ALJ's Decision in Employer's Favor Does Not Preclude Employee's New Sarbanes-Oxley Lawsuit in Federal Court
Time 5 Minute Read

As a recent decision by the U.S. Court of Appeals for the Fourth Circuit makes clear, the fact that an employer prevailed against an employee’s Sarbanes-Oxley claim in an administrative proceeding cannot be used to bar a new trial of the claim in federal court.  The U.S. District Court for the District of Maryland dismissed a former employee’s SOX lawsuit on the ground that it was precluded by an administrative law judge’s granting of the employer’s motion for summary decision.  The Court of Appeals, in a ruling of first impression, held that the lower court erred and vacated its dismissal in Stone v. Instrumentation Lab Co., 4th Cir., No. 08-1970, 12/31/09.

Employee’s Administrative Claim and District Court Claim Dismissed
David Stone filed a retaliation claim against his former employer, Instrumentation Laboratory Company, with the Occupational Safety and Health Administration pursuant to the Sarbanes-Oxley Act.  After OSHA issued its preliminary findings, Stone timely objected to them and requested a hearing before an ALJ.  ILC filed a motion for summary decision before the ALJ, which the ALJ granted.  The Administrative Review Board thereafter granted Stone’s petition for review of the ALJ’s order.  Before his initial brief to the Administrative Review Board was due, Stone notified the Board that he was going to bring a de novo action in federal district court, and the Board thereafter dismissed the appeal.

ILC filed a motion to dismiss in the district court pursuant to Federal Rule of Civil Procedure 12(b)(6), which the court granted, finding that the ALJ’s ruling was a “final judgment on the merits” for the purposes of collateral estoppel.  The court found that permitting Stone to pursue relief in district court would be “wasteful,” required the Administrative Review Board to rule on Stone’s appeal, and stayed Stone’s federal court proceedings.  When Stone refused to further prosecute his appeal before the Administrative Review Board, the Board entered a final order of dismissal and the district court entered a final judgment also dismissing his claim.

Court of Appeals Restores Employee’s Claim
Stone appealed the district court’s dismissal of his claim arguing “that as a Sarbanes-Oxley whistleblower complainant, he is entitled to a de novo review in federal district court because the Secretary of Labor did not reach a ‘final decision’ within 180 days, as required by the Sarbanes-Oxley Act.  ILC argued the Act does not “abrogate the district court’s long-recognized power to apply principles of preclusion to avoid duplicative litigation.”

The court first looked to the plain language of the statute and concluded that it unambiguously permits a whistleblower complainant to bring an action for de novo review in district court if the Secretary of Labor has not issued a final decision within 180 days of the complainant filing an administrative complaint.  The court held that “[i]n applying preclusion principles, the district court strayed from the plain and unambiguous meaning of [the Sarbanes-Oxley Act]” which does not merely give the federal district court jurisdiction over a complainant’s action, but rather gives a complainant a “statutory right” to a federal district court’s de novo review.  The court explained that the district court should not have looked to any Department of Labor interpretive regulations or the Secretary’s comments to such regulations to come to a different conclusion because the statute itself is clear.  Citing Astoria Federal Sav. & Loan Ass’n v. Solimino, 501 U.S. 104, 108 (1991), the court noted that courts do not have free rein to impose preclusion if it was not intended by the legislature.

The court next considered whether the plain language of the statute would lead to an “absurd result” because of the likely duplication of efforts by the ALJ and district court.  The Secretary of Labor had previously commented that it “anticipates that Federal courts will apply [preclusion] principles if a complainant brings a new action in Federal court following extensive litigation before the Department that has resulted in a decision by an administrative law judge or the Secretary.”  However, the court ruled that the Secretary’s comments “cannot be squared with the statutory language chosen by Congress,” nor does the Secretary or ILC “present a compelling argument as to why such duplication is ‘absurd.’”  The Court explained that Congress purposely chose an “aggressive timetable for resolving whistleblower claims,” a “natural result” of which is duplication if the Department does not resolve the claim within the prescribed timeframe.  If the timetable does not work in practice, it must be resolved by Congress, not the courts.

Given the unambiguous language of the Sarbanes-Oxley Act and the absence of the potential for an “absurd result,” the court held that Stone was entitled to de novo review of his whistleblower claim in the district court and, accordingly, vacated the dismissal and remanded to the district court.  The result for employers is the proverbial “second bite at the apple” for Sarbanes-Oxley plaintiffs.


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