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SOX whistleblower retaliation claim fails

Reporting an alleged violation of the Foreign Corrupt Practices Act (FCPA) does not qualify as a “protected activity” under the Sarbanes-Oxley Act (SOX), according to a ruling from a federal appeals court.

In Baker v. Smith & Wesson, Inc., a former employee sued Smith & Wesson (S&W), asserting a claim for whistleblower retaliation under Section 1514A of Sarbanes-Oxley. S&W moved for summary judgment, arguing that Earl Donald Baker’s actions did not fall within the definition of protected activity.

A federal trial court denied S&W’s motion. However, the 1st U.S. Circuit Court of Appeals reversed that decision on appeal.

The employee had argued that the whistleblower protections of SOX should be broadly applied to any rule or regulation of the Securities and Exchange Commission. However, he conceded that the FCPA is not a direct rule or regulation of the SEC but rather a statute within the enforcement power of the SEC.

Claims under SOX

Elements of Sarbanes-Oxley prohibit publicly traded companies from firing or otherwise retaliating against an employee for reporting activities they believe could reasonably violate SEC rules or constitute fraud.

To establish a retaliation claim under SOX, a whistleblower must show 1) they engaged in protected activity, 2) the employer knew they engaged in such activity, 3) they suffered an adverse employment action, and 4) the protected activity was a “contributing factor” in that adverse action.

Whistleblower protections not automatic

Just because an employee uses a company’s internal complaint process does not mean they’re granted automatic protection from adverse employment actions. Employees must first demonstrate that they engaged in protected activity.

In reacting to Baker v. Smith & Wesson, Inc., some analysts were critical of the court’s narrow interpretation. However, they said the outcome was not a runaway win for employers, noting whistleblower protections are generally in place when reporting an FCPA violation.