SOX Issues (Part II)

We continue our series on the evolution of SOX and how it impacts retaliation cases.

In Sylvester v. Parexel Int’l LLC, No. 07-123, 2011 WL 2165854 (ARB May 25, 2011), the ARB dramatically shifted the standards for “protected activity” under Section 806 of SOX in favor of claimants.

Until Parexel was decided, the vast majority of SOX claimants – more than 95% – lost their cases, often because the Administrative Law Judge (“ALJ”), Administrative Review Board (“ARB”), or federal district or appellate court concluded that they had not engaged in protected activity under the law. The decisions commonly reached that conclusion by finding that the alleged fraud that the claimant complained of was not material, that the complaint did not specifically and definitively relate to one of the six categories listed in SOX Section 806 or fraud on shareholders, or that the complaint was about supposed fraud that may occur in the future, but had not yet occurred. See Richard E. Moberly, Unfulfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 Wm. & Mary L. Rev. 65. (2007).

In Parexel, the complainants reported to company managers that their co-workers failed to properly record test times for clinical drug trials that the company performed on behalf of drug manufacturers; that management responded that it “was no big deal”; and that they then were subjected to various forms of retaliation. The ALJ dismissed the complaint, finding that Complainants failed to establish they engaged in SOX-protected whistleblower activity. However, the ARB reversed, making the following significant holdings:

• The federal pleading standards do not apply to SOX whistleblower claims initiated with OSHA.
• An employee’s complaint need not “definitively and specifically” relate to the categories listed in Section 806, and need not relate to fraud on shareholders.
• The “reasonable belief” standard does not require that the complainant actually communicate the reasonableness of his or her belief to management or other authorities.
• Section 806 protects complaints about a violation of law that has not yet occurred, provided that the employee reasonably believes, based on facts known to him or her, that the violation is about to be committed.
• A complainant need not establish the elements of fraud, including materiality.

These holdings contradicted many prior rulings from ALJs, federal courts, and the ARB itself.

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