SOX and foreign whistleblowers

One of the many problems with SOX is the extent to which it involves potential conflicts between US and foreign law. This particularly causes problems for foreign issuers that sell shares in the US. But it may also affect even US firms that do business in foreign countries, subject to different laws and mores.

Moreover, in my and Henry Butler's AEI project (draft here, book due soon) on SOX we pointed out that

The differences between SOX and foreign law may arise unexpectedly. For example, the SOX whistleblowing provisions, which provide for anonymous tips, may conflict with European privacy laws. U.S. companies operating in Europe may be forced either to comply with SOX or comply with local law.

An ABA Journal article (HT Fred Tung) notes that whistleblowers are viewed differently in Europe, with its memories of the Gestapo, than they are here, and that "Europeans place a higher premium on guarding personal reputations of targets of complaints, which sometimes arise out of spite, revenge or other suspect motives."

The article discusses a February 1 EU opinion that permits companies to set up and use whistleblowing systems, but imposes limits on these systems.

The article also discusses Carnero v. Boston Scientific Corp., which may slightly alleviate foreign/US conflicts (assuming other circuits join) by holding that whistle-blower protection didn’t apply to an Argentinean citizen working in South America for subsidiaries of a US company.

The opinion, which deals with SOX 806 (18 U.S.C. § 1514A), holds that "where, as here, a statute is silent as to its territorial reach, and no contrary congressional intent clearly appears, there is generally a presumption against its extraterritorial application. . . . ."

The court noted that

• "[T]he statute's legislative history indicates that Congress gave no consideration to either the possibility or the problems of overseas application."
• Congress provided for extraterritorial enforcement elsewhere in the act, including of a criminal whistleblower provision, but not for 806, "demonstrating Congress's ability to provide for foreign application when it wished."
• Congress did not provide for problems arising when the Department of Labor (which administers these provisions) seeks to regulate employment relationships in foreign nations, or give the DOL powers and resources to conduct foreign investigations.
• There were no judicial venue provisions as to foreign complainants claiming violations in foreign countries. . . .

The court observed:

If the whistleblower protection provision is given extraterritorial reach in a case like the present one, it would empower U.S. courts and a U.S. agency, the DOL, to delve into the employment relationship between foreign employers and their foreign employees. . . .

We believe if Congress had intended that the whistleblower provision would apply abroad to foreign entities, it would have said so, and certainly would have considered, before enacting the law, the problems and limits of extraterritorial enforcement. Yet Congress did not at any time discuss the interest other countries would have in regulating these employment relationships, nor did Congress include in the whistleblower provision any mechanism for resolving potential conflicts with foreign labor laws and procedures. Congress's complete silence suggests that it had no thought or intention to apply this provision to foreign employees and entities as now proposed. . . .

We can only be thankful that Congress' level of execution in this provision matched the level of its policymaking. 

Cases like this are a reminder that the problems with SOX are not all about small firms and 404.