SARBOX Trap for the Unwary - Appeal Within 10 Days, Or Else

Sarbanes Oxley is still a relatively new statute and so practitioners (as well as the judiciary, both administrative and legal) are just now beginning to work our way through various issues. While one would always hope for a civil tone and treatment between the bench and bar, it would seem especially called for when approaching new and unanswered questions. Be warned, the following is a rant.

Take the following situation: A whistleblower complaint goes to trial before an ALJ with three contested issues: was there protected activity, was the employer aware of it, and was there a causal connection to the adverse employment action (in this case a termination). ALJ finds plaintiff engaged in protected activity, company had at least constructive knowledge of the activity, but there was no causal connection between the protected activity and the termination. Bottom line, plaintiff loses, case thrown out, employer and its counsel happy, employee and his counsel not so happy. That is the scenario so far in Heinrich v. Ecolab, Inc. 2004 Sox 51 (ALJ) (2004) [pdf].

Next scenario. Unhappy employee files an appeal with the Administrative Review Board on the 10th business day after the ruling, the last day for an appeal under the rules. Within 8 business days, employer's counsel files cross-appeal. (Although the purpose of the cross-appeal is not clear, I am assuming the employer wanted to ensure it would be able to advance its arguments that the ALJ was wrong on the issue of protected activity, which included an argument that SARBOX should have a materiality provision, and on the issue of knowledge.) The ARB issues an Order to show why the employer's cross-appeal should not be barred as untimely for not being filed within 10 business days of the decision by the ALJ.

Employer's counsel, quite reasonably argues that it seems unlikely Congress intended every successful litigant should of necessity file a "defensive appeal" when it would have been quite happy to let the case slide into oblivion unless the losing party tries to keep it alive. It makes sense to me, although it is clear that there is no explicit procedure for cross-appeals in the final SARBOX rules. Employer's counsel, also reasonably it seems to me, argues that Federal Rule of Appellate Procedure FRAP(4)(a)(3) and "on information and belief” every state court's rules of procedure offer a reasonable period of time for a winning party to submit a cross-appeal if the opposing party chooses to initiate an appeal.

Then comes the ruling. Appeal dismissed. Henrich v. Ecolab, Inc.. ARB CASE NO. 05-036 (3/31/05) [pdf]. The Administrative Review Board first notes there is no procedure under the SARBOX rules for a cross-appeal, but goes on to say that is not jurisdictional and thus subject to equitable modification. However, it finds none of the traditional reasons for equitable extensions applicable here. While I would not necessarily agree that ruling is absolutely required under the circumstances, nor that it makes sense, that is not my main issue with it. Instead it is the treatment of counsel's argument, outlined above, by the ARB that I find, to put it mildly, less than charitable.

First, the Board notes that courts 'have generally been much less forgiving in receiving late filings where the claimant failed to exercise due diligence in preserving his legal rights." Under the circumstances, that seems an unduly harsh characterization of what happened here, particularly when the ARB concedes that there is no evidence that the other party has in any way been disadvantaged. But then the Board goes on the offensive (or so it seems to me from the opinion). Characterizing the employer's argument to be that it did not know it needed to file an appeal within 10 days, the Board wrote:

If Ecolab’s counsel was unsure whether the ten-day limitation applied to Ecolab’s appeal, it could have simply contacted the Board to inquire as to the applicable limitations period. Counsel did not do so.

Of course that misses the whole point of Ecolab's argument that it did not know till after the 10 business days had passed (at least based on the record recited in the opinion) that there was going to be an appeal by the other side. I can only imagine how the suggested conversation would have gone (assuming of course that the employer could talk with someone at the Administrative Review Board in a position to give a definitive answer that would not be prohibited ex parte contact):

Counsel for winning employer: I have a question. I don't know if the other side is going to appeal. I don't want to since I won and am happy. But if they do file an appeal, I am concerned whether I need to file an appeal to preserve my right to argue that the ALJ got a couple of points wrong, even though I won on the merits. Can you tell me -- do I need to appeal to preserve those rights? And if so, do I have to do it within 10 business days of the ruling?

Definitive Voice of the Board: Of course you do, my friend.

Yeah, right.

Then to add insult to injury, the ARB jumps on the employer's argument "based on information and belief" about the state appellate rules with the following footnote:

On information and belief” appears to be legalese for “Counsel didn’t actually research the question in all fifty states – this is my best guess.” Such statements reflect a lack of substantiation for the position argued and we give such arguments the insubstantial weight that they merit.

Sure, it makes sense for the employer's counsel to spend $10,000 or whatever it would take to make a definitive research of all state appellate laws, on a point that would clearly not be dispositive. I might be more inclined to disregard the sarcastic footnote of the ARB if they had bothered to point out any state appellate rules that do not permit cross-appeals after the other side has initiated an appeal.

And in a final snippy (but not particularly well reasoned point), the Board says that the employer's counsel cited them to FRAP 4(a)(3) which does give a period of time to cross-appeal after the opposing party, but that rule applies to appeals of right, not permissive appeals like ones before the ARB. Instead, the Board said the more appropriate rule would have been FRAP 5(b) which is related to permissive appeals:

FRAP 5(b), applicable to appeals by permission, provides that any party may file an answer in opposition to a petition or a cross-petition within seven days after the initial petition is served. But the initial petition is not submitted for approval until after the time has run for the cross-petition. Accordingly under the FRAP, a party may have to file a “potentially unnecessary and wasteful appeal in order to ensure the preservation of its own appellate rights.”

The italicized quote is taken from Ecolab's response and the Board cites it as if they have clearly vanquished Ecolab with its own language. Of course, the ARB missed the main point. Even under FRAP 5(b), at least as the opinion recites what happens, the winning party does not have to make a decision as to whether to file an appeal until the other side has done so. The fact that it is a request for a permissive appeal rather than one of right, in no way diminishes Ecolab's argument.

The way I see it, the ARB will now reap what it has sown, and will soon get a rash of "defensive appeals" by any winning party that did not prevail on every possible point. That of course will cost all litigants more time and money and the ARB will now be forced to file, docket, review and ultimately dismiss a large number of appeals which will ultimately not be necessary. (And the last thing I want to hear is about an overworked ARB that needs more resources.)

It may well be that the decision reached by the ARB is required by the rules which did not conceive of every possible situation, or even that it is what the rule makers intended. Still I do not think it likely that a system which requires such a waste of resources will ultimately survive. If it does not go away by judicial construction, then surely a rule change is in order. But whether it goes away quickly, or never, is really irrelevant to my main complaint -- the tone of the Order, which in my view reflects neither sound judicial reasoning, nor more importantly, appropriate judicial temperament.