SU's McDermott Wins Watershed Sarbanes-Oxley Whistleblower Case

SALISBURY, MD---In what law firms and academic blogs are calling a watershed case, the U.S. Department of Labor’s Administrative Review Board (ARB) has significantly expanded whistleblower protection under the 2002 Sarbanes-Oxley Act (SOX) following successful arguments by a Salisbury University professor.

The ARB decision rewrote existing law by finding that one need only express a “reasonable belief” of a SOX violation to engage in protective activity, the protected activity need not describe an actual violation of law, SOX complaints do not have to relate to fraud against shareholders, and a SOX complaint need not establish criminal fraud to prevail on a retaliation claim.

In January, Dr. E. Patrick McDermott, a practicing attorney, professor in the Management and Marketing Department of SU’s Franklin P. Perdue School of Business and director of research and evaluation for the Center for Conflict Resolution at SU, argued in favor of the plaintiffs, Theresa Neuschafer (a clinical research nurse) and her colleague Kathy Sylvester (a case report forms manager). They claimed they were terminated from their positions at pharmaceutical research company Parexel International after reporting their belief that the company breached the U.S. Food and Drug Administration’s Good Clinical Practices and used erroneous information to falsify data during the clinical testing of a drug.

This was a high-profile appeal, with the U.S. Securities and Exchange Commission and the Solicitor’s Office of the U.S. Department of Labor filing “friend of the court” briefs on the side of the plaintiffs, while the U.S. Chamber of Commerce filed a brief in support of Parexel.

“We teach about SOX in our classes, so it was an honor to help change the law so that shareholders in publicly traded companies are better protected,” said McDermott. “This decision, plus the recent Dodd-Frank legislative amendments, will lead to more effective management practices in publicly traded companies. I expect that our Perdue School of Business graduates, particularly our accounting majors, will play an important part in these compliance efforts.”

This was the first time the ARB, under any administration, scheduled oral arguments for a Sarbanes-Oxley whistleblower case.

“The Sylvester decision is a significant departure from the decision of the prior administration,” said Richard Renner, legal director of the National Whistleblowers Center in Washington, D.C., on the Whistleblowers Protection Blog. “All those decisions that required protected activity to ‘definitively and specifically’ implicate a violation of law are now out of date.” The latest decision “marks a decided turn in favor of recognizing whistleblowers as servants of the public purpose and deserving of strong protection. The ARB is clearing away the hurdles that made SOX so difficult for whistleblowers during its first eight years.”

Others in the legal field also have lauded the board’s ruling.

“The ARB has sent a clear message to would-be whistleblowers that SOX will provide them with real protection and that corporations will be held accountable for their misconduct,” said Debra Katz, a partner at the Washington, D.C.-based law firm Katz, Marshall & Banks, on the firm’s Corporate Whistleblower Blog.

In the wake of unreported fraud that toppled major corporations including Enron and Tyco, SOX, in part, granted protection for whistleblowers in the cases of shareholder and securities fraud in publically held companies. The act was co-sponsored by then-U.S. Senator Paul Sarbanes. A Salisbury native, he helped bring nationally renowned political speakers to the area through the Paul S. Sarbanes Lecture Series at SU’s Institute for Public Affairs and Civic Engagement (PACE).  He later received an honorary doctorate from the University.

For more information call 410-543-6030 or visit the SU Web site at www.salisbury.edu.