ALERT: Fourth Circuit Holds that Sarbanes-Oxley Plaintiffs Have the Right to a De Novo Federal Court Hearing Where the Department of Labor Fails To Finally Resolve the Claim Within the Statutory Time Frames

The Fourth Circuit recently became the first appellate court to consider whether a plaintiff has a right to de novo proceedings in district court on a whistleblower claim even after that claim has been resolved against the employee by a Department of Labor Administrative Law Judge ("ALJ"). Stone v. Instrumentation Laboratory Co., No. 08-2196, 2009 WL 5773765 (4th Cir. Dec. 31, 2009). The Stone court held that a whistleblower claimant is entitled to de novo review in district court, thus providing Sarbanes-Oxley whistleblower claimants with two independent chances to prove their claims, and requiring employer defendants in such cases to defend themselves twice. Employers subject to Sarbanes-Oxley, and to other statutes containing similar statutory language (such as the Federal Railroad Safety Act) should be aware of this decision and its implications for defending whistleblower claims.

Defendant Instrumentation Laboratory Company ("ILC") hired Plaintiff David Stone in 1999. In 2005, Stone assumed the role of Director of National Accounts. Stone alleged that ILC engaged in certain improper financial reporting practices, and claimed that ILC was misrepresenting its financial condition to shareholders. From September 2005 to March 2006, Stone voiced his concerns to several ILC managers, who allegedly refused to fix the problems. ILC terminated Stone for what it alleged were unrelated performance reasons in March 2006.

On June 19, 2006, Stone filed a Sarbanes-Oxley complaint with the Occupational Safety and Health Administration ("OSHA") alleging that his termination occurred in retaliation for reporting financial discrepancies. Sarbanes-Oxley provides that any complaints under the statute must be filed with OSHA within 90 days of the alleged retaliation. 18 U.S.C. § 1514A(b)(2)(D). It further provides that "if the Secretary has not issued a final decision within 180 days of the filing of the complaint," the claimant may "bring[] an action at law or equity for de novo review in the appropriate district court of the United States . . ." 18 U.S.C. § 1514A(b)(1). Under OSHA procedures, the Department of Labor ("DOL") first issues preliminary findings, after investigation, regarding a charge. 29 C.F.R. § 1980.105. Either party may then appeal those findings to an administrative law judge within 30 days, and then to the DOL’s Administrative Review Board ("ARB") within 10 days after the ALJ opinion issues. 29 C.F.R. § 1980.106; 29 C.F.R. § 110(a). The DOL order is considered final at any stage if the time to appeal passes without an appeal being filed; otherwise, the ARB’s final decision is considered the "final decision" of DOL.

In Stone, OSHA issued preliminary findings in favor of ILC on January 3, 2007, which was more than 180 days after Stone had filed his claim. Stone objected to the findings and requested a hearing before an ALJ. The ALJ granted ILC’s motion for summary judgment on September 6, 2007, and Stone timely appealed to the ARB. On November 8, 2007, before briefs to the ARB were filed, Stone notified the ARB that he planned to file a de novo action in district court, and the ARB therefore dismissed his administrative appeal. Stone filed an action in the United States District Court for the District of Maryland on November 26, 2007, and the district court dismissed the case, holding that the ALJ's decision was a final judgment on the merits and that the district court action was barred by collateral estoppel. The district court held that Stone’s remedy was to pursue his appeal before the ARB, and mandamused the ARB to decide the matter within 90 days. Stone did not try to further prosecute his appeal before the ARB because he believed the ARB lacked jurisdiction. The ARB therefore dismissed the case. Stone appealed the issue to the Fourth Circuit.

The Fourth Circuit addressed whether a Sarbanes-Oxley whistleblower complainant is entitled to de novo review of his or her claims in federal district court even after an ALJ had issued a decision on the merits because the DOL did not issue a final decision within 180 days of the filing of his or her complaint with OSHA. Stone argued that he was entitled to this review based on the clear language of the statute. ILC, on the other hand, argued that the language of the statute and relevant regulations do not abrogate the court's inherent power to apply preclusion principles where the DOL had already issued a decision – albeit potentially not a "final" one – on the merits.

The Fourth Circuit determined that the district court had clearly strayed from the clear meaning of the statute when it applied preclusion principles because the statute expressly provided that de novo review was available in district court if 180 days passed before DOL issued a final decision. While the court recognized the general judicial authority to prevent duplicative litigation, doing so in this case directly contradicted the de novo review requirement expressly provided for by the statute. Because the literal interpretation of the statute did not in the Fourth Circuit’s view produce an "absurd" result even though it would result in relitigating the issue decided by the ALJ, the Fourth Circuit held that courts must follow the clear statutory language and allow for de novo review when there is no final administrative decision within 180 days of the filing of a complaint. In effect, this permits a Sarbanes-Oxley plaintiff (and whistleblower plaintiffs under other similar statutory schemes) two bites at the apple: a claim before an administrative law judge and, if that does not turn out as the plaintiff wishes, a second chance to prove his or her claims in district court.

This decision may have a significant impact on Sarbanes-Oxley claims and whistleblower claims brought under statutes with similar language, such as the Federal Railroad Safety Act. In essence, the Fourth Circuit held that Sarbanes-Oxley gives plaintiffs in such cases two chances to prevail on their claims and, at the same time, puts the burden on employers to defend the same claim twice. Even if required by the statute, the result in Stone is particularly troubling because the ALJ proceeding occurred after the 180-day time period had already expired. Thus, Stone was permitted to proceed before the ALJ even though he could at that time have chosen to remove his claim to district court, and then when the ALJ proceedings did not turn out as he wished, obtain a do-over in district court. While it is unclear how other circuits will rule on this issue, this opinion may multiply Sarbanes-Oxley litigation by requiring two proceedings in contested cases, and thus significantly increase employer burdens in defending such cases. This is particularly true because, as a practical matter, DOL very rarely resolves whistleblower complaints within 180 days (or within 210 days, as required by some statutes), so that the potential for de novo district court review will exist in nearly every case.

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, Lawrence DiNardo at 312.782.3939, Mark Temple at 832-239-3939, or Jacqueline Holmes or Sarah McClure, at 202.879.3939.