Ninth Circuit Rules That SOX’s Whistleblower Provision Does Not Protect Media Leaks

On May 3, 2011, the Ninth Circuit Court of Appeals held that the whistleblower provisions in Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) do not protect employee leaks to the media. Rather, the statute’s plain language only protects disclosures to federal regulatory and law enforcement agencies, Congress and employee supervisors. Tides v. The Boeing Co., Case No. 10-cv-35238.

Background

The Boeing Company (the “Company”) employed Tides and Neumann in its IT SOX Audit group. They were responsible for testing technology controls to comply with SOX’s requirement that the Company annually assess the effectiveness of its internal controls and procedures for financial reporting. That group was staffed with approximately 8 other Boeing employees and supplemented by approximately 70 contract auditors. In addition, a company with which the contract auditors were not affiliated served as the Company’s external auditor and was responsible for annually attesting to, and reporting on assessments of internal controls.

Tides and Neumann asserted that the Company feared that the external auditors might find a “material weakness” in internal controls and, as a result, managers pressured IT SOX auditors to rate the internal controls as “effective.” Moreover, according to Tides and Neumann, they complained to management about: the practice of giving the contractors managerial authority over Company employees; involving those contractors in both the design and audit of internal controls; and concerns regarding the integrity of data stored in the Company’s software system.

Tides and Neumann asserted that a newspaper reporter contacted them to discuss an article she was writing on the Company’s compliance with SOX. Neumann told the reporter that he felt pressured to render positive audit results and that he and the reporter discussed a meeting in which IT SOX auditors expressed concerns over the role of the contractors in audits of internal controls. In addition, Tides contacted the reporter after receiving what he considered to be a negative performance evaluation. He sent her e-mails regarding perceived problems with the IT SOX Audit group’s auditing practices, as well as other internal Company documents. Thereafter, the newspaper published an article titled “Computer security faults put Boeing at risk.” The article referenced the information Tides and Neumann disclosed.

The Company conducted an investigation into Tides’ and Neumann’s contacts with the media, as it maintained a policy restricting the release of Company information to the news media. Its policy required employees to refer media inquiries to the communications department and prohibited the release of such information without that department’s prior review and authorization. Based on the results of its investigation, the Company discharged Tides and Neumann for violating this policy.

The Litigation

Tides and Neumann filed complaints with the Occupational Health and Safety Administration (“OSHA”) alleging they were retaliated against in violation of Section 806 of SOX, and then pursued their claims before the U.S. District Court for the Western District of Washington. The District Court granted the Company summary judgment on the grounds that SOX does not protect complaints and disclosures to the media, and Tides and Neumann appealed to the Ninth Circuit. The Ninth Circuit affirmed the District Court’s ruling.

The Ninth Circuit explained that “[t]he issue in this case comes down to whether the plaintiffs’ disclosures to the [media] were protected under [Section 806 of SOX].” In analyzing this question, the Ninth Circuit looked to the plain language of Section 806 of SOX, which provides that disclosures to the following are protected: a federal regulatory or law enforcement agency; a member or committee of Congress; or a supervisor or other individual who has the authority to investigate, discover or terminate such misconduct. It stressed that members of the media are not included in the statute.

In addition, although it noted that the statutory language was unambiguous, the Ninth Circuit referenced the legislative history to Section 806 of SOX revealing that Congress only intended to protect disclosures to individuals and entities with the capacity or authority to act effectively on the disclosure – i.e., supervisors and federal officials empowered to remedy any wrongdoing.

The Ninth Circuit also contrasted the foregoing exhaustive list in Section 806 of SOX against the language of the Whistleblower Protection Act, which protects “any disclosure” of certain information – without limitation or qualification as to the specific types of entities to which protected disclosures are may be made. In addition, it rejected Tides’ and Neumann’s argument that disclosures to the media are protected because they may eventually cause information to be provided to members of Congress or federal law enforcement or regulatory agencies. It characterized this interpretation of Section 806 of SOX as “boundless.”

Implications

The Tides decision underscores the need for employers to maintain policies that strictly prohibit employee disclosures of confidential information relating to SOX-imposed internal controls – or any other private company information for that matter – to the media or any other entities or individuals outside of the company not specifically included in Section 806 of SOX (e.g., competitors). Employers may rely on such policies to: support the legitimacy of their reasons for discharging employees who choose to disclose confidential information to the media rather than using proper channels to lodge complaints; minimize unwarranted risks to their reputations; facilitate prompt internal investigations and resolutions of any threats to the company’s financial well being; and avoid the damage they may suffer if confidential information falls into competitors’ hands.

For more information, please contact the Seyfarth attorney with whom you work or any member of our SOX Whistleblower Team.