ALERT: Second Circuit Holds that SOX Whistleblower Claims May Be Subject to Mandatory Arbitration

On October 2nd, the Second Circuit affirmed an order of the District of Connecticut compelling a plaintiff to arbitrate her claims against her former employer under the whistleblower provision of Sarbanes-Oxley Act ["SOX"], 18 U.S.C. § 1514A. The Second Circuit’s decision in Guyden v. Aetna Inc., No. 06-4954-cv (2d Cir. Oct. 2, 2008), represents the first time a federal Court of Appeals has decided whether SOX claims may be subject to mandatory employment arbitration agreements. A Jones Day team of Willis Goldsmith, Wendy Butler, Elena Voss, and Robert Terranova represented Aetna in the Second Circuit.

Factual and Procedural Background

Plaintiff-Appellant Linda Guyden served as Defendant-Appellee Aetna, Inc.’s Director of Internal Audit in 2004 until she was terminated for performance reasons. As a condition of her employment, Guyden had signed an agreement to arbitrate "all employment-related legal disputes."

After her termination, Guyden filed an administrative complaint with the Secretary of Labor, alleging that her termination violated § 1514A of SOX, which prohibits public companies from discharging an employee because he or she provided information or assistance to a person with supervisory authority "regarding any conduct which the employee reasonably believes constitutes a violation of [federal securities laws]." After the Secretary failed to take action within the statutorily prescribed waiting period, Guyden filed an action in the District of Connecticut.

The Company moved to dismiss the complaint and compel arbitration of Guyden’s SOX claim pursuant to her signed arbitration agreement. The District Court granted the Company’s motion. Guyden appealed, challenging both the arbitrability of SOX claims in general as well as the enforceability of the agreement she signed.

SOX Whistleblower Claims May Be Subject to Compulsory Arbitration

The Second Circuit rejected Guyden’s argument that Congress intended that SOX whistleblower claims should not be subject to mandatory arbitration agreements. Guyden claimed that an "inherent conflict" exists between the public purposes of SOX and the private nature of arbitration. The whistleblower provision, Guyden maintained, should be viewed in light of SOX’s overall purposes of encouraging accountability and transparency in public securities markets. Requiring individuals to arbitrate such disputes in a private forum would thwart these goals, Guyden argued, by preventing them from bringing potential violations to the attention of the public.

The Second Circuit rejected Guyden’s assertion that arbitration stood in such stark contrast with the policy behind SOX whistleblower claims. Citing the "liberal federal policy favoring arbitration" and prior case law enforcing arbitration of claims under a similar federal whistleblower statute, the Court noted that nothing in the language or history of the provision evinced Congressional intent to preclude mandatory arbitration of such claims. The Court explained that, in contrast with other provisions of SOX directed at public disclosure, the whistleblower provision was more narrowly aimed at providing protection and make-whole relief for employees who blow the whistle on real or believed securities violations. Indeed, Congress had specifically considered and rejected language that would have explicitly prohibited mandatory arbitration of SOX whistleblower claims.

Guyden’s Arbitration Agreement Is Enforceable

The Second Circuit also rejected Guyden’s challenges to the specific arbitration agreement she signed with the Company. Noting the common use of confidentiality clauses in arbitration agreements, the Court dismissed Guyden’s attack on the confidentiality provision in her arbitration agreement as "an attack on the character of arbitration itself" that "rest[ed] on a suspicion of arbitration" that was "far out of step" with the courts’ current view of arbitration. The Court also rejected Guyden’s challenge to the arbitration provision permitting the arbitrator to provide only a "brief summary of the arbitrator’s opinion" as preventing her from obtaining meaningful review of the arbitrator’s award. The Supreme Court had previously rejected a similar challenge, and Guyden offered no support for her speculation that the arbitrator would knowingly refuse to apply controlling law.

Finally, the Second Circuit found Guyden’s challenges to the arbitration agreement’s discovery provisions insufficient to overcome the strong policy in favor of arbitration. The Court acknowledged that the discovery provision, which provided for the deposition of only one fact witness as of right, "raises serious questions about whether Guyden effectively may vindicate her statutory cause of action in the arbitral forum," and cautioned that the agreement "might well be unenforceable" if that provision were "strictly enforced." However, because the agreement also permitted the arbitrator to order additional discovery "upon a showing that it is necessary for that party to have a fair opportunity to present a claim or defense" and the FAA provides the arbitrator with authority to compel the production of evidence and witnesses at a pre-merits hearing, the Court held that the mere unsubstantiated risk that the arbitrator might deny needed additional discovery was insufficient to preclude arbitration of Guyden’s claim.

Implications for Employers

The Second Circuit’s ruling in Guyden reaffirms the strong federal policy favoring arbitration, and provides significant support for the inclusion of SOX whistleblower claims in mandatory employment arbitration agreements. Employers should, however, pay heed to the Court’s language assessing the discovery provision contained in Guyden’s arbitration agreement and, in particular, its suggestion that a strictly enforced one-deposition limit might render the provision unenforceable. Therefore, employers who have adopted or are considering adopting mandatory arbitration policies should review those policies to ensure that arbitrators are provided with sufficient discretion to allow for additional discovery beyond any default limit, to satisfy the courts that employees will be provided with a fair opportunity to present their claims in arbitration.

This alert is intended to provide a brief synopsis of recent developments in the law and should not be construed as legal advice. For more information, please contact your Jones Day contact, Jacqueline Holmes, or Sarah McClure at 1.202.879.3939.

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