Friday, August 5, 2011

Sarbanes-Oxley Whistle Blower Protection - A Narrow Safe Harbor for Pennsylvania Employees


Federal Judge Gene Pratter issued a decision on July 21, 2011 that will surely impact on Sarbanes-Oxley ("SOX") litigation in Pennsylvania during the coming years.  The case is Wiest v. Lynch and, oddly enough, it involved a suit by a Tyco Electronics employee against Tyco.  This is notable, because it was the action of people such as former Tyco CEO Dennis Kozlowski that led to the enactment of SOX in the first place!

First, a little background on whistle blower law in Pennsylvania.  Plain and simple?  With the exception of protections afforded under OSHA (relating to complaints about dangerous work conditions), there is no protection for a Pennsylvania whistle blower unless he/she is employed by a state or local government entity UNLESS the employee comes within the protection of SOX.

Let me put it another way:  if you are employed by a private company (read: non-governmental employer), you can legally be fired in retaliation for complaining to the company about immoral, illegal or unethical business practices by a co-worker, your supervisor or management

Report a violation of the Internal Revenue Code?  You can be legally fired.

Report that your manager is illegally seeking personal reimbursement for phantom business expense?  You can be lawfully fired. 

Report that a co-worker is stealing money? You can be lawfully fired. 

Report that maintenance is selling precious metals and pocketing the proceeds? You can be lawfully fired. 

Report that the CFO is "cooking the books" and misrepresenting the company's financial position to the Board of Directors to save his own skin?  You can be lawfully fired.

Wow, right?  I understand.  I have received many phone calls from people who have quit their jobs or been fired after they made complaints to management about perceived illegal, unethical or immoral conduct.  I have to tell them, "You can get unemployment if you prove that you were fired because you made a complaint like that, but you can't sue for wrongful termination...."

Why, you ask - how can that be?  "How can companies that lie, cheat and steal fire me for trying to make them do what is right, or because I reported a thief in their midst?"

I do not pretend to know the answer.  But I have a pretty good idea, and here it is, expressed through the following 11 propositions:

Proposition 1:  Laws are enacted by politicians.  Although politicians are elected by popular vote, they win elections because of campaign funding that pays for advertising, appearances, etc.  When politicians think about re-election, they often think about keeping their source of funds happy.

Proposition 2:  Big business is the primary source of campaign funding for politicians.

Proposition 3:  Companies often try and cut corners to improve their bottom line. Management does not want to be second guessed or "dimed out."

Proposition 4:  Politicians are aware (acutely aware) of Propositions 2 and  3.

Proposition 5:  Governments cannot make campaign contributions.

Proposition 6:  Government corruption is bad.  Since it is good to stop bad things (depending upon the political cost), and since governments cannot fund campaigns, politicians have enacted state and federal laws protecting governmental employees who complain about illegal, unethical or immoral government practices;

Proposition 7:  Although private business corruption is also bad, private companies do make campaign contributions.

Proposition 8:  Politicians are aware of Proposition 7.

Proposition 9:  Politicians therefore often avoid enacting laws that anger their funding sources.

Proposition 10:  Protecting employees who complain about unethical or illegal management schemes will encourage such complaints, and that will anger funding sources.

Proposition 11:  Consequently, taking into account all of the above, many states, including Pennsylvania, do not have whistle blower laws that protect employees of private companies.

Given the absence of such statutory protection, "at will" employees of private Pennsylvania employers can be fired for making complaints about unlawful, immoral or unethical business practices - even if their complaint is well founded.

So, that brings us back to SOX.  Simply stated, SOX is a federal statute that was enacted to protect shareholders, not employees. The federal legislators decided the best way to protect shareholders was to empower those "in the know," employees, to blow the whistle on private employers who are publicly traded.  In order to accomplish that end, SOX has a provision that makes it illegal for an employer to retaliate against an employee who makes a complaint protected under SOX.

How do I conclude that SOX was intended to protect shareholders, and not employees?  Well, let's look at Judge Pratter's well-reasoned opinion.

In summary, the case makes clear that, to be protected from retaliation, an employee must make a complaint to management (or a governmental agency) that:

1. identifies past conduct;

2. relates to fraud on shareholders (this is the key - it does not protect employees who complain about, say, tax fraud);

3. alleges that management had a fraudulent intent.

So, SOX is an exception to the rule that employees of private companies may be fired for making complaints about business practices, no matter how heinous or illegal the business practice may be.

SOX was enacted to combat shareholder fraud, so, under the Pratter reasoning, only complaints of fraud on shareholders give rise to protection against retaliation. This is a VERY narrow “safe haven” for employees – the employee must allege that he/she complained that the employer’s actions constituted a fraud on shareholders.

"Mere” violation of state or federal regulations (think: FDA regulations, IRS regulations, etc.) do not protect one from retaliation because they are not covered by SOX (since they do not constitute complaints about concealed fraud on shareholders) – and SOX is the only statute protecting Pennsylvania employees of private companies from retaliation following complaints of “unseemly" (or worse) business practices.

Unless and until our elected officials decide that protecting employees who seek to require the adherence of their private employers to state and federal laws is a priority, there will be no protection for Pennsylvania employees who complain about corrupt practices of private employers who are not publicly traded.  And, even publicly traded private companies are free to violate many state and federal laws because the principal vehicle for changing such behavior - protecting employees who complain about such practices from termination - has not been adapted by Pennsylvania legislators, or by their federal counterparts. 

Thus, the absence of comprehensive whistleblower laws could lead one to conclude that politicians have put their own good (i.e. their self-interest in campaign funding from corporations), in front of the common good (which would be well served by requiring legal and ethical business practices). 

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