SOX Whistleblowers Afforded Protection Against Internal “Outing”

December 22, 2014

Whistleblowers under the Sarbanes-Oxley Act (“SOX”) received welcome news last month in the form of an excellent decision out of the U.S. Court of Appeals for the Fifth Circuit in the case of Halliburton v. Administrative Review Board, United States Department of Labor. The decision came in response to a lawsuit filed by Anthony Menendez, who previously worked in the finance and accounting department of Halliburton, the global energy products and services giant. Menendez’s supervisor informed a large number of his coworkers that Menendez had reported fraudulent practices by the company – including by those very coworkers – to the U.S. Securities and Exchange Commission (“SEC”).  Menendez alleged that this act was retaliation by Halliburton for his whistleblowing.    The Fifth Circuit found that informing Menendez’s coworkers of his whistleblowing activity constituted an adverse employment action under SOX and therefore constituted illegal whistleblower retaliation.

Menendez was hired by Halliburton in March 2005.  In July of that year, he raised concerns within the company that some of Halliburton’s accounting practices involving revenue recognition did not conform with generally accepted accounting principles.  After multiple complaints resulted only in an internal investigation that failed to substantiate Menendez’s concerns, in November 2005 Menendez filed a confidential complaint with the SEC alleging that Halliburton was engaged in improper accounting practices with respect to revenue recognition.

Later, in February 2006, the SEC notified Halliburton’s General Counsel, Bert Cornelison, that it was investigating the company’s allegedly improper accounting practices and directed the company to retain documents relating to the investigation.  Although the SEC did not specify the source of its information, the information so closely matched Menendez’s internal complaints that the company correctly surmised he was responsible.  Following notification by the SEC, Cornelison sent an email to several Halliburton employees, including Menendez’s boss, Mark McCollum, instructing them to preserve documents relevant to the SEC’s investigation and specifying that “the SEC has opened an inquiry into the allegations of Mr. Menendez.” McCollum then forwarded the email to fifteen of Menendez’s coworkers, thus alerting them to the fact that Menendez had complained to the SEC about their improper accounting practices.  Menendez immediately became ostracized at work and, after going on administrative leave for several months, resigned.

Menendez filed a complaint with the Occupational Safety and Health Administration of the Department of Labor (DOL) alleging that Halliburton retaliated against him by revealing his identity as an SEC whistleblower to his colleagues.  After an initial adverse ruling by a DOL administrative law judge (ALJ), the DOL’s Administrative Review Board (ARB) reversed the ALJ’s ruling, found Halliburton liable for retaliation, and awarded Menendez $30,000 in compensatory damages for emotional distress and reputational harm.  Halliburton appealed, arguing that the company’s disclosure of Menendez’s identity as a whistleblower did not constitute an “adverse action” and that his protected activity was not a contributing factor to the action.

The Court rejected Halliburton’s argument that Menendez’s protected activity had not contributed to the company’s disclosure of his identity.  As the court noted, “it is difficult to see how a different outcome could have been possible.”  Halliburton attempted to argue that the causal connection between the protected activity and the adverse action must be prompted by a “wrongful motive,” but the court dismissed that argument as “entirely lack[ing] support in the case law.”

On the question of whether revealing Menendez’s identity to other employees was an adverse action, the court first noted that it had adopted the “material-adversity” standard from the Supreme Court’s decision in Burlington Northern & Santa Fe Railway Co. v. White.  While that case addressed the anti-retaliation provision of Title VII, the Court here expanded it to address SOX anti-retaliation claims as well.  The “material-adversity” standard requires that the adverse action be “materially adverse, which in this context means it well might have dissuaded a reasonable worker from making or supporting a charge of discrimination.”  Applying this standard in Menendez, the court held that Halliburton’s disclosure unambiguously qualified as an adverse action:

The undesirable consequences, from a whistleblower’s perspective, of the whistleblower’s supervisor telling the whistleblower’s colleagues that he reported them to authorities for what are allegedly fraudulent practices, thus resulting in an official investigation, are obvious. 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 . . . 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.

Accordingly, the court rejected Halliburton’s argument and upheld the ARB’s holding for Menendez.

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