News & Information

EMPLOYMENT LAW — 6/7/07

SOX whistleblower protection does not extend to employee of non-public subsidiary

A complaint under the whistleblower protection provisions of the Sarbanes-Oxley Act (SOX) against a "thrice-removed corporate subsidiary" of its publicly traded parent was dismissed by a federal district court in Michigan because the subsidiary employer was not a publicly-traded company. Relying on the statutory language and guided by decisions of Department of Labor administrative law judges and the Administrative Review Board (ARB), the court held that only employees of public companies are protected under SOX. (Rao v Daimler Chrysler Corp, EDMich, 89 EPD ¶42,814)

The employee worked as a supervisor in one of the employer's engineering and technical departments. In late 2004, he asserted that he was the victim of retaliation after he complained of discrimination on the basis of national origin and reported alleged violations by his supervisor of various internal policies and accounting procedures. The alleged retaliatory acts were failure to promote, demotion and failure to address his hostile work environment claim. He eventually took a medical leave of absence.

Moving to dismiss, the employer argued that the SOX whistleblower protection provisions did not expressly apply to non-publicly traded companies like itself. The employee, who did not name the employer’s parent in the complaint, argued that SOX includes corporate subsidiaries whose financial information is consolidated in the publicly traded parent company’s financial statements. In the alternative he argued that the employer was liable as an agent of the publicly traded corporate parent.

The district court stated that the text of SOX does not list subsidiaries as subject to the whistleblower provisions, and it was not the court’s job to rewrite clear statutory text. Congress specifically mentioned subsidiaries of public companies in other SOX provisions thereby overriding the corporate law principle that parent companies are not automatically liable for the actions of their subsidiaries, the court reasoned. The court also noted "a growing number of opinions" among ALJs concluding that a SOX complainant must name the public parent of its employer to have a valid whistleblower claim.

The court rejected the reasoning in Morefield v Excelon Services, Inc (DOL ARB, 2004-SOX-2 (CCH ¶5160)), on which the employee primarily relied, noting that at least two other ALJs had rejected it as well in favor of applying general principles of corporate law. In Morefield, the SOX complainant sued both the subsidiary employer and the publicly traded parent. The ALJ denied the employer’s motion to dismiss, reasoning in part that the concerns underlying the enactment of SOX supported extension of its protections to employees of non-public subsidiaries of public corporations.

Citing another ALJ decision, the court held that the employee failed to establish that the employer was acting as the parent company's agent. In Klopfenstein v PCC Flow Technologies Holdings, Inc (DOL ALJ, 2004-SOX-11 (CCH ¶5216)), the ALJ found an agency relationship existed due to overlapping executives between the two entities as well as evidence that the parent's executives were directly involved in the employment decision. In contrast, the employee in this case failed to allege that anyone at the parent corporation even knew of any decisions made regarding his employment, much less took part in them.

For more information on this and other topics, consult CCH Employment Practices Guide or CCH Labor Relations.

Visit our News Library to read more news stories.