Fifth Circuit Finds Sarbanes-Oxley Violation in Disclosure of Whistleblower’s Identity
Thursday, November 20, 2014

The Fifth Circuit affirms the DOL Administrative Review Board’s decision that employer disclosure of a whistleblower’s identity in a document retention notice constitutes an adverse action.

In Halliburton, Inc. v. Administrative Review Board[1]—a per curiam decision issued on November 12—the U.S. Court of Appeals for the Fifth Circuit affirmed the decision of the Department of Labor’s (DOL’s) Administrative Review Board (ARB) that an employer’s disclosure of a whistleblower’s identity in a document retention notice constitutes an adverse action under the Sarbanes-Oxley Act (SOX). The ruling highlights that SOX may cover any actions that are “materially adverse” to an employee and that care must be shown when crafting document retention notices and other communications involving whistleblowers.

Halliburton Case

The case began when Anthony Menendez, a Halliburton employee, complained both internally and to the U.S. Securities and Exchange Commission (SEC) about Halliburton’s accounting practices. The SEC contacted Halliburton to notify the company that it was investigating the company’s accounting practices, but neither Menendez nor the SEC disclosed to Halliburton that it was Menendez who had complained. In light of Menendez’s internal complaint, Halliburton’s general counsel assumed that he was the source of the SEC complaint. The general counsel sent a document preservation notice to several employees, including Menendez’s boss. The notice instructed the recipients to preserve documents relevant to the SEC’s investigation “because the SEC has opened an inquiry into the allegations of Mr. Menendez.” Menendez’s boss then forwarded the preservation notice to 15 members of Menendez’s work group, thereby informing them that Menendez had complained to the SEC.

Menendez filed a SOX claim in 2006, and a DOL Administrative Law Judge (ALJ) dismissed the case, concluding that disclosing Menendez’s identity was not an adverse action. On appeal, the ARB—the appellate body within the DOL—reversed, holding that Halliburton’s breach of Menendez’s confidentiality was an adverse action that rose to the level of material adversity. Following the ARB’s remand back to the ALJ and a second decision by the ARB on another issue, the Fifth Circuit affirmed the holding that Halliburton’s disclosure of Menendez’s identity was an adverse action that was actionable under SOX. The court further ruled that Menendez’s protected conduct was a contributing factor to the adverse action and upheld the award of $30,000 in compensatory damages for emotional distress and reputational harm.

Adverse Action

Applying the framework established by the U.S. Supreme Court inBurlington Northern & Santa Fe Railway Co. v. White,[2] the Fifth Circuit reasoned that, under the facts presented in Menendez v. Halliburton, disclosure of a whistleblower’s identity rose to the level of a “materially adverse” action because such disclosure would likely dissuade a reasonable worker from engaging in protected conduct in the future. Specifically, the court noted that “[t]he 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.” The court observed that “[i]t is inevitable that such a disclosure would result in ostracism, and, unsurprisingly, that is exactly what happened to Menendez following the disclosure.”

The Fifth Circuit relied on the fact that Menendez’s boss informed Menendez’s coworkers that he was the cause of the SEC investigation because “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.” Moreover, the court further relied on the fact that Menendez worked in an environment where collaboration with colleagues was valued and where insufficient collaboration constituted deficient performance. As the court noted, “[t]he 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.”

Although the Fifth Circuit affirmed the ARB’s decision by finding that the disclosure amounted to a “materially adverse” action, it rejected certain “unfortunate dicta” by the ARB that suggested that the Supreme Court’s decision in Burlington Northern did not “control” and was not “broad” enough. In that regard, the ARB previously had defined an adverse action as “unfavorable employment actions that are more than trivial, either as a single event or in combination with other deliberate employer actions alleged.”[3] The Fifth Circuit’s decision, therefore, should be seen as having rejected any effort by the ARB to define an “adverse action” more broadly than the Supreme Court did in Burlington Northern.

Contributing Factor

Obviously, in a literal sense, Menendez’s whistleblowing was a “contributing factor” in the disclosure of his identity as a whistleblower. Halliburton, however, argued that Menendez was required to show that the company had a “wrongful motive” for its actions, in addition to showing that his protected conduct was a contributing factor in the adverse action. The Fifth Circuit, however, relied on its prior decision inAllen v. Admin. Review Bd.[4] that a “contributing factor” is “any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision” in rejecting the argument that there must be an additional finding of a wrongful motive.

Damages

Finally, the Fifth Circuit affirmed the award of $30,000 to Menendez for emotional distress and reputational harm. SOX provides for “all relief necessary to make the employee whole,”[5] and the Fifth Circuit affirmed the ARB’s decision that SOX permits noneconomic compensatory damages, including emotional distress and reputational harm.

Practical Guidance

Employers should be mindful of two implications stemming fromHalliburton. First, Halliburton underscores that SOX claims can be predicated on more than just tangible employment actions, such as demotions or terminations of employment. Instead, the DOL and courts may apply the Burlington Northern test and find adverse actions where the employer took any action that might “dissuade[] a reasonable worker from engaging in statutorily protected whistleblowing.”

Second, employers should exercise care when issuing document retention notices and when otherwise communicating with employees in matters involving whistleblowers. Indeed, given the court’s reliance onBurlington Northern, a retaliation case under Title VII, the finding in Halliburton may have implications for document retention notices triggered by employee complaints generally and for other communications and disclosures relating to employee complaints, such as those made during an investigation. In this regard, the decision may create tension between “adverse actions” under antiretaliation laws and the law on appropriate preservation obligations or conducting appropriate internal investigations.

In light of the developing case law, companies should be cautious and deliberate in disclosing information relating to employee complaints. With respect to document retention notices, when a company must issue notices about both an underlying regulatory issue and the employee who has raised the issue, the company should consider issuing two notices—each containing different information—to different individuals. Employers should also consider including in the preservation notice a directive to limit further dissemination of the notice without prior authorization.


[1]. Case No. 13-60323 (5th Cir. Nov. 12, 2014).

[2]. 548 U.S. 53 (2006).

[3].Menendez v. Halliburton, Inc., ARB Case Nos. 09-002, 09-003, 2011 WL 4915750, at *10 (ARB Sept. 13, 2011) (internal quotation marks omitted).

[4]. 514 F.3d 468, 476 n.3 (5th Cir. 2008).

[5]. 18 U.S.C. § 1514A(c)(1).

 

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