Supreme Court Set to Review Burden of Proving Retaliatory Intent in SOX Whistleblower Suits: Employee or Employer?

The Decision to Be Reviewed by the Supreme Court

The Second Circuit case arose out of an employee’s termination from a publicly traded company over a decade ago. The employee, a former strategist in the company’s commercial mortgage-backed securities business (a position regulated by the Securities and Exchange Commission), alleged that the company fired him in retaliation for reporting that two traders at the company improperly pressured him to skew his research and to publish reports in favor of their business strategies. The employee twice reported this conduct to his direct supervisor and was terminated one month later. The employee claimed his termination violated Section 1514A of SOX which prohibits publicly traded companies from taking adverse employment actions to discriminate against an employee because of a lawful whistleblowing act. The company defended that it terminated the employee as part of company-wide layoffs in response to the company’s financial difficulties at the time.

At trial, the district court instructed that a SOX anti-retaliation claim requires the employee to show that (1) they engaged in activity protected by SOX; (2) their employer knew about the protected activity; (3) the employee suffered an adverse employment action; and (4) the employee’s protected activity was a “contributing factor” in their termination. The district court further instructed the jury that the final element requires only that the employee’s protected activity “tended to affect in any way” the company’s decision to terminate them. Over the company’s objection to the instruction, the jury found the company liable and awarded the employee damages.

On appeal, the only issue was whether SOX Section 1514A requires an employee whistleblower to prove their employer had “retaliatory intent.” The Second Circuit answered affirmatively, holding that retaliatory intent is an element of a Section 1514A claim.

The Court first looked to the plain meaning of SOX’s statutory language. Section 1514A provides that no covered employer “may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of” whistleblowing. The Court explained that “discriminatory” actions are those based on an employer’s disfavor of an employee for whistleblowing. Noting that the phrase “because of” indicates a causal relationship between the parts of a sentence it connects, the Court reasoned that a successful SOX whistleblower suit requires that the employer’s adverse action be motivated by the employee’s whistleblowing activities. Accordingly, the Court concluded that adverse action “because of” whistleblowing requires retaliatory intent.

Additionally, the Court emphasized its consistent interpretation of nearly identical language in the anti-retaliation provision in the Federal Railroad Safety Act (“FRSA”). Cases interpreting the FRSA have held that an employer violates the statute only by engaging in conduct motivated by discriminatory animus because such animus is the essence of a retaliation claim. In the interest of reading both statutes consistently, the Court concluded that a SOX whistleblowing claim requires the employee to show that the employer took the adverse action against the employee with retaliatory intent.

The Court found that, absent a jury instruction requiring the jury to find retaliatory intent, the Court could not determine which parties’ evidence the jury credited in its decision. Given the strength of both parties’ evidence in this case, the Court determined that the district court’s jury instruction was not harmless, vacated the verdict, and remanded to the district court for a new trial. On May 1, 2023, the United States Supreme Court agreed to hear the employee’s appeal.

Conflict with Other Circuits

The Second Circuit’s decision departed from those in the Fifth and Ninth Circuits which have held that retaliatory intent is not an element of an employee’s whistleblower claim under SOX.² The Fourth and Tenth Circuits have run parallel to the Fifth and Ninth, noting that the purpose of the “contributing factor” test (the fourth element of a Section 1514A claim) is designed to eliminate the need for an employee to prove that an employer’s adverse employment action was motivated by retaliatory intent.³ These circuits relied heavily on the United States Court of Appeals for the Federal Circuit’s decision in Marano v. Department of Justice interpreting the whistleblowing provision in a different statute—the Whistleblower Protection Act (“WPA”).⁴ In that case, the Federal Circuit noted language in the Congressional record for the WPA stating that the contributing factor test was “specifically intended to overrule existing case law” that required a whistleblower to prove their protected conduct was a significant or motivating factor in the employer’s decision. The Second Circuit acknowledged that it departed from other circuits but reasoned that those courts “overlooked the plain meaning of the text” of SOX.

SEC Joined an Amicus Brief in Support of the Petitioner

On July 5, 2023, the Securities and Exchange Commission (“SEC”) joined an amicus brief filed by the Solicitor General supporting the petitioner in the Murray appeal to the Supreme Court.⁵ Commissioners Hester M. Peirce and Mark T. Uyeda dissented from the SEC’s decision to join the amicus brief, but not due to issues with the SEC’s position or the merits of the case.⁶ Rather, Commissioners Peirce and Uyeda criticized that, at the time the SEC was asked to review the amicus brief, the SEC did not have the capacity to fully and carefully consider the issue. At the same time, the SEC was also asked to consider and provide feedback on two complex rulemaking initiatives. Commissioners Peirce and Uyeda noted that the SEC’s attempt to pursue multiple deliberative processes has been “commonplace” recently. They emphasized that the SEC should better prioritize the issues it pursues to facilitate full and careful consideration of the issues.

What Will the Supreme Court’s Decision Mean for You?

With a grant of certiorari in May, the Supreme Court is expected to decide whether an employee suing under SOX must show the employer’s retaliatory intent or whether the lack of retaliatory intent is part of an employer’s affirmative defense. Whichever way the Supreme Court rules, the result will have significant effects on employers defending against SOX retaliation suits.

If the Supreme Court affirms the Second Circuit’s decision, an employee alleging retaliation would have to establish in their case-in-chief that the employer’s adverse employment action against them was motivated by their protected action—that is, that the employer had retaliatory intent. Because this would require the employee to provide evidence of the employer’s subjective intent to retaliate, it would be harder for employees to bring successful whistleblower retaliation claims under SOX. Employers could defeat retaliation claims by showing another, non-retaliatory motivating factor for terminations. Further, the increased burden on employees may reduce the cost for employers to settle these claims.

Conversely, if the Supreme Court sides with the employee, defending employee retaliation claims would become more challenging for employers. This result would mean that, in a Section 1514A suit, an employee whistleblower must only show that retaliation “tended to affect in any way” an adverse employment action. An employer would bear the burden of proving a lack of retaliatory intent as part of its affirmative defense.

Either way, the Supreme Court’s decision will likely clarify not only SOX, but several other whistleblower statutes that protect employees in various industries. Employers should work closely with counsel to ensure all terminations and other employment decisions are made in compliance with all applicable laws.

¹43 F.4th 254 (2d Cir. 2022), cert. granted, 143 S. Ct. 2429 (2023).

²See Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254, 263 (5th Cir. 2014); Coppinger-Martin v. Solis, 627 F.3d 745, 750 (9th Cir. 2010).

³See Feldman v. Law Enforcement Assocs. Corp., 752 F.3d 339, 348 (4th Cir. 2014); Lockheed Martin Corp. v. Dep’t of Labor, 717 F.3d 1121, 1136 (10th Cir. 2013).

⁴See Marano v. Dep’t of Justice, 2 F.3d 1137, 1140-41 (Fed. Cir. 1993).

⁵Brief for United States as Amicus Curiae Supporting Petitioner, Murray v. UBS Sec., LLC, U.S., No. 22-660 (filed July 5, 2023).

⁶Comm’rs Hester M. Peirce & Mark T. Uyeda, Sec. & Exch. Comm’n, Statement Regarding Amicus Brief Filing in Murray v. UBS Securities, LLC (July 6, 2023), https://www.sec.gov/news/statement/peirce-uyeda-murray-v-ubs-20230706.