Sarbanes-Oxley Whistleblower Prevails in Administrative Review Board Appeal
The Department of Labor Administrative Review Board’s decision in Dietz v. Cypress Semiconductor Corp., establishes important precedent on the broad scope of protected whistleblowing under the whistleblower provision of the Sarbanes-Oxley Act and clarifies the standard for proving constructive discharge.
Dietz’s SOX Whistleblower Case
Dietz brought suit under the SOX whistleblower law, alleging that Cypress constructively discharged him in retaliation for disclosing to James Nulty, a Senior Vice President at Cypress, that the company’s bonus plan violated state laws. The bonus plan forced Cypress employees to gamble their own money for the possibility of a bonus, calculated in a fashion that was unpredictable to the average employee. Dietz also raised concerns that Cypress failed to inform certain employees that its bonus plan took compulsory deductions from their base salary.
After Dietz raised these concerns, Cypress began undermining Dietz’s ability to perform his job. In particular, management took resources away from the project Dietz was supervising, without his knowledge or approval and in violation of the company’s own policies. In addition, management sent a memorandum to Dietz demanding that he “formally document [his] performance issues,” and warning him that the memo would be “placed in his personnel file to serve as the basis for ‘further’ discipline.”
Dietz believed that there was no basis for the alleged “performance issues” referenced in the memorandum and viewed the demand for him to confess his alleged performance shortcomings as the first step in laying the foundation for his termination. Dietz replied with a letter explaining why he believed he did not deserve any discipline and alleging that management was retaliating him for his whistleblowing.
Cypress management then ordered Dietz to attend an agenda-less meeting – an unusual occurrence at Cypress – 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 resigned his employment at Cypress.
Sarbanes-Oxley Protected Conduct
The SOX whistleblower law protects corporate whistleblowers for providing information about securities fraud, shareholder fraud, bank fraud, a violation of any SEC rule or regulation, mail fraud, or wire fraud. A SOX whistleblower is not required to show that the reported conduct actually violated of the law, but only that he reasonably believed that the Respondent violated one of the enumerated statutes or regulations.
Cypress contended that Dietz did not engage in SOX protected whistleblowing because his disclosures pertained to alleged violations of state wage laws, which falls outside the umbrella of the categories of SOX protected disclosures.
The ARB rejected Cypress’s narrow construction of SOX protected conduct and instead held that Dietz engaged in protected conduct because his disclosures about the bonus plan implicated the mail and wire fraud statutes. “SOX brings within its ambit fraud that is reasonably believed to involve the use of interstate mail, wires, or banks; in other words, the federal jurisdictional component . . . Dietz clearly believed that Respondent was carrying out a fraudulent scheme by violating state laws on payment of wages to its employees, a scheme that necessarily implicated interstate mail, wires, and banks.”
Elevating substance over form, the ARB noted that it is not dispositive that Dietz failed to characterize the bonus plan as “fraud” or “fraudulent.” “It is the nature of the conduct complained of that is determinative — that is, an employee need only identify the specific conduct that he believes to be illegal. No magic words are required.”
Proving Constructive Discharge Under SOX
The whistleblower protection provision of SOX prohibits a broad range of retaliatory adverse employment actions, including termination of employment. The ALJ had concluded that Cypress constructively discharged Dietz, and Cypress appealed that determination on the ground that Dietz voluntarily resigned his employment.
In affirming the ALJ’s decision, the ARB noted that constructive discharge can be established not only where the employer has created “working conditions so intolerable that a reasonable person in the employee’s position would feel forced to resign,” but also “[w]hen an employer acts in a manner so as to have communicated to a reasonable employee that [he] will be terminated, and the. . . employee resigns.” Under this standard, an employee facing imminent discharge can make out a constructive discharge claim.
The ARB held that Dietz met this standard because the memo he received about his alleged performance issues reflected on its face that it was “disciplinary” and warned Dietz that it would be placed in his personnel file to serve as the basis for “further” discipline, up to and including termination. Dietz was denied the opportunity to explain or challenge the allegations in the memo.
Implications for SOX Whistleblowers
This ruling highlights two important aspects of SOX whistleblower protection. First, SOX protects a board range of disclosures, including any fraud that is reasonably believed to involve the use of interstate mail, wires, or banks. Second, a SOX whistleblower need not wait until “working conditions become so intolerable that a reasonable person in the employee’s position would feel forced to resign” to be considered constructively discharged. Instead, a whistleblower “faced with imminent discharge” can potentially establish a constructive discharge claim.