This post was authored by our colleague, Rodney Tonkovic.
Resolving what it described as a novel question, a district court (SD NY) concluded that a Dodd-Frank Act amendment to the Sarbanes-Oxley whistleblowing provisions applies retroactively. The plaintiff alleged that his employment was wrongfully terminated in 2008 in violation of the SOX whistleblower provisions. The employee claimed that his employment was terminated as a consequence of his objecting to a proposal to use fraudulent information to obtain a contract.
Prior to 2010, SOX protected employees of publicly traded companies against retaliation for whistleblowing, and, in this case the plaintiff was employed by non-public subsidiaries of the publicly-traded defendant. The Dodd-Frank Act amended SOX to clarify that Section 806 protects employees of subsidiaries of public companies as well as those employed directly by public companies. Since the plaintiff's claims arose before the 2010 amendment, the court was required to determine whether the amendment applied retroactively. If so, the court would have subject matter jurisdiction over the case under Sarbanes-Oxley.
The employee argued that he had established subject matter jurisdiction because the amended statute explicitly addresses the liability of non-public subsidiaries. According to the employee, the amended provisions clarify the earlier version of the statute and should be applied retroactively. The defendants argued that Section 806 did not apply to this case because the employee was never directly employed by the publicly-traded company. The court did not address the employee's claim and held only that it had subject matter jurisdiction under Section 806.
Few courts have considered whether the earlier version of the statute applied to employees of subsidiaries, the court observed, and those held that the statute did not apply to employees of non-public subsidiaries. In 2011, the Department of Labor's Administrative Review Board held that the amendment to the provision should apply retroactively because it was a clarification of the intent of the previous version of the statute. The court noted that both the SEC and OSHA submitted amicus briefs to the ARB supporting the retroactive application of the amendment.
The court also cited precedent from appellate courts holding that an amendment clarifying an existing law is not considered to retroactive legislation. In this case, the Senate report accompanying Dodd-Frank Section 929A stated that the intent of the amendment was to clarify Section 806. Next, the court concluded that there was conflict and ambiguity regarding the meaning of Section 806 prior to the amendment. The Department of Labor's administrative law judges, for example, reached widely divergent conclusions on the issue. The district courts that addressed the issue generally reasoned that, since there was no specific reference to subsidiaries in Section 806, Congress appeared to have intended that the statute protect only employees of public companies. Several district court decisions, however, implicitly acknowledged the possibility that the statute covered employees of subsidiaries, the court remarked.
The court then concluded that the amendment is consistent with a reasonable interpretation of the pre-amendment text. The court based its conclusion on the policy and legislative history of Sarbanes-Oxley, noting in particular the importance with which Congress viewed whistleblowers and their role in exposing corporate fraud. The court stated that since corporate malfeasance can occur within subsidiaries, it is reasonable to infer that Congress intended to protect the employees of subsidiaries in addition to employees of the parent corporation. Support for the court's conclusion was also found in other securities laws and SOX provisions. Under the reporting provisions of the securities laws, for example, a public company includes its subsidiaries. The court also found nothing contrary to its conclusion in labor law cases or in the interpretation of other Dodd-Frank provisions.
Concluding, the court found that Dodd-Frank Section 929A's amendment is a clarification of SOX Section 806 that applies retroactively. As an employee of a subsidiary of a public company, the plaintiff's whistleblowing activities were covered under Section 806. The court therefore had subject matter jurisdiction and accordingly denied the defendants' motion to dismiss.
Leshinsky v. Telvent GIT, S.A.