No Good Deed Goes Unpunished: Document Preservation Notices Can Lead to SOX Violation!

On November 12, 2014, the Fifth Circuit affirmed a Department of Labor finding that Halliburton retaliated against a whistleblower by including his name in a document preservation notice.  The court also held that emotional distress damages are available under SOX.

In Halliburton, Inc. v. Administrative Review Board, the whistleblower, Anthony Menendez, claimed that he was ostracized and isolated in violation of SOX after Halliburton’s General Counsel sent out a litigation hold notice stating that the SEC had opened an investigation into concerns raised by Menendez about alleged accounting improprieties.  Menendez had previously raised these concerns internally to management.

An ALJ had dismissed Menendez’s case, holding that isolation and ostracism did not rise to “materially adverse actions” under the Burlington Northern standard.  See Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006).The ARB reversed, stating in its opinion that the definition of adverse action under SOX is broader than that under Burlington Northern and that Menendez stated a claim of retaliation. 

On appeal, the Fifth Circuit first clarified that the Burlington Northern standard is the proper standard for evaluating adverse actions under SOX.  The ARB’s language that could be construed otherwise was “troubling” to the court, but it concluded that this language was dicta and that the ARB actually properly applied the Burlington Northern standard to reach its conclusion that Halliburton’s actions in exposing Menendez as an SEC whistleblower would have “deterred a reasonable person” in Menendez’s position from engaging in protected activity.  Thus, the ARB did not commit reversible legal error.

The Fifth Circuit also agreed with the ARB that Menendez’s whistleblowing was a contributing factor in the adverse action, rejecting Halliburton’s argument that an employee must prove a “wrongfully motivated” causal connection between protected activity and adverse action as “lack[ing] support in the case law.”

Finally, the Fifth Circuit held that damages for emotional distress and reputational harm are available under SOX, explaining “It would be an odd result, to say the least, to construe a statute that prohibits certain ‘threats’ and ‘harassment’ against employees and purports to afford ‘all relief necessary to make the employees whole’ to not offer a remedy for the most usual and predictable result of threats and harassment, emotional distress.”  Thus, the court affirmed an award of $30,000 to Menendez for emotional distress.

In light of the Halliburton decision, employers should take great care not to reveal the identities of whistleblowers in document preservation notices (or otherwise) when such revelation is not absolutely necessary to meet a company’s legal obligations, in order to avoid potential exposure under SOX and other whistleblower statutes.