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Scope of Judicial Complaint in SOX Whistleblower Case Is Limited to Scope of Administrative Complaint: Fifth Circuit
Practical Law Legal Update 5-617-8947 (Approx. 6 pages)
Scope of Judicial Complaint in SOX Whistleblower Case Is Limited to Scope of Administrative Complaint: Fifth Circuit
by Practical Law Labor & Employment
| Published on 10 Aug 2015 • USA (National/Federal) |
In Wallace v. Tesoro Corp., the US Court of Appeals for the Fifth Circuit held that retaliation lawsuits under the Sarbanes-Oxley Act of 2002 (SOX) are limited in scope by the claims presented in the preceding administrative complaint. The Fifth Circuit affirmed the district court's dismissal of the plaintiff's retaliation claim concerning wire-fraud-based protected activity, concluding that the plaintiff failed to meet SOX's administrative exhaustion requirement.
On July 31, 2015, in Wallace v. Tesoro Corp., the US Court of Appeals for the Fifth Circuit held that retaliation lawsuits under the Sarbanes-Oxley Act of 2002 (SOX) are limited in scope by the claims presented in the preceding administrative complaint. The Fifth Circuit affirmed the district court's dismissal of the plaintiff's retaliation claim concerning wire-fraud-based protected activity, concluding that the plaintiff failed to meet SOX's administrative exhaustion requirement. Finally, the Fifth Circuit reversed and remanded the district court's dismissal of the plaintiff's claim that he engaged in protected activity when he reported what he reasonably believed were his employer's violations of SEC regulations. (No. 13-51010, (5th Cir. July 31, 2015).)
Background
Kevin Wallace worked as a Vice President at Tesoro Corporation (Tesoro). Wallace's employment was terminated in March 2010. He filed a complaint with OSHA in May 2010, alleging that he was fired in retaliation for his participation in activities that he claimed were protected under SOX, such as:
- Discovering and reporting that taxes collected by Tesoro were being booked as revenue.
- Investigating what he suspected was an antitrust side agreement in Idaho Falls.
- Marking "yes" to the retaliation questions on compliance certificates.
In October 2010, OSHA dismissed Wallace's complaint, determining that his activity did not contribute to Tesoro's termination of his employment. The Administrative Review Board had not issued a final decision within 180 days of Wallace's filing so he sued in federal district court in February 2011.
In his Second (and ultimately Third) Amended Complaint, Wallace alleged retaliation for four protected activity categories:
- Investigating and reporting Tesoro's booking of taxes as revenues.
- Investigating the Idaho Falls side agreement.
- Identifying retaliation on the compliance certificates.
- Reporting suspected wire fraud from:
- inconsistent discounts given to different customers; and
- price change signaling to some customers.
In response to Wallace's Third Amended Complaint, Tesoro moved for dismissal and raised for the first time that Wallace had not presented the wire fraud claims in his OSHA complaint so his argument was not properly administratively exhausted.
The district court dismissed Wallace's claims regarding all four categories of protected activity, noting that:
- Wallace was unreasonable in believing that violating taxes as revenue was an SEC violation.
- Wallace did not engage in protected activity regarding Idaho Falls.
- Wallace's compliance certificate identifications did not show a reasonable belief of retaliation.
- The wire fraud allegations were outside the scope of the OSHA complaint.
Wallace appealed to the Fifth Circuit, arguing that the dismissal was improper.
Outcome
The Fifth Circuit:
- Affirmed the district court's dismissal of the wire-fraud-based protected activity, concluding that Wallace failed to meet SOX's administrative exhaustion requirement.
- Held that SOX retaliation lawsuits are limited in scope by the claims presented in the administrative complaint.
- Reversed the district court's dismissal of Wallace's claim regarding his investigation of Tesoro booking taxes as revenue.
The Fifth Circuit noted that:
- SOX protects employees from retaliation for providing information or assisting in an investigation he reasonably believes relate to:
- four types of fraud;
- a federal offense that relates to shareholder fraud; and
- a rule or regulation of the SEC.
- An individual claiming an employer's retaliation in violation of SOX must file a complaint with the DOL and can bring a lawsuit if no decision is reached within 180 days.
- The correct exhaustion standard is the one the court applies in Title VII cases, which limits the complaint "to the scope of the EEOC investigation which can reasonably be expected to grow" from the discrimination charge (Thomas v. Texas Department of Criminal Justice, 220 F.3d 389, 395 (5th Cir. 2000)).
- De novo review prevents deference to OSHA's conclusions in a subsequent suit, but is not a redaction of the administrative proceeding.
- Although OSHA has a low requirement for filing a complaint, an exhaustion requirement is consistent with SOX's administrative enforcement mechanisms.
- An administrative charge is supposed to trigger the agency's defined investigation and conciliation procedures. The exhaustion requirement only goes as far as needed to allow the agency the first chance to resolve the matter.
- It joined the Court of Appeals for the Fourth Circuit (the only other circuit to directly address the issue) in analyzing SOX exhaustion scope under the same framework as Title VII complaints (Jones v. Southpeal Interactive Corp. of De., 777 F.3d 658, 669 (4th Cir. 2015)).
The Fifth Circuit found that Wallace did not meet the SOX exhaustion requirement because:
- His reply brief was the only time that he stated that his OSHA complaint would result in an investigation that would reveal wire fraud concerns. The court usually does not consider arguments raised for the first time in a reply brief.
- The price signaling and inconsistent discounts that Wallace alleged led to his protected activity regarding wire fraud are distinct from the vague items referenced in his OSHA complaint.
- Wallace failed to show a legal mechanism by which an amendment to a court complaint relates back to the administrative complaint or how a relation-back rule would exhaust claims that were never presented to the agency.
The Fifth Circuit also affirmed the district court's dismissal of Wallace's retaliation claims concerning his:
- Investigation of the Idaho Falls side agreement.
- Identification of retaliation on the compliance certificates.
The Fifth Circuit reversed and remanded the district court's dismissal of Wallace's claim that he engaged in protected activity in reporting that Tesoro was booking taxes as revenue. The Fifth Circuit found that:
- The district court erred in holding that Wallace had not pleaded an objectively reasonable belief of a SOX violation.
- While Wallace did not indicate which SEC rules were violated, he adequately alleged that he "reasonably believed" Teroso's practice violated SEC rules (18 U.S.C. § 1514A(a)(1)).
Practical Implications
In Wallace, the Fifth Circuit followed the Fourth Circuit in adopting the same exhaustion requirement for SOX whistleblower cases as is used in Title VII cases. Based on the court's decision, employers in the Fifth Circuit should take note of the fact that the scope of a judicial complaint in a SOX whistleblower case is limited to the scope of the administrative complaint that preceded it. If the claims in a judicial complaint were not included in the complaint at the OSHA level, the plaintiff has not properly exhausted the administrative remedy for those claims under SOX.