Labor Logic

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John D. Finerty, Jr.

After dominating the business law news following the fall of companies such as Enron, WorldCom and Adelphia, the Sarbanes-Oxley Act (SOX) has made little news.

A few cases have gone through the administrative hearing process, but, until recently, federal circuit courts have yet to take up substantive issues under the Act.

In a case of first impression, the First Circuit in Carnero v. Boston Scientific Corp., Case Nos. 04-1801 and 04-2291 (1st Cir. Jan. 5, 2006), held that Sarbanes-Oxley does not protect a foreign citizen who reports accounting irregularities at a U.S. corporation’s foreign subsidiary. In other words, SOX does not have extraterritorial effect.

Background

Boston Scientific Corporation is headquartered in Natick, Massachusetts; it is a Delaware corporation that manufactures medical equipment. In 1997, Boston Scientific hired Ruben Carnero to work at one of its subsidiaries in Argentina. Carnero had an employment contract that provided his place of employment was Boston Scientific Argentina’s Buenos Aires headquarters; he would be paid in pesos; and, his employment agreement would be governed by the law of Argentina.

In 2001, Boston Scientific assigned Carnero to its Brazilian subsidiary. He continued to be employed, however, by Boston Scientific’s Argentinean subsidiary. Boston Scientific terminated his employment in April 2003 for, Carnero alleged, reporting that Boston Scientific’s Argentinean and Brazilian subsidiaries were improperly inflating sales figures.

Carnero’s Claims

Carnero filed claims against Boston Scientific in Argentina seeking statutory termination pay. Boston Scientific, in turn, sought relief from an Argentinean court claiming Carnero’s allegations were defamation. The court in Argentina denied Boston Scientific’s motion for a preliminary injunction, finding that Carnero’s claims of operating irregularities had not been shown to be false or publicized to third parties.

In the meantime, Carnero filed a complaint with the U.S. Department of Labor under the whistleblower protection provisions of the Sarbanes-Oxley Act. The Department of Labor, and specifically the Occupational Safety and Health Administration, is responsible for receiving and investigating whistleblower complaints under Sarbanes-Oxley.

On Dec. 19, 2003, the Department of Labor issued a preliminary decision that dismissed Carnero’s whistleblower claim on the basis that the Act does not apply to employees of covered companies working outside of the United States. See Carnero v. Boston Scientific Corp., 2004-SOX-22 (OSHA Reg’l Adm’r)(Dec. 19, 2003)(citing Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949)). Carnero then filed a complaint in federal district court seeking de novo judicial review. Carnero also filed state law claims, including breach of contract and retaliatory termination.

The Court’s Holdings

The district court, affirmed by the First Circuit, dismissed Carnero’s state law claim because Carnero “had no contact with the defendant in Massachusetts” and Boston Scientific, the Delaware corporation, did not “in anyway direct or control” Carnero’s employment in Latin America. The lower court then dismissed Carnero’s Sarbanes-Oxley claim, agreeing with the Department of Labor that “nothing in § 1514A(a) [the civil whistleblower provisions] remotely suggests that Congress intended it to apply outside of the United States.”

On appeal, the First Circuit held that Carnero stated a Sarbanes-Oxley claim, but that the Act does not have extraterritorial effect. A foreign employee who complains of misconduct abroad by overseas subsidiaries may not, therefore, bring a SOX whistleblower claim against a United States parent company.

The court based its ruling on a number of factors that begins with the presumption against extraterritorial application of U.S. laws. Absent clear congressional intent to the contrary, there is a general presumption against extraterritorial application of U.S. law. Such a presumption protects against unintended conflicts between U.S. laws and those of other nations and reflects the understanding that Congress is “primarily concerned with domestic conditions.” See EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).

Next, the court noted that Congress recognized the need to address SOX coverage of foreign entities; it specifically required foreign accounting firms to register with the Public Company Accounting Oversight Board and, thereby extended certain provisions of SOX to specific foreign entities. Specific coverage of accounting firms, however, evinces congressional intent to cover only select foreign entities.

Further, Congress also extended extraterritorial jurisdiction for criminal sanctions against anyone who retaliates against another for giving truthful information to law enforcement officers. Here again, by specifically including extraterritorial jurisdiction in the Act for criminal violations, the absence of mention in the legislation of civil whistleblower claims, evinces Congress’s intent to exclude them. Last, the court noted there are significant enforcement problems to extending extraterritorial jurisdiction to civil whistleblower claims.

Exceptions That May Provide Coverage

There are at least two instances where an employee may successfully argue for coverage and jurisdiction under SOX. First, foreign corporations that list securities on U.S. exchanges must abide by the registration and reporting requirements of the Securities and Exchange Act of 1934. Thus, a foreign corporation operating outside of the United States may bring itself under the whistleblower provisions of the Sarbanes-Oxley Act by virtue of its registration on a U.S. exchange. That is because SOX applies to companies “with a class of securities registered under
§ 12 of the Securities Exchange Act” … or “required to file reports” under the Exchange Act.

Second, Sarbanes-Oxley protects “employees” of a covered corporation, but defines “employee” broadly. Under the Act, an “employee” is someone “presently or formerly working for a [publicly-traded] company or company representative.” A “company representative” is defined to include any “contractor . . . or agent of a company.” See 29 C.F.R. § 1980.101 (2005). The First Circuit in Carnero found that the employee, despite working overseas for a foreign subsidiary of a domestic company, could be an agent of the domestic company, thus fitting the definition of a “employee” under the Act.

For more information on this case, contact John D. Finerty, Jr. at Michael Best & Friedrich LLP at (414) 225-8269 or on the Internet at jdfinerty@ michaelbest.com.