Sarbanes-Oxley Act Of 2002 Enacted

Overview

The Sarbanes-Oxley Act significantly expands

existing federal whistleblower protection laws, and

public companies would be well advised to pay

special attention to these new protections for

corporate whistleblowers. Section 806 of the Act

prohibits an employer from engaging in retaliation or

discrimination against employees who report

suspected accounting or financial fraud, and

establishes a new system by which aggrieved

employees can bring an action for damages against

their employer before the Department of Labor or in

federal District Court.

The whistleblower provisions are an integral part of

the new law. Many of the questionable accounting

practices that gave rise to the Sarbanes-Oxley Act

came to light, at least in part, as a result of employees

who blew the whistle. Even before the scandals at

Enron and other companies broke, Congress had

embraced the policy of whistleblower protection as a

means to help federal regulators ferret out violations

and wrongdoing. In fact, the whistleblower

provisions of the Sarbanes-Oxley Act are patterned

after similar statutory schemes for protecting workers

in the airline and nuclear power industries.1

Experience has shown that whistleblower cases

can inflict serious damage on a company's

reputation as well as on the careers of accused

managers. Accordingly, companies should

consider taking a strategic approach to

implementing the new whistleblower provisions.

Below we summarize the key provisions and offer

some suggestions for employers.

Whistleblower Provisions of

Sarbanes-Oxley Act

Prohibition of Discrimination. Section 806 of the

Act establishes a system for whistleblower protection

for employees of publicly traded companies. That

provision provides that no public company or any

officer, employee, contractor or agent of such

company "may discharge, demote, suspend, threaten,

harass, or in any other manner discriminate against an

employee in the terms and conditions of employment

because of any lawful act done by the employee" (1)

to provide information or otherwise assist in an

investigation conducted by a federal regulatory or law

enforcement agency, Congress, or company personnel

regarding any conduct which the employee

"reasonably believes" constitutes a violation of SEC

rules and regulations or fraud statutes; or (2) to file,

testify, participate in, or otherwise assist in a

proceeding - pending or about to be filed - relating to

an alleged violation.

Virtually any personnel action taken against an

employee, including a demotion or suspension, can

potentially be actionable under this provision.

Moreover, if the experience under other

whistleblower statutes is applied in the Sarbanes-

Oxley context, the SEC and DOL will broadly

construe what actions of an employee are protected.

The Act does seek to avoid frivolous complaints by at

least requiring that the employee have a "reasonable"

belief that the practice constitutes a violation.

Civil Action by Employees. An employee who

believes he has been unlawfully discharged or

discriminated against may seek relief by filing a

Business & Finance

Alert

December 2002

Whistleblower Protection Requirements

of the Sarbanes-Oxley Act

2

complaint with DOL. The complaint must be filed

within 90 days after the date on which the violation

occurs. Congress provided that the procedural rules

governing the case, including the burdens of proof for

the employer and employee, will be those applicable

under the Air 21 statute for airline employees. 49

U.S. Code § 42121(b). For example, to prevail on a

complaint before DOL, the employee must

demonstrate that discriminatory reasons were a

"contributing factor" in the unfavorable personnel

action. Relief will be denied, however, if the

employer demonstrates by "clear and convincing

evidence" that it

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