How Does That Burden of Proof Work Again? The Second Circuit’s Recent Sarbanes-Oxley Decision Explains

| Zuckerman Spaeder Team

Earlier this month, we blogged about an important decision by the U.S. Court of Appeals for the Second Circuit in Bechtel v. Administrative Review Board, a Sarbanes-Oxley whistleblower case.  In Bechtel, thecourt upheld the Department of Labor’s denial of a whistleblower claim, even though it found that the administrative law judge (“ALJ”) had applied the wrong legal standard. 

So how did the ALJ get the law wrong?

To understand the ALJ’s error, it’s important to understand how the governing law defines the burden of proof in a Sarbanes-Oxley case. 

The sources for the Sarbanes-Oxley burden of proof are (i) 49 U.S.C. § 42121(b), which the Sarbanes-Oxley whistleblower law (Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A) incorporates by reference; and (ii) the Department of Labor regulations implementing Section 806.  In Bechtel, the Second Circuit adopted the following description of the burdens of proof in a Sarbanes-Oxley whistleblower action, saying that it was “established by the relevant regulations and ... consistent with the statute”:

To prevail under [§ 1514A], an employee must prove by a preponderance of the evidence that (1) she engaged in protected activity; (2) the employer knew that she engaged in the protected activity; (3) she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action.

This is the so-called “prima facie” (in English, “at first appearance”) whistleblowing case.  If an employee cannot prove the four elements necessary to support a prima facie case of retaliation, then his whistleblowing claim fails.  But if he can support a prima facie case, then the employer has an opportunity to rebut that case.  As the Second Circuit wrote in Bechtel

If the employee establishe[s] these four elements, the employer may avoid liability if it can prove “by clear and convincing evidence” that it “would have taken the same unfavorable personnel action in the absence of that protected behavior.”

TheALJ in Bechtel recognized this burden-shifting approach, but also described an alternative.  The ALJ said that if at the prima facie stage, an employer presented evidence of a legitimate reason for the adverse action, the employee could still prevail if he proved by a preponderance of the evidence that the employer’s articulated legitimate reason was pretext for discrimination (i.e., that the legitimate reason was a cover-up for whistleblower retaliation).  After that, the employer could avoid liability by presenting clear and convincing evidence that it had a nondiscriminatory justification for the adverse employment action.  This new burden-shifting approach, said the Second Circuit, was “apparently an alternative to proving the four elements of the complainant’s prima facie case, as required under the statute and relevant regulations.” 

The Second Circuit was plainly unhappy with the ALJ’s invention: it wrote that the alternative approach “ha[d] no basis in any relevant law or regulation, and [wa]s simply incorrect.”  Instead, it clarified, “Bechtel’s sole burden was to prove, by a preponderance of the evidence, that his protected activity contributed to the adverse employment action. If he had successfully made such a showing, the burden would then have shifted to CTI to prove, by clear and convincing evidence, that it would have taken the same action absent Bechtel’s protected activity.” 

As we wrote in our prior post, the ALJ’s error was unimportant to the outcome because, according to the Second Circuit, Bechtel couldn’t prove the fourth element of a prima facie case – that his protected activity was a contributing factor to the unfavorable action that his employer took against him.  If Bechtel had put forth the evidence that the ALJ would have required under the alternative approach (that the “employer’s articulated legitimate reason” for firing him was a cover-up for retaliation), he would certainly have shown the fourth factor of his prima facie case (that his whistleblowing was “a contributing factor in the unfavorable action”).  Thus, in a practical sense, the ALJ’s alternative burden-shifting approach was meaningless.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

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