At a time
when the extraterritorial reach of U.S. regulations seems to grow at a rate
faster than the economy, U.S. employers breathed a sigh of relief when the U.S.
Department of Labor’s Administrative Review Board (ARB) confirmed by a 3-2 vote
that the whistleblower provision of Title VIII of the Sarbanes-Oxley Act (SOX)
has no extraterritorial application.
In
Villanueva v. Core Labs. NV, Saybolt de Colombia Limitada, ARB Case No. 09-108
(ARB Dec. 22, 2011), the ARB affirmed a decision dismissing a whistleblower
complaint, despite the fact that the alleged retaliatory decision occurred in
the U.S., because the complaint involved a foreign citizen who alleged
violations of foreign law by his foreign employer.
The
difficulty in future cases will be determining the extent to which the
essential claims at issue trigger extraterritorial application of SOX.
The
Complaint
The
complainant lived and worked in Colombia for over 20 years as the General
Manager (CEO) for Saybolt de Colombia Limitada (Saybolt Colombia), a Colombian
company. He was not a U.S. citizen and never worked in the U.S. during his
employment. Importantly, Saybolt Colombia did not list securities in the U.S.
under Section 12 or file reports under Section 15(d) of the Securities and
Exchange Act of 1934.
The
complainant believed Saybolt Colombia was violating Colombian tax laws as a
result of a transfer pricing scheme between Saybolt Colombia and an affiliate
in the Dutch Antilles. He allegedly raised concerns to his superiors in
Colombia as well as to the Chief Accounting Officer of the company’s indirect
affiliate in Houston, Texas. The affiliate, Core Laboratories N.R. (“Core
Labs”), is a Netherlands company publicly traded on the New York Stock Exchange.
Two independent investigations in response to the claims failed to find any
impropriety. Nevertheless, the complainant refused to sign the company’s
Colombian tax returns when they became due and claimed that after his report to
the affiliate in Houston, he was denied a pay raise and eventually terminated.
He further alleged that his termination was perpetrated by American executives
of Core Labs in the U.S.
The
complainant filed a whistleblower complaint under SOX, which was heard by an
Administrative Law Judge (ALJ) at the Department of Labor. In dismissing the
complaint, the ALJ relied primarily on Carnero v. Boston Scientific
Corporation, 433 F.3d 1 (1st Cir. 2006), the only federal appellate court
decision to specifically address the extraterritoriality of SOX’s whistleblower
protections. The ALJ reasoned that the complaint was the “exact” scenario as in
Carnero.
The ARB
Affirmed that SOX’s Whistleblower Protections Have No Extraterritorial
Application
While
rejecting the reasoning of the ALJ, the ARB affirmed the ALJ’s ruling, based on
the Supreme Court’s recent decision in Morrison v. National Australian Bank,
Ltd. In Morrison, 130 S. Ct. 2869 (2010), the U.S. Supreme Court engaged in a
two-step process to resolve any extraterritoriality issue. In one step, the
adjudicative body determines the extraterritorial reach of the relevant
statute. The other step is deciding whether the essential events occurred
extraterritorially and, thus, outside of the statute’s domestic reach.
Applying
Morrison’s first step, the ARB confirmed that SOX’s whistleblower provision,
Section 806(a)(1), has no extraterritorial application. Indeed, that provision
is silent as to any extraterritorial application and further analysis,
including SOX’s legislative history, failed to overcome that presumption. The
ARB noted that Section 929P of the recently-passed Dodd-Frank Act provides
federal district courts jurisdiction over proceedings brought or instituted by
the Securities Exchange Commission or the U.S. government. Nevertheless,
Section 929A of that Act, which addresses SOX’s Section 806(a), failed to
include similar language. Accordingly, the ARB reasoned that Congress’s silence
as to Section 806’s extraterritorial application conclusively establishes
Congress’s intent to withhold its application outside the borders of the U.S.
As for
Morrison’s second step, the ARB considered whether the essential parts of the
alleged fraud occurred domestically or whether they triggered extraterritorial
application. Here, the ARB focused on the locus of the fraudulent activity
being reported and stressed that the “onus of the alleged fraud involved
actions affecting foreign companies doing business in a foreign country, and a
failure to comply with foreign tax law.”
The ARB
further noted that even if the complainant’s allegation that a publicly-traded
American company controlled all aspects of Saybolt Colombia were true, it would
“not change the fact that the disclosures involved violation of
extraterritorial laws and not U.S. laws or financial documents filed with the
SEC.” Thus, despite the allegation that the retaliatory decision was made in
the U.S., the ARB held that, pursuant to Morrison, “some domestic contact will
not convert an extraterritorial application to a domestic one.”
Impact on
Employers
The ARB’s
confirmation that SOX’s whistleblower provisions, at least in this case, have
no extraterritorial application is a relief for multinational employers.
Covered employers can find some assurance in the limited circumstance that
non-U.S. citizens of indirect foreign subsidiaries have no claim under SOX for
retaliation based on their complaints about violations of foreign laws in
foreign countries. Indeed, where “the driving force of the case – the
fraudulent activity being reported – [is] solely extraterritorial,” there is no
cause of action under Section 806.
Despite the
ARB’s conclusion in this case, the question of whether the alleged fraudulent
activity is “solely extraterritorial” is an analysis that remains in an immense
ocean of gray. Such an evaluation will, of necessity, require a case-by-case
analysis, resulting in continued confusion about the exact scope of the
whistleblower protections under SOX. Indeed, the dissent strenuously argued
that there was no issue of extraterritoriality in this case because the
complainant took his complaint to the chief accountant in Texas and the foreign
subsidiaries’ conduct was directed from Houston. While the ARB rejected the
dissent’s argument and found that the “driving force” of the case – the
fraudulent activity – was an extraterritorial one, it conceded that courts
should consider the “location of the protected activity, the location of the
job and the company the complainant is fired from, the location of the
retaliatory act, and the nationality of the laws allegedly violated that the
complainant has been fired for reporting . . . .” The ARB further noted that,
“where the complainant, for example, is working for a covered company in the
United States, but may have worked in a foreign office of the company for part
of the time, [these facts] may require a different outcome.” In other words, to
the extent a complainant can show that the alleged fraud affects a U.S.
security or a financial disclosure law, the complainant may have a claim.
This
decision did not address the extraterritorial application of the Dodd-Frank
Act. As a result, it remains unclear how Dodd-Frank will be applied in these
types of cases.
IIn sum, the ARB decision lends
some clarity to the boundaries of the extraterritorial application of SOX’s
whistleblower provision. Nevertheless, there remain uncertainties. Companies
covered by SOX must exercise caution and restraint when faced with a
whistleblower complaint, regardless of whether that complaint comes from a
domestic or international source.
By Gregory
Keating, Philip Berkowitz, Trent Sutton, and Joseph Lazazzero
After
a year of intensive consultation among development partners and with
technical experts within the World Bank, I am pleased to announce that
the World Bank Approach to Public Sector Management (2011-2020)
has been agreed by the Public Sector Governance Board (the internal
body that maintains professional standards on PSM and governance work
within the Bank).
