Whistleblower Claims Arbitrable under Sarbanes-Oxley Act, Second Circuit Says

Holding:

Claims under the whistleblower protection provision of the Sarbanes-Oxley Act of 2002 ("SOX") are arbitrable, so ruled the U.S. Circuit Court of Appeals for the Second Circuit in this case of first impression. The Second Circuit thus affirmed the judgment of dismissal by the U.S. District Court for the Eastern District of New York of a suit filed by plaintiff-appellant Linda C. Guyden against her former employer, defendant-appellee Aetna, Inc. In her complaint, Guyden alleged that she was wrongfully terminated because she was about to speak out about what she called the "ineffective" and "demoralized" Internal Audit Department of the company. The Second Circuit rejected Guyden's argument that SOX whistleblower claims are categorically non-arbitrable because mandatory arbitration of such claims conflicts with the policy objectives animating the whistleblower protection provision and SOX generally. According to the Second Circuit, the primary purpose of the statute is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct. The provision’s focus on the plaintiff’s state of mind rather than on the defendant’s conduct is inconsistent with what Guyden argued is the statutory purpose -- to employ SOX retaliation litigation as a vehicle for publicizing corporate misconduct.

Detailed Summary:

In January 2004, Guyden joined Aetna as its Director of Internal Audit. Soon after starting, Guyden alleged that she discovered that Aetna’s Internal Audit Department was “ineffective, demoralized, and without independence or objectivity.” Opinion, p. 3.

According to Guyden’s complaint, these problems were so serious that she believed that Aetna was in danger of violating the SOX, Pub. L. No. 107-204, 116 Stat. 745 (2002). Id. SOX, and regulations promulgated thereunder, require corporate officers to report on the effectiveness of internal controls over financial reporting, and they prohibit those officers from characterizing the controls as “effective” if “there are one or more material weaknesses . . ..” 17 C.F.R. § 229.308(a)(3). Id.

Guyden claimed that she reasonably believed that Aetna was at risk of violating this regulation because (1) the Internal Audit Department was ineffective, and (2) that ineffectiveness, if left unaddressed, would become a material weakness in the company’s internal controls. Id.

A week before an Audit Committee meeting in which Guyden intended to discuss her concerns, Aetna terminated Guyden’s employment.  Within ninety days of Aetna’s termination of her employment, Guyden filed an administrative complaint with the Secretary of Labor alleging that Aetna’s action had violated the SOX whistleblower protection provision, 18 U.S.C. § 1514A. Section 1514A prohibits public companies from “discharg[ing] . . . an employee . . . because of any lawful act done by the employee . . . to provide information . . . regarding any conduct which the employee reasonably believes constitutes a violation of [federal securities law], when the information or assistance is provided to . . . a person with supervisory authority over the employee . . ..” 18 U.S.C. § 1514A(a)(1)(C). Id., p. 5.

When the Secretary did not act on Guyden’s administrative complaint within 180 days, she filed this action in the district court. Shortly after Guyden filed her complaint, Aetna moved to dismiss the complaint and compel arbitration based on an arbitration agreement that Guyden had signed. Id.

Guyden opposed Aetna’s motion to compel arbitration on two grounds. First, she argued that the SOX whistleblower claims are categorically non-arbitrable. Second, she claimed that certain components of this specific arbitration process would prevent her from vindicating her statutory rights. The district court rejected both challenges and dismissed the complaint in favor of arbitration. Id., p. 7, citing Guyden v. Aetna Inc. (”Guyden I”), No. 3:05cv1652 (WWE), 2006 U.S. Dist. LEXIS 73353, at *1 (D. Conn. Sept. 25, 2006).

On appeal, Guyden argued, among others, that SOX whistleblower claims are categorically non-arbitrable because mandatory arbitration of such claims conflicts with the policy objectives animating the whistleblower protection provision and SOX generally. Id., p. 8.

The Second Circuit however rejected such argument, citing the legislative history of SOX whistleblower provision.  According to the Second Circuit, the primary purpose of the statute is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct. Id., p. 11. Although Guyden correctly pointed out that the broad purpose of the SOX is to strengthen the integrity of capital markets, the whistleblower provision in particular fills a far narrower gap in the law—it protects “employees when they take lawful acts to disclose information or otherwise assist . . . in detecting and stopping actions which they reasonably believe to be fraudulent.” Id., citing S. REP. NO. 107-146, at pt. III.

Moreover, a whistleblower need not show that the corporate defendant committed fraud to prevail in her retaliation claim under § 1514A. The statute only requires the employee to prove that she “reasonably believe[d]” that the defendant’s conduct violated federal law. Id., p. 18, citing 18 U.S.C. § 1514A(a)(1). The provision’s focus on the plaintiff’s state of mind rather than on the defendant’s conduct is inconsistent with what Guyden argued is the statutory purpose—to employ SOX retaliation litigation as a vehicle for publicizing corporate misconduct.

Because the Second Circuit did not find any inherent conflict between the purpose of the SOX whistleblower protection provision and mandatory arbitration, the Second Circuit held that such claims are arbitrable.

On the basis of the foregoing, the Ninth Circuit affirmed the district court’s judgment of dismissal in favor of arbitration.

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