03.21.2013 Second Circuit Clarifies Burden-Shifting Framework for Sarbanes-Oxley Act Whistleblower Retaliation Claims


On March 5, 2013, the United States Court of Appeals for the Second Circuit affirmed a final decision and order of the Administrative Review Board (“ARB”) affirming the dismissal of the retaliation claim of J. Scott Bechtel (“Bechtel”) under the Sarbanes-Oxley Act (“SOX”) against his former employer, Competitive Technologies, Inc. (“CTI”).  Bechtel v. Admin. Review Br., No. 11-4918-ag (2d Cir. Mar. 5, 2013).  In doing so, the Second Circuit clarified the burden-shifting framework applicable to whistleblower retaliation claims under SOX.

CTI hired Bechtel in February 2001 to serve as its vice president of technology commercialization.  In December 2002 and March 2003, CTI asked Bechtel to join a committee to review CTI’s financial transactions and make recommendations regarding CTI’s compliance with SOX disclosure requirements.  During both committee meetings, Bechtel asserted that certain aspects of CTI’s finances should be disclosed pursuant to SOX; the other committee members, however, disagreed.  Worried about his personal liability under SOX, Bechtel refused to sign the relevant disclosure forms.  Meanwhile, CTI’s financial condition deteriorated, and, in May 2003, CTI decided to reduce operating costs by, among other things, terminating certain employees, including Bechtel.

After his termination, Bechtel filed a SOX whistleblower complaint with the Occupational Safety and Health Administration (“OSHA”) alleging that he was terminated in retaliation for refusing to sign the SOX disclosure forms.  After its investigation, OSHA determined that there was reasonable cause to believe that Bechtel’s termination was retaliatory and ordered that Bechtel receive reinstatement, back wages, and compensatory damages.  This, however, was the last good news that Bechtel would receive.

CTI objected to OSHA’s findings and requested a formal hearing before an Administrative Law Judge (“ALJ”).  After a hearing, the ALJ dismissed Bechtel’s complaint.  Bechtel appealed to the ARB, which reversed the ALJ on the grounds that the ALJ applied the wrong legal standard.  On remand, the ALJ once again dismissed Bechtel’s complaint, with the ARB this time affirming that dismissal.  Bechtel appealed to the Second Circuit.  Bechtel’s primary contention[1] before the Second Circuit was that, on remand, the ALJ again applied an erroneous legal standard in dismissing his complaint; and, as such, the ARB should have reversed the ALJ’s decision. 

Writing for the panel, Judge Cabranes explained that, under the applicable legal framework, Bechtel had to prove by a preponderance of evidence that:  1) he had engaged in a SOX-related protected activity; 2) CTI had knowledge of his protected activity; 3) he suffered an adverse employment action; and 4) the protected activity was a contributing factor in the adverse employment action.  If Bechtel could prove all four elements by a preponderance of the evidence, CTI could rebut his prima facie case with clear and convincing evidence that it would have taken the same adverse employment action against him in the absence of any protected activity.  While the Second Circuit agreed with Bechtel that the ALJ misconstrued the appropriate legal standard[2], it nevertheless affirmed the dismissal of Bechtel’s complaint because the ARB correctly concluded that the ALJ’s error did not affect the outcome of the case.  Specifically, the Second Circuit concluded that, based on the factual record, the ARB correctly rejected Bechtel’s claim that his protected activity was a contributing factor in his termination.

Through its Bechtel decision, the Second Circuit joins the First, Fourth, Fifth, Sixth, and Eleventh Circuits in explicitly setting forth the burden-shifting burden of proof[3] framework for SOX whistleblower claims.  Accordingly, multi-jurisdictional employers should expect that, at least with respect to SOX and comparable whistleblower statutes enforced by OSHA, federal courts will apply a similar standard.  Moreover, as Bechtel’s claim was doomed by a lack of causality between his protected activity and termination, the Bechtel opinion underscores the need for employers to be able to substantiate a lawful basis for terminating employees who may have engaged in protected activities.  With SOX whistleblower actions, as with any other retaliation claims, following procedures and proper documentation remain the keys to avoiding liability.

[1] Bechtel also argued that 1) the ALJ erred in requiring him to prove the elements of his case by a preponderance of the evidence and “not by mere inference”; 2) the ALJ incorrectly found his loss of status as an officer of CTI did not constitute a prohibited act under SOX; 3) the ARB did not address properly his post-employment blacklisting claim; and 4) the ARB erred in two evidentiary rulings.  The Second Circuit summarily dismissed each argument.

[2] After stating the correct legal framework, the ALJ further elaborated that, until an employee makes his or her prima facie case, an employer need only articulate a legitimate reason for the adverse action.  If the employer can do so, the employee may still prevail by showing, by a preponderance of the evidence, that the employer’s stated reason was pretext for discrimination.  In essence, the ALJ improperly set forth a second burden-shifting system separate from the one applicable to SOX whistleblower claims.

[3] It is important to note the SOX burden-shifting scheme applies to the burden of proof, as opposed to the burden of persuasion.  As the ARB noted in its second Bechtel decision, while a whistleblower is not required to show necessarily that the employer’s reasons for the adverse employment action were pretext, the ultimate burden of persuasion remains at all times with the whistleblower.  Bechtel v. Competitive Technologies, Inc., ARB NO. 09-052, ALJ No. 2005-SOX-033, slip. Op. at 10 (ARB Sept. 30, 2011).