Corporate Governance

Fleszar v. U.S. Dept. of Labor: Judicial Refusal to Extend Whistleblower Provisions to Non-Profit

By Michael Silverman

SOX provided whistleblower protection to public companies (those registered under Section 12 of the Exchange Act).  In Fleszar v. U.S. Dept. of Labor, 598 F.3d 912 (7th Cir. 2010), plaintiff unsuccessfully tried to extend those protections to the American Medical Association ("AMA"), a nonprofit membership association. 

Plaintiff filed two complaints under Section 806 of SOX with the Department of Labor.  She received an adverse ruling from an ALJ and the DoL Administrative Review Board.  The DoL declined to investigate her claims, concluding that the AMA did not fall within Section 806.  

Plaintiff essentially argued that an investigation might turn up facts indicating that the AMA was subject to Section 806.  The investigation could show that the AMA was somehow required to file reports with the SEC because of its past involvment with an affiliated broker dealer or that the AMA was a "contractor, subcontractor, or agent" of a company filing reports under Section 12.  As Judge Easterbook put it, plaintiff "believes that an investigation by a team of bloodhounds at the Department of Labor might turn up facts showing that the AMA is such a 'contractor, subcontractor, or agent.'"

The court concluded that the decision of the Secretary not to review plaintiff's claim was a non-reviewable discretional decision by the agency that was not subject to judicial review.  As the court noted:

• An agency must be allowed the authority to decide where its investigative and prosecutorial resources are best applied. Judges do not know what is on the agency's menu and so cannot displace the agency's choices among projects. What sense would it make to direct the Department to investigate the AMA, which almost certainly is not covered by § 1514A? That would just reduce the resources available to investigate and vindicate claims by employees of publicly traded companies, the statute's main objects.
  

Although non-reviewable, the court did offer some insight into the plaintiff's legal argument.  The mere fact that the AMA engaged in business dealings with public companies did not result in the Association becoming a contractor under Section 806.  As the court noted:

• We don't share Fleszar's belief that the phrase "contractor, subcontractor, or agent" means anyone who has any contract with an issuer of securities.  Nothing in § 1514A implies that, if the AMA buys a box of rubber bands from Wal-Mart, a company with traded securities, the AMA becomes covered by § 1514A. In context, "contractor, subcontractor, or agent" sounds like a reference to entities that participate in the issuer's activities. The idea behind such a provision is that a covered firm, such as IBM, can't retaliate against whistleblowers by contracting with an ax-wielding specialist (such as the character George Clooney played in "Up in the Air"). But whether or not this is the right way to understand "contractor, subcontractor, or agent", Fleszar did not produce evidence that the AMA fits this category, and the Secretary was not legally obliged to assist her.
  

The primary materials for this case may be found on the DU Corporate Governance Website.

Full post as published by The Race to the Bottom on August 21, 2010 (boomark / email).