SEC”) for what he believed were violations of Generally Accepted Accounting Principles (“GAAP”) governing revenue recognition and joint venture accounting practices.  Whistleblower retaliation of this sort is prohibited by Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”).

Menendez began raising concerns about potential GAAP violations at Halliburton not long after he began working there.  After reviewing the financial statements of some joint ventures Halliburton was taking part in, Menendez formed the belief that Halliburton was recognizing revenue on certain products prior to their delivery into the physical possession of their customer, in violation of GAAP.  Menendez circulated a memorandum to his supervisors about the issue, and continued to pursue the problem after his immediate supervisors did not act.  Finally, after being ignored for months within Halliburton, Menendez contacted the SEC and informed it of the issue.  Three months later, the SEC launched an investigation into Halliburton and ordered the company to retain certain documents related to the alleged GAAP violations.  In an email which was widely circulated throughout Halliburton, the company’s general counsel, Bert Cornelison, identified Menendez by name as the person who had initiated the investigation by the SEC.  Not long after, the work environment became untenable for Menendez, and, after a leave of absence, he resigned.

In its decision, he ARB first explained the elements of a whistleblower-retaliation claim under SOX.  In order for an employee to demonstrate that she was illegally retaliated against in violation of the whistleblower protection provision of SOX, an employee must show that: (1) she engaged in “protected activity”; (2) the employer took an adverse employment action against the employee; and (3) the employee’s protected activity was a “contributing factor” to the employer’s decision to take the adverse employment action.  If an employee is able to demonstrate all of these elements, the employer may still escape liability if it can show by clear and convincing evidence that it would have taken the same action in the absence of the protected activity.

The Board first determined that there was no question that Menendez had engaged in protected activity.  Menendez reported Halliburton’s “questionable” accounting practices and violations of SEC rules with respect to revenue recognition to his supervisors, the Board of Directors’ Audit Committee, and to the SEC.

The Board next considered the question of whether Halliburton took an adverse employment action against Menendez.  Menendez alleged that Halliburton had taken five different adverse actions against him: (1) breach of confidentiality; (2) isolation; (3) removal of duties; (4) demotion; and (5) constructive discharge.  Of these, the ARB determined that the only meritorious claim was that of breach of confidentiality.  After observing that “employee whistleblowers are some of the most effective sources of information concerning fraud and corporate crime,” the Board explained that Section 301 of SOX statutorily establishes a right to confidentiality as a “term and condition” of Menendez’s employment within the meaning of Section 806’s whistleblower protection provision.  As a result, the Board held, the disclosure of Menendez’s identity in connection with his complaint to Halliburton’s Audit Committee constituted a violation of that employment term and condition and was therefore an adverse action.

The Board also determined that there was no question that Menendez’s protected activity – reporting Halliburton to the SEC – was a contributing factor in the adverse action taken by Halliburton in breaching his confidentiality.  As the ALJ pointed out and the ARB agreed, “[i]t is metaphysically impossible for Respondent to show that if Complainant had never filed his complaints (the protected activity), it still would have disclosed him as the one who made them (the adverse action).”  As the Board explained, “motive or animus is not a requisite element of causation as long as protected activity contributed in any way – even as a necessary link in a chain of events leading to adverse activity.”  Relying on the same reasoning, the Board found that it simply was not possible for Halliburton to meet the burden of its affirmative defense – it could not show that it would have breached Menendez’s confidentiality even in the absence of Menendez reporting to the SEC.

Finally, the ARB affirmed the ALJ’s decision to award Menendez $30,000 for emotional distress and reputational harm.  Noting that “the facts of this case exemplify the very reason why Congress mandated that publically-traded firms set up confidential avenues to report wrongdoing,” the Board detailed how Menendez was severely ostracized both socially and professionally after his revelation that he had reported the company to the SEC.  Looking at the history of SOX and its antecedents, the Board found that there was ample precedent for the proposition that Section 806 of SOX does allow awards for non-pecuniary compensatory damages.   After explaining that “Section 806 requires that prevailing employees are entitled to ‘all relief necessary to make [them] whole,’” the Board found that “[w]ithout compensation for the intangible damages to his reputation, Menendez would be left without meaningful relief,” and affirmed the award of $30,000 plus costs.

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