D.C. Circuit Holds that Whistleblower Provision Does Not Apply Extraterritorially
February 2, 2023
In Garvey v. Administrative Review Board, the D.C. Circuit held that a whistleblower provision in the Sarbanes-Oxley Act did not apply to alleged retaliation against an employee in Hong Kong by a subsidiary of a U.S. investment bank. The opinion carefully applies the Supreme Court’s two-step framework for the presumption against extraterritoriality to the whistleblower provision and accords with the provision’s interpretation by the Department of Labor and an earlier First Circuit decision. But the opinion also reveals a gap in the protection of whistleblowers at U.S. firms with multinational operations.
Background
In 2002, after the collapse of Enron, Congress passed the Sarbanes-Oxley Act (SOX). Section 806 provides whistleblower protection for the employees of publicly traded companies, making it unlawful to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment” for providing information about violations of federal laws protecting shareholders from fraud. A victim of retaliation may file a complaint with the Secretary of Labor and, if the Secretary has not made a final decision within 180 days, may file a civil action in federal district court. In 2010, the Dodd-Frank Act amended Section 806 by extending it to subsidiaries and affiliates of publicly traded companies whose financial information is included in the companies’ consolidated financial statements.
Christopher Garvey was employed as a lawyer by Morgan Stanley’s Japan and then Hong Kong subsidiaries. Garvey reported concerns about insider training, market manipulation, tax fraud, and other violations of U.S. securities laws. Morgan Stanley launched an investigation, although Garvey alleges that it was not seriously pursued. Instead, Garvey says, his superiors pressured him and cut his pay. He resigned from the Hong Kong subsidiary and retained legal counsel, but his counsel withdrew, allegedly because of pressure from Morgan Stanley.
Garvey filed a pro se complaint with the Department of Labor alleging retaliation in violation of Section 806, but the Department found that he had not alleged a prima facie violation. Garvey appealed the decision to an Administrative Law Judge, who held that Section 806 did not apply extraterritorially to his employment abroad. The Administrative Review Board (ARB) affirmed that decision, and Garvey appealed to the D.C. Circuit.
Applying the Presumption Against Extraterritoriality
In RJR Nabisco, Inc. v. European Community (2016), the Supreme Court articulated a new, two-step framework for applying the presumption against extraterritoriality. At the first step, a court looks for a clear indication of a statutory provision’s geographic scope and, if it finds one, applies the provision as Congress indicated. If it does not find one, then at step two, a court determines the “focus” of the provision and applies the provision if the focus occurred in the United States.
In Garvey, the D.C. Circuit first noted that other circuits have given Chevron deference to ARB interpretations of Section 806. As I have written elsewhere, courts have applied the ordinary rules of deference to administrative agencies to interpretations of geographic scope. But the court of appeals found it unnecessary to decide how much deference to give the ARB’s decision on the geographic scope of Section 806 because it considered the answer to that question clear.
Step One
At step one of the presumption analysis, the D.C. Circuit looked for a clear indication of whether Section 806 applies extraterritorially. The court began by noting that the provision’s text is silent on the question. The court also noted that the Sarbanes-Oxley Act had amended a separate, criminal whistleblower provision to apply extraterritorially. The court reasoned that “legislation explicitly providing one provision with extraterritorial reach likely weighs against a finding that another provision without such language applies overseas.” There was also nothing in the legislative history to indicate that Congress wanted Section 806 to apply abroad.
The Dodd-Frank Act, which expanded Section 806 to cover subsidiaries and affiliates in 2010, again said nothing about extraterritoriality, despite amending provisions of U.S. securities law to apply extraterritorially after the Supreme Court’s decision in Morrison v. National Australia Bank (2010). The court again reasoned that “Congress’s silence on Section 806’s scope—even as it amended the provision and provided for extraterritoriality elsewhere in the same statute—weighs strongly against a finding that Congress intended to provide for the overseas application of Section 806.”
Garvey argued that Congress’s expansion of Section 806 to cover subsidiaries and affiliates in 2010 provides a clear indication that the provision should apply to all such companies’ operations. But the D.C. Circuit held that generic terms like these are not enough to rebut the presumption. “The important point here,” the court said, “is that, even if Section 806 reaches some companies that have a presence in foreign countries, the statute is silent on whether it applies to those companies’ overseas operations and personnel.”
Finally, Garvey argued that Section 806 provides a clear indication of extraterritoriality by referring to other provisions of federal law with at least some extraterritorial application, as the Supreme Court found to be true of RICO’s criminal provisions in RJR Nabisco. But the court saw a different connection to the referenced statutes in Section 806 than in RICO. Whereas RICO makes violations of the referenced statutes a criminal offense, Section 806 merely protects persons who report suspected violations on the basis of a good faith belief. Whether the referenced statutes apply extraterritorially, the court concluded, “is irrelevant to whether Section 806’s prohibition on retaliation does as well.”
Step Two
Turning to step two, the D.C. Circuit looked to the focus of the particular provision rather than the statute as a whole. “Although the stated purpose of SOX is to protect investors and build confidence in U.S. securities markets,” the court observed, “the provision relevant here—Section 806—was specifically designed to afford remedies to employees of specified offending companies.” The court also noted that Section 806’s venue provisions assume that the complainant lives within the United States.
Garvey argued that Section 806 should apply whenever the fraudulent conduct reported would affect U.S. investors. But the court responded that “Section 806 was not intended to cure all the ills of the securities markets.” It did not create a cause of action for securities fraud but rather protected employees.
The court of appeals thus held “that the clear focus of Section 806 is on regulating employment relationships—specifically prohibiting covered employers from retaliating against employees for engaging in the protected activities enumerated in the statute.” Because Garvey worked and suffered retaliation outside the United States, applying Section would be impermissibly extraterritorial.
Assessment
As a matter of statutory interpretation, the D.C. Circuit’s decision in Garvey seems correct. The Supreme Court has repeatedly said that questions of geographic scope should be answered provision-by-provision, so it was proper for the court to determine the focus of Section 806 specifically rather than looking to the purpose of the Sarbanes-Oxley Act as a whole. The fact that Sarbanes-Oxley and Dodd-Frank expressly extended other provisions extraterritorially but said nothing about Section 806 also cuts against an expansive interpretation.
Garvey’s interpretation of Section 806 accords with the First Circuit’s in Carnero v. Boston Scientific Corp.(2006), a case decided before the Supreme Court adopted its current version of the presumption against extraterritoriality. Garvey also agrees with the Labor Department’s Interpretation of Section 806 both beforeand after the Supreme Court embraced the new presumption.
And yet the D.C. Circuit’s interpretation of Section 806 reveals a significant gap in the protection of whistleblowers. The Sarbanes-Oxley Act aims to protect U.S. investors, and its whistleblower protections further that aim by encouraging employees to report violations of federal law that could affect the valuation of publicly traded companies. Many publicly traded companies have substantial operations outside the United States, and legal violations abroad have the same capacity to hurt listed companies as legal violations in the United States. Yet Section 806 offers no protection to whistleblowers employed abroad, discouraging them from reporting violations for fear of retaliation.
Conclusion
The geographic scope of Section 806 now seems settled. The D.C. Circuit’s opinion is thorough and well-reasoned, and it agrees with the only other court of appeals decision to have addressed the question. The Labor Department’s interpretation has also been consistent and seems unlikely to change. Section 806 applies only to employees working in the United States. Although this leaves a gap in the protection of whistleblowers, it is a gap that Congress must fill.