SOX - Strictly Domestic According to 1st Circuit
by Michael Fox
Finding itself the first appellate court to address the question, the 1st Circuit had no difficulty in finding Sarbanes Oxley's whistleblower protection under Section 806 has no extraterritorial application. Carnero v. Boston Scientific Corp. (1st Cir. 1/5/06). The Court relied on the Supreme Court's presumption that laws passed by Congress are limited to the territorial jurisdiction of the United States absent a clearly expressed contrary intent, first articulated in Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949). The Court affirmed the dismissal of the the SOX claim of an employee claiming he had been improperly terminated for reporting that two Boston Scientific Corp. Latin American subsidiaries, by which he was directly employed, were creating false invoices and inflating sales figures.
Although clearly important for those companies with foreign operations, the opinion also addressed a much broader reaching question -- would the conduct have been covered assuming it had occurred within the United States. The argument the Court seemed to be going out of its way to address, since it was not raised by either party, was whether the fact that Carnero was employed by subsidiaries of Boston Scientific Corp., not the parent company, would preclude coverage since the whistleblowers protected under the literal language of SOX are "employees of publicly traded companies."
Although Carnero alleged he was employed by the publicly traded company, due to its oversight of its two subsidiaries and his contacts with it, the Court found there might well be an alternative way to liability:
Moreover, apart from that, the fact that he was employed by BSC's subsidiaries may be enough to make him a BSC "employee" for purposes of seeking relief under the whistleblower statute. The DOL regulations pertaining to the whistleblower provision of the Sarbanes-Oxley Act define "employee" as someone "presently or formerly working for a [publicly-traded] company or company representative" (emphasis supplied). The latter term is defined as including a "contractor . . . or agent of a company." See 29 C.F.R. § 1980.101 (2005). If BSA and BSB were agents of BSC, as seems quite possible, their own employee would fit this definition of the parent's "employee." Hence Carnero, by virtue either of his own asserted contacts with BSC or his direct employment by its subsidiaries, or both, may well be an "employee" of BSC for purposes of 18 U.S.C. § 1514A.
Although the comment may be dicta, it should give pause to those who had hoped for a more restricted reading of SOX.