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Employment: Second Circuit Compels Arbitration in Sarbanes-Oxley Whistleblower Case (Web)

Can an employer compel an employee to arbitrate an unlawful termination action that claims the firing violates the Sarbanes-Oxley Act’s whistleblower protection provision?

The Second U.S. Circuit Court of Appeals says yes. It upheld a U.S. District Court decision dismissing the case and sending the matter to arbitration.

The facts in Guyden v. Aetna Inc., No. 06-4954, 2008 WL 4426478 (2d Cir. Oct. 2, 2008)(available here) are not disputed: Plaintiff Linda Guyden filed suit against against Aetna Inc. for violating the “SOX” whistleblower provision.

She alleged that Aetna had unlawfully terminated her position as internal audit director in retaliation for her efforts to address Aetna’s accounting irregularities. Prior to and during her employment, however, Guyden had signed documents incorporating, acknowledging and agreeing to mandatory and binding arbitration in employment-related disputes. After Guyden filed her complaint, Aetna moved to dismiss the complaint and compel arbitration. The district court granted both motions, and Guyden appealed.

On appeal, Guyden raised two issues: First, she argued that SOX whistleblower claims are not arbitrable because arbitration would conflict with SOX’s underlying purpose to compensate individual injury and its policy to serve as a “vehicle for transmitting to the public information about [corporate fraud].” Id. at 4.

Second, she argued the arbitration agreement’s procedural requirements would inhibit her ability to fully preserve her statutory rights.

With regard to the first issue, a party can prevent an arbitration agreement’s enforcement only by establishing Congressional intent to preclude a waiver of the judicial remedies for the statutory rights the party seeks to vindicate. Id. The Second Circuit, in a unanimous opinion by Circuit Judge Peter W. Hall, looked to the analysis found in Oldroyd v. Elmira Sav. Bank, 134 F.3d 72, 76 (2d Cir. 1998)(available here), where the appeals court held that arbitration remained appropriate for a whistleblower claim brought under the Financial Institutions Reform, Recovery, and Enforcement Act, or Firrea.

Similar to the Firrea review, the Second Circuit found that Congress’s primary purpose in adopting the SOX whistleblower provision is to provide private remedial measures to the injured employee and not to address public disclosure of corporate wrongdoing. Indeed, the provision focuses specifically on protecting the plaintiff rather than revealing the defendant’s misconduct; Guyden need not even show Aetna had committed actual fraud in order to prevail on her statutory claim.

Finding SOX’s “compensatory scheme is entirely consistent with mandatory arbitration,” the panel noted that Guyden retained her ability to vindicate her statutory cause of action and could guarantee SOX’s remedial and deterrent purposes in an arbitral forum. The appellate court held that SOX claims are arbitrable. Id.

Regarding the second issue, Guyden contended that the arbitration agreement’s confidentiality clause, brief summary provision, and limited discovery provision would prevent her from fully vindicating her statutory rights.

While the Second Circuit recognized Guyden’s concern that arbitration confidentiality of SOX whistleblower claims might hinder potential whistleblowers, the court found confidentiality indispensable role in arbitration, and therefore could not be excluded.  Guyden’s contention that a brief summary of the arbitrator’s decision also would thwart efforts to obtain adequate judicial review of that decision was without merit.

The court deemed Guyden’s fears as mere speculation based on unfound assumptions that the arbitration tribunal would fail to apply controlling law and suppress review “through the form of its written decision.” Thus, the brief summary provision also was upheld.

Finally, Guyden’s argument that limited discovery--in her case, one witness and one expert deposition--would not allow her a meaningful chance to fully support her claims also was was precluded. Although the court conceded that limiting discovery to an unfair degree might make the arbitration agreement unenforceable, it found Guyden and Aetna’s arbitration agreement, and the FAA, provided sufficient safeguards for Guyden’s rights. In particular, the agreement gave the arbitrator authority to order additional discovery, and the FAA grants the arbitrator further discretion to compel discovery and witnesses to a pre-merits hearing. Citing Guyden’s unsupported conjectures regarding an arbitrator’s decision to deny her needed discovery, the court also rejected her third challenge.

Signed into law on July 30, 2002, the Sarbanes-Oxley Act was intended to “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws.” See The whistleblower provision provides a forum for plaintiffs like Guyden to vindicate their statutory rights in a fair, impartial judicial setting.

Nevertheless, in the age of increasing awareness and acceptance of alternative dispute resolution practices, companies are employing arbitration as the means to resolve their employment-related, albeit statutorily-derived, disputes. Guyden reflects the challenges that face courts today in balancing those interests to create a forum where the employee can justly vindicate her statutory rights, as well as arbitrate those interests in a fair and meaningful manner.

--Jean Loh, CPR Intern