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Second Circuit First to Rule on Arbitrability of Sarbanes-Oxley “Whistleblower” Claims

The Second Circuit Court of Appeals recently became the first federal appellate court to decide the question of whether employee whistleblower claims brought under the Sarbanes-Oxley Act of 2002 are arbitrable.  In Guyden v. Aetna, Inc., 544 F.3d 376 (2d Cir. 2008), the Court answered that question in the affirmative.  The Court also analyzed several commonplace limitations in Aetna’s arbitration agreement, and upheld them as valid limitations that did not prevent the employee from enforcing her statutory rights.  This article discusses the Guyden decision and the specific arbitration clause at issue in that case, and offers some practical guidance to employers concerning the enforceability of arbitration agreements construing statutory claims.

Legal Background

A key component of the Sarbanes-Oxley Act of 2002 (“SOX”) – which provides a comprehensive framework for corporate governance – is the protection afforded to corporate “whistle-blowers.”  Specifically, SOX prohibits public companies from, among other things, “discharg[ing] … an employee … because of any lawful act done by the employee … to provide information regarding any conduct which the employee reasonably believes constitutes a violation of [federal securities law], when the information or assistance is provided to … a person with supervisory authority over the employee….”  18 U.S.C. § 1514A(a)(1)(C).

Arbitration agreements are “valid, irrevocable and enforceable” under the Federal Arbitration Act (“FAA”) except where grounds exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.  The Supreme Court has long-recognized that the FAA embodies a strong federal policy favoring enforcement of arbitration agreements – a policy that is “not diminished when a party bound by an agreement raises a claim founded on statutory rights.”  Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 226 (1987).  In determining whether to stay litigation pending arbitration, a court must resolve four issues:  1) whether the parties agreed to arbitrate; 2) whether the dispute falls within the scope of the arbitration agreement; 3) if federal statutory claims are asserted, whether Congress intended the statutory claims to be non-arbitrable; and 4) if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration.  See Oldroyd v. Elmira Sav. Bank, 134 F.3d 72, 75-76 (2d Cir. 1998).1

Factual Background

In reviewing the district court’s dismissal of Plaintiff Linda Guyden’s complaint, the Second Circuit accepted as true the following facts:  In January 2004, Guyden joined Aetna as its Director of Internal Audit. Shortly thereafter, Guyden claimed to have discovered that Aetna’s Internal Audit Department was “ineffective, demoralized, and without independence or objectivity.”  After raising her concerns with Aetna’s senior management, Guyden received a “withering” performance review.  Nonetheless, Guyden succeeded in hiring an outside auditor to review Aetna’s internal controls.  Just before she was scheduled to present the outside auditor’s report to Aetna’s Audit Committee, Aetna terminated Guyden’s employment.  Believing that she was fired by Aetna to prevent her from bringing attention to alleged deficiencies in Aetna’s internal controls, Guyden filed an administrative complaint with the Secretary of Labor alleging that her firing violated the SOX whistleblower protection provision.  When the Secretary took no action on her complaint, Guyden sued Aetna in the District of Connecticut.

Aetna moved to dismiss the complaint and to compel arbitration based on an arbitration agreement, which provided that “all employment-related legal disputes between [Guyden and Aetna] will be submitted to and resolved by binding arbitration….”  Guyden challenged Aetna’s motion to compel arbitration on two grounds.  First, she argued that SOX whistleblower claims are categorically non-arbitrable.  She further argued that Aetna’s arbitration process prevented her from vindicating her statutory rights.  After the district court rejected these challenges and dismissed Guyden’s complaint in favor of arbitration, Guyden appealed.

Arbitrability of SOX Whistleblower Claims

Before the Second Circuit, Guyden asserted that Congress did not intend for SOX whistleblower claims to be arbitrated.  She urged the Court to find an “inherent conflict” between the underlying purpose of SOX and the arbitration process.  Specifically, she argued that a SOX whistleblower claimant acts, in essence, as a private attorney general, and that resulting litigation serves an essential function of informing the public about a corporation’s fraudulent activity.  Arbitration, she claimed, interfered with the purpose of SOX by preventing her from using her lawsuit to expose Aetna’s accounting irregularities to Aetna’s shareholders and the investing public.  The Second Circuit previously rejected a similar argument under a different statute when it held that retaliatory discharge claims under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) are arbitrable.  See Oldroyd, 134 F.3d at 76 (2d Cir. 1998).  In examining SOX’s legislative history, the Court found that the primary purpose of SOX is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct.  In fact, before passing a final version of SOX, Congress twice rejected versions that would have precluded mandatory arbitration of whistleblower claims.  Finding no inherent conflict between the purpose of SOX and mandatory arbitration, the Second Circuit held that SOX whistleblower claims are arbitrable.

Enforceability of Aetna’s Arbitration Provisions


Guyden also claimed that certain limitations set forth in Aetna’s arbitration agreement prevented her from vindicating her statutory rights.  Specifically, she challenged:  1) a confidentiality clause; 2) discovery limitations; and 3) a clause requiring the arbitrator to provide a brief summary of his or her decision.  The Court addressed each of these provisions.

Confidentiality Clause

Aetna’s arbitration agreement contained the following confidentiality clause:

All proceedings, including the arbitration hearing and decision, are private and confidential, unless otherwise required by law.  Arbitration decisions may not be published or publicized without the consent of both [Guyden] and [Aetna].

 

Guyden argued that if she prevailed on her claim in arbitration, the confidentiality clause would prevent her from communicating her success to other Aetna employees.  She claimed that such communication was essential to fulfill a primary purpose of SOX – to remind employees that their rights are protected if they report wrongdoing.  Although the Second Circuit found merit in this argument, the Court recognized that confidentiality provisions are frequently employed in arbitration agreements.  “Confidentiality clauses are so common in the arbitration context,” the Court stated, that Guyden’s “attack on the confidentiality provision is, in part, an attack on the character of arbitration itself.”  In light of the Court’s holding that SOX whistleblower claims are arbitrable, the Court rejected Guyden’s challenge to the privacy of the resulting arbitration.

Discovery


Aetna’s arbitration agreement allowed for limited discovery as follows:

[Guyden and Aetna] shall be entitled to conduct limited pre-hearing discovery.  Each may take the deposition of one person and anyone designated by the other as an expert witness.  [Each party] also has the right to submit one set of ten written questions (including subparts) to the other party, which must be answered under oath, and to request and obtain all documents on which the other party relies in support of its answers to the written questions….Additional discovery may be permitted by the arbitrator upon a showing that it is necessary for that party to have a fair opportunity to present a claim or defense.

 

Guyden argued that the discovery limitations prevented her from adequately presenting her claim because she needed access to third-party discovery, subpoenas and document production.  Even though she could apply to the arbitrator for “additional discovery,” she claimed she would be unable to make the required showing given her limited resources.  The Court agreed that the discovery limitations in Aetna’s arbitration agreement raised “serious questions” about whether Guyden could effectively vindicate her statutory rights in arbitration.  However, the Court recognized that the FAA provides the arbitrator with authority to compel the production of evidence and witnesses at a pre-merits hearing.  See Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 578-80 (2d Cir. 2005).  Moreover, Guyden introduced no evidence in support of her claim that an arbitrator would refuse to order additional discovery pursuant to the parties’ agreed-upon terms.  Absent such evidence, the Court enforced the arbitration agreement.

The “Brief Summary” Provision

Aetna’s arbitration agreement contained the following language concerning the decision of the arbitrator:  “Unless otherwise agreed, the arbitrator’s decision will be in writing with a brief summary of the arbitrator’s opinion.”  In light of this limitation, Guyden argued that she would be precluded from obtaining effective judicial review of the arbitrator’s decision, as the brevity of the summary would allow the arbitrator knowingly to ignore the law because “no one would be the wiser.”  The Court recognized that a similar argument was considered and rejected by the Supreme Court when it ruled that claims under the Age Discrimination in Employment Act are arbitrable.  See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31-32 (1991).  Here, Guyden provided no basis for her speculation that the arbitrator would fail to apply controlling law and then attempt to insulate that failure through the form of its written decision.  Accordingly, the Court refused to find the arbitration agreement unenforceable on the basis of the brief summary requirement.

Take Away’s” for Employers


In light of the Guyden decision, employers in New York (and elsewhere in the Second Circuit) that utilize arbitration agreements can take comfort in knowing that SOX whistleblower claims are, as a matter of law, arbitrable.  However, employers should review their arbitration agreements to ensure that they are sufficiently broad in scope to encompass statutory claims (e.g., “all employment-related disputes”).  Employers also should examine any limitations set forth in their arbitration agreements that arguably limit an employee’s ability to vindicate his or her statutory rights in arbitration.  Based on Guyden, confidentiality clauses in arbitration agreements appear to be generally acceptable.  Similarly, reasonable discovery limitations also are generally acceptable.  However, employers should consider including language that empowers an arbitrator to award additional discovery if necessary to enable an employee to present his or her claim.  At a minimum, the arbitration agreement should require that the arbitrator’s decision be in writing with a brief summary of the arbitrator’s opinion.  Finally, although not specifically at issue in Guyden, employers should review their arbitration agreements to ensure that they contain no restrictions on the arbitrator’s ability to award statutory remedies.  Such restrictions arguably prevent an employee from vindicating his or statutory rights in the arbitral forum, and thus, may provide an employee with grounds to challenge the enforcement of the arbitration agreement with respect to a statutory claim.  See, e.g., PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003) (compelling arbitration of RICO claims even though remedial limitations in the arbitration agreement arguably prevented arbitrator from awarding treble damages available under RICO).

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Reprinted with permission from the December 2, 2008 edition of the New York Law Journal© 2008 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.



[1]  For further background on Sarbanes-Oxley, see Klein and Pappas, “The Whistleblower Provisions of the Sarbanes-Oxley Act” (New York Law Journal at p. 3, December 2, 2002); Klein and Pappas, “Defining ‘Whistleblower’ Under The Sarbanes-Oxley Act,” (New York Law Journal at p. 3, August 7, 2006).

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